It seems that there is no real good news on the economy today. The spinmeisters spin, but the raw truth is that we are in a place of pain like the Country has only seen once before. That once before being the Great Depression. And Ben Bernanke says that this is going to last at least another five years. That doesn’t include the massive and on-going loss of wealth in the housing market. That won’t recover in another ten years, at least. Most likely, that won’t recover ever.
The bright spot in the economy, if it can be said to have a bright spot, is that there has been little inflation seen. Yet. And it is that “yet” that is troubling to me. Inflation is a thief that robs the rich and poor alike. And it may be returning with a vengance. Consider the following:
The international monetary system set up at Bretton Woods in 1944 is on the verge of breaking down. It could still be saved by heroic measures, especially if these were taken in the United States. They would include an immediate slash in projected government expenditures, an immediate balancing of the budget, and a halt in any further increase in the stock of money.
But in the present political and ideological atmosphere, these measures are very unlikely.
Parallel measures are even more unlikely in Britain or in France. The government in Britain will never give up its socialistic obsessions. In France, Nicolas Sarkozy is caught in a chronic dilemma of either yielding to untenable wage demands or having his country paralyzed by strikes.
And nearly every other country, in varying degree, now operates on the fixed assumption that at least some inflation, some constant increase in its stock of paper money, is necessary to prevent an economic slowdown or setback.
The four paragraphs above–substituting “Charles de Gaulle” for “Sarkozy” and adding “Labor” before “government in Britain”–appeared at the beginning of a Los Angeles Times editorial written by Henry Hazlitt in March of 1969. The editorial concluded that the U.S. was certain to leave the gold standard and commence an inflationary devaluation, with resulting economic chaos.
Two years later, President Nixon appeared on national television to “suspend temporarily the convertibility of the dollar into gold.” The second part of Hazlitt’s prediction took longer to manifest itself. In fact, the inflation rate as measured by the Consumer Price Index sank from 5.2% when Hazlitt wrote the editorial to 2.7% in 1972. Initially it seemed Nixon was correct that suspending convertibility would paradoxically “protect the position of the American dollar.” A speculator betting on inflation 1969 would have gone broke.
Source
That sounds like good news! No inflation then equals no inflation now, right? Not so fast. Remember the wonderful economic times in the ’70s?
But what Hazlitt knew, and Nixon didn’t, is that inflation has great momentum. The price level can withstand significant monetary abuse, but once inflationary expectations cement they are impossible to dislodge without extreme economic and political pain, as Ford, Carter, and Reagan soon discovered.
The similarities between then and now are obvious. Despite the Republican takeover in the House, there is no chance of restraint at the Fed or a balanced budget. The tax deal passed in the lame-duck session will add nearly $1 trillion in deficits, most of which the Fed will be forced to monetize.
Although the Conservatives have gained power in Britain, their “austerity” plan is to return spending back to 2007 levels–in terms of projected GDP. Nominal spending is set to increase. Meanwhile, France continues to have strikes, as do Britain, Ireland, Italy and Greece.
The inflation rate has fallen for the past three years, as it did between 1969 and 1972, but monetary policy has caused commodity prices to surge back to 2008 bubble highs despite rising unemployment. Anecdotal evidence of pricing turmoil for foreign producers of intermediate goods suggests that inflation is already lurking just offshore, preparing to crash into the economy. The higher costs will cause commerce to freeze, as it did in 2008, or else the inflation spiral will again begin in earnest. Either way, European-style protests will soon come to these shores as well.
There’s my sunshine! This puts into words my personal economic fears. I am not an economist, but I see danger signs all around me. The center falls apart, the edges cannot hold. Our current level of spending is clearly unsustainable, but where will the cuts come from? Defense? That is unwise. But as we have seen in Europe, the people on the paying end of “entitlements” will not simply take it when those “entitlements” stop being paid. Riots in America like in Greece are entirely possible when the parasite class begins to feel the pain.
What can be done? On a macro level, I am not sure that Anything can be done. The Republican House can propose, but Harry Reid’s Senate has already promised to dispose of anything positive that the Republicans accomplish in the House. We are in for two years of gridlock in the Legislature, which is far better than two more years of the Pelosie-Reid-Obama spending machine that has put us so deep in this hole. On a macro level it may be that nothing can be done, but on a personal level we can prepare:
In the current cycle, the dollar and the Dow began deflating in 1999. With gold at $1,400 and oil at $90, the dollar and the Dow have declined by nearly 80% against both. To match the 1970s, they would have to lose another 80% against gold and another 60% against oil, implying gold at $7,000 and oil over $200. Given that the current monetary abuse is far worse than in the 1960s and 1970s, these figures are conservative.
Bretton Woods II is collapsing. The seductive Keynesian policies that fiscal and monetary authorities have followed for decades will soon cause the end of dollar hegemony. The United States is entering its third consecutive year of deficits greater than $1 trillion coupled with continuing dramatic increases in the stock of money. Devaluation and economic chaos are guaranteed, just as they were in 1969. Fortunately, unlike in 1969, gold ownership is legal. Those who understand free markets can still preserve the capital that will be needed to restore American prosperity after the deluge.
Please note, both of the articles referenced in this piece are in Forbes Magazine, hardly an apocalyptic conspiracy-based publication. With anything, consider the source, and I’d say the source on this is as good as you can get in tthe financial world. After the Obama Boom, the deluge is coming. Inflation, perhaps even hyper-inflation is probably just around the corner. Bernanke is monetizing debt to the tune of $600 billion and simply hoping that the “great momentum” of inflation stays in check. That seems unlikely in the medium and long term, but then the current leadership doesn’t appear to think much beyond the next 24-hour news cycle, so truly long term thinking is not to be expected.
