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Three Reasons Inflation Is Coming

 January 07, 2013 10:06 AM

First and best known here, and scarcely anywhere else, is the economic Long Wave of N. Kondratieff. This wave's last disinflationary phase ran from the prior inflationary momentum peak in 1974 to the nominal and inflation-adjusted lows of 2002. Copper is one important key to inflationary trends as Steve Saville demonstrates in this inflation-adjusted chart from his post on Gold-Eagle in 2010.


[Related -Has Warren Buffett Found The Best Investment In Oil?]

Gold's nominal price pattern--I see little value in inflation adjusting gold- in my 2003 post is similar in wave counts but starting from 1980.Drake100103a

Copper and gold and nearly every commodity and finished good has risen over the past decade. The Long Wave has been resting or consolidating since 2008, but it has cycle up legs to about 2030.

The second reason for inflation is that US banks alone are sitting on nearly a trillion dollars in excess reserves held at and earning only 0.25% (one quarter of one percent) at the Federal Reserve who wants it deployed into the economy. The way for banks to multiply reserves into the economy are by making loans and by buying assets. Inflation is coming since banks are begining to deploy.

[Related -The Return Of Crisis]

Forbes contributor Michael Pollaro outlines this development in a recent post explaining that many trillions of dollars will likely cascade into the markets. There is widespread optimism that the Federal Reserve can manage that flood by backing out of the Quantitative Easing expansion of their balance sheet. This optimism, if it is such, was bolstered this past week with the release of the Federal Reserve Open Market Committee's most recent minutes. The minutes show several committee members urging a pullback this year by selling some of its holdings it has bought since 2008. This is quite  a contrast with the chairman's recent committment to the first to occur of an inflationary limit of 2.5% or a much lower unemployment rate.

The third and potentially explosively inflationary factor fallout has been developed persuasively by John Hussman in Roach Motel Monetary Policy. Hussman and others have shown that with short term rates so low it would take massive sales of Federal Reserve assets into the market to reverse even quite modest effects on rates, which are the mechanism for cooling off inflation in normal times. Thus would arise the specter of a "Havenstein moment" as discussed here recently. The Federal Reserve would face the dilemma of crashing the economy or accepting "a little more" inflation. Loss of faith in the government and the currency could develop very quickly and lead rapidly to major inflation due to capital flight.



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