Inflation Stimulation

Pulling into my favorite cheap gas station last week I was a bit upset by the rise in the price of unleaded ‘plus’ to $1.96. Yes, I’m one of those douche bags who puts plus into his car even though the guys on Car Talk say it doesn’t matter. I quickly recovered realizing that $1.96 was quite reasonable compared to the $4.40 I had paid a few months earlier. When I mentioned this to a friend he replied that he was glad inflation had ebbed. When I replied to him that the jump in gas prices had nothing to do with inflation my friend looked at me as if I had told him I just saw Santa Claus humping the Easter Bunny.

Allow me to explain my reasoning. Inflation is defined as too much money chasing too few goods. For those of us addicted to the History Channel (a.k.a. the Hitler Channel) you may recall scenes of people in the 1920’s and early 1930’s running through the streets of Germany with wheelbarrows full of cash on their way to buy a loaf of bread. That, brothers and sisters, is inflation. What we experienced with the price of oil last year is called commodity pricing. A commodity is a product that is widely available and undifferentiated. Gasoline (don’t be a putz and think the gas with detergent in it is worth an extra 10¢ per gallon), milk, and sugar are often used as examples. The price of a commodity is determined through the trade of contracts that allow buyers and sellers to agree on prices in advance. Contracts allow producers to hedge their investments in the production of a commodity so they don’t go broke when the prices of orange juice concentrate or pork bellies shit the bed. For a much better description of commodities please refer to this scene from the 1983 film Trading Places.

I know what you’re thinking (if you’re still reading this drivel and haven’t switched over to Perez Hilton to read something really interesting): So if the rise in gas prices was due to 27 year old commodities traders who couldn’t find their ass with both hands wildly bidding up oil futures, we shouldn’t be worried about inflation! Wrong. We will soon be hit with a long steady flow of too much money chasing too few goods. We can thank our present and former presidents and most of congress for jacking up the money supply to unseen levels in hopes of stimulating the economy through easing tight credit markets.

Printing money, however, may help out a bit in the short term. Historically inflation has helped people who need to pay off debts. If I borrowed $100 when it was worth $100 but can pay it back when it is effectively worth $50, that’s a good score. If I saved $100 when it was worth $100 but have to withdraw it when it is effectively worth $50 that sucks. It is inflation’s ability to decimate savings that makes it the best and quickest way to drive the most people into poverty. Hmmm, isn’t it interesting that increasing the money supply in the absence of increased demand allows people (and institutions) who are deeply indebted to get out from under at the expense of those who have saved?

If you think I’m full of it (and good for you if you do because I almost always am) check out the two helpful graphics down below. The first is a graph of the number of dollars in circulation in billions as of February 2009. Notice the Al Gore we’re all fuckin doomed like spike at the end. That’s the Federal Reserve pumping, with a capital ‘P’ baby, money into the economy. All that cash hasn’t had a chance to make an impact on prices yet because it hasn’t been able to circulate. Once consumer spending and institutional credit begin to expand again, watch out. Just as economic output begins to pick up the economy will be awash in dollars.

Now take a long look below (apologies for the obnoxiously long graphic but when you want to make a point I say go big or go home) at the second graph. For those of us who struggle with imagining what a billion looks like compared to a trillion, look yonder to experience the law of large numbers. I’ll come back to this comparison in a moment.

The Federal Government has pumped too much money into circulation before but never at the current levels even when adjusting for inflation, GDP, or anything else that allows for unscrupulous unprofessional pundits to make their point. From the early days of the Johnson administration through most of the Carter administration the feds dumped lots of gas on the fire through huge spending sprees like the Vietnam war, the War on Poverty, the removal of the gold standard (a deliciously fun topic being saved for another day), and lax monetary policy (not doing anything to reverse the impacts of the other three). All that fun Sixties and Seventies action pushed the American economy into a special flavor of inflation known as stagflation. With stagflation you get all the fun of losing your savings and you get to lose your job too! It’s the economic equivalent of having your wife run off with the dog (As I recall the Seventies were also a time of great country songs. I’m a Hee-Haw fan from way back).

Don't get me wrong, I'm glad the government is doing something about the lack of liquidity in the financial system. When the feds failed to feed the beast and make more cash available during the Great Depression things got worse and for a longer period of time. However, this time around they are pushing out so much so fast that trying to absorb it will be like watching your cat drink from a fire hose (I tried this once and it was funny as hell). To add to all this, I haven't even factored in the impact from the fiscal stimulus being engineered by the White House. Most of that largess (between 80% and 90%) won't take effect until 2010.

We are on the verge, let’s go with the second half of 2010 (see above), of being be hit with a wave of deep seeded inflation. Inflation caused by the addition of unheard of levels of trillions of dollars into the economy. I wish I had some sage advice here but other than buying gold, which is always a rip off, or buying land, that you may not be able to sell, I see no easy way out. Anyone have any suggestions?

- Later