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Essentialist Observations

Sunrise begets sunset.

Stability begets instability.

Birth begets death.

Boom begets bust.

Information begets ignorance.

Inflation begets deflation.

Longtime Daily Reckoning sufferers will recall that we have our own philosophy. Essentialism, we call it.

It came to us neither as the result of logical inducement nor sober reflection. Nor was it revealed to us as a divine truth. Instead, we just took it up as a man takes up with a pretty woman; we thought we might have some fun with it.

But now we find ourselves married to her - and happier for it. After a few years, we find her as attractive as before, and more serviceable than ever. She guides our steps and keeps us from making a fool of ourselves.

Essentialism begins with the same insight as existentialism - that the world is so complex and so full of baroque exuberance that we will never be able to know' or 'understand' it fully.

But no sooner have we shaken hands with the existentialists than we part company. We leave them to their folly. For the poor bumblers then go forth, believing that even though they can't understand how the world works, they can nevertheless figure out how to make it work better!

Thus do they want to control interest rates...economic growth...foreign governments...ingestibles...you name it. And thus do they throw away their dignity...and generally make a mess of things.

In the '50s and '60s it was all very hip to be an existentialist. It was avant-garde.

But now almost everyone is an existentialist and almost every one of them seems like a pathetic boob.

We essentialists may be pathetic too, but we hope to maintain our dignity by observing the world rather than sweating to improve it. We content ourselves to try to fathom the essential principles, rules, and laws that keep the old ball turning.

'You can't get something for nothing,' is a common example. We were too late on the scene to claim we coined the phrase, but when we found it we didn't waste a minute putting it in our pocket, along with the other loose change of the essentialist's fortune.

'Love thy neighbor,' is in there. So is 'the borrower is slave to the lender.'

This last essential verity has been recently overlooked - along with most of the rest. But it came to mind after a news report explained that China had warned U.S. Treasury Secretary John Snow to lay off criticism of China's policy of pegging its currency to the dollar. Keep it up, said the Chinese, and we'll stop lending you money by investing in your damned bonds.

We're sure Snow must have shot back with something like:

'Oh yeah...well, we'll just stop buying your cheap crap...'

But Snow's comeback must have had a tinny sound to it, like a bankrupt who threatens to take his bank business down the street.

China's trade is booming - up at a 33% rate in the first 7 months of the year. The average Chinaman still lives in a hovel, but it is a better hovel. They're building luxury apartments in Shanghai and selling them as fast as they can get them up. And foreigners are lining up to learn to speak Mandarin, hoping to get an early edge on the Next Big Thing.

Of course, the Chinese will have their own mad booms and comic bust-ups. But the big boom of the last 200 years has been in America. The U.S. is the great success story of the last two centuries. Its thrifty, hard-working people built the greatest economy the world has ever seen. Now they enjoy the fruits of their labors; America has become the land of the freest spenders on earth. And they will continue to enjoy their good fortune...as long as the Chinese are willing to lend them money.

A tide of tsunami proportions threatens America's free spenders. But what exactly is shaping the wave - inflation, or deflation? The Fed has been inflating, off and on, more and less, ever since it came into being...and especially after the golden handcuffs were taken off in 1971. People grump and grouse when gasoline prices inflate, but they smile in silence when inflation bubbles out the prices of their houses or their stocks.

But everything that inflates, deflates too. At least, that is our essentialist observation. While asset prices have been going up...consumer price inflation has been falling. In the last 18 months, the median CPI rate has fallen in half, from 4% annually to 2%.

We are headed to Tokyo, we have thought, where CPI rates have been negative for several years and the Bank of Japan maintains short rates near zero.

But whoa-ho! Both Bloomberg and TheStreet.com think they have spotted a change in the trend. Now there is talk of the Fed raising rates, in light of an expanding economy.

There has been a "U-turn in rate expectations," said one analyst. "No one expects a cut any more."

We're not so sure. We don't think Greenspan has the stomach for it. Besides, sooner or later, the inflation of the last great credit boom will deflate...no matter what the Fed does. Either prices will fall, or the dollar will. When? How? All the gypsy fortune-tellers in the Bronx couldn't tell you.

But we will find out.

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