Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE - 31st Jan 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

An Economic Storm is Brewing

Economics / Inflation Mar 05, 2010 - 01:16 AM GMT

By: John_Townsend

Economics

Best Financial Markets Analysis ArticleWhen the tech bubble burst in 2000, Greenspan tried to “fix” the problem by cutting rates and printing money.  Fix the problem he did … well sort of!  What Greenspan did was create two new bubbles in the credit and real estate markets to replace the tech bubble that had burst.  Millions of jobs were created in these two industries.  Much needed jobs to replace the ones lost as the tech boom came to an end.


I think we will all admit it was one heck of a party, but like all good parties there’s a price to pay. The Hangover!

The truth is the economic boom of the mid 2000’s was built on a lie. Instead of a foundation of productivity the last bull market was founded on an ocean of liquidity. That ocean of liquidity fostered risky investments and massive speculation. It was only a matter of time before the house of cards came crashing down.   And crash it did.  The world suffered through the second worst bear market in history almost taking down the global financial system in the process.

Apparently the powers that be have learned nothing from this near death experience because they are back at it again, printing, printing, printing  in another vain effort to create prosperity with the printing press.  I dare say the average 6th grader can understand that the act of putting ink on paper does not create wealth.  It’s too bad our elected officials can’t understand this.

So here we are, we’ve survived the credit crisis and all appears to be well in the world.  I’m here to say that all is not well.  We now have a cancer growing under the surface of the economy many times bigger than the one Greenspan created. This cancer isn’t going to show up in real estate or credit markets, that bubble has already burst, never to be inflated again.  No, this time I expect the cancer is going to flare up as inflation in the commodity markets.

Witness the strange resilience of oil at $80 despite a very strong dollar the past 3 months. Gold has been holding over $1100. Sugar is at multi-year highs. Copper is less than 15% from all-time highs.

The commodity markets are now poised to unleash a massive inflationary storm.  I think there’s a very good chance that storm will strike this spring.

The dollar is now deep into a counter trend rally and in jeopardy of putting in an intermediate term top at any time. When it does the flood gates could break and we will have to deal with the unintended consequences of Bernanke’s actions.

Unfortunately, there are no painless cures for spiking inflation, especially in an ongoing recession.  The cure is to let the market clean out the excesses.  The cure is to raise rates and drain liquidity, to induce a recession.  That course leads to 20%+ unemployment and a deflationary depression.  Does anyone really believe our elected officials will choose the that course of action?

On the other hand, doing nothing leads to higher and higher inflation and running the presses faster and faster to stay ahead of rising prices, eventually culminating in a hyperinflationary event if government debt is allowed to spiral beyond the point of no return.
Unfortunately, I think it’s probably too late to stop the storm.  Let’s face it, you don’t start turning the Titanic when it’s 100 yards from the iceberg.  By then it’s too late and the ship is doomed.

The same principle applies with our economy.  If the Fed waits until inflation starts to pop up it is too late.  The damage is already done and there’s no going back.  If the inflation Genie gets out of the bottle there’s no easy way to get him back in. I would argue that the commodity markets are already trying to tell us there’s trouble coming.

History has been crystal clear - every time oil spikes 100% or more within a year’s time, it has pushed the our economy into a recession. We already have a spike from $32 to over $80 and this is against a backdrop of high unemployment. The last thing we need in an economic environment that’s already under stress is surging energy prices again.

The question investors have to ask themselves is whether it’s more likely the powers that be will do the right thing, raise rates, drain liquidity and force the world into a deeper recession before inflation gets out of control or will they continue to kick the can down the road making the problem bigger and bigger?

Knowing human nature, my bet is that our elected officials will do whatever they have to do to avoid short term pain - even if it means compromising our future.

The storm is brewing. It’s time to batten down the hatches.

That means gold and silver!

John Townsend

The Smart Money Tracker

John Townsend authors the Smart Money Tracker and daily financial newsletter tracking the stock & commodity markets with special emphasis on the precious metals market.

© 2010 Copyright John Townsend - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in