Deflation to Inflation: A Trend We Will Soon Witness

Thursday, April 16, 2009

With all the money the US has spent, the fears on the street are that of inflation. History has proven that if you keep spending as a country, and you exceed a certain percentage of your GDP then you run the risk of rampant inflation. Take Zimbabwe for example, where a loaf of bread (if you can find any) costs the equivalent of three days pay for the average worker (again, if you can find any work). Now, I am not suggesting that the US is headed down Zimbabwe's path, however the spending bills they have come up with in the past three months alone total nearly 80% of their Gross Domestic Product.

Wednesday, the US released data that showed that deflation was rampant in the US and Forex Traders flooded to the dollar thinking this is the greatest thing that can happen. My online Forex friends though are not so naive. The fact is, it takes a while for these things to take affect. It is impossible to spent 12 Trillion Dollars in a few months, although give me a platinum card and I will try my best to do so.

The reality is that the US has had a deflationary issue which is why the recession is bad, and which is why the "pros" at the Federal Reserve and treasury think that insane spending can reverse it. I can guarantee you right here, right now, that they are right. The problem is they have gone too far and went crazy on their spending (mostly to fulfill political promises and appease labor unions), that they will find themselves in a hyper-inflationary mode once the spending and borrowing catches up. I talk about this often and I will not say I told you so when you see it.

Anyway, England also reported that the rate at which housing prices are falling has slowed. Many online Forex chatter is elated that a bottom to the housing bust in Britain is in sight, and all I can see is that it's still falling at a high rate. I mean, London property was so overpriced, and even with the year long slide in value it is still one of the most expensive cities to live in. It just shows you how much air was in the bubble. But I would not bet on a speedy recovery here either. Social spending has hampered the future for the UK just like the US and it will be to the detriment of the Sterling overall. Just wait.

Now the EU has it right. They are finally getting in on the bandwagon of spending to stimulate the economy - but they are mindful of the inflation factor in doing so. There is no "blank check" they are writing. They will announce a plan that is not indefinite, it has an end. In doing so they are not writing new laws that will see Billions spent each year to "prevent" this sort of crisis from happening again, it is a one off - one time only - lasting less than a year. They really are putting their money where their mouth is after being so vocal about beating down the US and UK's plans. Bravo Trichet - the Euro just might be the currency of the future yet.


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