Therein lays the “magic” inflation cure. While we can't do a damn thing about how much we owe China, by inflating the dollar, actually making it worth less against other currencies, we get to pay China back with discount dollars. It's as if you borrowed $100,000 from someone and was able to repay them in something else worth only half that much. You and I can't do that, but the US government can.
And will.
I only mention all this because you are hearing all kinds of folks in DC complaining about the size of the stimulus package, the bailout trillions going to Wall Street and failing banks and soaring domestic spending. Most Democrats in Congress are for it all, claiming their purpose is to create jobs. Most Republicans are against it because all the domestic spending balloons the deficit.
And the only way that's going to happen any time in the near future – and it damn well better happen in the near future – is to inflate, and inflate with a passion.
Of course they are not going to admit that anything of the sort is afoot. After all, the Fed has spent the last quarter century fighting inflation as if it were the Federal Reserve's own version of al Qaida. That's been the Fed's raison d'être. So, how could they now admit to purposely igniting the flames of inflation, turning arsonist? They can't. And they won't.
Besides, even if they could tell us, they can't let on to our borrowers, the Chinese, who are already giving us the hairy eyeball. Should the Chinese start dumping their dollar-denominated US bonds, and/or stop lending to us by refusing to buy additional bonds, we would be supremely screwed.
But it's already begun. For the time being we are in a deflationary spiral. Each day the value of all those CDO, MBS, derivatives and homes plummet things get worse – for everyone. No amount of Presidential jawboning is going to change that.
So onto Plan B. Think of all the stimulus, from TARP to TALF to the budget and the Fed's trillions in financial help to banks and others, as lighter fluid being pumped through the veins of our financial system. At some point all that stimulus will hit critical mass and ignite -- inflation. So, buckle up. Because when it hits it's going to be 1978 all over again, squared.
As the humongous surplus of stimulus dollars start chasing the finite supply of goods and services it will start to drive up prices, salaries, stocks and real estate values. Up... and up, and up, and up they'll shoot. Irrational exuberance will return to Wall Street. The stock market will shoot up because, as the real value of the dollar declines it will take more dollars to buy stock, even though the intrinsic value of those share has not changed at all. But the higher dollar volume will drive the DOW and NASDAQ up and up and investors will begin chasing it once again.
Once asset values reach market valuations that relieves the pressure on banks, companies like GM and securities markets life will begin to return to pre-crash normality.
Plus, if you want to get consumers consuming again, the fastest way to do that is to make think, "Better buy it today because it's gonna cost more tomorrow."
But don't be too quick to breathe a sigh of relief. Because at that point the Fed will have another tiger by the tail – the risk of hyper-inflation. Just ask the citizens of Zimbabwe how that's working for them, where inflation is now running somewhere around 250 million percent a year.
Because it's a lot harder to put a fire out, than it is to start one.
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