Tuesday, May 12, 2009

Inflation? NO! It's DEflation, dude.

I love The Cunning Realist, but he seems to be falling into this worry troll mode about the inflation that doesn't exist.  My thesis is that this is a function of 40- and 50-somethings who remember the harrowing inflation of the 1970's and are still looking around every corner for it to reappear. 

"For now and many years into the future, you'll spend part of every day working for people who sit in front of computer screens in Manhattan trading paper.  And what you're allowed to keep will be inflated away for the same cause."

I understand the sentiment, but the time for such angst was 5, 10, 15 years ago... and I would argue that there was no way we (collectively) could accept the dangers then and certainly no way we would have done anything about it.  Heck, we voted an imbecile MBA into the WH (twice), so that tells you how concerned we all were.  Actually, everything done since September 7th has (finally) been in the right direction and more quickly in the proper direction now since Nov and January.  Better late than never, but that's how such an interconnected behemothic economic system with all the inefficiencies and corruption rolls.

The fact is that there is no significant inflation no matter what the venerable TCR says, and when there is it will just be evidence that the economic growth that we have longed for is occurring.  As for making money in Manhattan in front of computer screens, that inefficiency is being addressed with the decrease in available credit and leverage.  Not to say that some new inefficiency will not crop up, because it certainly will, and there will be barracudas out there ready to take advantage.

Can this whole thing still collapse under it's own weight?  Sure, but it's much less likely than just a few moths ago. We are light years away from the precipice into which we were staring in September, so let's all count our blessings for a minute.  It is a bit disheartening that we had gotten so far along towards Armageddon, but the real danger is the NEXT Black Swan event, and we can not know what it is anyway or whether we will avoid it, so why worry?

Whining now about inflation, as TCR does, when we have rampant deflation is silly.    Sure the dollar will lose valuefrom its current lofty position versus most assets, and people who have saved will seem poorer, but prices are also stable or declining so the pain is mitigated.  That's how deflation works.  When inflation starts to tick up again it will just be a sign of the long-hoped-for economic growth, but TCR will be there charting gas and egg prices, god bless him. 

The next test is when to slow the Keynesian spending and quantitative easing: too fast and you shut down the economic growth, too slow and you can get punishing inflation.  But that is the price we all pay to live in this huge interconnected economy, so why wet your pants over it?  If you don't like it, buy 10 acres in Northern AZ and live sustainably... I'm not being funny, it's probably not that hard to go native, grow some food, raise some chickens, use solar power, get off the grid.  Certainly no harder than all the years of useless edjumacation, paying 4 months labor per year in taxes... and now worrying if Bernanke is going to land this thing in one piece.

I love TCR, but he's such an old worry wort sometimes.

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