I wrote yesterday about the recent rise in mortgage rates, and my fears that those increases could be the first signs of a strong inflation brought about by Obama's massive spending. ("Mixed Blessing") Well, today I was checking the stock market, and, wondering why gold stocks were dropping slightly, I decided to check the news I missed while on vacation this weekend. And I found this article.

For the benefit of those who never follow links, allow me to summarize. It appears that both silver and gold futures saw quite strong growth this quarter. Not incredibly strong, but strong. And when combined with rising mortgage rates and increasing federal long term bond yields, they all paint a picture of a loss of confidence in the currency.

Well, allow me to be precise. We are certainly experiencing inflation. We have been since the Fed was founded. And with Obama spending nearly a trillion more than we can afford, debts which are purchased by the Fed and used to secure new credit, we certainly are seeing unprecedented growth of the money supply.

No, what I mean is, we are beginning to see the complex of problems associated with out of control inflation. I haven't seen a large increase in consumer prices, but a lot of the other signs are there. For example, the stock market is beginning to rise, despite no real underlying change in market conditions. And, while some may see that as a positive, it is, in reality, a sign of inflationary worries. After all, if the money is losing value, then bonds and other fixed dollar assets are losers, so money will, at first, flow into futures and stocks. (Later, when the inflationary pressures hit harder, money will leave the market entirely, fleeing into concrete assets, such as gold and land.) Combined with rising interest, increasing valuation of precious metals, and rising bond yields, it certainly seems we are taking the first steps toward an economy reminiscent of the late 1970's.

So, what is next?

Well, the stock market will continue to flourish for a time. Money fleeing bonds will land there, driving up prices. In addition, as inflation makes accounting more difficult, firms will see rising paper profits, leading to massive dividend payments. Only later, as they realize they paid those dividends out of equity, and as interest rates choke off sources of new capital, will the market take a decided downturn.

Commodities will continue to rise, with precious metals leading. And eventually we will see those costs reflected in consumer prices. There will be a lag, as current prices have yet to incorporate higher replacement costs, but they will. In short order we will begin to see slowly climbing consumer prices. However, again, the initial signs will be positive. Until interest rates begin to rise, buying on credit will be more attractive, for two reasons. First, because prices continue to rise, buying now will be preferable to buying later at a higher price. Second, with falling value, paying in depreciated future dollars will be seen as a money saving device. And so, for a short time, the economy, as measured in sales, may seem attractive.

However, I doubt Obama will have long to claim credit for his "success". Though the market will rise, and sales will improve for a while, there is every sign the banks are already worrying about his out of control spending. Unlike past attempts to cure our problems through inflation, Obama announced too soon his plans to continue spending throughout the coming years, and so banks have already started to incorporate expected inflation into their interest rates. As interest rises, first housing sales will decline, then new housing starts. After that, growth will slow, as loans become more difficult to obtain, and consumer spending on large ticket items will decline. Soon we will see other sales dropping as well, as rising prices make consumers worry about making ends meet. Wages will begin to rise to match prices, and with them profits will decline even more. Before long we will have returned to the "stagflation" of the Carter era, with negative growth paired with rising prices and double digit interest rates.

Of course, as I wrote in "The Future", "I Told You So!" and "Winning By Losing? Not A Chance!", there is hope. The Democrats, hoping to hold their seats, may rebel against Obama. And, even if they fail to do so, there is always 2010 and, more importantly, 2012. I have serious doubts Obama will even recognize his spending is to blame for the inflationary effects, much less rein it in, but I think the public will. And so, even if the worst comes to pass, and we suffer full fledged Carter like inflation until 2012, at least we can rest easy knowing there won't be a second Obama term.

Well, that is, unless the doomsayers in the Republican party manage to push their "party of 'no"" line before the disaster strikes. Unfortunately the RINO/Inside-the-Beltway/"New Republican" coalition has had some success.("Conservatives and the "Big Picture"", "The Party of 'No'?", "Activism As The Only Acceptable Position? ") If they manage to push the party left before Obama's house of cards collapses, then there is every reason to fear. With a choice between the Obama fiasco and a "Democrat Lite" Republican, voters will likely still pick the Republican. But, just as Bush did nothing to stop the inflationary policy of years before ("Place Blame Fairly, Regardless of Party"), the new Republicans will likely do nothing but slow Obama's spending a little. With inflation continuing almost unchecked, the inflationary problems will continue, and likely the Democrats will come back in 2016 with an even more radical prescription for "change".

So, please, let us avoid all that. The Republicans have no need to move left to win. As I said in "Need to Change Direction?", they lost by running left, following a mostly center presidency. The right didn't lose as the right was never tried. But the right has every chance of winning big in 2012, if we just wait before making any ill-considered "reforms" to the party.("Hurrah For Murchison")

POSTSCRIPT

This is an interesting event in one regard, as it does provide more evidence for my contention that both evil and mistaken theories are self-limiting and self-correcting. ("The Triumph of Good")


POSTSCRIPT II

The above described course of events may not be followed exactly. As inflation deals largely with human expectations, it is impossible to predict with mathematical precision. People may, for a time, ignoring the risk of additional inflation and allow the increased money supply to reduce interest. They may raise prices faster than inflation. They may panic unpredictably and interest could skyrocket. It is also impossible to predict precisely how they will react to rapidly rising prices. They may flee into land, or gold, or consumer goods. They may try to hide money off shore, or put it into stocks so long as the market remains untouched. People respond in different ways. However, in the long run, inflation, by making money dishonest, has a disastrous effect. The specifics of the disaster are impossible to predict, but the general nature is easy.

POSTSCRIPT III

I didn't mention it above, but equally damaging as the "moderate" solution, arguing the Republicans need to "be FOR something", is the "paleo-con" solution, consisting mostly of proposing a new Smoot-Hawley solution. Just as that fiasco helped deepen the Great Depression, any attempt to solve our woes by ending "out sourcing", dissolving NAFTA, and otherwise hampering internaitonal trade, will not only do no good, but will do quite a bit fo harm. However, I dealt with that at great length in my posts "Jobs, Jobs, Jobs, and More Jobs", "Cheap Lighters, Overseas Dumping and Monopolies", "More Proponents of Protectionism", "Has No One Heard Of Lord Say?", "Protectionism Right and Left" and ""Fair Trade"", as well as many others, but those can be found by following links in the articles listed.