Infinite Unknown

By Krassimir Petrov, PhD:

Once again the Fed, the mainstream media, and Bubblevision continue to relentlessly propagate the myth that the slowing U.S. and global economy will ease inflationary pressures. In addition, the current Credit Crisis and the ongoing collapse in commodity prices have encouraged deflationists to reiterate their beliefs that deflation is inevitable. These views represent two different approaches of the same myth. Investors should not fall for it.

Given the recent fall in prices in a broad range of commodities, we are assured that inflation is no longer a problem, indeed that the real threat is deflation; inflation is supposedly transitory and inflationary expectations are “well anchored”. We are led to believe that “recessions cure inflations.”

Nothing can be further from the truth. On the contrary, given the current macroeconomic environment, the massive government stimulus of hundreds of billions of dollars in rebate checks and a series of bailouts will most certainly translate in much higher inflation and little or no economic growth. One must prepare for the reality that the government’s “cure”, as Peter Schiff has repeated so often, will be worse than the disease.

In coming years, investors must expect a lot more inflation and adjust their portfolios accordingly - their survival depends on it. Our job here is to outline the importance of the inflation-deflation debate, interpret its meaning, provide some historical evidence, and present the arguments for future economic development with its investment implications.

1. Importance of the Inflation-Deflation Debate

For any investor, the most important issue in today’s macroeconomic environment is the correct forecast of future inflation. Its essence boils down to strategic asset allocation. In a strong deflationary environment, the prices of stocks, commodities, and risky bonds fall; cash, cash equivalents, and safe bonds are the winning investments. On the other hand, in an inflationary environment, cash, cash equivalents, safe bonds, and most stocks rapidly lose value for two reasons - due to rising interest rates and due to loss of purchasing power; commodities, gold, and other tangible assets are the winning investments.

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Tags: Commodities, Credit Crisis, credit crunch, Deflation, Dollar, Economy, Fed, Federal Reserve, Gold, Government, Inflation, Politics, Recession, Stagflation, Stock Market, Treasury, U.S., Wall Street

Fears that the cost of living in America is rising out of control were heightened today after official data showed that factory gate prices increased at their fastest rate for 27 years.

US producer prices — a measure of the price of goods as they leave the manufacturer — rose 1.2 per cent in July compared with the month before. The increase represented a 9.8 per cent jump from July last year.

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Tags: Dow Jones, Economy, Fed, Federal Reserve, Food, Inflation, Labor Department, Recession, Stagflation, U.S., Wall Street

The following statement is written by Congressman Paul about the pending financial disaster.

He will introduce this statement as a special order and insert it into the Congressional Record next week. Fortunately, we have the opportunity to debut it first on the Campaign for Liberty blog. It reads as follows:

I have, for the past 35 years, expressed my grave concern for the future of America. The course we have taken over the past century has threatened our liberties, security and prosperity. In spite of these long-held concerns, I have days-growing more frequent all the time-when I’m convinced the time is now upon us that some Big Events are about to occur. These fast-approaching events will not go unnoticed. They will affect all of us. They will not be limited to just some areas of our country. The world economy and political system will share in the chaos about to be unleashed.

Though the world has long suffered from the senselessness of wars that should have been avoided, my greatest fear is that the course on which we find ourselves will bring even greater conflict and economic suffering to the innocent people of the world-unless we quickly change our ways.

America, with her traditions of free markets and property rights, led the way toward great wealth and progress throughout the world as well as at home. Since we have lost our confidence in the principles of liberty, self reliance, hard work and frugality, and instead took on empire building, financed through inflation and debt, all this has changed. This is indeed frightening and an historic event.

The problem we face is not new in history. Authoritarianism has been around a long time. For centuries, inflation and debt have been used by tyrants to hold power, promote aggression, and provide “bread and circuses” for the people. The notion that a country can afford “guns and butter” with no significant penalty existed even before the 1960s when it became a popular slogan. It was then, though, we were told the Vietnam War and a massive expansion of the welfare state were not problems. The seventies proved that assumption wrong.

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Tags: Alan Greenspan, bubble, civil liberties, Congress, crash, Depression, Dollar, Fed, Federal Reserve, financial crisis, Gold, Government, Hyperinflationary Depression, Inflation, Meltdown, Military, Monetary System, Recession, Ron Paul, Stagflation, Stock Market, U.S., Unemployment, Wall Street

June 27 (Bloomberg) – European confidence dropped more than economists forecast this month and retail sales plunged, signaling that economic growth is continuing to cool even as the European Central Bank prepares to lift interest rates to a seven-year high to tackle inflation.

An index measuring sentiment in the euro area fell to 94.9, the lowest since May 2005, from 97.6 the previous month, the European Commission in Brussels said today. Separate reports showed European retail sales plummeted, while inflation accelerated in Germany and Spain.

Stocks fell in Europe today as oil climbed to a record above $140 a barrel and Carrefour SA, Europe’s biggest retailer, scaled back its earnings forecast. With soaring food and energy prices boosting inflation, ECB President Jean-Claude Trichet has said the bank may raise the benchmark rate next week by a quarter point to 4.25 percent.

``The economy has hit the wall,” said Ken Wattret, senior economist at BNP Paribas SA in London. ECB officials “run the risk of tipping the euro area into a recession” as the inflation outlook increases the risk that the central bank “may need to go beyond one rate rise.”

Confidence among the manufacturing, construction and retail industries across the 15 nations that share the euro declined this month, as did consumer sentiment, according to today’s commission report.

The Bloomberg retail index, based on a survey of more than 1,000 executives compiled by Markit Economics, fell to 44 this month from 53.1 in May. A reading below 50 indicates contraction. Europe’s manufacturing and services industries also contracted this month.

Export Growth

The euro has increased 17 percent against the dollar in the last 12 months, threatening export growth, and was at $1.5770 today. The Dow Jones Stoxx 600 index fell 1.3 percent to 284.67 as of 11:29 a.m. in Brussels.

Separate figures today showed France’s economy expanded less than initially estimated in the first quarter as household spending, the driving force of growth, stagnated. U.K. first- quarter growth was revised lower today.

ECB council member Miguel Angel Fernandez Ordonez said today a July rate increase is not a certainty.

“Nothing is inevitable in life,” Ordonez told reporters in Rome today. “What we said was that the increase is not certain, but possible.”

Still, the ECB remains focused on consumer-price growth, according to ECB Executive Board member Juergen Stark. He said yesterday the bank sees its primary aim as being to “firmly anchor inflation expectations.”

16-Year High

Euro-area inflation reached a 16-year high of 3.7 percent in May. In Spain, inflation accelerated to 5.1 percent this month, the fastest on record, according to data today. Inflation in four German states also accelerated this month.

Oil prices have doubled in a year and Libyan National Oil Corp. Chairman Shokri Ghanem said yesterday that $150 a barrel may be “around the corner.”

Companies expect to raise prices more than previously anticipated to recover soaring costs, the commission report showed. A gauge of companies’ selling-price expectations rose to 18 in June from 16 in May, which compares with an average reading of 6 over the last 18 years. Consumers also expect prices to rise more sharply than they did last month.

The “worrying combination” of falling confidence and rising price expectations, “will add to fears of stagflation in the euro zone,” said Martin van Vliet, an economist at ING Group in Amsterdam.

`Remain Elevated’

“Inflation is likely to remain elevated for a longer period than we initially expected,” EU Monetary Affairs Commissioner Joaquin Almunia said in London today. It “should only begin to show a significant deceleration around the end of this year, although further possible rises in the price of oil and agricultural products cannot be ruled out.”

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Tags: Consumer Confidence, Dollar, Dow Jones, ECB, EU, euro, Inflation, Oil, Oil Prices, Recession, Stagflation, Stock Market

BASEL, Switzerland, April 29 (Reuters) - Stagflation is an increasingly plausible prospect in the United States and weak economic growth could last well into 2009, if not longer, the head of the Bank for International Settlements says.

That does not herald a rerun of the economic stagnation and rampant inflation that ran riot during the 1970s when oil prices last soared to unprecedented levels, Malcolm Knight, BIS general manager, said in an interview.

But it does cast some doubt on the White House’s thesis that the economy will rebound in the second half of 2008 in response to the tens of billions of dollars of tax rebates the government will be delivering to U.S. households in the coming weeks.

“I see a certain amount of scope for stagflation in a number of economies and that usually tends to result in subpar economic growth performance for an extended period of time, which could go well into 2009 or even longer,” said Knight, a Canadian who worked for more than 20 years at the International Monetary Fund.

“I think the U.S. economy is likely to experience weakness this year and in much of 2009,” said Knight, speaking to Reuters at BIS headquarters in Basel, Switzerland.

“Stagflation is a definite risk.” Continue reading »

Tags: Bank for International Settlements, BIS, crisis, financial system, Henry Paulson, Inflation, Mortgages, Recession, Stagflation, Treasury, U.S.

Cleaning up the mess that Mr Greenspan left behind was never going to be easy. Banks and brokers around the world face more than half-trillion dollars in write-offs as a consequence of the US sub-prime mortgage crisis, which is spreading from the US property market and roiling global stock markets. It’s toppled the US economy into a recession and the tremors are also rattling Asian stock markets.

Roughly $7 trillion has been wiped from world stock markets since the beginning of the year amid fears of a severe US economic recession and financial institutions reporting more mega losses. “The market crisis will preoccupy us well into 2008,” he said German Finance Minister Peer Steinbrueck on Feb 15th. “The financial risks securitized by banks contained packaged explosives,” and he accused rating agencies of having a conflict of interest in the role they played in the process.

So far, the Bernanke Federal Reserve has pumped more than half-a-trillion dollars into the markets with open market operations and special emergency lending schemes, to help cushion the blow to the US economy and stock markets. However, there’s evidence that the Fed’s prescription for dealing with the sub-prime debt crisis, is actually making matters much worse, and leading to “Stagflation.” Continue reading »

Tags: Bernanke, Bill Clinton, bubble, central bank, China, Commodities, Fed, Greenspan, Inflation, money supply, Nasdaq, Oil, Oil Shock, Peak Oil, rate, Recession, Stagflation, Stock Market, US dollar

CNN host Lou Dobbs says the U.S. economy is heading for a stagflation crisis as a result of the U.S. government’s policy of dollar depreciation and that the only solution is for the American people to restore a proper Constitutional system of government.Dobbs told The Alex Jones Show today that the decline of the dollar was, “a clear signal as to how much trouble this economy is in,” added to a 9 trillion dollar national debt and a 6 trillion dollar trade debt.

America’s dependence on cheap imported Chinese consumer electronics, clothes and toys was negating any elasticity that could be gained from the demand relationship with China on imports, meaning that the only conceivable benefit of a weak dollar - cheaper exports - was not even applicable, Dobbs explained.

“We have the specter of stagflation staring at us coldly and inevitably right now,” said Dobbs, adding, “There’s no doubt that those who would degrade the sovereignty of this country would want to certainly the power, the strength, and the respect of the U.S. dollar and it is the last thing we should permit.”

Stagflation is a macroeconomics term used to describe a period of inflation combined with stagnation, ie slow economic growth allied to a potential recession.

“We have to come to terms with the amount of debt that we have allowed the elites of this country to run up,” Dobbs concluded. Continue reading »

Tags: crisis, Dollar, Inflation, Stagflation