Inflate And Die

Richard Russell has been preaching the mantra of Inflate Or Die for quite some time. Here are two references.

November 26, 2002
Inflate Or Die

The frantic Fed has taken the threat of deflation very seriously. The are seriously afraid that the US might be following the deflationary path of Japan, and they have decided to do what I predicted they would do all along. The Fed's dilemma can be described in three words. The three words are --

Inflate Or Die.

Jun 13, 2007
I'm an old-timer...

On June 7 the national debt of the US was $8.85 trillion. The annual interest on this debt is $406 billion or over one billion dollars each and every day of the year. The debt is increasing at the rate of $1.38 billion a day. Thus, we see the magic of compounding, but unfortunately what we're seeing is compounding in reverse.

With the above in mind, you have to ask yourself, "How in the world is the US going to finance its rising and compounding debt?" And the answer rings loud and clear -- it will be financed through inflation. I've said it for years, and I'll say it again -- it's a case of "inflate or die," and the US has no intention of dying. So we'll inflate, it's simply a matter of how rapidly we inflate and how successful the government and the Fed are in keeping the American people in the dark about what's happening to their money.

Recently, I've watched David M. Walker, our brave Comptroller of the United States, as he tours the nation and evidently will continue to tour until the 2008 elections. Walker is talking to anyone who will listen about the recklessness of borrowing money from foreign lenders to pay for running the US government and about the "demographic tsunami" that will arrive when the baby-boom generation begins to retire.

I've held all along that the next war will not be a military war. It will not be a matter of the major powers fighting each other. The coming war for power and world leadership will be an economic war. It will be fought with competitive currencies and the movement of gold and the potential threat of nuclear bombs.

All the above is why I suggest that my subscribers accumulate gold. Furthermore, I've suggested that subscribers think of their gold holdings in terms of the number of ounces held. As for the price of gold, the price will take care of itself as the dollar slowly (I hope slowly) slides into the dusky realms of fiat-history.

I have to admit "Inflate Or Die" has a nice catchy ring to it. Unfortunately there is no substance in it. Oh, I understand the premise alright: borrow money today and pay back tomorrow with cheaper dollars. But there is one huge problem with that idea. No, make that three.

1. Government liabilities are rising faster than the stated rate of inflation, particularly Medicaid and Medicare
   
2. Servicing consumer debt is becoming impossible for many borrowers because of sinking home prices in conjunction with higher property taxes, higher insurance costs, and higher interest payments.
   
3. Interest payments+ongoing expenses are rising far faster than wages+asset appreciation for most borrowers.
   

That said, Richard Russell is right about the next war: "The next war will not be a military war. It will not be a matter of the major powers fighting each other. The coming war for power and world leadership will be an economic war. It will be fought with competitive currencies and the movement of gold and the potential threat of nuclear bombs."

The economic war Russell described is already being waged. You can see it now in Congress with Veto Proof Insanity and if that is our battle plan we are in deep cereal trouble.

Richard Russell is also right about gold as outlined in Best of Richard Russell from December 31, 2003.

Paper money is now being created wholesale throughout the world. Stated simply, all paper currency is now valued against each other. But more important, ultimately ALL paper is ultimately valued against the only true, intrinsic money -- gold. In world history, no irredeemable paper currency has ever survived. Since all the world's currency is now irredeemable (in gold), this means that in the end, the only form of money that will survive is real intrinsic money -- gold.

It's not a question of whether gold will survive, it's a question of when the world's current paper money will deteriorate and finally die. I can tell you that irredeemable paper will not survive -- but obviously I can't tell you when it will die. The timing is the only uncertainty.

But as right as Russell may be about gold and economic war he is wrong about the Inflate Or Die thesis. I simply do not think there is a choice (or if there is one it will do any good).

The Challenge

• I challenge anyone else to explain how rising inflation is going to bail out Medicaid or Medicare when costs due to an aging of baby boomers are rising exponentially compared to wages, tax revenues, or the composite CPI.
• I challenge anyone to explain how inflation (in conjunction with rising mortgage payments) is going to bail out homeowners who are struggling right here right now to make mortgage payments.
• I challenge anyone to explain how rising interest rates are going to help either consumers or the government pay their bills.
• I challenge anyone to explain how inflation is going to cure the problem of debt increasing at the rate of $1.38 billion a day with the magic of compounding going in reverse and real wages shrinking (even before that compounding).

Simply put, the idea that there is a choice between inflation and economic death is fatally flawed. Wages are not keeping up with expenses and in an environment of wising interest rates, that spells disaster for many people. For proof see Foreclosures Reach Record Levels Across Country.

In another sign that the housing market is taking a major tumble, Americans across the country are getting foreclosure notices at a record pace. New data released this afternoon indicates that one in every 656 homes in the United States went into foreclosure during May.

Irvine, Calif.-based RealtyTrac says more than 176,000 people got foreclosure notices last month. That is the highest figure they have ever recorded in their monthly report and is 90 percent higher than the numbers from a year ago. "Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year," said James Saccacio, CEO of RealtyTrac, in a release accompanying the data.

M3

Check out this chart of M3 from Bart at Now and Futures.




So what has attempting to inflate out of the dotcom bubble busting brought us?

The Reflation Attempt

• A housing bubble that has now popped
• Record foreclosures
• GDP inching up at +0 .3% (and that is with hedonics and imputation added in)
• 70+ subprime lenders blowing up
• Government liabilities growing faster than tax receipts
• Interest on the national debt is soaring
• Rising equity prices (for now) but benefits highly skewed to a small portion of the population
• Massive consumer debts
• Extreme speculation in assets worldwide

From the Fed’s own flow of funds we see just how ineffective the Fed has become: in 1980 it took $1 of new debt to create $1 of GDP whereas today it takes $7 to $8 of new debt to create $1 of GDP. Each reflation effort takes more and more dollars to produce any results. The problem now is that nearly all debt is going for unproductive purposes and nearly all of the benefit to those who least need it.

One can not inflate out of a problem, when inflation is the problem. Simply put, it's not Inflate Or Die, but rather Inflate And Die that describes the current sad state of affairs.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/