Friday, April 30, 2010

You'd better let it deflate, Mr. Bennie.

Even though this blog is dedicated to the topic of inflation, there is a potential alternative reality in our future. We could have deflation and there's a whole subset of economists and pundits who fervently believe that's where we're headed. I've been preaching just the opposite, that we're headed for bad inflation, possibly hyperinflation that destroys 100% of the value of the US dollar. I believe that because the people in charge of making the choice have given every indication that they will print until we have inflation. But let's be clear about one thing; there is absolutely no middle ground. We will not have moderate inflation and growth over the next two decades. We have too much debt, too many unfunded obligations, too many overpriced financial assets, like stocks and bonds. Real (inflation adjusted) economic growth is going to take a huge hit, either with inflation or deflation.

Ben Bernanke believes he can engineer our way out of this with some tricky driving of the economy through the minefield. He's insane. The planet is riddled with insolvency. This is not fixable through sleight of hand and manipulation of the money supply. That Keynesian bag of tricks won't work this time. There is not enough capital to produce the growth to pay off the debt and there aren't enough suckers left to loan more money. All we have is Bernanke and his printing press. If Ben ever comes to his senses, we could still choose the better course of action. Let the economy deflate. It will be incredibly painful, as bad or worse than the depression. The alternative will be worse because we will still have an economic collapse, and we will have resource hoarding, a dead currency, and a population that has learned the wrong incentives for future stability. That combination spells disaster.

Today's market was a harbinger of what lies ahead if Bernanke and Obama don't rethink their mindset. Stocks dropped hard; oil and gold, corn, wheat, cattle, hogs, cotton, soybeans, and copper all rose. Bernanke this week refusing to even hint at raising interest rates, coupled with a massive IMF bailout of Greece, may represent a bridge too far in terms of dollar viability. If that's not the case now, it will be soon. Our currency is in a precarious position. If the government and central bank don't quit "stimulating" now, we're in for a dose of stagflation that will make all previous financial crises look tame. One of these days, hard assets will start moving up against the dollar and they won't stop. The markets are saying enough is enough. Does Ben Bernanke listen?

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