- Published on Thursday, 23 August 2012 14:25
- Written by Bill Bonner, Founder and President, Agora Inc.
- Hits: 735
There are folks who say inflation will never come. They say the rules of economics have changed. We beg to differ.
Still in the dog days of summer, and still the old dog is taking it easy... lying in the shade... panting in the heat of the day.
Not much action in the markets, either. Even the papers are quiet. Economists who would usually be saying stupid things must be on vacation.
That just leaves us!
And what have we got? New ideas? Old ideas? Any ideas at all?
Well, we're just thinking about inflation. More specifically, we were wondering why there isn't more of it... and if there ever will be.
As you know, central banks have doubled the size of their balance sheets over the last five years. The gold price responded. It doubled too.
But consumer prices have gone up at an annual rate of less than 2%. What's the matter with the Consumer Price Index? Can't it read the headlines?
Of course it can! But the headlines it is reading tell it that this is no time for consumer price inflation. Here's an AFP article from yesterday:
The odds the United States will slip back into recession next year have risen, ratings agency Standard & Poor's said, citing risks from the European debt crisis and budget tightening at year-end.
The U.S. ratings firm raised the chance of the U.S. falling into recession to 25%, up from a 20% chance estimated in February, as the world's largest economy struggles to recover from a severe 2008-2009 slump.
It also pointed to the looming possibility of the government being forced by existing law to severely cut spending and increase taxes on Jan. 1, the so-called fiscal cliff that would crunch the economy.
"Economic activity has downshifted sharply from earlier this year," S&P said in a report on North American credit conditions amid global uncertainty, dated Aug. 20.
"At the same time, possible contagion from the European debt crisis, the potential so-called 'fiscal cliff,' and the risk of a hard landing for China's economy have added greater uncertainty to U.S. economic prospects," it said.
In the second quarter, the world's largest economy grew at a 1.5% annual rate, a sharp slowdown from late last year as unemployment remained stuck above 8.0%.
S&P underscored concern about the impact of a recession in the 17-nation eurozone, whose economy contracted 0.2% in the second quarter. S&P forecast a 0.6% contraction this year.
"A double-dip recession in Europe that transmits financial turmoil to the U.S. could push it into recession," the agency said.
Prices don't go up in a recession. They go down. Because the money in bank vaults doesn't get lent out into the consumer economy. And it doesn't push up prices.
And the more people fear that the economy may take a turn for the worse -- with fewer jobs on offer and lower prices available -- the more reluctant they become to borrow and spend.
That's why news from Europe and China is also important. Europe is in recession already. And now British newspaper The Telegraph reports that China -- which was supposed to be the engine that powered the whole world economy out of its funk -- is getting close to a crack-up:
"China is now entering the 'danger zone'," said Kiyohiko Nishimura, the Bank of Japan's deputy governor and an expert on asset booms.
The surge in Chinese home prices and loan growth over the past five years has surpassed extremes seen in Japan before the Nikkei bubble popped in 1990. Construction reached 12% of GDP in China last year; it peaked in Japan at 10%.
Mr. Nishimura said credit and housing booms can remain "benign" so long as the workforce is young and growing. They turn "malign" once the ratio of working age people to dependents rolls over as it did in Japan.
China's ratio will peak at around 2.7 over the next couple of years as the aging crunch arrives. It will then go into a sharp descent, compounded by the delayed effects of the one-child policy.
"Not every bubble-bust episode leads to a financial crisis. However, if a demographic change, a property price bubble and a steep increase in loans coincide, then a financial crisis seems more likely," he said in Sydney at a conference on asset booms.
But what got us to thinking about inflation was an article in the Financial Times by Dan McCrum. He tells us not to worry about it. He says worrying about inflation is just "part of the subculture of Armageddon-upmanship, a world where an economic volcano is always rumbling."
As near as we can make out, Mr. McCrum -- whose photo is on the article and who appears to be about 30 years old -- is unaware that volcanoes sometimes explode. And rising inflation rates are not only possible, but something you really should be worried about. Someone should nudge him with an elbow and whisper in his ear: "Uh, by the way, inflation rates actually rose for 30 years before you were born."
The situation reminds us of what happened in the late 1990s, when young men like McCrum referred to fears of a dot-com bubble as "out of touch with reality." The only reality they knew was the reality of the previous five years -- when the Nasdaq was going crazy.
Geezers like your editor warned that Nasdaq prices were out of order... and that it was madness to think they could go higher. But they did go higher. And the young guns were encouraged to believe they had discovered some kind of new-era miracle. We recall Jim Cramer saying so! ("The old laws of economics no longer apply"... or words to that effect.)
But the laws of economics had not been repealed. They had merely held back. Judgment had not been denied -- just delayed, probably for the amusement of the gods who control these things. (They like to see humans make fools of themselves and lose a lot of money.) In the end, those those who claimed that they and they alone "got" the Internet revolution got it good and hard.
And then, scarcely five years later, a new breed of know-it-all knew that housing prices had to go up. We waited... we held our breath... we kept our own counsel... and we discovered -- surprise, surprise -- they didn't have to go up at all. They could go down... for many years.
And now, young McCrum tells us we have nothing to fear from inflation. "We are awash in predictions of disaster," he continues, "but they are a dangerous way to make investment decisions."
So enjoy the summer. Don't worry about recession... or China... or volcanoes. And don't worry about inflation, either.
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