Tuesday, January 4, 2011

Inflation

This last year saw more bank closings than in any time in recent memory. The Chinese Communists have been buying American government debt but have recently been playing hardball with the Japanese and may begin doing the same with the Americans. The Bush Administration tried to stop the nation from going into recession by spending a trillion dollars and President Obama has tried spending trillions more without success. While some keep speaking of hints of recovery the stark facts are that the stock market is low, home sales and home values are low, unemployment is high, incomes are not rising, and government spending is out of control. Several states, including California are hovering just above bankruptcy. While inflation is currently low, what is to stop it if the Chinese stop buying our debt? The Federal Government will have to offer higher interest rates on bonds in order to entice either the Chinese back into the debt market or to get others to buy our debt. This will have an inflationary effect that the markets will not be able to ignore. As the cost of money goes up, houses will be even more difficult to afford, and investment in plant will be even more expensive. While big business has a lot of cash on hand, they can lose it very quickly in an inflationary environment. If business becomes worried about inflation, they may be tempted to spend their money on capital goods in order to get maximum value for their cash before inflation takes that value away. An increase demand for goods at a time when most businesses are not producing could further increase inflation, keeping an inflationary spiral going. The Fed would be hard pressed to keep interest rates low as a stimulus to the economy if they have to sell bonds to pay for government services. With a Republican House unwilling to raise our already massive tax burden and a Democratic Senate and President unwilling to cut spending the Federal Governments need to sell bonds will only continue. I suspect we may see massive inflation in the next few years as these competing forces come together; that’s the view from the Hysterical Right Wing.

No comments: