Investing, economics, finance and random thoughts.
Posts tagged hyper-inflation
Time to Rebalance?
Dec 29th
Economist Robert Higgs comments in the following piece about the prospect of inflation in 2009 and beyond:
The Fed versus the Banks: Who Will Blink First?
I have never been inclined toward touting doomsday financial scenarios. I raise the possibility now only because, as I consider the situation portrayed in the graph of excess reserves linked above, I am unable to foresee how the Fed and the Treasury can navigate through these treacherous waters – waters that their own previous actions have whipped to a foam – without creating terrible financial and economic harm. If the dollar survives the ministrations of Bernanke, Paulson, Bush, and the Obama gang, its survival will be something of a miracle.
Earlier in 2008 inflation fears were the bogeyman. Oil was at $150 a barrel (it’s now $40). Gold hit $1000 an ounce (it’s now in the $800′s). And the Dollar was at record lows against the Euro and other world currencies (it recovered greatly). The markets were sure that inflation was coming on strong.
Ahhh, but Fall 2008 came and so did the popping of the Real Estate bubble. This caused a massive destruction of paper wealth that rippled through the financial markets taking out many large banks. By December, Long Term bonds (a powerful deflation shield) swapped places with gold, commodities and other inflation hedges for being the winning asset of the year. The US Dollar shot up in value at a rate never seen against the Euro. Deflation was on everyone’s mind and Long Term bonds proved their mettle as they powered ahead with 30-40% gains. This boost erased almost all market losses in the Permanent Portfolio strategy during the October/November stock crash.
Who would have thought that we’d start 2008 with the prospect of inflation only to end the year with our illustrious central bankers scrambling to prevent an all out deflation? The markets are like that though. Moody. Random. Unpredictable.
But what should we do now?
Terry Coxon Discusses the Possibility of High Inflation
Dec 21st
Terry Coxon, co-creator of the Permanent Portfolio, discusses the possibility of high inflation as the US economy stagnates. Is it possible? Sure. The Fed is biased towards creating inflation because that’s what they were designed to do. Their worst fear is deflation because their tools are so limited. In my opinion, they will continue to try to inflate the dollar to force people to spend money. They’ll worry about the inflation it causes later.
Will it work? Hard to say. It didn’t work in Japan for the past 20 years and may not work here. Economics is just as much about psychology as anything else. If people don’t want to spend money and take on new debt it’s hard to force them to.
People often wonder why the Permanent Portfolio holds a 25% gold allocation at all times. After all, isn’t gold a zero real return asset? Well, this is the reason. If bad inflation comes the other components of the portfolio will do poorly, but the gold will react so strongly that it’s likely all the other losses will be overcome. But what about a deflationary situation and these predictions of inflation are wrong? Well, the portfolio holds 25% in Long Term Treasury bonds which will do very well under that scenario.
Can high inflation save the economy?
Dec 11th
An article in Forbes magazine tries to make the case for devaluing the dollar by 40% to help out the economy:
Why not attack the situation in a manner that will benefit most everyone, an approach that has been successful before and, when compared to the current course, has little downside? Here it is. Stand back. World currencies should be devalued overnight.
The Forbes article is riddled with errors about inflation and the gold standard that I won’t address in this post. The short of it is that devaluing the dollar by 40% won’t do anything at all except force the prices of everything else in the market up by 40% overnight as businesses move to protect themselves. It would also drive interest rates on loans through the roof, put many companies into bankruptcy, wipe out huge portions of savings of the average American and make a bad economy much, much worse.
So what if? After all, this is Forbes Magazine discussing the idea so someone thinks it’s good. How would you want to position your finances if the threat of a massive inflation to solve our problems came to pass?