[Peace-discuss] Don’t Be Fooled by Inflation

[E. Wayne Johnson]

Peter Schiff is one of the Austrian school (which is not the "Chicago 
School") economists who predicted this current economic collapse.

He writes for lewrockwell.com today:
*
Don’t Be Fooled by Inflation
by Peter Schiff*

Strike up the band, boys, happy days are here again! Recently released 
short-term economic data, including unemployment claims, non-farm 
payrolls, home sales, and business spending, which had been so 
unambiguously horrific in February and March, are now just 
garden-variety awful. With the Wicked Witch of Depression now apparently 
crushed under the house of Obamanomics, the Munchkins of Wall Street 
have sounded the all clear, pushing the Dow Jones up 25% from its lows. 
But the premature conclusion of their Lollipop Guild economists, that 
the crash of 2008/2009 is now a fading memory, is just as delusional as 
their failure to see it coming in the first place.

Once again, the facts do not support the euphoria. Over the past few 
months, the government has literally blasted the economy with trillions 
of new dollars conjured from the ether. The fact that this “stimulus” 
has blown some air back into our deflating consumer-based bubble 
economy, and given a boost to an oversold stock market, is hardly 
evidence that the problems have been solved. It is simply an illusion, 
and not a very good one at that. By throwing money at the problem, all 
the government is creating is inflation. Although this can often look 
like growth, it is no more capable of creating wealth than a hall of 
mirrors is capable of creating people.

We are currently suffering from an overdose of past stimulus. A larger 
dose now will only worsen the condition. The Greenspan/Bush stimulus of 
2001 prevented a much-needed recession and bought us seven years of 
artificial growth. The multi-trillion dollar tab for that episode of 
federally-engineered economic bullet-dodging came due in 2008. The 2001 
stimulus had kicked off a debt-fueled consumption binge that resulted in 
economic weakness, not strength. So now, even though the recent stimulus 
administered a much larger dose, we will likely experience a much 
smaller bounce. One can only speculate as to how much time this stimulus 
will buy and what it will cost when the bill arrives.

My guess is that, at most, the Bernanke/Obama stimulus will buy two 
years before the hangover sets in. However, since this dose is so 
massive, the comedown will be equally horrific. My fear is that when the 
drug wears off, we will reach for that monetary syringe one last time. 
At that point, the dosage may be lethal, and the economy will die of 
hyperinflation.

As always, the bulls fail to understand that investors can lose wealth 
even as nominal stock prices rise. As a corollary, the bearish case is 
not discredited by rising stock prices. While there are some bears that 
mistakenly cling to the idea that deflation will cause the dollar to 
rise, those of us in the inflation camp understand that the opposite 
will occur.

In the meantime, stocks are not rising because the long-term 
fundamentals of our economy are improving. If anything, the rise in 
global stock prices is due to investors realizing that cash is even 
riskier then stocks. The massive inflation that is the source of the 
stimulus is essentially punishment for those holding cash. To preserve 
purchasing power, investors must seek alternative stores of value, such 
as common stock.

It is important to point out that despite an impressive rally, U.S. 
stocks have substantially underperformed foreign stocks. In the past two 
months, while the Dow Jones has risen 30%, the Hang Seng and the German 
DAX have risen by over 50% in U.S. dollars. Commodity prices are also 
rising, with oil hitting a five-month high. And gold is shining as well, 
with the HUI index of gold stocks up 30% during the past two months, and 
2/3 of those gains occurring in the past month. If this rally really 
were about improving economic fundamentals, gold stocks would not be 
among the leaders. Further, during those two months, the U.S. dollar 
index fell by 7%, with commodity-sensitive currencies such as the 
Australian and New Zealand dollars surging 20%.

To me, the relative strength of foreign stocks and currencies indicates 
that perhaps the global economy is not as impaired as many have feared. 
It has been my view all along that after the initial shock wears off, 
the world will be better off – once it no longer subsidizes the American 
economy. The shrinking U.S. current account deficit is evidence of this 
trend in action. Renewed strength in foreign stocks and weakness in the 
dollar may indicate that not only is the world decoupling from the U.S., 
but benefitting as a result.

So let the Munchkins dance for now. But remember, the Witch is not dead; 
only temporarily stunned by an avalanche of fake money.

/May 10, 2009/

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