The new Marketwatch columnist who won the competition to become their “World’s next great investing columnist” is on the right track, but he needs to learn more about the fundamentals of modern money mechanics before he can really cut loose. He offers good advice on where to look to find the next big investment areas, but he needs to unlearn the Keynesian hogwash preached to him by the institutional charlatans hired by the economics department at the University of Wisconsin so that he won’t lead his readers into treacherous waters.
He can start with the Ten Commandments (“Thou shalt not steal” — not even by majority vote). Then he needs to start reading Ludwig von Mises’ “Theory of Money and Credit”.
Back to his analysis. He admits that, in January of 2009, he wrote that the nation was undergoing deflation. He was wrong about that — I’ll return to ”why” shortly. He says that another deflationary iceberg lies in wait on the near horizon. He’s off-base on that, too.
Let’s look at the source of inflation: The Federal Reserve. They publish statistics right under our noses that reveal the true story. Let’s see what was happening with the monetary base in the 18 month period leading up to January 2009, the month he wrote his original letter:
Federal Reserve inflation - 2008
Between June 1, 2007 and January 31, 2009, the monetary base rose by $900 billion, from $850 billion to $1750 billion. That’s 106%. It doubled in the five months from September 2008 to January 2009.
There is nothing deflationary about this. There is no deflation to be found within miles — decreasing the monetary base. To illustrate how inflationary this time frame was, let’s take a look at the previous 90 years of monetary base growth:
Monetary base - 1917 through 2008
In 90 years, the monetary base grew from just a few billion dollars to approximately $850 billion (note the rate of increase in growth after 1971, the year that Richard Nixon removed us from the last remnants of a gold standard and unshackled the last restraint on the government’s ability to spend lavishly). Roughly, we can say that in 90 years the monetary base grew $850 billion.
In five months, from late 2008 to early 2009, the monetary base grew more than it had over the last 90 years of its history.
This is inflationary behavior, not deflationary behavior.
WHAT HE REALLY MEANT TO SAY
He admits that inflation is on the horizon. What he really means to say is price inflation is on the horizon. Monetary inflation is a pre-requisite for price inflation (at least “inflation” in the sense that it is commonly used these days — describing a general, overall rise in prices across the board). If there were no central bank expanding the monetary base (what people really mean when they say “printing money”) and the money supply were stable, price increases in one sector of the economy would be offset by falling prices in another sector of the economy.
In our modern inflationary economy, we should only expect rising prices or “stable” prices. Stable prices under an inflationary (central banking) economy mean that decreases in prices brought about by increases in production and efficiency are generally offset by price inflation induced by monetary inflation. Don’t be fooled. Those efficiency gains are stolen from us by those who control the money supply.
Think of it as skimming off the top. “No one will notice.”
When he says that deflation is a threat, what he really means to say is that the modern economy is built upon fraud: fractional-reserve banking . It’s a con-game. When the victims of the con-game lose confidence in the perpetrators, they pull their money out of their banks (or hedge funds). This is deflationary because it unwinds the fractional-reserve process. This is the constant threat that he refers to — when the victims catch on, the game is up.
However, the central banks will always inflate their way out of this “deflationary pressure.” That is, until mass price inflation created as a result of their inflationary bailouts threatens to destroy the currency — and the central bank’s control over it — through hyperinflation. Then we’ll truly see deflation as the US Government goes bankrupt and becomes unable to stop bank runs because it’s no longer able to fund the FDIC. It will cut all other budget programs to keep the FDIC afloat. There’s a chance it may not go down.
But we are certainly years away from all of that.
Price inflation follows monetary inflation. We have not yet seen the price inflation because the banks aren’t lending all of that fresh money — they’re sitting on it, holding it in their accounts at the Fed banks as “Excess Reserves”:
Excess Reserves held at commercial banks
Notice that historically banks have always been fully “lent-up” such that they held onto zero excess reserves. This situation of commercial banks hoarding excess reserves hasn’t happened since the Great Depression.
He next speaks of buying stocks in anticipation of inflation. What he doesn’t do is look at the history of the markets’ performance during the last round of high inflation, from the mid-1960s to 1980:
The Dow Jones during stagflation
Bets are that, contrary to common analysis assumptions, mass price inflation is not going to do good things for the stock market.
He says he derived his recommendations based on what “smart” and “big” money are doing. Billions are buying gold across India and China. The Chinese have recent memories of how untrustworthy their government is. We have become complacent.
His recommendations are good: energy, agriculture, commodities. But he’s aiming at domestic funds. He doesn’t talk at all about investing in China. That’s where the real growth is going to be after their coming recession ends. The US stock markets won’t be the best places to put your money.
Inflation and deflation disrupt economies. It alters peoples’ buying patterns. Depending on how severe the phenomenon are, people react more severely. In either scenario most people are going to become most concerned with keeping what they have. Their tolerances and appetites for risk will decrease. They will become more concerned with, and focused on, daily living, at least until the crisis passes. Stock markets are seen as risky places to put your money. People aren’t going to want to put their money in the stock markets during periods of severe economic disruption brought on by either inflation or deflation — especially in a country that hasn’t seen severe boughts of either in a very long time.
Our population is growing, but our jobs aren’t. We aren’t saving as a nation. We are eroding our underlying capital structure. China is increasing all of these areas. That is where real wealth will be produced. Look to the East.