SOME VERY IMPORTANT POINTS ABOUT INFLATION
1) We expect that we will soon be seeing inflation data show that inflation in China and other parts of Asia is moderating. All that this means is that the rate of inflation, which was for example 11% for the last 12 months, may be falling to 6 % for the next 12 months. Inflation is a rate of change calculation. When you have a high rate of change in year One and it goes to a lower rate of change in year Two, then the data says inflation is lower.
2) However, prices are not lower. If for example, prices for food or gasoline rose 11% last year and an additional 6% this year, it is of no solace that inflation is only 6% now…if the compounded price increase is up by 17% in a little over a year. That is why monetary authorities worldwide always strive for not more than 1 or 2% inflation. Inflation is a huge tax on those who are on fixed income. It creates massive social problems and is pernicious in the extreme.
3) The so called ‘decline’ in inflation will be a big headline over and over for months to come. The fact is that rate of inflation is moderating. However, longer term, we believe that the decline is temporary because the amount of money created to bailout the banking system worldwide will be uncountable. The upcoming PR spin may convince some of the uninformed that inflation will now moderate for a long time.
4) Even with a moderation in the rate of inflation, inflationary raises in prices penalize a large part of the society. In the 70’s, we went through years of incorrect belief that inflation had moderated…which in the final analysis turned out to be incorrect. Incorrect as it was, it still periodically scared commodity speculators, and the prices of gold and foreign currencies went down.
5) In the end, gold and foreign currencies had huge price rises as the truth about the insidious nature of inflation became plain to people.
Moderating inflation does not mean lower prices. To get a better read on how the inflation’s burden is being felt, we suggest asking a business owner…and sample some consumers. They will be able to give you better data points than the media…or the government.
HOW THE BIG U.S. HOUSING BAILOUT HAS THE POTENTIAL TO UNHINGE THE WORLD FINANCIAL MARKETS, AND SEND THE U.S. DOLLAR DOWN…AND GOLD UP
Lawrence B Lindsey is the former assistant to the president for economic policy and a respected economist with both an academic and consulting background. Mr. Lindsey wrote a big article for today’s Wall Street Journal. A link to the article is below, but I would like to quote from the last two paragraphs of that article. He is speaking about the convoluted 700 page bill that will bail out Fannie Mae and Freddie Mac.
“The legislation also creates long-term uncertainty with regard to the extent and form of government assistance. In effect, Treasury Secretary Paulson now has an open-ended mandate to bail out the nation’s troubled housing finance market, the largest single capital market in the world.
If any other country announced that its finance minister could print unlimited debt to do something similar, financial markets around the world would dump both the country’s debt and the country’s currency. It may well be different because this is the United States of America. But certainly, to take such a risky and unprecedented step, a better crafted and considered piece of legislation should have been created.”
TO QUOTE MR. LINDSEY "IF ANY OTHER COUNTRY HAD ANNOUNCED THAT ITS FINANCE MINISTER COULD PRINT UNLIMITED DEBT TO DO SOMETHING SIMILAR, FINANCIAL MARKETS AROUND THE WORLD WOULD DUMP BOTH THE COUNTRY’S DEBT AND THE COUNTRY’S CURRENCY."
For those who have not believed up until now that the U.S. would flood the world market with currency, this is how the U.S. will create the inflation that will send gold up and the dollar down. Clearly, you cannot bail out the single largest capital market on earth by printing money without creating:
1) A much lower value for the U.S. dollar.
2) A much higher price for gold.
You can see the entire article here:
Thanks for listening.
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