Posted by
Andrews on Saturday, January 31, 2009 3:08:47 PM
I was reading
another blog when I ran across an article about a Texas auto show and the lack of signs of recession. It was something that struck me at Christmastime as well, that despite the talk of bad economic times, sales seemed to be on the rise. It was almost as if all the talk about recession was simply hype and the situation was nowhere near as dire as some thought.
Then again, perhaps that is a sign that people are bracing for inflation. As we know, Obama is promising an $850 billion bailout, with more to come. As it certainly won't be funded by spending cuts, new taxes, or borrowing on the private market, the only option left is the Federal Reserve. In other words, we are looking at nearly a trillion dollars in monetary inflation, on top of the half trillion already enacted in Bush's bailout, and with two trillion or more to come.
What most people disregard when thinking of inflation is the role expectations play. You can see it early in inflation when prices do not rise a fast as money supply does. That is because, as a one time infusion, people expect the impact to be small. However, as inflation continues, people come to expect the rises, and the price inflation catches up with and eventually surpasses the expansion of the money supply.
And that is my fear with the bailouts. With at least a trillion and a half already in the pipeline and talk of two trillion more, people already know the money supply is going to grow by 20%, more or less, and may be making plans in anticipation of that inflation.
And heavy spending is one sign of that. It is a characteristic of massive, rapid inflation, that people tend to buy and buy and buy. As you expect your dollars to crash in value with alarming speed, you want to hold them as short a time as possible. So, rather than watch them lose value, the moment you receive money you buy something, anything, as it will hold value better than money. Even if you don't need it, you will buy it since you can sell it later.
Of course, we have yet to hit the massive inflationary process Germany experienced, but people are not idiots. They can see what is coming, and so maybe they are spending in anticipation of inflation. And, in fact, cars and Christmas gifts are actually good choices. You see, both can be bought on credit, and, as the inflation has not hit that strongly yet, those loans will be at interest rates that will probably not keep pace with future inflation. In other words, it is a good time to buy on credit, as the bailout inflation may wipe the debt out, or at least reduce it to a quarter of what it was, or even much, much less.
Some will argue that people aren't that economically savvy, and perhaps they aren't, but they do not have to know a lot of economics to realize that after bailouts prices rise, or to notice that dollars buy less and less every year, at least in recent times. If the Germans of the 20's knew enough to respond to inflation with a buying spree, why not Americans? They may not be responding to the inflation itself, but to a number of symptoms of that inflation. It doesn't matter. What does is that it appears that the anticipation of inflation may be driving us, or some of us anyway, in some economic sectors, into a strong buying cycle, consistent with historical periods preceding hyperinflation.