Inflating Away?

Is runaway inflation in our future? Or is it deflation? Some people point to the growth of money over the past year and say that accelerating inflation is inevitable. Others point to rising unemployment and economic slack and say that deflation is the problem. Who’s right?

Certainly, if money were the only issue, prices would be rising. The money supply has been growing about 6% per year for a while, in spite of the economy’s contracting. If inflation is really caused by too many dollars chasing too few goods, then goods prices should rise.

But the active verb in that phrase is “chasing.” The money that’s out there isn’t chasing anything. Rather, we’re in a “chastened” economy. Consumers are chastened by banks suffering from foreclosures. Banks are chastened by regulators determined not to repeat the mistakes of last year. Regulators are chastened by a Congress that just might restructure their agencies away, and Congress is afraid of being chastened by the voters, as the circle comes around.

In this “chastened” economy, the only items significantly increasing in price are things we have little immediate power over: health care, gasoline, and education. Other prices are falling. And unless some new spirits animate the economy, they’re likely to continue fall.

Economics is not a physical science. It’s rooted in the animus of a population balancing present consumption with planning for the future. And the “animal spirit” in the current economy is that of the ant, not the grasshopper. Until things turn around, inflation will likely remain contained.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T13:40:18+00:00 November 2nd, 2009|Global Market Update|0 Comments

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