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

[n.dahlheim at mchsi.com]

Schiff is largely correct, but his analysis fails to capture the political dynamic of the current financial crisis---and why I don't see hyperinflation as a near-term risk much less even significant inflation such like that seen in the 1970s.  The reason: the world will invest in US T-bills for the forseeable future.  Why?  As Niall Ferguson notes, the US, as badly as this depression has hammered its economy, is hurt far less when compared to the EU nations (especially those in Central and Eastern Europe), China, Russia, Japan, and Taiwan.  Other emerging market countries such as Brazil will also begin to feel the effects of the crisis very acutely because of the heavily export-driven economic model that drives their economy.  The US is also more politically stable than these other economies, so it is likely that the US will be looked to for the political solution to the current economic downturn.  Therefore, expect continued investments in US debt because of the political dynamics alive and well in the world economy today.

Best,
Nick
 -------------- Original message from "E. Wayne Johnson" <ewj at pigs.ag>: --------------

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

He writes for lewrockwell.com today:

Don’t Be Fooled by Inflation
by Peter Schiff


Strikeup the band, boys, happy days are here again! Recently releasedshort-term economic data, including unemployment claims, non-farmpayrolls, home sales, and business spending, which had been sounambiguously horrific in February and March, are now justgarden-variety awful. With the Wicked Witch of Depression nowapparently crushed under the house of Obamanomics, the Munchkins ofWall Street have sounded the all clear, pushing the Dow Jones up 25%from its lows. But the premature conclusion of their Lollipop Guildeconomists, that the crash of 2008/2009 is now a fading memory, is justas delusional as their failure to see it coming in the first place.
Onceagain, the facts do not support the euphoria. Over the past few months,the government has literally blasted the economy with trillions of newdollars conjured from the ether. The fact that this “stimulus” hasblown some air back into our deflating consumer-based bubble economy,and given a boost to an oversold stock market, is hardly evidence thatthe problems have been solved. It is simply an illusion, and not a verygood one at that. By throwing money at the problem, all the governmentis creating is inflation. Although this can often look like growth, itis no more capable of creating wealth than a hall of mirrors is capableof creating people.
Weare currently suffering from an overdose of past stimulus. A largerdose now will only worsen the condition. The Greenspan/Bush stimulus of2001 prevented a much-needed recession and bought us seven years ofartificial growth. The multi-trillion dollar tab for that episode offederally-engineered economic bullet-dodging came due in 2008. The 2001stimulus had kicked off a debt-fueled consumption binge that resultedin economic weakness, not strength. So now, even though the recentstimulus administered a much larger dose, we will likely experience amuch smaller bounce. One can only speculate as to how much time thisstimulus will buy and what it will cost when the bill arrives.
Myguess is that, at most, the Bernanke/Obama stimulus will buy two yearsbefore the hangover sets in. However, since this dose is so massive,the comedown will be equally horrific. My fear is that when the drugwears off, we will reach for that monetary syringe one last time. Atthat point, the dosage may be lethal, and the economy will die ofhyperinflation.
Asalways, the bulls fail to understand that investors can lose wealtheven as nominal stock prices rise. As a corollary, the bearish case isnot discredited by rising stock prices. While there are some bears thatmistakenly cling to the idea that deflation will cause the dollar torise, those of us in the inflation camp understand that the oppositewill occur.
Inthe meantime, stocks are not rising because the long-term fundamentalsof our economy are improving. If anything, the rise in global stockprices is due to investors realizing that cash is even riskier thenstocks. The massive inflation that is the source of the stimulus isessentially punishment for those holding cash. To preserve purchasingpower, investors must seek alternative stores of value, such as commonstock.
Itis important to point out that despite an impressive rally, U.S. stockshave substantially underperformed foreign stocks. In the past twomonths, while the Dow Jones has risen 30%, the Hang Seng and the GermanDAX have risen by over 50% in U.S. dollars. Commodity prices are alsorising, with oil hitting a five-month high. And gold is shining aswell, with the HUI index of gold stocks up 30% during the past twomonths, and 2/3 of those gains occurring in the past month. If thisrally really were about improving economic fundamentals, gold stockswould not be among the leaders. Further, during those two months, theU.S. dollar index fell by 7%, with commodity-sensitive currencies suchas the Australian and New Zealand dollars surging 20%.
Tome, the relative strength of foreign stocks and currencies indicatesthat 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 theAmerican economy. The shrinking U.S. current account deficit isevidence of this trend in action. Renewed strength in foreign stocksand weakness in the dollar may indicate that not only is the worlddecoupling from the U.S., but benefitting as a result.
So let theMunchkins dance for now. But remember, the Witch is not dead; onlytemporarily stunned by an avalanche of fake money.
May10, 2009
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