Inflation and the prospect of it occurring has been a topic of more than one article with the first explicit mention of inflation occuring in June when I noted that economy history predicted inflation in the future.. I later included the possibility of inflatin as one of my offerings in my series about the direction the economy might take in the next year. Overall I have not emphasized this danger as while just about every credible economic theory includes a warming that excessive government spending will result in inflation the markets were not showing strong signs of inflationary pressure.
That is no longer true. China and Japan, the two nations with the strongest reasons to purchase US Treasury bonds and keep the dollar from devaluing have all but declared they will no longer prop up the US government deficits. And this has scared many investment gurus.
Warren Buffett declared his worries in an editorial that was picked up by the New York Times on August 18. He notes:
But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
His worries should be considered carefully. Mr. Buffett has been a strong supporter of the spending and for him to start wondering if the brakes should be applied only opened the flood gates as other investment gurus declared their fears that the deficits will drive inflation. Since that editorial was published others have appeared.
Even Warren Buffett Is Now Saying Bonds Could Crack! At iStockAnalyst
The Crescendo Is Getting Deafening.... at Market Ticker
There's no will to fight inflation at MSN Money
Even the managers for the bond fund PIMCO are worried as one of the articles includes a quote from the funds managing director:
“While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative. In combination with other factors, that likely means a continuing devaluing of the U.S. dollars versus other currencies, especially the [emerging markets] currencies.”
When you add in the fact that the administration on Friday admitted that their deficit forecasts for the period from 2010 to 2019 were $2 trillion low and raised the estimate to $9 trillion for the period, you have a recipe for a currency crash.
The US economy will be able to recover from this. Its simply too large for any collapse to linger forever, but high inflation will only worsen many of the problems we already see and wither the faint green shoots of recovery that some economists are so assiduously seeking. Spending packages like the stimulus need to be repealed and the huge expenditures that Cap-and-Trade and Health Care Reform represent are unwise in the face of this prospect of inflation. I only wonder if the will exists to accept this reality.
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