We appear to be at a turning point of sorts, yet again. After much vigorous monetary stimulation, US economy seems to be slipping into a second leg of the recession (or the double dip). All of the efforts aimed at monetary stimulation succeeded in making the banking system solvent, by essentially subsidizing it and moving the leverage onto the government books. However, they did not restart the lending activity and banks are content to be safe, while hoarding their cash. The money supply is contracting yet again and inflation is increasing at a far slower pace. Does this mean that everything we wrote about potential worldwide inflation threat is now less likely? Absolutely not. Contrary to some esteemed critics, who misunderstood our writing, our position was never based on monetary arguments. The initial stage of expansion of money supply was quite inevitable from the perspective of even such differing schools of economics as Neo-Classical and Keynesian (though not Austrian). We also saw no problem with replacing the initially lost money supply through expansion. Our argument for inflation and an eventual dramatic rise in the price of gold and in long term interest rates was based on a very simple precept. United States, with its total liabilities anywhere between 300-500% of GDP is unable to endure deflation without a catastrophe. In fact, in the medium term (3+ years), it is unable to endure anything other than high inflation without a catastrophe. If the inflation is not allowed to happen, the Great Depression will appear to be a golden age in comparison. The same holds true for many countries around the world who are essentially banrkupt. Those that are not bankrupt will not be able to sit idly and watch the indebted ones inflate away debts and inflate currencies, simply because their trade balances will deteriorate rapidly if they do. Therefore, we are heading into an era of global inflation, as we wrote before. Europe's attempts at fiscal austerity surely go against the grain, but I think that they will see the futility of fighting this trend (otherwise they will have to endure a useless bone-crushing recession only to finally succumb to inflation after their exports dry up). The US dollar is going to be the last to fall and is in fact likely to remain strong (relative to other currencies of course, it has been falling with respect to gold quite dramatically) for a while, because it appears as the less dangerous of the crazy bunch. In the short term, we will likely experience deflationary pressures, but these pressures will only serve to ensure the now nearly inevitable inflation by increasing the debt load due to attempts at restarting the failing growth. It is already nearly impossible for the Fed to 'pop the clutch', because doing so will speed up the process of default in the US and could make the US dollar the first one to fall (we still maintain it will likely be the last). Add to this the lifelong mission of Ben Bernanke to avoid the Great Depression deflation and I think we can be sure that deflation will only serve as the gasoline, albeit a slow acting one, on the fire of the eventual inflation.
We are not here passing judgement on the moral propriety of inflation or anything else for that matter. We are merely looking at facts and pointing out the direction.
