The Most Important Economic Phenomenon and How to Play It
by George Kleinman
The most important
economic phenomenon lying ahead of us, which we must understand
as traders and/or investors, is the inflation-versus-deflation battle.
Below I discuss
this most important of all financial phenomena, one poorly understood
by the public at large, as we lead into specific ways to position
ourselves in the marketplace.
is a phenomenon not just of money supply, but of money in circulation.
Reserve Chairman Ben Bernanke was interviewed recently by Congressman
Ron Paul (R-TX), one of the smartest guys in Congress, he didn't
give the full answer.
Here's an excerpt
from that interview (with some additional comments Rep. Paul then
gave to correspondent Neil Cavuto):
So it seems to me that you're in the midst of massive inflation,
but I guess you have a different definition. When you double the
money supply, that's not inflation itself? Or are you looking at
"Inflation" is the change in the price of the consumer
price level, which is very stable right now, and the various measure
of money, as you know, in the broad measures of money, the measures
that cut the measures of money in circulation like M1 and M2 are
not growing quickly.
So, Congressman, he more or less said your inflation concern was
misplaced. What do you make of that?
Yeah, that's what he said. But when it comes, people will realize
they should have been more concerned. Just like he was totally unconcerned
about the crisis building. Remember the many years and months before
the crisis hit he reassured everybody that there were no problems.
So I don't know why we should be reassured by him now saying, "Don't
worry about inflation."
But I was trying
to make the point that the definitions are different. If you increase
the supply of money, that is inflation. It causes harm, even if
you don't have your rise in prices yet. But we do have rising prices
in medical care and there is a lot of inflation out there.
And you've been arguing that a lot of this federal printing of money
led by the Fed and all these rescues and bailouts where we are pulling
money out of our you know what, I mean, that's going to be eventually
inflationary. Now, to be fair to you, you've been saying this long
before even our economists started picking up on this. What is your
worry now? How pronounced is this threat? How soon is this threat?
Well, I don't think you can predict, that's one thing, Austrian
economics teaches you that you can predict trends, but not timing
and yet, it will come because the money supply has been increased.
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© 2009 KCI Investing