Where Is the Inflation?

By Dr. Duru written for One-Twenty

January 23, 2006

Gold hits 25-year highs. Silver is soaring. Copper keeps making all-time highs. Geo-political risks have some people finally believing that $100 oil is really possible soon. Gas is creeping back toward last year's highs. The Chinese economy continues to grow more than expected. Unemployment in America continues to decline. American taxpayers have received massive tax breaks to support additional spending and many of these tax breaks may survive the next battles over the budget. The U.S. is fighting TWO land wars AND a shadow war against international terrorists. What's wrong here? Despite all these upward pressures on prices, the global economy seems to be missing signs of inflation. Well, if the economists are to be believed, inflation is tame. The bond market has put its stamp of approval on this claim on control over inflation by maintaining low long-term rates. Yet, we all know that education and medical costs continue to spin out of control. Many housing markets all across the globe have seen astronomic and historic increases in price. It seems almost everything of importance either has or should have inflationary problems. Can the abundant labor supply in China alone be responsible? Is the American worker so efficient in the few things we still make ourselves? I just cannot imagine such a fortuitous combination of events that we can have our wealth and eat our money too. I just cannot understand it...no matter how many pundits I listen to or read. Inflation *must* be around the corner. It is my set of suspicions that had me reluctant to believe that the Fed is almost done hiking short-term rates.

Jim Cramer had some interesting comments on Mad Money tonight. He claimed that the rising levels of indebtedness in America are indicators of the slow and steady erosion of the middle class. More and more people are getting poorer. More and more people are being forced to turn to alternative sources of funding, like pawn sharks, to continue supporting their spending. I agree - America is getting poorer and we cannot see it yet because personal and government debt distorts the real picture. Maybe when the Federal treasury goes belly-up (or something like that), and we are forced to slash and burn a whole host of important social supports, we will start to feel it. Maybe when we find ourselves at a loss trying to support another blistering front in our wide-ranging war against terrorists, we will feel the weight of our empty pockets. I have wanted to write on this topic in more detail for some time now and maybe Cramer has finally got me thinking more seriously about it. I have said before that America's capacity to spend and spend and find a way to spend some more never ceases to amaze me. I am now chastened not to bet against the consumer. But if inflation (or stagflation!) ever does rear its ugly head, we will be in some kind of trouble. Stay tuned....and, as always, be careful out there!

DrDuru, 2006