The Smell of Inflation in the Morning

About a month ago I drafted the following stub, which never turned into a full-blown post:

I’ve been getting “Dow Jones Market Alerts” in my e-mail more frequently than ever, stroking over a new record high, or a 200-point rise in a single trading day.

A 7.6% Yield in 90 days?

Whenever it happens, it’s going to be one hell of a crash.

That was July 7. But the writing has been on the wall: I remember a particularly nasty Asian nosedive early this year that sent shockwaves through my 401(k). Today, Yahoo! reports that “World stocks have shed over seven percent since they hit record highs only a month ago.” I hate to say I told you so, but… Through the miracle known as fractional-reserve banking, we’ve managed to export our inflation all across the world. Ahhh, to be both the minter and the banker of the world’s reserve currency! Except, you can’t fool all the people, all the time.

Isn’t “liquidity crisis” just a code word for “nobody wants to buy shit at a grossly inflated price?” Doesn’t it really mean that at prices satisfactory to the sellers, no buyers can be found; the market cannot clear? That’s the problem with inflation – sooner or later it stops working. Sooner or later, someone realizes that the emperor has no clothes. Of course, the inflation has now worked its way through the system – but prices have already risen. And you can only take advantage of inflation if you buy before prices rise, which usually means you have to get it before other people. Other people who had to pay relatively higher prices during the period of time when prices were rising – but who did not have the benefit of inflationary credit.

Sooner or later, everyone who has profited during the inflation decides that they’ve probably risked enough already, and that whoever is in charge of the profit-machine is about to put the kibosh on the good times. What’s left are the people who aren’t politically connected or otherwise favored, and the less-than-savvy average Joes, whose incomes have finally risen to such a whose inflation-adjusted incomes are now (in real terms) back to where they used to be – before they were diluted by the invisible thief – and now they might be able to get a slice of the riches, too, if the economy remains robust. By the time their incomes have met inflation, they’ve already been losing out for quite some time. And there is no recompense for this. For anyone to “win” via inflation, someone else has to lose. It is a zero-sum game.

But these people are committing the cardinal sin of investing; they are buying when prices are high – which works only as long as prices continue to rise. When nobody else is buying (aka, “liquidity crisis”), prices invariably fall, and people – sometimes nations – are ruined.

For the time being, the Federal Reserve is committed to “[P]pump enough money into credit markets to keep the [Fed Funds rate] at 5.25%” which simply means that they’re going to create money out of thin air, and give it to banks, who will lend it to people, so that they can continue to buy the crap that is presently overvalued. If nobody is buying, the problem must be that “there isn’t enough money.”

Nobody ever suggests that the prices are too high, as a result of previous inflations.

With apologies, I can’t recall the source who said, “When the only tool you have is a hammer, sooner or later, everything begins to look like a nail.”