Enzio's Clock

Background

1. Current nonsense (inflation)

Readers know from our Economic Clock® that the Economic Time® is characterized by an 

• excess demand for money, and thus by an
• excess supply of goods

Concerning the excess demand for money, what we mean is that banks won't lend. This puts to rest the idea that the Fed is "printing money". Indeed, as Prof. Bernanke's Princeton colleague, Prof. Krugman, recently pointed out: the Fed may be buying debt, but the money that it gives the banks is, in turn, re-deposited at the Fed. So the money is not coming into circulation. In technical jargon, the velocity of money keeps wilting: the ratio of GDP to money supply keeps shriveling. In simple jargon, banks won't lend. 

The banks' unwillingness to lend means that companies are cash-starved, so they don't invest or produce more goods than those required by inventory minimums. Thus, there is an excess supply of goods: people are being laid-off, so they don't spend. Instead, they save. 

Put differently, de-leveraging in the monetary world is mirrored by de-stocking in the industrial world. People don't have money, so they don't spend, so companies stop producing....

Put differently, the "output gap" is widening: growth is way below its potential which is measured as gains in productivity plus gains in the labour force. 

Given these facts, how can inflation be a threat? Certainly it cannot be a threat from the "demand pull" side of the equation: demand is wilting. And how about the "cost push" side? Well, a falling dollar and others' competitive devaluations may foment some "imported" inflation: here, Americans have to spend more dollars per unit of foreign currency. But then, the demise of superpower currency dollar is a historical pattern that all superpower currencies go through. Not that this will lead to inflation: the excess supply of goods prohibits that higher import costs get passed-on. So margins take the hit.

Thus, don't believe that inflation is "just around the corner". It cannot be: the Economic Time is just too terrible for it to rear its ugly head for a long, long time. 

2. Current sense (debt)

But where we are d'accord with markets has been for some time their sub-conscious concern about the level of U.S. federal debt. 

That is going to give rise to a huge bond sell-off, so the Fed will have to buy even more paper. This is what Prof. Bernanke was railing against: being "stuck" with having to buy ever-larger amounts of Federal debt.

Back to the framework of our Economic Clock®: the very fact that the Treasury is spending even more tells you, does it not, that America's excess supply of goods must be worsening? Otherwise, why would America's politicians be seeking to create demand if there already were an inflation-threatening excess of it around?

3. How to Make Money Off This Idea

1. Always consult your financial adviser first.
2. Short long-dated US Treasuries by buying, for instance, the ETF, TBT:US.  It has shot up by 51% since our Christmas recommendation of 22nd December 2008.
   
3. Buy gold: it remains a store of value even when the price of U.S. debt disintegrates. Look at one popular ETF, PHAU:LN, which is up by 22% since we recommended it on 15th November 2007.