The Visible Ghost Of Inflation

Can you see a ghost? I can if we are talking about inflation, and I am. For about two years now, and following the unprecedented money printing the Fed has been doing, some have been adamant that inflation is not a problem nor would it be because the Fed has a "plan" to drain out all, or most, of the liquidity it pumped into the economy. Even today with gold at around $1,350 some still refuse to acknowledge that inflation is even a possibility. Really!!! tell that to the rioters in India and Bangladesh. Tell that to the Tunisian people who toppled a well entrenched dictator because food prices are rising fast. Convince the Egyptians, whose government may fall before these lines are finished, that price increases are a figment of their imagination. Inflation is spreading throughout the world mainly as a result of all the money the central banks have been printing but partly because some up and coming societies like Chindia and others are now consuming more because of their new found prosperity. Those who believe inflation does not exist cherry pick their data. While they acknowledge some basic commodities prices are higher they counter that real estate values have plummeted. They got that right! except that for the most part plummeting home values do not result in increase in disposable income . People don't have to buy something they can't afford but they do need to buy wheat, rice, butter etc...so this attempt at arguing there is no inflation doesn't really hold water. Additionally, because of globalization what used to be a home grown phenomena, inflation, is now like any other commodity that can be imported from far away places. As the factory of the world China exports its inflation just as easily as, and through, its exports of manufactured goods. Like other economic concepts inflation can take many forms including outright increases in the price of basic raw materials and the appreciation of a currency. That is why countries have been rushing to fight off inflation by increasing interest rates or imposing measures to devalue, or at least limit the appreciation of, their currencies by making them less attractive to foreign investors hoping to discourage foreign capital inflows.

The ghost is here. It may not be fully visible yet because most companies have not been able to pass on the increase to the final consumer. Make no mistake business to business inflation is here and widely acknowledged. If there is no relief at some point (soon) businesses will have to make the decision of whether to take a hit to the bottom line or attempt to pass on the extra cost. Do you want to bet which way they will go?

It is nearly impossible to reverse the flow of water once it starts down the drain. But again maybe this is the plan. Bernanke said a little inflation is not a bad thing. The problem is how do you engineer and control a little inflation with such a huge amount of liquidity. The answer is you can't. You just hope that the length of the drain that water has to travel is short. And short treasuries is what you do to keep your head above water.

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Money! The Misunderstood Concept And The Financial Pie

I once had a friend say to me "I don't know why our government does not print enough money for everyone to have everything they want so we can all be rich". My reply was if printing, or having, money was the answer than Latin Americans would be the richest people on earth. To the contrary, printing money without economic productivity to justify such an action is a slow but sure way to the poor house. It creates a false sense of prosperity. Money is nothing but an agreed upon medium of exchange. Money by itself does not make a person rich. The purchasing power of that money is what determines the wealth of an individual. Many factors go into determining the purchasing power of a specific currency. Chief among these factors are free market forces and government economic policies. However there is another less talked about , or should I say less understood, but equally important factor that determines the purchasing power of a currency. That is the limiting factor. This translates into productivity within the confine of what I like to call the financial, and other, pies. That is what makes an individual or a nation rich. Rich only in comparison to other not so productive society(ies).

Our ability to produce (economic activities) is limited by many factors including human resources, natural resources, political stability, free market principles or the lack thereof and yes financial resources as well. Economic activities require, among other things, financing and the financial pie is by my definition finite, no matter how big it is or how big it grows. There is always a limit on our ability to grow that pie. Limits are imposed ultimately by the value of money. Money is just another commodity that has a price that is determined by, among other factors, what the perceived value is and what others are willing to pay for it. That could be in the form of outright purchase or exchange for other currencies, services or simply the interest rate attached to that currency's debt. All financial pies are limited (by definition) but all are not equal. In other words Americas' financial pie is limited but much bigger than all other countries' pies including China's.


Today, America is faced with the phenomena of other economies vying for a greater share of the financial pie which ultimately determines the size of all other pies these economies can afford (production pie, consumption pie, etc...). Even though the size of the pie does grow over time to reflect changes in demographics and economic activities and changes in human economic behavior ( desire for more goods and services whether as luxury or as necessity as we see today in Bangladesh and Tunisia), its borders are always defined. As I always say if everyone is economically equal society could not function. Economic inequality is a necessary beast in our society as we know it today. Of course that does not mean that individuals or nations can't progress. They can, they should and they do. But it does mean that the progress ladder will always have lower steps that have to be climbed to reach the ever changing upper steps. If one tries to jump to the top they run the risk of falling hard. The point I am trying to make here is that because of the pie shaped limitations the betterment of any economy(ies) always comes, in the long run, at the expense of another economy(ies). China at the moment seems to be capturing a bigger share of some of the pies, certainly the financial pie. However, this comes at the expense of denying its people the right and opportunity of a better life by keeping the value of the yuan artificially low and at a substantial risk to the economy going forward. But China can't be ignoring market forces for good and it certainly can't keep artificially growing its economy much longer. So eventually China's share of the pie will stop growing and start declining giving others an opportunity.

Because money in itself has no value other than being a medium of exchange printing more of it causes the value determining factors of that currency to assign it lower valuation.

As for me I have always liked apple pies because they are as American as pies can be.