Minyan Mailbag - 'Flation Revelations
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
I'm in the stagflation camp. I started writing in 1999 that it would develop at the end of this cycle as a consequence of an extended, strong dollar driven, (including the emerging markets' collapse), liquidity-pumped, non-inflationary U.S. economic crescendo.
Flation is all about supply and demand.
The trade deficit reflects the amount of dollars that the U.S. has to "create" out of thin air to pay for that for which is not represented by exported goods and services.
This, almost by definition, increases the supply of dollars.
When the dollar declines, imported unit volumes become more expensive in dollars and exported goods become less valuable in foreign currencies. This in turn creates a larger trade deficit. (Unless you believe that export volumes would increase sufficiently due to lower U.S. goods cost to foreigners. I am confident that will fall woefully short, but happy to debate the whys with anyone interested.)
Foreign intervention is the only thing preventing a quick logical conclusion to the imbalances with the dollar falling sharply. It will end WHEN?? Foreigners figure out that they can consume and enjoy their own "stuff" rather than save, save, save, and let the U.S. consume what they are producing on an exploding and seemingly endless line of credit. We will look back at the U.S.-centric global economy nostalgically, much as Japan looks back at the 80's.
Without radical change, we are headed for inflation, as surely as the "new era" was going to hit a speed bump for the citizens of 1999. It is as simple as:
the U.S. has a credit problem, we consume much more than we produce. And, the U.S. has a printing press. We can always pay our creditors with more dollars. (It's not that deflation isn't a possible outcome, it is that it isn't one that will be permitted since there is a less evil choice.)
IMSBHO (In my strong but humble opinion)
P.S. Foreign financing is confidence that flies in the face of fundamentals. Failing confidence is not something that can be precisely timed. The U.S. is VULNERABLE. In the 70's, the U.S. was dependent on foreign oil. Today, we are dependent on foreign oil, foreign goods, and foreign capital.
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