This inflation has two main components, the subsistence aspect such as food, energy, and one might even argue areas like medical, at least in part. I doubt there is too much price elasticity there? And there's the production or input aspect, the goods that go into about everything made. The two, not just one, makes it a very powerful inflationary force.
Clearly income is diverted to pay for this, but recently the evidence is that it's just been borrowed, thus fueling more inflation. So my thesis is that it is likely to be fueled by additional credit for as long as interest rates are at negative real rates and "stupid" lenders (*) make this money available. There may come a point when perhaps suddenly (inflationary panic?)the credit and borrowing is choked off, and you may get some version of your deflationary scenario. I can tell you I will be watching for a significant credit choke off, but until then, it's horse (inflation) and buggy (panic and bust).
Backwardization: True, in many commodities, and a good challenging question. Apparently the market just believes these are temporary shortages, but in the areas (metals, and to some extent energy) I know pretty well, and have familiarity with, there is little new production coming on stream. In fact some very low cost, newer potential mines on a cash cost basis such as Goro (nickel) and Meadowlark (gold) have been afflicted by the runaway input costs of steel, concrete, energy, etc. Ironic isn't it? So I have to attribute the backwardization to the persistent bearish psychology of the market toward commodities. It was that way in oil and nat gas two years ago, and you would have cleaned up buying the long dated futures, and then again last year, and again this year. The market has been continually wrong about it's backwardization. I also don't really think they are looking at a Train Wreck along the same lines I am, so that wouldn't really account for it.
(*) See next post from Contrary Investor commentary on this. |
