Tuesday, April 19, 2011

Deflation has been Defeated, Woe to us All!

4/19/2011 Portland, Oregon – Pop in your mints…
It is hard to imagine that the amount of negative news has ever been more abundant.  Reasons to worry abound.  At The Mint, we have speculated that bad news and the worry it causes is, to some extent, a seasonal phenomenon.  Not that the events that cause the news only occur during certain seasons, rather that mankind is more apt to worry about the news during the Spring and Fall in either hemisphere than during other times of the year.  It is a time when preparations for the upcoming summer or wintertime are being made and it is natural to worry as to whether or not one's preparations are adequate.
However, even discounting seasonal worry, the combination of troublesome events that are being reported at present is staggering.  Under normal circumstances, any of the catastrophic events and wars that have occurred recently on its own would be reason for a stock market collapse.  Taken together, it is a wonder that stocks even have a pulse.
Yet in what can only be described as the eighth wonder of the world (ninth, if you count Andre the Giant), the stock, bond, and commodity markets are all racing higher at various speeds.
Can the Economic Recovery rival Andre the Giant as the 8th wonder of the world?
What to make of it?  Here at The Mint, we look at the data and believe that there is only one reasonable conclusion:
The Central Bankers have won:  Deflation has been Defeated.
As you may recall, three and one half years ago, give or take, the Financial authorities realized that there was a four alarm fire occurring in the financial markets.  Soon, every major Central Bank and Government were on the scene and proceeded to pump liquidity into the system to avoid a deflationary collapse that, as we were told, would bring an end to the world as we know it.
Now, much like George W. Bush in Iraq, we survey the landscape in the financial markets and, with equal confidence declare "Mission Accomplished."
Just like the US Military in Iraq, the financial authorities are announcing plans for an "orderly handover of power" from the public sector to the private sector.  

Just like the US Military in Iraq, the financial authorities are finding the handover of power to be much easier in word than deed.
Now that the financial authorities have defeated deflation (or Saddam Hussein if you are still following the Iraqi war parallel), they are finding that instead of the smooth transition of power that they apparently had hoped for there exists a cadre of violent elements in the economy which are jousting to fill the vacuum that the financial authorities and governments of the world will leave as they begin to pull liquidity out of the markets.
Instead of supply and demand being in balance, even more grotesque ratios of debt to equity and skyrocketing commodity prices are emerging as the rule of the day and equity, bond and commodity markets are walking time bombs.  Essentially, the later condition of the markets is worse than the former.
Didn't Jesus say something about this in Luke 11:24-26?  More than a clean heart, Man needs to have his sinful nature cleansed from him.  In the same way, more than liquidity, the financial system needs to have its bad debts written off, no matter how painful it may be.
Free money (or liquidity) is not the ultimate answer to the imbalances in the financial markets just as democracy does not appear to be the ultimate solution to a peaceful and prosperous Iraq.  It may even be breaking down in the United States if the recent partisan wrangles over the budget and debt ceiling are any indication. 
No, we are just now beginning to see the "unforeseen" (yet strangely logical) consequences of flooding the world with liquidity.  The war against deflation has been won, but the pent up demand and distorted production patterns that the war has left in its wake are now threatening to unleash inflation on a scale not seen for nearly a century.
Woe to dollar holders everywhere, for this inflation is now taking on a life of its own.
Stay Fresh!
P.S.  Please check out our latest 72 Hour Call at www.davidmint.com
Key Indicators for Tuesday, April 19th, 2011

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.