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Fleursdumal
फूल की बुराई
ciao cè buon week 
ditroooooooo mostrando quei boschetti fai propaganda subdola per il cespuglio maior
ditroooooooo mostrando quei boschetti fai propaganda subdola per il cespuglio maior
Fleursdumal
फूल की बुराई
Un pò lungo e impegnativo da tradurre ma interessante.
Solletico anche ditro in quanto verso la fine parla di uno shortage sul lumber
AN AUSTRIAN ANALYSIS OF U.S. INFLATION
Krassimir Petrov, Ph.D.
ABSTRACT
The inflation-deflation debate continues unabated. From an Austrian point of view, U.S. inflation today is relatively low, hence in coming years inflation will continue to accelerate. Therefore, investors must adopt an inflationary investment strategy.
I. INTRODUCTION
The inflation-deflation debate continues to intensify. I completely concur with renowned financial analyst Jim Puplava that the most important part of any investor's strategy for this decade involves the correct analysis and forecast of the inflation-deflation development of the U.S. economy. In a deflationary environment, the appropriate strategy involves investing in bonds and cash; this strategy, however, in an inflationary environment will prove suicidal. Therefore, correct prediction of monetary developments becomes crucial for investor survival.
The objective of this article is to present an Austrian analysis of the inflation-deflation debate. We present the Austrian stages of inflation, provide the crucial criteria that allow us to differentiate between those stages, and illustrate them with prominent examples. Then we apply the Austrian inflation theory to the current U.S. monetary environment and infer the current stage of inflation, the likely monetary developments in the future, and the appropriate investment strategies in this environment.
II. STAGES OF INFLATION: THEORY
Qualitatively, there are three stages of inflation. We will simply call these stages:
Low inflation
High inflation
Hyperinflation
Unfortunately, established Austrian terminology on inflation varies widely and is inconsistent even among the classical authors, namely Mises and Rothbard. One of our goals is in this section is to introduce and explain some of these terminological variations.
We define inflation to be "low" when consumer prices grow slower than money supply. In other words, even though money supply increases, general prices rise slower. Because of this, some people refer to this stage as "hidden inflation": there is indeed inflation, but you don't see much of it. Prices rise slower for two related reasons. First, because people believe that the price increases are temporary and that prices will soon get back to normal, they spend less from the new money and increase their cash holdings in anticipation of the more favorable prices in the future. In short, the social demand for money increases. Second, because people have more cash, rather than spending it all, some of it will be channeled into various investments, such as stocks, bonds, and real estate. Therefore, asset prices begin to rise; many people mistakenly think of these as bull markets and not as inflation. In addition, incomes rise faster than inflation, thus the real purchasing power of consumers, businesses, and the government increases. Rising incomes, coupled with stock, bond, and real estate bull markets generate a sense of prosperity. Economic activity accelerates, and a boom is under way. Everyone sees the benefits of inflation, and no one sees its drawbacks. Optimists call it "good", politicians call it "benign", bankers call it "under control", and poets call it "tame"; yet for Austrians it is only a prelude to even more inflation.
Now comes the crucial point to emphasize about the stage of low inflation: because the government generates revenue out of the increased money supply, since money supply grows faster than prices, the government actually increases its real purchasing power. This extra purchasing power is popularly known as an "inflation tax". In short, the government benefits directly from "low" inflation. As a corollary, as long as inflation is low, the government stands to benefit from it and will therefore continue to inflate.
However, low inflation cannot last forever. Sooner or later, people wake up to the fact that inflation is here to stay and that current high prices will get even higher. They realize that they gain by buying now, so they step up their purchases. General prices now begin to accelerate higher. As a result, the government revenue falls in real terms, and if the government accelerates the money supply, consumers respond by accelerating even further their purchases. Now consumers begin to spend not only all the new cash that they get, but also that extra cash that they have hoarded while inflation was low. At this point prices begin to increase faster than money supply. Now the economy switches into a qualitatively different regime: from one of "low" inflation, to one of "high" inflation. As Rothbard puts it in his Man, Economy, and State, "This stage of inflation is the beginning of hyperinflation, of the runaway boom" (p. 876, 4E). In economic terms, the increase in the quantity of money causes a fall in the demand for money. Now inflation has reared its ugly head. It is no longer benign, but vicious. Prices continue to rise and incomes can't keep up with them; real incomes fall and people begin to feel impoverished. Interest rates begin to reflect the new inflationary expectations and as a result begin to rise. As a consequence, bond prices fall, the stock market drops, and real estate falters. Feelings of prosperity vanish, and consumers retrench their spending. Good times turn into bad times (even though technically these are still boom times and the bust has not yet even begun). As the situation continues to exacerbate, prices rise further while at the same time people reduce their cash holdings. As a result, a crisis develops where there is a perceived shortage for cash, and there are more cries for further inflation in order to alleviate the cash shortage.
At this point, two scenarios are possible: (1) hyperinflation or (2) deflationary bust. In the first scenario, the situation gets so out of control that financial authorities oblige the public's demand for more money and accelerate the money supply, now almost exponentially. This is hyperinflation, the third and terminal stage of inflation. Mises refers to this as flight into real goods or the crack-up boom. His description from Human Action is as follows: "Everybody is anxious to swap his money against real goods, no matter whether he needs them or not, no matter how much money he has to pay for them" (p. 428). And Rothbard calls it flight from money and describes it as "getting rid of money as soon as possible in order to invest in real goods-almost any real goods-as a store of value for the future. This mad scramble away from money, lowering the demand for money to hold to practically zero, causes prices to rise upward in astronomical proportions. The value of the monetary unit falls practically to zero… The economy in effect breaks down" (p. 876). Hyperinflation ruins the middle class and wipes out the fixed income groups. It ultimately leads to unemployment and lower standards of living.
In the second scenario, before runaway inflation gets totally out of control, the pain of inflation becomes so unbearable and widespread that the government has no choice but to put an end to it. More importantly, as opposed to the clear benefits from low inflation, during high inflation, the benefits of the government from more printing are actually increasingly negative, since price inflation quickly erodes the purchasing power of the budget. Having little to gain, and standing to lose even more, the government reluctantly stops the printing presses, terminates the boom, and the bust begins its course. According to Rothbard, the bust is clearly better than hyperinflation. For the purposes of our analysis, description of the bust is irrelevant.
The observant reader will have noted the inconsistent and even confusing terminology for the second and the third stages of inflation. For example, Rothbard refers to the second stage as "the beginning of hyperinflation" and "the runaway boom", and the third stage as "hyperinflation", "runaway inflation", and "flight from money", yet Mises calls the third stage "flight into real goods" and "crack-up boom". This somewhat confusing terminology may be partially explained by the fact that neither author delineated clearly the second and the third stage, and for a good reason: the third stage is a natural outgrowth of the second, and there is no well-defined qualitative distinction between the two. In other words, in the first stage, demand for money increases, in the second stage-decreases, and in the third stage-"drops to practically zero" (Rothbard). It is hard to tell where decreasing demand begins to approach, for all practical purposes, zero, thus the distinction is rather blurry.
III. STAGES OF INLFATION: EXAMPLES
A well-known, worn-out example from Mises' The Theory of Money and Credit vividly illustrates the psychology of the three stages. From p. 459 of the 1980 Hardcover Edition:
Inflation works as long as the housewife thinks: "I need a new frying pan badly. But prices are too high today; I shall wait until they drop again." It comes to an abrupt end when people discover that the inflation will continue, that it causes the rise in prices, and that therefore prices will skyrocket infinitely. The critical stage begins when the housewife thinks: "I don't need a new frying pan today; I may need one in a year or two. But I'll buy it today because it will be much more expensive later." Then the catastrophic end of the inflation is close. In its last stage the housewife thinks: "I don't need another table; I shall never need one. But it's wiser to buy a table than keep these scraps of paper that the government calls money, one minute longer."
Our second illustration comes from Jim Puplava's latest installment in his StormWatch Series, The Carry Trade Economy, where he quotes Jens Parsson's Dying of Money p. 31:
Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular prosperity, all in the midst of temporary stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the later effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock prices, rising taxes, still larger government deficits, and still soaring money expansion, now accompanied by soaring prices and the ineffectiveness of all traditional remedies. Everyone pays and no longer benefits. That is the full cycle of every inflation. [Emphasis added by Jim Puplava]
IV. THE CURRENT STAGE OF U.S. INFLATION
Generally, the CPI for the last 12 months runs about 2.7%, and similar CPI measures annualized over the last 3, 6, 9 months or 1-3 years run somewhere between 1.5% and 3%. Some relatively aggressive "unofficial" estimates run in the 5-7% range.
More specifically, from official BLS data, CPI (All Urban Consumers) stood on 01/2001 at 175.1 and on 01/2004 at 185.2, for a 3-year growth of 5.8%, and an annualized rate of 1.9%.
At the same time, growth of money supply, as measured by M3, runs in the 7-8% range, again depending on the period of annualization. More specifically, from official Federal Reserve data for the same period, M3 on 01/2001 was $7.250T and on 01/2004 was $8.911T. In other words, the three-year growth of M3 was 23%, which amounts to an annualized growth rate of 7.1%.
Therefore, we must conclude that over the 2001-2004 period, consumer prices grew at a considerably slower rate than broad money supply. Thus, U.S. inflation today is still in its first stage.
A couple of important notes are in order here. First, the choice of 01/2004 as a cutoff point has been made for convenience. Over the course of 2004, neither the CPI nor M3 growth has shown any material changes in trends that may invalidate the above analysis. Second, specific variations of the CPI measure, such as "core" CPI, do not alter the analysis either. Finally, even providing for more aggressive inflation measures does not change the conclusions of our analysis; for example, recent analysis of the CPI by Walter Williams indicates that the CPI has, on average, underestimated "true" inflation by 2.7% annually.
Supporting our conclusion that we are still today in the first stage of inflation is a raft of anecdotal evidence from Wall Street economists, government officials, politicians, and even financial journalists. More importantly, many consumers are currently rather sanguine about inflation (i.e. price increases). They have little concern over the fall of the dollar on foreign exchanges. Consumers' major concerns today are about increases in gasoline prices and rising real estate. The connection between inflation and real estate has been close over the last few years. After the technology bust, consumers chose real estate as a substitute for the stock market, realizing that the dollar loses rapidly its value against real estate. This per se does not yet represent "flight from money", however it is evidence that consumers have begun their shift into assets that they believe would hold their value better than the dollar. This effect we may aptly call "flight into real estate". It also explains why in recent years consumer prices have grown less than money supply: new money has flown mostly into real estate (and mortgages) and has not yet tangibly spilled over into consumer goods. For a better understanding of this process, providing a proper historical perspective, extensive Austrian analysis, and examples, I recommend Robert Blumen's recent article "Weimar and Wall Street".
V. MORE INFLATION AHEAD
Having properly grounded our analysis in Austrian inflation theory, we can finally draw our conclusions. First, there is little doubt that U.S. inflation today is "low", as defined and explained in Section II above. As a result, the government will aggressively pursue inflationary monetary policy because it clearly stands to benefit from it. Given the current fiat monetary system, there is nothing to stop or restrain more inflation in the future, short of tremors in derivatives. Given that "low" inflation can last for many years and that inflationary psychology changes very slowly, I expect that the United States will continue to have "low" inflation for another couple of years, possibly three, four, or even more. It is important to realize that as prices begin to rise faster, at the 4-6% rate, the Fed will step up its inflationary policy in order to keep ahead of prices and to sustain and prolong the government benefits from inflation.
Second, it is important to understand that when inflation moves to its second stage, the Fed will continue to inflate for a few more years. One reason is that the government will still need the extra revenue, even though its value will rapidly dwindle. Second, the political process of government budget planning will require two or three years to accommodate to the drastically reduced real revenue before inflation can be abandoned as a source of revenue. Third, inflation will not be abandoned until there is a widespread growing pain and popular outcry to end inflation, whatever the consequences may be. Fourth, inflation will be stopped only after the realization that inflation hurts the real economy and leads to job losses. Therefore, "high" inflation can go on for many years, three to five won't be unreasonable, before it is finally abandoned.
Therefore, we must expect more inflation for the next 6-10 years: 3-5 more years for stage one to mature and morph into stage two, and 3-5 more years for stage two to develop and mature. I will readily admit that these are only rough estimates, based on historical knowledge and adjusting for the role of the U.S. dollar, and each stage could admittedly last longer or be truncated by sudden, unforeseen events, such as a dollar crisis or a derivative crisis. However, it is a safe bet that inflation will be with us to stay for many more years.
I would like to emphasize that nowhere did I indicate that there would not be any deflation. I am also not saying that those that predict inflation are right, and those that predict deflation are wrong. On the contrary, I predict that eventually deflationists will get their deflation, but they better be prepared to wait for another decade before their wish is granted. Notwithstanding their constant cries that deflation is just around the corner, a rigorous Austrian analysis demonstrates that this is not really the case. Notwithstanding their constant threats that deflationary forces are too strong to overcome by sheer inflation, in a fiat monetary system this is clearly not the case either. In a fiat monetary system, there is always a way to inflate, because there are no limits to what the Fed can monetize and how much to monetize. Therefore, I forecast that the United States will have continuous inflation until 2010-2015, before deflation is allowed to take over. And, if a pundit predicts deflation, make sure you find out whether they have sold their house or not; on this, the reader is referred to Gary North's "Testing The Deflationist".
Before we turn our attention to the ultimate endgame, we must observe that inflation has been going on for too long in the United States. As a result, the economy has developed too many distortions and accumulated too many malinvestments. Therefore, it is likely that the economy will perform rather poorly over the next 5-10 years, although when the Chinese bubble economy eventually falls into a Great Depression, so will the American economy; on this, the reader is referred to the article "China's Great Depression". However, we must emphasize that Depression or bust do not necessarily mean deflation, as many people erroneously assume. In other words, I predict many years of stagflation, before America ultimately succumbs to another Great Depression.
The ultimate endgame presents the choice between hyperinflation and deflation. This is the third stage of inflation, and at this point it is purely a matter of speculation as to which way the monetary system will tip. From an economic point of view, deflation is clearly the better of two evils, or so Rothbard tells us. However, it is far from clear that deflation is a choice given the overhang of derivatives on the financial markets. When derivatives begin to cascade in a series of cross-defaults, their monetization is likely to lead to a sudden burst of hyperinflation. Therefore, I believe that the ultimate outcome, hyperinflation or bust, will crucially depend on how the derivatives problem is handled. For more on money, inflation, and the ultimate endgame, the reader is referred to Jim Puplava's "The Great Inflation".
VI. CONCLUSION
In conclusion, the U.S. still has many years of inflation before the endgame arrives. The intelligent investor is advised to position himself accordingly. Cash and bonds are obviously good for deflation, but a terrible investment choice in an inflationary environment. The obvious choices are hard assets (precious metals, industrial commodities, real estate) and strong foreign currencies.
Personally, I have my doubts about real estate. As a student of speculative manias, there is no doubt in my mind that real estate is in a bubble of historic proportions that is destined to burst. As such, real estate is grossly overvalued and must be avoided. On the other hand, commodity shortages due to China's and India's industrialization are practically across the board. Today, we hear of shortages in steel, copper, lumber, and cement, to mention a few. Worries and concerns about energy are practically front-page news. Energy problems are here to stay with us for the next decade or two, and the energy sector presents spectacular investment opportunities; for more on energy, I refer the reader to Julian Darley.
Yet demand for commodities is dependent on a strong worldwide economy. A worldwide depression will hardly prove bullish for commodities. In such an environment, commodities and energy may no longer be expected to be safe and profitable bets, as explained in Oil Performance in a Worldwide Depression; only precious metals will provide the ultimate safe-haven in such an environment. Even though gold is the ultimate choice, I believe that over the next decade, silver will outperform all investments, whether boom or bust, inflation or deflation; for more on silver, I refer the reader to the excellent work of Dave Morgan and Ted Butler.
Krassimir Petrov, Ph.D.
09/26/2004
[email protected]
Also by the Author:
Masters of Austrian Financial Analysis
China's Great Depression
Oil Performance in a Worldwide Depression
Solletico anche ditro in quanto verso la fine parla di uno shortage sul lumber
AN AUSTRIAN ANALYSIS OF U.S. INFLATION
Krassimir Petrov, Ph.D.
ABSTRACT
The inflation-deflation debate continues unabated. From an Austrian point of view, U.S. inflation today is relatively low, hence in coming years inflation will continue to accelerate. Therefore, investors must adopt an inflationary investment strategy.
I. INTRODUCTION
The inflation-deflation debate continues to intensify. I completely concur with renowned financial analyst Jim Puplava that the most important part of any investor's strategy for this decade involves the correct analysis and forecast of the inflation-deflation development of the U.S. economy. In a deflationary environment, the appropriate strategy involves investing in bonds and cash; this strategy, however, in an inflationary environment will prove suicidal. Therefore, correct prediction of monetary developments becomes crucial for investor survival.
The objective of this article is to present an Austrian analysis of the inflation-deflation debate. We present the Austrian stages of inflation, provide the crucial criteria that allow us to differentiate between those stages, and illustrate them with prominent examples. Then we apply the Austrian inflation theory to the current U.S. monetary environment and infer the current stage of inflation, the likely monetary developments in the future, and the appropriate investment strategies in this environment.
II. STAGES OF INFLATION: THEORY
Qualitatively, there are three stages of inflation. We will simply call these stages:
Low inflation
High inflation
Hyperinflation
Unfortunately, established Austrian terminology on inflation varies widely and is inconsistent even among the classical authors, namely Mises and Rothbard. One of our goals is in this section is to introduce and explain some of these terminological variations.
We define inflation to be "low" when consumer prices grow slower than money supply. In other words, even though money supply increases, general prices rise slower. Because of this, some people refer to this stage as "hidden inflation": there is indeed inflation, but you don't see much of it. Prices rise slower for two related reasons. First, because people believe that the price increases are temporary and that prices will soon get back to normal, they spend less from the new money and increase their cash holdings in anticipation of the more favorable prices in the future. In short, the social demand for money increases. Second, because people have more cash, rather than spending it all, some of it will be channeled into various investments, such as stocks, bonds, and real estate. Therefore, asset prices begin to rise; many people mistakenly think of these as bull markets and not as inflation. In addition, incomes rise faster than inflation, thus the real purchasing power of consumers, businesses, and the government increases. Rising incomes, coupled with stock, bond, and real estate bull markets generate a sense of prosperity. Economic activity accelerates, and a boom is under way. Everyone sees the benefits of inflation, and no one sees its drawbacks. Optimists call it "good", politicians call it "benign", bankers call it "under control", and poets call it "tame"; yet for Austrians it is only a prelude to even more inflation.
Now comes the crucial point to emphasize about the stage of low inflation: because the government generates revenue out of the increased money supply, since money supply grows faster than prices, the government actually increases its real purchasing power. This extra purchasing power is popularly known as an "inflation tax". In short, the government benefits directly from "low" inflation. As a corollary, as long as inflation is low, the government stands to benefit from it and will therefore continue to inflate.
However, low inflation cannot last forever. Sooner or later, people wake up to the fact that inflation is here to stay and that current high prices will get even higher. They realize that they gain by buying now, so they step up their purchases. General prices now begin to accelerate higher. As a result, the government revenue falls in real terms, and if the government accelerates the money supply, consumers respond by accelerating even further their purchases. Now consumers begin to spend not only all the new cash that they get, but also that extra cash that they have hoarded while inflation was low. At this point prices begin to increase faster than money supply. Now the economy switches into a qualitatively different regime: from one of "low" inflation, to one of "high" inflation. As Rothbard puts it in his Man, Economy, and State, "This stage of inflation is the beginning of hyperinflation, of the runaway boom" (p. 876, 4E). In economic terms, the increase in the quantity of money causes a fall in the demand for money. Now inflation has reared its ugly head. It is no longer benign, but vicious. Prices continue to rise and incomes can't keep up with them; real incomes fall and people begin to feel impoverished. Interest rates begin to reflect the new inflationary expectations and as a result begin to rise. As a consequence, bond prices fall, the stock market drops, and real estate falters. Feelings of prosperity vanish, and consumers retrench their spending. Good times turn into bad times (even though technically these are still boom times and the bust has not yet even begun). As the situation continues to exacerbate, prices rise further while at the same time people reduce their cash holdings. As a result, a crisis develops where there is a perceived shortage for cash, and there are more cries for further inflation in order to alleviate the cash shortage.
At this point, two scenarios are possible: (1) hyperinflation or (2) deflationary bust. In the first scenario, the situation gets so out of control that financial authorities oblige the public's demand for more money and accelerate the money supply, now almost exponentially. This is hyperinflation, the third and terminal stage of inflation. Mises refers to this as flight into real goods or the crack-up boom. His description from Human Action is as follows: "Everybody is anxious to swap his money against real goods, no matter whether he needs them or not, no matter how much money he has to pay for them" (p. 428). And Rothbard calls it flight from money and describes it as "getting rid of money as soon as possible in order to invest in real goods-almost any real goods-as a store of value for the future. This mad scramble away from money, lowering the demand for money to hold to practically zero, causes prices to rise upward in astronomical proportions. The value of the monetary unit falls practically to zero… The economy in effect breaks down" (p. 876). Hyperinflation ruins the middle class and wipes out the fixed income groups. It ultimately leads to unemployment and lower standards of living.
In the second scenario, before runaway inflation gets totally out of control, the pain of inflation becomes so unbearable and widespread that the government has no choice but to put an end to it. More importantly, as opposed to the clear benefits from low inflation, during high inflation, the benefits of the government from more printing are actually increasingly negative, since price inflation quickly erodes the purchasing power of the budget. Having little to gain, and standing to lose even more, the government reluctantly stops the printing presses, terminates the boom, and the bust begins its course. According to Rothbard, the bust is clearly better than hyperinflation. For the purposes of our analysis, description of the bust is irrelevant.
The observant reader will have noted the inconsistent and even confusing terminology for the second and the third stages of inflation. For example, Rothbard refers to the second stage as "the beginning of hyperinflation" and "the runaway boom", and the third stage as "hyperinflation", "runaway inflation", and "flight from money", yet Mises calls the third stage "flight into real goods" and "crack-up boom". This somewhat confusing terminology may be partially explained by the fact that neither author delineated clearly the second and the third stage, and for a good reason: the third stage is a natural outgrowth of the second, and there is no well-defined qualitative distinction between the two. In other words, in the first stage, demand for money increases, in the second stage-decreases, and in the third stage-"drops to practically zero" (Rothbard). It is hard to tell where decreasing demand begins to approach, for all practical purposes, zero, thus the distinction is rather blurry.
III. STAGES OF INLFATION: EXAMPLES
A well-known, worn-out example from Mises' The Theory of Money and Credit vividly illustrates the psychology of the three stages. From p. 459 of the 1980 Hardcover Edition:
Inflation works as long as the housewife thinks: "I need a new frying pan badly. But prices are too high today; I shall wait until they drop again." It comes to an abrupt end when people discover that the inflation will continue, that it causes the rise in prices, and that therefore prices will skyrocket infinitely. The critical stage begins when the housewife thinks: "I don't need a new frying pan today; I may need one in a year or two. But I'll buy it today because it will be much more expensive later." Then the catastrophic end of the inflation is close. In its last stage the housewife thinks: "I don't need another table; I shall never need one. But it's wiser to buy a table than keep these scraps of paper that the government calls money, one minute longer."
Our second illustration comes from Jim Puplava's latest installment in his StormWatch Series, The Carry Trade Economy, where he quotes Jens Parsson's Dying of Money p. 31:
Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular prosperity, all in the midst of temporary stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the later effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock prices, rising taxes, still larger government deficits, and still soaring money expansion, now accompanied by soaring prices and the ineffectiveness of all traditional remedies. Everyone pays and no longer benefits. That is the full cycle of every inflation. [Emphasis added by Jim Puplava]
IV. THE CURRENT STAGE OF U.S. INFLATION
Generally, the CPI for the last 12 months runs about 2.7%, and similar CPI measures annualized over the last 3, 6, 9 months or 1-3 years run somewhere between 1.5% and 3%. Some relatively aggressive "unofficial" estimates run in the 5-7% range.
More specifically, from official BLS data, CPI (All Urban Consumers) stood on 01/2001 at 175.1 and on 01/2004 at 185.2, for a 3-year growth of 5.8%, and an annualized rate of 1.9%.
At the same time, growth of money supply, as measured by M3, runs in the 7-8% range, again depending on the period of annualization. More specifically, from official Federal Reserve data for the same period, M3 on 01/2001 was $7.250T and on 01/2004 was $8.911T. In other words, the three-year growth of M3 was 23%, which amounts to an annualized growth rate of 7.1%.
Therefore, we must conclude that over the 2001-2004 period, consumer prices grew at a considerably slower rate than broad money supply. Thus, U.S. inflation today is still in its first stage.
A couple of important notes are in order here. First, the choice of 01/2004 as a cutoff point has been made for convenience. Over the course of 2004, neither the CPI nor M3 growth has shown any material changes in trends that may invalidate the above analysis. Second, specific variations of the CPI measure, such as "core" CPI, do not alter the analysis either. Finally, even providing for more aggressive inflation measures does not change the conclusions of our analysis; for example, recent analysis of the CPI by Walter Williams indicates that the CPI has, on average, underestimated "true" inflation by 2.7% annually.
Supporting our conclusion that we are still today in the first stage of inflation is a raft of anecdotal evidence from Wall Street economists, government officials, politicians, and even financial journalists. More importantly, many consumers are currently rather sanguine about inflation (i.e. price increases). They have little concern over the fall of the dollar on foreign exchanges. Consumers' major concerns today are about increases in gasoline prices and rising real estate. The connection between inflation and real estate has been close over the last few years. After the technology bust, consumers chose real estate as a substitute for the stock market, realizing that the dollar loses rapidly its value against real estate. This per se does not yet represent "flight from money", however it is evidence that consumers have begun their shift into assets that they believe would hold their value better than the dollar. This effect we may aptly call "flight into real estate". It also explains why in recent years consumer prices have grown less than money supply: new money has flown mostly into real estate (and mortgages) and has not yet tangibly spilled over into consumer goods. For a better understanding of this process, providing a proper historical perspective, extensive Austrian analysis, and examples, I recommend Robert Blumen's recent article "Weimar and Wall Street".
V. MORE INFLATION AHEAD
Having properly grounded our analysis in Austrian inflation theory, we can finally draw our conclusions. First, there is little doubt that U.S. inflation today is "low", as defined and explained in Section II above. As a result, the government will aggressively pursue inflationary monetary policy because it clearly stands to benefit from it. Given the current fiat monetary system, there is nothing to stop or restrain more inflation in the future, short of tremors in derivatives. Given that "low" inflation can last for many years and that inflationary psychology changes very slowly, I expect that the United States will continue to have "low" inflation for another couple of years, possibly three, four, or even more. It is important to realize that as prices begin to rise faster, at the 4-6% rate, the Fed will step up its inflationary policy in order to keep ahead of prices and to sustain and prolong the government benefits from inflation.
Second, it is important to understand that when inflation moves to its second stage, the Fed will continue to inflate for a few more years. One reason is that the government will still need the extra revenue, even though its value will rapidly dwindle. Second, the political process of government budget planning will require two or three years to accommodate to the drastically reduced real revenue before inflation can be abandoned as a source of revenue. Third, inflation will not be abandoned until there is a widespread growing pain and popular outcry to end inflation, whatever the consequences may be. Fourth, inflation will be stopped only after the realization that inflation hurts the real economy and leads to job losses. Therefore, "high" inflation can go on for many years, three to five won't be unreasonable, before it is finally abandoned.
Therefore, we must expect more inflation for the next 6-10 years: 3-5 more years for stage one to mature and morph into stage two, and 3-5 more years for stage two to develop and mature. I will readily admit that these are only rough estimates, based on historical knowledge and adjusting for the role of the U.S. dollar, and each stage could admittedly last longer or be truncated by sudden, unforeseen events, such as a dollar crisis or a derivative crisis. However, it is a safe bet that inflation will be with us to stay for many more years.
I would like to emphasize that nowhere did I indicate that there would not be any deflation. I am also not saying that those that predict inflation are right, and those that predict deflation are wrong. On the contrary, I predict that eventually deflationists will get their deflation, but they better be prepared to wait for another decade before their wish is granted. Notwithstanding their constant cries that deflation is just around the corner, a rigorous Austrian analysis demonstrates that this is not really the case. Notwithstanding their constant threats that deflationary forces are too strong to overcome by sheer inflation, in a fiat monetary system this is clearly not the case either. In a fiat monetary system, there is always a way to inflate, because there are no limits to what the Fed can monetize and how much to monetize. Therefore, I forecast that the United States will have continuous inflation until 2010-2015, before deflation is allowed to take over. And, if a pundit predicts deflation, make sure you find out whether they have sold their house or not; on this, the reader is referred to Gary North's "Testing The Deflationist".
Before we turn our attention to the ultimate endgame, we must observe that inflation has been going on for too long in the United States. As a result, the economy has developed too many distortions and accumulated too many malinvestments. Therefore, it is likely that the economy will perform rather poorly over the next 5-10 years, although when the Chinese bubble economy eventually falls into a Great Depression, so will the American economy; on this, the reader is referred to the article "China's Great Depression". However, we must emphasize that Depression or bust do not necessarily mean deflation, as many people erroneously assume. In other words, I predict many years of stagflation, before America ultimately succumbs to another Great Depression.
The ultimate endgame presents the choice between hyperinflation and deflation. This is the third stage of inflation, and at this point it is purely a matter of speculation as to which way the monetary system will tip. From an economic point of view, deflation is clearly the better of two evils, or so Rothbard tells us. However, it is far from clear that deflation is a choice given the overhang of derivatives on the financial markets. When derivatives begin to cascade in a series of cross-defaults, their monetization is likely to lead to a sudden burst of hyperinflation. Therefore, I believe that the ultimate outcome, hyperinflation or bust, will crucially depend on how the derivatives problem is handled. For more on money, inflation, and the ultimate endgame, the reader is referred to Jim Puplava's "The Great Inflation".
VI. CONCLUSION
In conclusion, the U.S. still has many years of inflation before the endgame arrives. The intelligent investor is advised to position himself accordingly. Cash and bonds are obviously good for deflation, but a terrible investment choice in an inflationary environment. The obvious choices are hard assets (precious metals, industrial commodities, real estate) and strong foreign currencies.
Personally, I have my doubts about real estate. As a student of speculative manias, there is no doubt in my mind that real estate is in a bubble of historic proportions that is destined to burst. As such, real estate is grossly overvalued and must be avoided. On the other hand, commodity shortages due to China's and India's industrialization are practically across the board. Today, we hear of shortages in steel, copper, lumber, and cement, to mention a few. Worries and concerns about energy are practically front-page news. Energy problems are here to stay with us for the next decade or two, and the energy sector presents spectacular investment opportunities; for more on energy, I refer the reader to Julian Darley.
Yet demand for commodities is dependent on a strong worldwide economy. A worldwide depression will hardly prove bullish for commodities. In such an environment, commodities and energy may no longer be expected to be safe and profitable bets, as explained in Oil Performance in a Worldwide Depression; only precious metals will provide the ultimate safe-haven in such an environment. Even though gold is the ultimate choice, I believe that over the next decade, silver will outperform all investments, whether boom or bust, inflation or deflation; for more on silver, I refer the reader to the excellent work of Dave Morgan and Ted Butler.
Krassimir Petrov, Ph.D.
09/26/2004
[email protected]
Also by the Author:
Masters of Austrian Financial Analysis
China's Great Depression
Oil Performance in a Worldwide Depression
Fleursdumal
फूल की बुराई
l'euruzz sta prendendo i max di giornata , quindi possibile che anche i bonds seguano formando l'ultima gamba rialzista
preso un long di 5y a 111-85/32 stop strettissimo 4 ticks sotto in modo da uscire se rompe al ribasso la fascia di congestione di breve
preso un long di 5y a 111-85/32 stop strettissimo 4 ticks sotto in modo da uscire se rompe al ribasso la fascia di congestione di breve
Fleursdumal
फूल की बुराई
un fà lo sfaticato e leggi
intanto portato lo sl un tick avanti l'ingresso e attendo r1 del 5y per mollarlo
uè hai visto che il marzo del cotone è andato a sconto sul dicembre? inizio a vedermi un pò la situazione nel week , i margini son pure calati a 1200$ da 1700
intanto portato lo sl un tick avanti l'ingresso e attendo r1 del 5y per mollarlo
uè hai visto che il marzo del cotone è andato a sconto sul dicembre? inizio a vedermi un pò la situazione nel week , i margini son pure calati a 1200$ da 1700
ditropan
Forumer storico
Fleursdumal ha scritto:un fà lo sfaticato e leggi
intanto portato lo sl un tick avanti l'ingresso e attendo r1 del 5y per mollarlo
uè hai visto che il marzo del cotone è andato a sconto sul dicembre? inizio a vedermi un pò la situazione nel week , i margini son pure calati a 1200$ da 1700
Leggerò domani adesso ho tutto il sangue nello stomaco per cercare di digerire una sorta di mattone di calamari fritti ... ergo non stò capendo una mazza !!!
:smile: Intanto quel cornutazzo del crudo ha chiuso praticamente sui max ... io non ho ancora sbolognato nulla e non vedo l'ora che bush si levi dai peones !!!
... così si presenta il crudo praticamente in chiusura ....
ragazzi io stacco buon we a tutti .
... e tu neo papà di un fleurs vedi di fare il bravo con tua figlia e fammi pure precipitare quel quasso di tbond !!!
Maandiiiii !!!
Fleursdumal
फूल की बुराई
cia testyna di gemona
intanto non mi ha preso su r1 per un misero tick, aspetto e intanto per far qualcosa avanzo il takeprofit di qualche frazionale
intanto non mi ha preso su r1 per un misero tick, aspetto e intanto per far qualcosa avanzo il takeprofit di qualche frazionale
