Inflation Coming Soon?

We hold up USA Today as the ultimate sign of what is not, in fact happening. If the rag says to do one thing, we know it's a bad idea; if it says that something is happening, we know it isn't. Which is, as an aside, how we expect to know the bottom of the 2007 Depression is in: USA Today will be screaming that the end is near and everyone is going to die... metaphorically speaking.

That is all a bit arch, of course, but you get the idea. As a for-profit company of popular persuasion, USA Today and other information sources have to amend what they publish in order to maintain mass appeal. The public at large does not want to read or hear especially gloomy news, which is probably why our Depression Gazette will never hit the big time. USA Today, as long as enough people feel it provides the desired style and quality of information, will continue to limp along.

Limping along, however, does not make what the company prints actually accurate. And in that vein, we present this article from USA Today, which spews some very impressive fallacies about the nature of inflation. We recommend reading the article with popcorn, as it is quite a laugh, but we'll take on some of the most egregious errors.

"If inflation does hit, it won't be this year, barring a major jump in oil prices or a drastic change in government philosophy." We wonder how oil prices cause inflation. Additionally, according to ShadowStats.com, the Federal Reserve is printing physical money (i.e. growth in the M1 Money Supply) with abandon. That trend is about as iron-clad a guarantee of inflation, at some point in the future, as one can get. Indeed, the USA Today writer himself writes "The ultimate cause of inflation is an unwarranted increase in the money supply."

"...Unemployment... [is] 9.4% now and widely expected to break above 10% this year."Again according to ShadowStats.com, unemployment is cooking at well over 20% and rising sharply. We personally expect to see 25% unemployment be a reality sometime very soon, if that level has not been hit already. That's not to say that particular non-fact is necessarily the writer's fault, though: it's an artifact of the purposefully inaccurate and under-reporting nature of Government statistics.

The best part, though, was this:

If you're worried about inflation rearing its ugly head soon, relax... You don't get inflation in an economy that's as slack as this one... Inflation just isn't going to happen in this economy.

"A lot of the worries about immediate inflation are examples of financial illiteracy," says David Wyss, chief economist for Standard & Poor's. "You won't get inflation until the economy gets back, and that's at least five years out."... To get to inflation... you need a humming economy, and the [U.S.] economy is barely breathing.

Oh, where do we start, dear Reader? How do we assail such a monument to stupidity? To say that inflation cannot happen except in a 'humming economy' is like saying... oh gods, we don't know! Words fail us utterly!

So instead, we would like to take a trip to reality for a moment and provide an example: Zimbabwe. Zimbabwe's economy has not been truly 'humming' since it was a colony of the British Crown (pre-1965). In fact, it has been in negative 'humming' since 2000 (source), and official unemployment in the nation is now a horrifying 94%. Yet this nation is experiencing an inflation rate so high it is effectively meaningless: 231 million percent annualised. It is lunacy - or perhaps misinformation - to say that inflation requires a 'humming economy' to take place. Zimbabwe is chilling proof of the total untruth of such an assertion.

These errors we've expounded upon, plus a few more, are shockingly out of character with the rest of the article, which is fairly sober and accurate. The writer seems to be going out of his way to drive home his fallacious definition of inflation, and we can only wonder why. Whatever the case, though, we take this as a sign for the contrarians: inflation this way comes. And soon.

The Obama Bounce is Yet to Come

The classic form of an economic depression sees the occurrence of major rallies. These "bear market rallies" tend to be huge, setting records for size-of-rally, and luring in those who are foolish enough to believe 'the worst is over.' Such rallies are easily observable in any graph of the Dow Jones (see this one as an example; source), and are impressive for their ability to both capture the painfully credulous, and extract from them their money.

In this depression there have not yet been any similar, massive rebounds in the stock market. A quick perusal of this chart will show this to be the case. The recent rally-ette is nothing like the scale of the first rebound of the 1929 Depression, so it is likely that the big first false-flag rebound of the 2007 Depression has yet to appear.

It is, of course, possible that the shape of this Depression will be different from historical ones. Past performance is no guarantee of future performance, in bad times as well as good. That said, we're fairly confident that such a big rally will occur at some point in the future. The reasoning behind our statement is fairly simple:

We're pretty certain that times are bad, and they will be getting a whole lot worse. Still, too many people are getting gloomy; far more than we would have expected. As a contrarian investor and cynic, we feel that, when people are being this gloomy, it is with their tongue firmly in their cheek. People say they expect horror and doom, doom, doom... but they're just waiting for the next big rally, so they can buy in just as "the bottom is in."

Simply put, we see a value trap. The average person now living does not know a person who was working for a living (i.e. to pay the rent, buy the food, support the family) in the 1929 Depression. Absolutely no one now living has any idea of just how bad a depression can actually get. People have, generally speaking, convinced themselves that the stock markets only go up; when 'up' is not happening, it is a road-bump. Eternal prosperity is a huge part of the American ethos, and everyone wants their share of that prosperity.

So, we feel confident in saying that things are going to go up, and in a big way. At some point in the future, for no particular reason, all the people sitting on the sidelines, wringing their hands and fretting profusely, will suddenly lose their inhibitions. They will feel rich again; their pockets will spring forth with great gobs of money to buy... anything! The stock markets will soar wildly, houses will be bought and sold, cars will zoom off the lots (perhaps on going-out-of-business clearance from the Big Three?), and life will seem to return to a generally-accepted normal. President Obama's approval rating will zip up to record levels, and he will be hailed as the hero who saved the consumer economy; it was the "Obama Bounce" that turned America around. So too will the rally be touted as the triumph of the consumer economy. Happy days are here again!

This will be the greatest disillusion of the 2007 Depression, when the rally inevitably fails. The reason the rally will crash is the same reason why the markets first crashed in October 2008: a crash happened. For whatever reason, people then, as they will in the future, simply got spooked and started selling to spooked buyers. It doesn't matter how, or why, these crashes occur. Rest assured, though, crashes will indeed happen, and no amount of wishful-thinking and lucky-rabbit-foot-stroking will stop them.