A debate is waging between the deflationists and inflationists. It will come as no surprise to those who’ve read my previous posts on the subject that I fall into the latter camp. I have indicated numerous times that I’ve put my money where my mouth is. In January, I was so convinced that there would be inflation, that I eventually decided to implement a strategy of holding little cash but rather oil and gas and gold mining stocks. I’ve also shorted the US dollar. This strategy is paying off handsomely so far. Besides the inflationists have many decades of contemporary monetary history to back their point of view, and the knowledge that government deficits generally feed inflation. The current Obama deficit is profligate and never seen in the US before Obama. In Bloomberg, David Reilly asks whose face should go on the $1,000,000 bill, but never suggests Obama, apparently because he is afraid to be put on the President’s enemy list.
It is true that the credit bubble was popped last Autumn, and this caused deflation. But this has been reversed. Consumers don’t see it yet because consumer goods haven’t increased in price yet. But rising prices is not the definition of inflation. One mustn’t confuse the symptom with the cause. Inflation is caused by an expansion of the money supply without a corresponding growth in real wealth (i.e., goods and services). When the supply of money is inflated, prices will rise to accommodate it. This is what is already happening to gold, oil, and the stock market. In Canada, there is an increase in real estate prices. Next, consumer prices will catch up and everyone will feel the pain when their pay cheque won’t go as far. Witness that oil is already back above $80 per barrel, gold is above 1050, and the Canadian dollar is almost en par with the dollar. These are all symptomatic of the re-inflation of the US money supply. Meanwhile, the Koreans are buying Harvest Energy Trust, a sign that the Asian, creditor nations are abandoning the dollar for hard assets in commodity interests around the world, including Africa.
Irwin Seltzer writes in a his column, “The Dethroning of King Dollar?“:
Which puts the ball right back in the Fed’s court. Unless Bernanke drains liquidity from the financial system, and shrinks the Fed’s balance sheet by winding down $2 trillion in support programs — and does so precisely when the recovery takes hold so as not to cause a relapse by moving too early — the dollar’s decline will accelerate, shattering confidence in its long-term value. One well-respected expert tells me that in two-to-five years the dollar will no longer be considered safe enough to be the currency in which the world does business. Its replacement: separate deals in local currencies — the Chinese paying for Brazil’s oil in renminbi, which the Brazilians use to purchase stuff made in China — and the International Monetary Fund’s drawing rights, bits of paper backed by a basket of currencies, including but not limited to the dollar. That would mark the end of an era that has seen world trade flourish and millions emerge from poverty. Sad.