Friday, November 2, 2007

Can Massive US Inflation Be Avoided?

Can massive inflation be avoided?


Will it be?

I doubt it.

What does Massive mean? I predict that the US will see a total of 30-35 percent inflation over the next 24-30 months.

Am I crazy?

You be the judge. Take the sum of the following points:

1. The Fed is printing more money that it has in a very long time (here). How can this not be inflationary?

2. The Greenback is at record lows against the currencies of ALL of it's major trade partners (here is a chart vs the Canadian loonie).

3. A very large percentage of the products purchased in the US are at least in part manufactured overseas.

4. China has been artificially keeping its currency low (this could change at a moment's notice)

5. The price of oil has tripled in just a few years and shows no sign bouncing back --of course, with the devaluation of the greenback on the world stage it cannot bounce back.

6. The record budget deficits that the current administration has (and continues to) run up is (are) not going towards investment in the country's future. (remember Iraq was only going to cost a total of 60 billion, tops.)

7. The effect of the change in the cost of imports has not been passed on to the consumer. (This has to be corrected. Do you think that Toyota is happy selling cars to the US for 40 percent less than it did 3 years ago? By accepting US currency this is what they are doing)

8. The message from the pundits is that the economy is good, that unemployment is low, etc. They always fail to mention that the international purchasing power of their post tax income has been almost cut in half in the last 5 years. By lying to the people the pundits are setting them up to be blindsided. You are going to hear, "who could have seen it coming" repeated as a mantra. Folks, this is basic economics.

If you combine just a few of the above points you have a recipe for disaster.

The most ominous point to me is number 7. There has been a bit of a consumer price honeymoon largely because of stockpiled and pre-purchased assets: from toys to steel to oil.

Look around your home and tally up everything that is made overseas (including items with foreign made parts). Now understand this. Because of the devaluation of the almighty buck all of those items cost someone 40-50 percent more than they did when you purchased them. Do you think overseas producers are happy to absorb that added cost without passing it on to the American consumer?

Back to number 7. Once the increase price of goods starts to be passed on to the consumer inflation will be unstoppable. It is not rocket science.

Can US Manufacturers take up the slack?

I can hear the naysayers saying that as assets become more expensive overseas the domestic manufacturing sector will take up the slack. This is true. But is it a good thing? In order to take up the slack US manufacturers will have to make products less expensively and of similar quality to those made in China, Japan, Korea, Germany, Canada, etc.

Can the US make cheaper products than China? Yes, but only by lowering the standard of living of its people.

An example of the incongruity of stable US prices

There is a controversy brewing in the land to the north of the US. Right now the average price of a new car in Canada is 30 percent higher than in the US. Do you think Toyota is happy with Canadians paying them 30 percent less simply by driving a few miles south? No, Toyota has countered by prohibiting their American dealers from selling cars to Canadians. Naturally a class action lawsuit has followed. But the real problem is not that cars are too expensive in Canada, the problem is that they are way to cheap in the good old US of A. Toyota will not be able to keep Canadians from legally purchasing cars in The States (remember NAFTA?).

The incongruity of cross border pricing can only be resolved by rationalization. Once the price of that Toyota has been rationalized it will cost 30 percent more in the US. This will happen in the next 24-30 months and will be typical of the increase in the cost of goods nationwide.

A 30 percent increase in the cost of goods equals 30 percent inflation, no matter how it is spun by Fox News.

Don't believe me?

Run the following test:

Click on the American Toyota website (here) and price any vehicle, then click on the Canadian Toyota website (here) and price the exact same vehicle. Then go to a currency converter such as the one at Oanda (here) and marvel at the difference as little as a mile can make.

Still don't believe me?

Why is Warren Buffett keeping his cash reserves in foreign currency (and for the first time looking overseas for investment)?

Time for a Plymouth.


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