Sunday, December 27, 2009

Learn About Capitalism

Capitalism is a major value for a rational person. It is the political system of freedom. It requires property rights and thus the individual rights that are necessary for man to live as a man and pursue happiness. Without rights and capitalism, man is a miserable, sacrificial animal.

Not known until the last century, and the writings of Ayn Rand, capitalism is the only moral economic/political system. It is the only such system that is consistent with man’s need to make decisions based upon his own judgment and create values. In our current world that is flooded with pleas, demands, and commands to be altruistic, to be a human sacrifice, the morality of capitalism is truly unknown. This knowledge, the reality of the moral purity of capitalism, needs to be broadcast loudly and constantly.

Yet, I have found that those who know of the moral stature of capitalism often have less knowledge of how capitalism works. They do not know the issues of trade, finance, money, and business. They do not know how the nuts and bolts fit together.

I think that it is vital that the supporters of capitalism know the economics of capitalism, for the same reasons.

You see, unfortunately, the rest of the population doesn’t know either.

The effort to deny the moral stature of capitalism also has succeeded in hiding the efficaciousness of capitalism as well.

People in general do not know that capitalism works.

People in general believe that capitalism leads to boom and bust, to keeping the poor poor, to the exploitation of the under privileged, to overproduction, to producing things that will fall apart, to destroying the Earth. They do not know anything, or at least very little, about what capitalism actually does for mankind.

I think that this lack of knowledge extends to just about everyone, including “economics professor”. Certainly, almost no journalist, few blogger, no commentator, and few TV talking heads have an idea of how capitalism works. I wouldn’t put the “pro-business” conservative or Republican in the category of the pro-capitalist, since most of them would be terrified of the idea of doing away with any of the New Deal restrictions on business. Capitalism is fine, they think, as long as it isn’t allowed to go full bore.

It isn’t just that capitalism is the unknown ideal, capitalism as a system is literally unknown, too (even among many who support it). If you sit down and argue capitalism’s moral worth, you could easily get the answer, “Okay, it may be moral, but it doesn’t work!”

I have read and heard surprise that people are ready to discard this wonderful system that has brought about our unprecedented standard of living. But people do not know that capitalism is responsible. They see the health care industry failing, for example. It seems that the market is failing. They do not know that capital is required for production. They do not actually know what capital is. They do not know how money works, or finance, or markets. Their ignorance is amazing until you realize that there is no source in our educational system to learn about capitalism.

So, if you want to argue for capitalism, you need to be able to explain what it is, that it is moral, that it works (and how), and, I am sorry to say, how and why what is currently going on is so bad for America. This last point is like having to look deeply into very shameful, evil, and often, boring issues. But it is necessary. I do mean necessary. If we are going to beat this thing, we need to root it out and kill it. And we have got to know our enemy to succeed.

Our biggest enemy today, the one with the most impact on our daily lives and that undercuts our prosperity is the Federal Reserve Board. There are very few who have a clue as to what it is and how it works. Start there. Read Meltdown by Thomas Woods. (I just finished it and will have a review here shortly.)

Read the business section of your newspaper. Read The Capitalist Manifesto. Read Ludwig von Mises. Read the Fed website. Read the few blogs dedicated to capitalist economics.

Learn how the Fed manipulates the money supply and how much it has done. Pick an industry and learn how it is manipulated and regulated. Learn how pervasive federal, state, and local governments are in every area of our daily lives. You will become a fountain of knowledge and moral condemnation.

I know that this sounds like a lot to do. Economics texts tend to be big and filled with jargon. If you took economics in college you may be scared for life! But knowing how capitalism works is important. You know, if you actually lived in a capitalist economy, you would want and need that knowledge. The more you knew about the rational world you lived in, the better off you would be. The same is true in this context. Speaking about your personal situation, the more you know about what is happening, especially when it is bad, the better off you will be. So there are two excellent reasons to follow up.

Sunday, December 20, 2009

Green Jobs; Obama’s Jobs Program and Inflation

This idiot program has been discussed in other places regarding its failings as a stimulas, as a provider of real jobs, as a wealth producer, and as a drag on the economy. I want to talk about it regarding its impact on inflation.

This is a direct price inflation input into the economy.

As we know from economists, inflation affects industries and people unevenly. Its first impact is where the new money enters the economy. There are at least two sectors in our economy that have been receiving made up money for decades which are major distributors of consumer level price inflation. They are very obvious: health care and higher education (the costs of which have been raising at over 7% a year for decades).

Most of the rest of the inflation has been coming in via the expansion of bank credit, i.e., exported inflation by way of the trade deficit, and asset balloons like the tech stock bubble and the residential real estate bubble.

Here we have money to be pumped directly into the consumer economy by way of unproductive jobs. The good news is that this entry point into the economy will not cause asset bubbles or significantly increase our trade deficit. The bad news is that it will feed directly into consumer prices.

A major technical hurtle in understanding how newly made money filters through our economy is understanding why prices haven’t risen more over the past twenty years. Don’t yell at me that the government CPI under measures inflation, it doesn’t matter. My standard is real, corporate profits, which is to say, their real, ongoing costs of production. If we had significant price inflation, those costs would be causing ongoing corporate profit problems because the cost of replacing materials would be higher each cycle, and you would see problems. We don’t see cost problems to speak of. The inflation is going elsewhere.

We do have other consequences of inflation: the trade deficit, or actually, the money that leaves and doesn’t come back (yet) and asset bubbles. Some suggest that our rising productivity soaks up made up money, and thus prices don’t drop as they normally would. I don’t disagree with this suggestion. I don’t think that it’s large enough to make up the difference between the actual amount of inflation and the experienced level of price inflation. I admit that I don’t have figures (if it is actually possible to have “figures”).

We do see in front of us on a daily basis the method that made up money makes it into the economy: the federal payroll and federal retirement benefits, plus social security. To the extent that the government finances itself via inflation, the federal payroll, etc., is a dispenser of money that goes directly into consumer prices. How does the federal government do that? I mean that I am on record as saying that as long as the deficit is funded by selling bonds, then there is no inflation stemming from the deficit. No body called me on that. You see, a significant portion of the annual federal deficit is funded by foreign central banks and other foreigners buying federal bonds. All of the money coming from foreign central banks is made up money. Plus, some of the federal debt is purchased by the Fed, though not much. Therefore, a lot of the federal spending each year is in made up money, which goes directly into the consumer markets, and is a source of the rise of prices and price inflation. It’s nice to figure these things out.
So, the conclusion about Obama’s grand unproductive jobs program is that he will be adding yet another source for inflating the prices we see when we go out to the market. Thank you B.O.

Friday, December 18, 2009

The Gold Market: Update on Central Bank Activity and More

People get excited about central banks because they have lots of money (called inflation) and they tend to make big moves. The central banks do not move as a group. Some may be buying while others are selling. You also have to factor in the IMF, which has a lot of gold and is selling to support its activities. When the IMF sells and some central bank is buying, they tend to set the transaction between them, so there is no impact on the gold market. The IMF has been selling around 400 metric tons a year. There is an agreement among the major central banks called the Central Bank Gold Agreement in which they voluntarily limit the amount of gold they sell a year, currently 400 metric tons. That doesn’t mean that they are selling that amount, just that they won’t as a group sell more than that. It is suggested that they aren’t selling at all. Who can know? We won’t know for some time. There is reason to think that some central banks, small countries, are buying, probably from the IMF.

One writer suggested that central banks do not pay attention to price, once they decide that they want to buy. On the other hand, a spokesman for the Chinese Central Bank said that they would not buy when the price was “high”. I think that belittling the bankers is reasonable when writing about them, but when devising a gold purchase strategy, it is risky. Overestimating the reasoning power of other market players is a better approach to risk management, keeping in mind their motivations and perspectives.

An article I came across recently reminded me that over the last two decades the central bankers have been selling gold. Even last year, on balance, they sold. I think that period has ended. It ended primarily because of the realization of the weakness of the dollar and, more importantly, the U.S. financial system and economy. They might have the wrong idea as to why the U.S. financial system is weak, blaming the banks rather than the Fed, but they do understand that the recent worldwide recession began in the U.S. financial system. What has happened since has done nothing to reassure anyone.

From a wider perspective, the relation between gold and inflation is not direct. The effect, the ability of gold to keep pace with the drop in value of the dollar is in the long term, over years, sometimes decades. This is the result of the activities of the different elements of the market. The big drop had to do with the waining of the U.S. price inflation and gold selling by the central banks. The movement of gold upward now is due to fears and uncertainty, not a response to specific changes in the purchasing power of the dollar or other currencies, but expectations of deteriorating conditions. If conditions do not deteriorate within a certain time, the attention in gold will be reduced and the price will flatten, at best, maybe drop.

With the certainty that the Fed will be expanding the money supply by expanding credit as forcefully as it can, as it has been doing for the last year, we will see something happen. It could be another asset bubble, it could be a huge increase in our trade deficit, a significant drop in the value of the dollar, or, because of Obama’s spending, it could be real price inflation. We do not know where all that money will pop up, maybe many places at once. Just keep your eyes open.

Tuesday, December 15, 2009

THE GOLD MARKET: The Players, Part II

Central Banks are a very special case as a player in the gold market. They will act in secret and try to have as little impact on the market as they can. When they buy they want as low a price as possible and will refrain from buying if the price is too high, in their opinion. Their purchases will be large, spread over years. Recently it was revealed that the Chinese central bank had doubled its gold reserve. That news excited a lot of people (plus the news that China also told its people to buy gold and began holding talks to use a “bag” of currencies for oil purchases). Lost or ignored was the fact that the change had taken six years to implement and that no one could say when China stopped buying. China has recently said that they would not buy when the price was too high. One person I talk to suggested that the recent push to $1200 was due to Chinese buying. An article I found suggested that the Chinese stopped buying at around $920. No one seems to know.

There are rumors that other nations will begin buying gold for their reserves, putting more upward pressure on gold and downward pressure on the dollar. We won’t know if any bank was buying until well after the fact. Certainly, if countries do try to move away from the dollar, gold will play some part in their strategy. Considering their options, among the currencies of the world, there aren’t many realistic choices. But the moves into gold will not be big, on their scale of things, just considering their interest in keeping the dollar as highly valued as they can. It would do them no good to cause the dollar to plummet, in spite of the warnings of some American writers.

If central banks should be buying, it will be very good for the gold bugs. Central bank buying would be a step into bringing gold back into currency support. It would support the gold price, level out the market some.

Another issue is that the gold held by central banks is currently valued at next to nothing, in the $30 range. Someone wrote that the U.S. government could undercut the market by pricing its gold at market. He didn’t explain how that would work. Everyone knows how much gold is held by the central banks. It isn’t a secret. I don’t think that people take the $30 number seriously. No one thinks that there will be sales from the cnetal banks of any considerable proportions. Who cares how they value it? Even at the market price, the number of dollars held by central banks as reserves would still dwarf their gold holdings. The central banks would want the gold market to be stable. I don’t see the problem, at least based upon what I know today.

Let’s move on to the speculators. Speculators are in and out of markets in short bursts. They go where they see opportunities in short-term price swings. They actually help even out the market and provide a valuable service. One good barometer of a person’s understanding of markets and capitalism is how they regard speculators. Speculators often don’t agree with each other. When they do, the market will swing in their direction, at least briefly. If your goal is safety from the depreciation of the dollar, their short-term activity will have little meaning.

The hedge funds have found gold. They have put a lot of money into gold and gold related investments in a very short time. I think that it is possible that it was their activities pushing the gold prices up in the short-term, maybe even this last push. I read comments from one of them who stated that he was concerned about inflation, price inflation I suppose. He didn’t say why he had this concern. There is a problem with the recent entry of hedge funds into the gold markets, I think. These people are marketers, they want to offer products that people will buy, that is, use it as a place to put their money. The hedge fund makes money, at least in part, from just selling the investment. I expect that this is just a new found opportunity to them, like the tech stocks were in the 90’s. I don’t expect them to stay, at least for the duration. If the economy appears to be coming back and significant price inflation doesn’t pop up in the next year, I expect to see the hedge fund pack up and go somewhere else. The fad will be over. The assets in the hedge gold fund will be either liquidated or sold to another investment company. This may happen slowly, in which case the impact will be minor. I mean, they won’t want to announce that they are leaving. It isn’t good marketing. We may have seen the end of the hedge fund impact on the gold price because they may not have access to more money and the price is high, compared to what it was when they first entered the market. That isn’t a prediction, actually. We will just have to wait and see, just as we will with any other element in the gold market.

Recent articles have also found a few mutual funds, generally more aggressive stock funds, are also investing in bullion and etfs. As far as the safety-oriented person is concerned, their presence, commitment, and understanding of this market should be regarded as just as the hedge funds.

The London Exchange is the primary market for gold in the world. Why am I including it in a survey of different elements that participate in this market? There is a claim that the London Market is practicing a form of fractional banking. That is, they are selling more gold than exists in their safe-keeping. They buy and sell London Good Delivery (LGD) bars of a certain weight and fineness. The estimate is that whether measured in weight or dollar amounts the 100% turnover in LGDs is high, weekly by dollars, daily by weight. I am not too worried about this. People participating in the London market are not going to be seeking to ask for delivery of their gold holdings, at least for a while. If the market starts moving that way, the London market management can move to acquire the necessary gold. If the claim of overselling their supply is true it does mean that the market is less volatile than it would be. Prices might be slightly higher, but the market price would move faster one way or the other to attract the necessary supply or demand. If true, it isn’t a major problem because the London market is not acting like the Fed, for example. They are not constantly making new pretend LGDs. The creation of LGDs is contained to a certain level and no more. My view of the people who are yelling “fraud”, if the allegation is true, is that they are correct to the extent that the London market is doing so and not admitting it. But the significance is far less than the allegations would imply. It would be significant if many of the market participants suddenly demanded delivery of the gold they owned. If that happened, I think we would have many other more serious problems to concern us than the short fall of the amount of gold available from the London market.

Similar concerns have been voiced about etfs, that they cannot have the amount of gold in hand to cover their investors. As a practical matter, this claim could be accurate. You would need to look closely at the prospectus to see what is allowed. (I will look soon.) I expect that as money flows in they have given themselves time to acquire the gold. There might also be provision for holding funds for redemptions. Practicalities aside, I expect that you will find that they work to have a 100% gold backed fund.

The final group that I know of that makes up the gold market is those who are looking for safety from the currency of their own country. They expect their currency to buy less and less stuff as time goes on and gold to at least maintain that purchasing power. These people come from all over the globe and have varying degrees of understanding of the economic, political, or personal freedom issues involved. They have varying proportions of their personal assets in gold, and they own the gold in various forms. As with the other elements in this market, I don’t think it is really possible to discern the size of this group in terms of numbers or dollars. It may be growing, but not fast, not as fast as you would expect. It is a group that will be buying primarily. They will be mainly fully invested, as much of their assets as they have decided to place in gold. They will rarely be sitting waiting with cash in hand for a drop in price. They might be as the price continues higher, but I don’t think that the last few days showed any real support from this group.

Of the groups that I have mentioned, the jewelry and industrial users, the central banks, and those seeking safety are the elements who are in the market for the longer-term and will be the primary upward pressure on the dollar price.

The most helpful inference to draw from this listing is that short-term movements in the gold dollar price do not necessarily reflect a market response to the dollar or the U.S. government’s monetary policies in any significant way. Rumors of strengthening of the U.S. economy will send the gold price down. Rumors or actual changes in U.S. interest rates will send the price down. Strengthening in the U.S. dollar, short-term, maybe daily, will send the price down.

However, as long as the U.S. continues to export dollars, keep interest rates low, especially near zero, and encourage bank credit expansion, there will be upward pressure on the dollar. These problems will continue as long as the U.S. government insists on spending more than it possibly take in by taxes. They will continue for as long as the U.S. government insists on trying to provide services that it cannot possibly afford. They will continue into the next decade as long as U.S. politicians refuse to address the coming fiscal impossibility of Social Security and Medicare funding. There is no reason to think at this time that the U.S. dollar will stop sliding. There is reason to fear a higher rate of price rises in the U.S., including much higher oil prices. There are good reasons to expect gold to continue to rise sufficiently to maintain the purchasing power of your assets.
At this point it is not clear if productive assets will perform sufficiently that their profits will exceed the rate of inflation plus taxes and provide an increase in wealth. That depends upon many coming problems. The first one on the horizon is Obama’s medical bill. Will it promise expansive spending? The next very big one within the next year will be the Fed’s ability to soak up all of the excess Fed member bank reserves that now exist (see other posts). Watch the Fed. I will be and talking about it here.

Sunday, December 13, 2009

THE GOLD MARKET: The Players, Part I

The recent strong upward push and rapid decline in the dollar price of gold should provide some grounds for thought. I wouldn’t say concern. Gold is the place for safety from concern.

I decided that this survey might be helpful after seeing and hearing some people respond to the recent gold price movements. They were looking at the market solely from their own perspective and couldn't understand why the market might go down or what it meant regarding their own purposes. By knowing that there are other perspectives and purposes in this market a gold investor can get a better feel for his position and what movements in the market mean to him.

The point is to understand about the recent up and down in the gold market is that it is made up on many different elements. The market is thin enough that nearly any of those elements can drive the price when the mood strikes them. In this case, I think that we have seen a certain speculative group, short-term buyers and sellers move the market. My reasoning is that the fall took place on news, more than rumor, but news that offered a glimmer of economic recovery. It was just a glimmer. The people who sold were taking profits or decided that there was no prospect of immediate profits.

The profit motive is different from the safety motive. If you are thinking profit but also safety in some fashion, your thinking may be confused. Safety from the dollar means that as the dollar depreciates, you maintain your purchasing power by being in gold. There is no profit. In fact there is a lack of profit. Buying gold, regarding it as a currency, is like the late-18C miser who put his savings in the mattress. It didn’t earn him anything. Fortunately for him, it tended to increase in purchasing power during that period. Buying gold means that you believe that the dollar will depreciate faster than the return of any actual reasonable investment over the next few years.

There is a way that you could be increasing your wealth vs. the dollar without there being price inflation or as much price inflation as your gold holding has appreciated. The value of gold should compensate for the expansion of the money supply, inflation. No matter what your view of what price inflation in the U.S. has been over the last twenty years, the money supply has expanded faster. Along with the expansion of our domestic money supply, we have exported hundreds of billions of dollars every year for twenty years. This wild expansion is what has and will fuel the rise of gold. We will see that as well in the fall of the dollar, which as fallen by over a third in the last decade. A recent report on imports showed a nearly 4% increase in import prices alone (year to year). If the world economy heats up, increases in import prices will quicken, the dollar will continue to fall and this will fuel increases in the price of gold. All of this will be true before you add in any domestic price inflation. Thus, your gold investment will tend to gain more than your loss of purchasing power. This will happen regardless of what is happening now domestically because it is the result of the export of all of the dollars over the last twenty years.

In the near future I will discuss the different options that you have for putting your money in gold. I think that these different options relate to the level of risk that you see from the government and society.

But for this entry, I am going to discuss the different elements in the gold market and what influence they have on the market.

Probably the biggest, continuous element in the gold market is the jewelry industry, which includes, in a very broad sense of jewelry, the country of India. Aside from their general fascination of gold, they have traditions that create a large demand for gold during the “marriage seasons”, which are generally warmer weather periods. Up until this year, India was the largest importer of gold. Their demand has fallen slightly, due to the higher price, but they are still a steady constant upward pressure on the gold market. They are more likely to buy newly mined gold since they will melt it down and use it, consume it. Within India there is a large market for gold that has been used, which they will melt and reuse. We see a little of that industry in the U.S., consider the TV ads we have seen offering to buy gold jewelry.

Who is overtaking India as the largest importer? China. As their economy prospers their demand for quality consumer goods is also raising, including their desire for fine jewelry. Again this is consumer activity.

Use of gold for industrial use and jewelry reduces the supply. I don’t have the figures as to how much gold is taken off the market every year by these uses vs. gold production (about 2,500 metric tons). The actual figures aren’t really that much help. What you have to keep in mind is that these uses will continue and that they will reduce the availability of gold for safety purposes, and thus the price will continue to rise faster than you would expect as long as these two elements continue.

Industrial and jewelry consumption of gold will continue but they will be sensitive to price levels. At some price point, jewelry demand especially, will start to fall off. At some price point, jewelry will be melted and return to the world market. We will also see whatever gold is stored in jewelers safes reappear. When this happens, increased supply will begin to blunt the upward price pressure. To what extent will depend upon the general context at the time.

Industrial use is somewhat less sensitive to price. Usually, the amount of gold used in a specific product is very small and makes up a tiny portion of the overall cost of production. The importance of gold is very high in those products, often making the difference between performance and not. So, in those products, the gold price will not make much of a difference. There are other products containing gold that are more a consumer fad, e.g., gold covered sushi. As the price goes up these products and usages will be less popular. At some point we will see gold covered audio cables disappear from the shelves, but that won’t make much difference to the world gold price.

Another important element in the gold market is the professional trader. These are the people who make the market, who have traded in gold for years, or who have been selling gold to people for some time. I would say that they are becoming a smaller minority as time goes on. The diminution of their influence will be seen in wider price swings. They don’t necessarily have any ideological connection to the metal and may consider the market from a strictly technical perspective. They would tend to see the current market as over bought and consider the recent pullback as a much needed correction. They may sell gold short when the market goes up rapidly and would be a breaking force.

Next week, Part II

Sunday, December 6, 2009

Inflation Watch Update

These are some thoughts and observations about inflation: the prospect and what we are seeing specifically in prices.

As a reminder: inflation refers to the money supply
I use the term “price inflation” to talk about prices and the cost of living.

I saw someone saying that the price for small things like candy, fruit juice, stuff for less than a dollar or so, has gone up significantly in the past year or two. I don’t spend money on these things and don’t have a perspective. It would be interesting to hear form some people and their experiences of recent price changes.

I have also seen reports that segments of our produce production have been wiped out by weather. While this might have an impact on prices, it is not inflation and would be remedied by imports and the next harvest. It is important to keep a perspective on what is caused by government manipulation and what is caused by natural or market forces. Another example is oil or gasoline prices. The oil market is also heavily regulated and constricted domestically and in many other countries, which would tend to push the prices up due to shortages. A rising oil price due to government imposed shortages is not inflation or price inflation, however.

At the same time, housing prices and markets have been held up artificially over the last several months, which means that housing prices still have a ways to fall. If you are contemplating selling, do it soon.

Unfortunately, many, if not all, of the people who are arguing that significant price inflation is coming are very strident and projecting very extreme scenarios. Perhaps it is the result of the apparent indifference or ignorance of the American people. Maybe it is because of the propaganda emanating from the Fed, the Treasury, and the administration. Whatever, the stridency has a tendency to either make people anxious or drive them away. I am trying to offer a reasonable discussion and inference.

The major problem that is presented in looking into the economic future is the timing. In generally good conditions, you have considerable uncertainty mainly because of the multiplicity of actors and their perchance of doing things you don’t expect, usually good things, but still things different than you expected, so your decisions do not pan out.

In this situation, you know that what the government is doing is not good and will have adverse consequences. In fact there have already been adverse consequences, really bad ones. What you don’t know is how much worse the situation can get and when.

Price inflation can come at us from many different directions. We can see the dollars overseas come storming back, which would increase the circulating money enormously. (This is a favorite scenario of the scare mongers.) The Fed might try to stop or reverse the potential of price inflation by increasing interest rates, in which case we would see a business slow down and possible a reduction in availability of goods, while the money supply continued to go up, and we have price inflation during a recession, the 70’ again.

In a few years we will see inflation when the baby-boomers hit Social Security and Medicare, especially if their retirement funds continue to be wiped out.

We will see price inflation as Obama continues to spend money and the Fed accommodates him by buying the debt and pump money directly into the economy and keeping interest rates low. (This is actually not as bad as what they normally do which is expand bank credit, which has a multiplier effect.)

In other words, with all the money that the Fed is creating and will create, it is nearly impossible that price inflation won’t descend upon us. The ground has been laid for general inflation, i.e., the expansion of bank credit and thus many different messes, including price inflation.

Right now the banks have unlimited opportunity to make loans. There is plenty of demand and their Fed reserves are 10 times what they need. Bankers, however, are businessmen, government controlled businessmen, but still profit driven. They are conservative, cautious, and frightened by the mortgage crisis. They do not want to be taken over by the government. So they aren’t lending right now. Haven’t been for maybe a year or more.

You can see the problem of a lack of credit available in many of the business failures and the coming wave of commercial real estate foreclosures. Further, the Fed is trying to keep them from loaning out the money by giving the banks interest payments for the money in their reserves. I don’t really understand the reasoning here. Why did they give them the reserves only to pay interest on them to keep the banks from using it. Doesn’t make sense to me.

What the banks are really waiting for is the rebuilding of their capital structures (and for the banks forced to take government money, they are waiting until they can also pay that money back). Once their capital structures are in place, they will look for very secure, “safe” opportunities to loan money. We are not likely to see any asset bubbles soon. (Some say that the recent, rapid rise in the gold price is a bubble, but that is only true if it were financed by Fed created credit, for which I have seen no evidence.)

The Fed says that it will be able to soak up the excess reserves before it becomes a problem. Ha! Who can believe them. They will not own up to creating the last two asset bubbles (for starters). They won’t own up to what inflation really is. They are self-deluding. They think low interest rates are vital to a growing economy. They will also be pressured to keep interest rates low to support Obama’s spending plans. They will also want to keep interest rates low to keep the interest payments on the national debt from swamping the budget. The way they keep interest rates low is by creating bank credit. Increased bank credit is inflation. There is no way that the Fed is going to manage this mess without real inflation that will reach consumer prices. You can’t fault the hyper-inflation bugs. Any serious look at the situation has got to make you frightened!

So, what is going to happen. Here is where I find a limb to go out on.

Things are going to drift for a while. It may seem like the economy is going to recover, and it will in important ways. This is one problem with some of those who are expecting the worst, they do not give the American economy any credit. The American economy has a lot of strength and productive capability which is trying to dig its way out of the mess the government created. It is cutting costs where it can and looking for ways to become more productive, to carry the new burden placed upon it, just as it has done for years. Businesses are beginning to show profits, real ones. Unemployment seems to have reached its peak. I don’t think that the credit situation has worked its way out of its problems and that could cause a problem. If the Fed comes running in with more made up money, we could go back into recession. Things are touchy.

The banks are continuing to recover and build their reserves. The banks are, I think, the weak link, because in spite of their business orientation, they are creatures of the government. They have to be, with all the regulations and interference from the government. Some people complain that the regulators and the banks have become too buddy-buddy. The critics don’t understand that everyone in that community understands who is in control. It isn’t the bankers. So when the banks recover, they will try to do as their masters want, and open the credit window. It will start slowly at first, but over time, probably not a long time, the bankers will be back to lending profusely. Then it will be Katy bar the door, because the money, created money, will flow.

Sometime within the next two to five years we will be seeing significant price rises. This is my expectation now. I don’t feel as if I am being overly pessimistic, just as reasonable as I can be.

In a wider perspective of preparedness, I also think that oil prices will still have some upwards pressure. Commodity oil prices have gone up to the $70 range in spite of the worldwide recession. If the recovery is beginning why wouldn’t there be more demand for gas and other oil products? The supply has not grown in any significant way. Also, it was noticed this week that China is now buying more cars than the U.S. Isn’t that a demand for oil? Oil futures are showing higher prices.

I would say that we have some time to make some preparation, if you haven’t already. Don’t go overboard. You want to consider gold and dollar protection, as well as where profits might lurk, both short and long-term.

So, there is lots to consider in making your own plans. Just don’t expect the end of civilization, not based upon today’s information.

On the other hand, who knows what Obama’s supporters will do when it is obvious that his efforts are to no avail? They could riot and destroy everything in their path. They are the next storm troopers, just waiting for their opportunities. See, it is easy to expect the end of civilization!

More on inflation as I actually have something to add.
I have comments on gold, the dollar, and the Fed’s actions coming.