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Inflation Raising its Ugly Head

Budget deficits to the left of us, money growth to the right of us, and an oil price shock behind us, will leave only inflation in front of us!

Information featured in a The New York Times article last month says it all. These are not wimpy numbers!

Consumer Price Inflation over the last six months
United States, Euro Countries and Britain
United States 5.0 %
Euro Countries 3.6%
Britain 3.1%

(Today it takes $237.14 to buy what $100 could buy in 1980)

Other countries are also showing what can be done when budget deficits and the money supply are cranked up and currencies are allowed to fall. A prime example of this is Venezuela and Russia. Even with all their wealth from oil, they suffer from very high consumer price inflation:

Consumer Price Inflation Venezuela and Russia
Venezuela 15.0 %
Russia 12.5%

Even countries that have tremendous wealth from resource sales to China are experiencing escalating consumer price indexes:

Annual Consumer Price Inflation
Argentina and Brazil, Indonesia, Turkey and The Philippines
Argentina and Brazil 9.6 %
Indonesia, Turkey, and
The Philippines
8.0%

The fueling engine causing this inflation is a combination of large world budget deficits and overly accommodative central banks, which have fostered rapid growth in money and credit:

Budget Deficits as Percentage of GDP
  Short Term
Interest Rates
Budget Deficits as
Percentage of GDP
Japan 0% 6.0%
United States 3.5% 4.0%
Europe * 2.0% 3.0%
*Broad Money Growth in Europe is 8%

World money growth is at its boiling point. China is printing money at an annual rate of 16 percent; Denmark is 15+ percent; Australia, Britain, and Canada are over 10 percent and broad money growth in Europe is 8%. While the broad measure of money growth in the United States is only 5 percent, growth of total credit is double digit!

After raising short-term interest rates to 3.5 percent, the Federal Reserve said they were still accommodative. They really meant it! Low interest rates in the United States, Japan, Europe and China - combined with an "anything goes money growth" philosophy - has allowed the United States to finance its $700 billion annual trade deficit and run an economy with negative consumer savings. These budget deficits and money growth are creating demand, which causes inflation. The world simply has too many Dollars, Yuan, Yen and Euros that are chasing a fixed number of barrels of oil. Believe me, the last thing inflation needed was Hurricane Katrina's devastating impact on oil production.

A number of market analysts and "cheerleaders" for the stock market have called for the Federal Reserve to stop raising interest rates because Katrina may cause the economy to slow. However, when you actually take a look at the budget deficits and money and credit growth (above), if the Federal Reserve stopped raising interest rates, the dollar could crash causing inflation to run at well over 5 percent a year.

The inflation numbers for August and September in the United States should look real ugly. While Congress seems intent to increase the budget deficit by as much as $150 billion to rebuild the south, we will watch the Federal Reserve response very closely and, like many foreign investors, be ready to dump the dollar if the Fed once again listens to the mob's cry for easy money.

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