Hold Onto Your Wallets

Hold onto your wallets, folks. Here comes stagfalation. Reports today from the government today are giving pause to the inflation and commodity hawks. Monthly unemployment apps increased by 31,000 to 473,000. It was expected to decline by approximately 15,000. Even more disturbing was the 1.4% monthly increase in the PPI (wholesale Producer Price Index). That is an annual PPI inflation rate of 16%. That’s right…16%. As we all know, those wholesale price increases will translate sooner or later into retail prices.

Alright, so retail prices for produced goods will go up…what else is new? Well, commodity prices will start to rise as the investor class look for a hedge against the inflation. That means you will pay more for any commodity based product from gasoline to bread and cereal. In addition, gold prices will begin to rise; great for the gold investor and lousy if you want some jewelry.

The Federal Reserve, whose mandate by law is to control inflation, will have to act. It will raise interest rates and tighten the money supply by either increasing the reserve requirements for banks or simply taking the cash out of circulation. Watch the news. They do that by “selling bonds” and paying interest to people to park their money on the Fed balance sheet.

As interest rates go up, the government will have to pay more just like you and me. You know all that debt we just incurred? Interest rates will go up on that, and the cost of debt service to you and me for government debt will cripple all other government programs. Of course, they could just print money, in which case the dollar would collapse and we would have hyper inflation.

In addition, other countries will not want to buy our debt, forcing interest rates up even further. Taxes will have to rise to pay for basic government services. Folks, this is not a good thing.

Keynesian economics is an economic theory propagated in 1936, and came to prominence as economists concluded that World War II, and the associated massive government spending, pulled us out of the Great Depression. It believes that government is necessary to cure the inefficiencies in the economic system, and looks for private/public partnerships and massive government intervention into the country’s economic system to save us from ourselves.

The 2008 financial collapse is an example of what empowers Keynesians to up the intrusiveness of the central government. Maybe it was needed, but socialists use it as a simple power grab wrapped in intellectual mumbo jumbo.

The cure is often worse than the disease: stagflation. High unemployment, high taxes, high interest rates, high inflation combine to form the misery index. Those of us who lived through the Carter years know what this is.

Are we headed there again? The articles I read today seemed mixed and tempered fears. On the other hand, I am a firm believer that those who don’t learn from history are doomed to repeat it. Even money says this is beginning of something we don’t want to go through!!