(This is Part 5 in a series. Go back to Part 4.)
The great Austrian economist Friedrich Hayek said that monetary and credit inflation can show up in an economy in three different ways, in any combination:
1) Rising goods prices;
2) Rising asset prices;
3) Growing trade deficits.
The public has been lulled into thinking that there is no inflation because government statistics appear to show that goods prices are rising at a low rate. The Consumer Price Index rose only 1.7% in the last 12 months, so inflation is "not a problem" according to the government.
Well, not exactly. Because the other two manifestations of money and credit inflation are both rising strongly. For now, let's consider the former:
Crude oil has doubled in 3 years.
Copper is up 130% in 3 years.
Soybeans are at the highest level in 15 years.
Corn is at the highest level in 8 years.
The price of lumber was up 40% last year.
The price of PCV was up 55% last year.
Gold is up 66% in 3 years.
Platinum is at a 24-year high.
Hot-rolled steel, a benchmark, has doubled in 6 months.
A commodity index is at its highest level in 20 years.
Get the picture? In fact, there is global inflation going on in all commodities—from rice to tin, from coal to zinc. These are the raw materials of industry and will inevitably show up as much higher consumer prices.
And it's not just commodities. Healthcare premiums have risen 42% in the last 3 years. Auto insurance premiums have risen almost as fast. And we've already covered the inflationary bubble going on in real estate.
The Great Global Credit Boom has kindled inflation in all major asset markets—stocks, bonds, emerging market, commodities, gold, housing and so on. Even the riskiest junk bonds have joined the party.
Your house, your gasoline, your health care, your food, your business' raw materials, your insurance are all rising. But don't be concerned because there is "no inflation."
Great inflations always begin with the fancifal appearance of wealth creation. For awhile everything seems to be going better. The economy goes on a sugar high, because money and credit are increasing faster than prices and so there is more "wealth" around.
But true wealth is not created this way. So that, along with the apparent increase in "wealth" comes increasing distortions, mal-investments and mountains of debt. And so the great inflation is inevitably followed by the other face of the process, the great deflation and depression.
After a critical point is reached in the inflationary process, prices begin to rise even faster than money and credit. Paradoxically, as prices overtake and then surpass the rise in money and credit, the process becomes deflationary—because there is an increasing "shortness of money."
As prices rise faster than income, consumers begin to experience having less and less purchasing power. Another way of describing it is that the society's standard of living begins a precipitous fall.
Part and parcel of this process is a great asset deflation as stocks, bonds, housing and so on undergo collapses of their wildly inflated values. Indeed, all major deflations in world history were related to a sudden, relentless and substantial fall in the values of assets.
The over-inflated bubble creates the bust. As the addictive sugar leaves the system, the result for companies, banks, households and governments is extremely traumatic. And yet, ultimately, the process is a divine healing, a "winter" that silently prepares for the new spring.
(This is the end of Part 5. Go to Part 6.)
—jim sloman, 3.29.04 for Jun 1
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