Does the Fed's massive money printing mean inflation is about to soar? I'm not jumping on that bandwagon, but gold is still an attractive bet right now.
Marc's most recent Gloom, Boom & Doom Report contains an excellent discussion of inflation vs. deflation, and he makes the connection between the policies we're pursuing -- massive stimulus to create inflation, due to the fear of deflation -- and the funding crisis that I have warned about that will arrive as the U.S. has trouble financing its increasing debt. (Read "Why creating jobs is so hard.")
I decided to quote liberally from Marc's report. But I encourage folks to read it in its entirety. (Here's the Gloom, Boom & Doom Web site; a subscription is required.)
For newer readers who continue to ask me to elaborate on this subject, hopefully Marc's commentary will bring them up to speed:
Deflation can be avoided through debt and money printing. This isn't to say that I support such policies, or that I find deflation to be "bad" and inflation to be "good." (Price stability is the most desirable condition.) But the point is that if a government is really determined to inflate its problems away, it can be done. Those people who believe in deflation have, however, some strong arguments. Their principal contention is that the economy is so weak (output gap) that the private sector's contraction cannot be offset by government spending and money printing.
In fact, the massive money printing and the rest of the stimulus are why gross domestic product has held up as well as it has. More from Marc:
The deflationist argues that, because we have a weak economy, we shall have deflation; an argument with which I would tend to agree in the very short term.
I believe that in fact we have passed the point of maximum downside pressure. But more from Marc:
A true deflationist will also argue that because of deflation, economic conditions will worsen and, therefore, long-term U.S. government bond yields will decline. . . . But what happens to fiscal deficits and monetary policies under a scenario of a further decline in economic activity and a further collapse in asset prices? The answer is very simple. Deficits will increase further and more money will be printed. And the longer weakness in the economy prevails under the deflationary scenario, the more fiscal deficits will pile up and the more easy monetary policies will be pursued.
And here, in Marc's words, is what the funding crisis could look like:
For the reasons I explained above, inflation will pick up. With or without Fed tightening, interest rates will shoot up because of a loss of confidence by foreign U.S. dollar debt holders and the dollar tanks. Government debt payments and health care expenditure will soar. Instead of contracting, fiscal deficits will increase and force the Fed to continue monetizing the debt at a time when it should be tightening. . . .
Marc is far more certain than I am that hyperinflation lies ahead. For me, it's way too early to have to make that determination, and it's not at all clear to me that that is our ultimate destination.
However, I am more certain than he is that the maximum deflationary pressures have passed. The policies of the Fed and other central banks are why I continue to advocate that folks own the currency with no central bank to screw it up: gold.
GEe, who knew?
Were these attempts to just sweep problems under the rug? Many of us have thought that GE has been monkeying with its numbers for a long time in an attempt to win at the game of beat the number.
The modest fines imposed by the SEC make it look as though GE and Bank of America had done nothing more than tell little white lies -- which hardly instills confidence that the agency is serious about its role as enforcer of financial integrity.
Regretfully, this is what I've come to expect from the government. (If I were surprised, I'd be outraged.) What those in command do is rescue the "establishment" rather than punish them for wrongdoing. How else can you interpret giving GE the functional equivalent of a parking ticket in light of the fact that, according to Bloomberg:
If this is what the paper tiger SEC decided to charge GE with, who knows what creativity really took place? I'm sure financial scoundrels everywhere are laughing all the way to the bank.
