If this isn't inflation, then What Is?

Posted on 01/24/10 at 2:04am by Paco Ahlgren

Over the last year, I have written extensively about the economic crisis on The Bottom Violation. I've positively flogged the proverbial dead horses of quantitative easing and impending dollar collapse to the point where my arm feels like it's going to fall off. And many of you have politely -- and sometimes not-so-politely -- offered to tell me just exactly how wrong I am.

So the debate rages. Are we in an inflationary or deflationary environment? Are asset-classes rising in price, or falling in price? Over the last couple of years, so many of you have taken the time to remind me that the collapse in housing prices alone mandate that we are experiencing massive global deflationary price pressure.

I still disagree, of course; the increase in the money supply -- coupled with the lowest interest rates the globe has ever seen -- conspire to create an extremely dangerous setting. Perhaps it's true that some asset-classes have fallen in value -- but that isn't universal by any means. And perhaps the prodigious increase in the money supply and easing of credit offset some of the falling asset prices, but even if that is true, the balance certainly isn't sustainable.

And then there's the velocity of money. "Sure," you say, "the government is printing more money than ever, but it's not getting into the economy, because no one is lending." And that's true too, but it doesn't change the fact that banks have to make money somehow, and the way they do that is by lending. Eventually they will have to start lending, and when that happens, it's not going to be a quiet slow process; it's going to be like a tsunami of cash hitting the economy.

Have a look at this sweetheart of a chart:

Or maybe this one, that's a little longer-term?

And just in case you thought this was just a "U.S. problem:"

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Disclosures: Paco is long TBT, UCO, and gold. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.

Read all of Paco's articles at THE BOTTOM VIOLATION. www.BottomViolation.com

Paco has been a financial analyst and a portfolio manager for 18 years. You can buy his novel Discipline wherever books are sold. Or visit www.DisciplineNovel.com.

Questions or Comments: questions@pacoahlgren.com