Thanks for a very good post.
You are correct, deflation/inflation will be strictly a political decision.
It looks like all signs point to the possibility that this decision has already been made. We can all clearly see what has been happening in the last few years. Hyperinflation in housing, bailouts of JPM and possibly FNM, low Treasury yields "conundrum" ,massive tax cuts and deficits, swelling money supply, and to cover up the tracks, massive manipulation of inflation statistics.
IMO the currency will eventually be destroyed and replaced.
The reason is that the Fed will attempt to perform "some" monetization (political decision), if they are not doing it right now. However, there is no such thing as "some" monetization, because that creates only bigger imbalances and can only postpone inevitable adjustment. Eventually they will have to go all the way unless at some point they decide to allow the adjustment.
IMO it would be better to hike rates to 6% now and swallow the bitter medicine, rather than having to hike them to 12% later. The longer the interest rates stay below the rate of inflation, the higher the inflation will be down the pike.
At some point even 12% rates will be stimulative if inflation rises to 20 %, then you would need 25% rates etc
I think the current situation can be described as inflate or die.
I think destruction of currency is the more palatable option at this point rather than 20% unemployment rate, 50% decline in real estate prices, 20% of US housing stock in foreclosure and collapse of the financial system.
The odds of hyperinflation dwarf the odds of deflation, although deflation will happen after the replacement of currency.
Either in hyperinflation or deflation, both borrowers and lenders will get destroyed, the only difference is that in hyperinflation the lenders get destroyed first and in deflation the borrowers get destroyed first. |
