Sunday, March 30, 2008

Inflation is here to stay

Today I'm going to point out what I consider to be critical fundamental conditions that virtually guarantee the continuance of the bull market in commodities. Consider that the economy is now in recession. I don't think too many people will try to deny this fact. What is the only realistic response from the Fed to this? They have to print money. There's just no way they are going to drain liquidity during a recession. This is the road to deflation and depression. I just don't see any realistic possibility that the Fed would start to constrict money supply during a recession. So if the Fed is expanding money supply I just don't see any sensible reason for either the dollar to appreciate or commodities to fall other than for a short term correction of an overbought level. Next consider that we have unpayable debts in the form of Social Security and Medicare. Add to that two wars and again we have fundamental conditions that exclude the possibility of reducing the money supply. So even when we do come out of the recession these debts will still be there. Debts that are only payable by debasing the currency. So until I see a Fed raising rates aggressively to control inflation I just don't have any reason to expect a reversal of the long term trend of higher prices for commodities.

BTW does anyone find it funny that we are now giving the Fed responsibility for financial regulation when it was the Fed who caused all the problems in the first place by lowering rates to 1% and trying to avoid any pain when the tech bubble burst? The very same Fed who are now expanding money supply and again lowering rates as inflation is soaring. The very same Fed who are now laying the foundation for the next catastrophe.