Monday, December 15, 2008

When will the hyper-inflation start?

Our economy is currently being devastated by a severe deflation. Loans have stayed dried up, and business activity is grinding to a halt. However, a massive inflation is in the works, and here's why.

The cause of the deflation: this year's recessionary economy does not support last year's production. We have a huge glut of excess goods, from houses to cars to oil to consumer good, and we are witnessing a massive fire sale to get them all moved, resulting in a huge deflation.

However, we are not headed for a decade-long deflation, a la the Great Depression, because the Fed is absolutely committed to NOT let it happen. The Fed is going to drop its benchmark rate to the absolute floor level, then look for "non-traditional" methods to get things going after that. From stimulus packages to securities purchases, the Fed is flooding our economy with liquidity, financed with long term debt.

At the same time as the expanded monetary liquidity, we are in a worldwide economic recession, which means less is being produced. More money, less goods, the classic supply-and-demand conditions for inflation.

And the inflation will be severe: We will have LOTS more money, and LOTS fewer goods, because of the extremity of both the Fed's monetary actions and the worldwide recession.

Think of all the big box stores that are closing right now, the massive layoffs by automakers, the drastic cuts in oil production, and so on. The inflation will really kick in once "the shelves are empty" and all that excess inventory gets depleted. Probably by late spring or summer 2009, we will see a massive inflation of goods and commodities. Because of the gigantic unsold inventory, housing prices will lag at first, but by late summer, housing will begin to heat up as well, as delayed demand and investors gobble up the super-cheap foreclosure inventories, using the pools of new liquidity the Fed is creating. Look for the stock market to also shoot up as money floods the system, and cheap stocks are gobbled up.

Sounds like good news, right? Wrong. Rising prices will not represent a real recovery, only an inflation. Employment will lag desperately, and common workers will be more pinched than ever as their wages stay flat in the face of skyrocketing prices. Think of four dollar gas and how bad that was, but think of it as ten or fifteen dollar gas, or higher. Yeah, see what I mean?

The dollar will fall like a stone, in response to oversupply and low-as-you-can-get interest rates. The Greater Depression will be based on conditions of stagflation: no economic growth, high unemployment, and probable high interest rates (after the Fed jacks them back up in response to the inflation).

Now is the time to buy your goods, from food stocks, guns, and equipment, to cars and land, while things are cheap, before they get real expensive from the inflation.

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