Thursday, December 01, 2011

Potential for massive inflation winning over potential for deflation

Up until the past week I was torn between the probability of the US economy heading into deflation or heading into significant inflation.  Experts such as Harry Dent in his recent new book “The Great Crash Ahead” gave a sound argument for deflation in the coming decade.  However, with all due respect to Harry, I don’t think he considered that the scale of perpetual “quantitative easing” (aka printing hundreds of billions of dollars out of nothing) – to not only prop up our own US banks, but to prop up banks around the world -would reach the level it has.

The Euro’s crash appeared imminent to many, perhaps within days.  With the interconnectedness of international banking, the risk of the failure of the Euro has the additional risk of crashing banks not only throughout Europe, but in the US as well.  Earlier this week the US Fed took the unprecedented action of providing US dollars in exchange for risky Euro’s to avert Euro Armageddon and the likely follow-on world banking Armageddon.  More details of this move by the Fed and other banking systems are given HERE.

This action is seen by some experts as the Fed embarking on “perpetual quantitative easing.”  Never mind QE 3 or QE 4.   We now have QE infinity.

This puts a whole new twist on Dent’s predictions.  The clearer direction at this point is significant inflation

The following are several resources I have reviewed to come to these revised conclusions:

Perpetual Q.E. Without The Billboard, Hyper Monetary Inflation

Currency Wars, a highly rated new book on Amazon

The Great Supercycle

When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany

This last book explains why a government in debt up to its eyeballs prefers wealth-stealing inflation over deflation:

The Inflation Deception: Six Ways Government Tricks Us...and Seven Ways to Stop It!


jim said...

The government no doubt prefers inflation.

But what makes you think the government gets what it wants?

Inflation post WW2 has been driven by relentlessly exponentially expanding US private sector debt. Then suddenly at the end of 2008 the private sector stopped borrowing and private debt has been contracting since.

So far it looks like the governments efforts to restore inflation (by restoring the private credit engine that caused inflation) has been an exercise in dead horse whipping

Gerardo Moochie said...

You are correct. Government is certainly not now getting what it wants. The problem with government is "oversteer". Just like maneuvering on an icy highway in a semi, there are delayed reactions sometimes with cataclysmic consequences. Look for an example of this on a new December 23 blog.

Government often overcompensates to bring about desired results (in this case its' cherished "inflation". This over-meddling/over-stimulating, in the minds of many will result in a short-lived economic boom that will lead to severe inflation.