I can’t find any sources for this, so consider it my own conjecture. I have been asked many times lately why inflation is not worse, and if it disproves what I have been saying about the economy being in dire straits. The answer is “not yet,” and here are a few reasons why:
- Consumer confidence is largely driven by lies told by the media and government. Demand will slacken if the economy is in danger, but if “they” say it is on the rise, people generally believe it and invest again. Despite not a single great improvement in the economy (even by the state-economists’ own attenuated indicators), people generally believe the economy to be on an upswing. That cognitive dissonance is glaring, but the public is too dumb/deceived to notice.
- Demand for American dollars abroad is still kept high by the weakness of other currencies (especially the Yuan and very much the Euro, which is in extreme danger and has any intelligent investors fleeing to American treasury bonds and other “safe” – relatively – hedges against currency devaluation or failure) and the (actually somewhat strong) remnants of the reserve currency status. Other countries still predominantly trade oil and other commodities in U.S. dollars, even if such exchanges are being slowly phased out. As long as demand is artificially maintained in the dollar, we are safe. But it is not perpetual.
- Our debts have not reached the point that it is *absolutely* certain that we will not pay them. Yes, they are getting close, but until we have the inability to pay the interest on the national debt with our tax revenues (especially given all of the tax raises that are impending), we will not have to print away debt.
- Many of the bills that the U.S. government has promised to pay are not yet due. This means politicians can continue to promise more and more people government pensions and Social Security and Medicare today and not think about the cost. But the pyramid schemes are not sustainable and the more we create (ahem, Obamacare), the more quickly the bills will come due and the above problems will arise.
- Our government has shown that it will go to war for the “financial indiscretions” of countries who reject our petrodollar (reserve currency) status. Not many people want a war with us, thinly spread as we may be.
- The debt bubble continues to grow, without any moral outcry, which allows all of us to spend beyond our means and delay payment to the future. Fractional reserve banks are able to extend credit where no wealth exists to back it, and the people kick the can down the road despite the average American being in debt $30,000. This is not sustainable, but the demand has not slackened yet.
- Real money theory posits that the money that causes inflation is that which is paper and circulating the most quickly in the economy (mostly consumer goods). I don’t ascribe to the theory, but if it is true, it could explain why inflation has been lower than many would have expected, since most of the money that was created is not cash but credit.
- The velocity of money is the cause of hyperinflation. If money is not circulating very quickly because people are afraid to invest, even though there is more money in the economy, there is no danger because most of it is not in circulation.
- Studies indicate that it takes 36 months for money to circulate far enough into the economy to have any effect on the consumers’ perception of its value. This means what we are seeing today is the monetary policy of mid-2009. I would expect that within 3 years inflation will be higher than it is today, because we will have seen the full effects of Obama’s vicious spending and the Bernank’s sandbox tomfoolery with the system.
- Most of the money that has been injected into the economy by the Federal Reserve has been as excess reserves in the big banks. Given the 36-month rule above paired with the fact that those big banks are only now beginning to lend money again, it will be a while until that money hits the markets with any substantial velocity.
- Various derivatives markets have yet to fail, but will need several trillion (up to 200 trillion) dollars to insure. I would not bet against the Fed intervening in one of these markets’ collapse, if and when it happens…
A few other possibilities come to mind, but they do not have the explanatory power of those above. If you are wondering about timeline, I don’t think any major economic decline will happen for at least 5 years, but no later than 2025 (may have to eat those words…). We are talking about huge debts coming due in the coming years, that amount to over 8 times the U.S. GDP or 2 times the world GDP. How long has it taken to build our economy? And we need another 8 within 50 years or so? It would take an industrial revolution of magnificent proportions, which our government and the status-quo nature of our people do not have the stomach for. Let me give an example. Say that a cold fusion engine that ran on water was invented. It would render the combustion engine obsolete, leaving in its wake many unemployed people in the oil and auto industry. Our GDP would decline, unemployment would increase. But we would be far more wealthy, and it would free up much of the money of many middle-to-low-income people who currently spend it on energy. Even so, the people would resist the change, and the government would ban the invention. So not only is such an advance unlikely technologically, we as a people are not ready for any sort of industrial revolution. We love the status quo, and will pay for it dearly when our wealth is sucked away by government spending via taxes and inflation.
Inflation still is higher than it has been in years, and as I have written about many times before, the gutted mainstream CPI will be no indication of the failure of our currency. Look at the growth in the M2 money supply, and using the simple supply and demand law that is bound to this world, you tell me: Is inflation coming?
Edit: For those calling for higher inflation – you are immoral.