Tuesday, November 18, 2008

Inflation, Deflation, MAINSTREAM MEDIA LIES and More!

I keep getting comments from people arguing that we are in deflationary times and there is no threat of inflation. Inflation often gives many market participants a headfake and then chews them up and spits them out. Remember rising prices are the effect of inflation as declining prices are the effect of deflation. Can there be a disconnect between the time that inflation begins and the time that we see the effects? Absolutely! Those in the deflationary camp are going to get hammered by the timing disconnect. For those that argue debt is deflationary---I would ask this simple question "How can the United States Government Debt possibly be DEFLATIONARY when we are pumping it into the economy?

Now I understand that the numbers that came out today all point to deflation---but it is a headfake. This is simply a case of a timing disconnect between the massive government liquidity injections and the money actually being circulated in the economy. Pardon my silly example but this is like going to the bank to borrow money for a nice meal when you are extremely hungry. The banker hands you the money and you head to your favorite restaurant. You sit down and order your food you wait and wait for the server to bring your food. Just because are at the restaurant, have ordered the meal, and have the money to pay for it DOES NOT MEAN YOUR STOMACH IS FULL. You are waiting for that effect.

Prices are falling right now because the credit markets are frozen. The economy is slowing because we have not yet felt the "effect" of the massive, unprecedented government injections. Some are even arguing that taxing the wealthy will solve the problem because it will balance the budget. SO WRONG. It may hammer the stock market because it will take away from those who tend to save and invest and give to those who will spend every last dime. I ask you---what will that scenario do to the economy? OVER HEAT IT. It might look brilliant in the short-term, but we will pay the piper when inflation takes over. Our economy is not geared to deter inflation. Massive rate hikes will not be popular!! It would be easier to not let inflation begin, but friends that is NOT THE PATH WE ARE ON!!!

Yes we will have falling prices in the short term---IT WON'T LAST!!!

Allow me to shift gears and bash the mainstream media. This morning on CNBC the question arose as to whether or not the Plunge Protection Team had intervened to buy some form of S&P index to support the market. Steve Leisman (don't care if I misspelled his name) said that those kind of theories were for the "conspiracy theorists" in the blogosphere. Now I don't believe that the PPT bought any index vehicle, but I do believe that they have been supporting the dollar. They need spiraling prices to keep up the fear of recession or potentially even depression right now. Remember, the more fear we have in the markets right now--the more the flight to quality will push up the price of treasuries at the auctions. The higher the price---the lower the effective interest rate.




Anonymous said...

The one thing that sticks out is the fact that we have not yet felt the effects of the injections by the government because they are still trying to figure out which friends to give the money.