Monday, February 26, 2007

Inflation Conundrum

John Stucco in a post over at Minyanville says that real inflation is running at between 12-13% based on reconstructing the M3 numbers (which the Federal Reserve has stopped reporting again). All this inflation is being run up by extension of credit.

The U.S. saw a total of $4 trillion in new credit created last year. All that money you see out there has been borrowed.

Normally all that money would go to bid up consumer prices. It is not because of the U.S.' sickness.

All that free money (first fostered by Japan's ridiculously low interest rates, a rate that was just raised yesterday because it is clearly causing malinvestment) combined with globalization has created overcapacity. The latest capacity numbers show it now falling from already below average numbers. The U.S. has too much production in the world so producers can't increase prices. The U.S. has too many houses so the prices are beginning to fall. The U.S. has too much commercial real estate so REIT stocks are showing severe weakness. The U.S. made too many risky loans so the subprime mortgage market is falling apart. The U.S. has too many strip malls so the countryside is getting ugly.

All that borrowed money is now going into speculation because there is nothing left to build. It is going into stock prices, gold, commodities as the last flushes before the market says "we can't take anymore debt." Total U.S. debt is 3.5 times GDP, a level never seen before. The second highest level was 2.9 times in 1929. Total U.S. financial debt (excludes consumer debt) is 2.1 times GDP, the highest ever and up from one time in 1987.

The timing is uncertain, but logic tells us that this must end.

There is a lot of anecdotal evidence that middle America is starting to wake up to the fact that they are getting too deep in debt. Blogs are starting to pop up wherein people are trying to blog their way to financial health by exposing their consumption and use of debt to the world. (Let me just say for the record that I think this is a bad idea. If you need to get your spending under control, buy a financial software program as in Microsoft Money or Quicken. Most consumers only need the cheap $30 version that you can buy anywhere.)

Now, as for there not being anything left to build, I can tell you that there is a lot of new building going up near where I live that I think was needed. They are taking old run-down shopping areas and creating new shops. I can only speak for my local area, but I am glad they are doing it. Now if they don't get more money into consumer's hands, it may not help much. That may be a legitimate fear. Based purely on my observations, the new shops seem to be rather busy. So, at least for this area, they seem to be good investments -- at least for now.

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