Wednesday, January 7, 2009

"Inflation is coming, inflation is coming"

That’s the cry from the inflationary camp. It’s obvious to any respectable gold bug that the incredible amount of liquidity the Fed is currently shoveling out is going to immediately lead to inflation and possibly hyper inflation.

I do agree that it will eventually take us in that direction I’m just not so sure about the timing.

This summer before the banking system started to collapse the Fed was also printing mountains of money. At the time that money had no where to go but into commodities, oil specifically. The situation has changed though. Now we have somewhere else for all this money to go. That somewhere else is the incredibly large holes in the financial sectors balance sheets.

I don’t see how much if any of this money is going to be poured into commodities at a time when every penny is being used to try and keep the financial system solvent. Of course now we’ve added another money pit to the equation in the form of the US auto makers. Every bailout, and keep in mind that all these bailouts are just the beginning, just add more holes to drain capital out of the system.

Until all the excess debt gets washed out of the system this demand on capital is going to continue. The quick way to end this is to let these companies go bankrupt. That would put an end to the vicious circle immediately. Of course that solution won’t even be considered because it’s too painful.

Unfortunately the market is going to enforce this final solution whether we like it or not. We can buck up and take our medicine now. Go thru some really painful withdrawal symptoms for a couple of years and be done with it or we can continue to try and fight a losing battle and turn this into a decade long nightmare.