[edit 2021] I was obviously wrong about the prospect of hyperinflation when writing in 2004. But the majority of my first public article holds true today with the main difference being that a virulent deflation (ref. also 2004’s Deflation: A Manufacturer’s View) is more viable as the final act of this cheesy movie…
This article was originally posted in 2004 at the now defunct biiwii.com.
July 1, 2004
As we enter the summer of 2004, our markets appear to be moving with all the grace of Dr. Frankenstein’s creation, staggering forward, arms outstretched and seeking sanctuary. Ideally, the market would find that comfortable place in the arms of a healthy, productive and fundamentally sound economy. But will it find those loving arms, or will it instead ultimately find an angry mob, ready to strike it down?
What follows is a breakdown of the situation as I see it. There will be no charts of trends or statistics, but merely what I consider to be a common sense overview of the situation. I will compare what was to what now is, at least as far as the US economy is concerned.
A Country That Was
The very origins of America, at least westernized America, are rooted in independence, self-reliance and hard work. A land of opportunity for anyone willing to work hard, take chances and go for what became known as the “American Dream”. In short, people were free to come here and define themselves and in so doing, define a great nation that seemed to out-work, out-produce and out-compete most others. It is no wonder that as this great vacuum was filled with productive people seeking a better life, America was built, brick by brick and with constant sweat-equity, into such a powerful economic and cultural force, affecting and influencing the majority of the modern world.
From the early days of the industrial revolution right on through two world wars and well into the cold war, America seemed to thrive as each new era presented its own particular set of problems. There were setbacks of course, notably the Great Depression of the early 1930’s. In fact, many would argue that policies originating from the depression’s aftermath would set the country on a course to a destination we now find ourselves approaching; a predominantly paper-based, service oriented economy and a financial system underpinned by credit (and its evil twin, debt), speculation and fiat debt paper, AKA the US dollar.
Our Modern Economy
Whereas a less mature, formative America worked and produced itself to the stature of superpower, we now find a bustling, mature society that sadly feels entitled to its riches and stature. In short, hubris has set in to the American consciousness, and it is hubris that I believe will be its downfall. We are simply not seeing things through the same eyes that our great grandparents, grandparents and even parents saw them through. And because of that fact, we have transitioned from production to consumption. Consumption being a much easier route. After all, why work and produce for what you want when you can attain easy credit, and seemingly get the same results. This would not be so unsettling if it were only a portion of our population going in this direction, but the scary part is that the whole country, Uncle Sam, has gotten on board and I would argue, has led the charge into this brave new world of Alan Greenspan’s “information economy”.
Meanwhile, third world nations do the work that we have risen above as an entitled superpower. Why would we need to do the “dirty” jobs like manufacturing after all, when we are the world’s number one financial services provider? We will continue to do certain dirty work, such as construction, that can’t be outsourced. And if it’s construction for infrastructure, so much the better. Uncle Sam is hiring! With your depreciating dollars.
This leads me to the main point regarding our current economic recovery. This is a recovery built on inflation, not real productivity. This far into a recovery cycle, I would expect to have seen a far less accommodative Fed, as growth has really picked up and inflationary pressures are becoming apparent even to those who believe the official massaged numbers in the CPI and PPI. But as a friend of mine says, we’ll probably get “tightening lite”, or the Fed talking the talk, but in fear of short circuiting the economy it created through unprecedented liquidity from negative real interest rates, a credit system gone berserk, and vendor financing agreements of massive proportions in the form of Asian central bank purchases of our treasury paper.
So where does this leave our poor monster, sloppily stitched together and meandering aimlessly forward? The market will look to the economy, and being a forward looking monster, I expect it to see one of two things; The Fed taking away the punch bowl for real, deciding too late that the party is over, or more realistically, it will see a Fed doing all it can to sustain the monster it created. This market was stitched together with debt, and it will require more of the same to keep it going. We are knocking on the door of hyperinflation, and I believe the Fed will choose to open that door, given that it is too late for our economy to de-leverage in any orderly fashion.
As entitled modern Americans, I can envision the majority seeing this as bullish, and Alan Greenspan gaining even more accolades as the celebrated maestro. Frankenmarket will probably get an extra bounce in its step. A warning before you go full-bore bullish longer term though; for a reality check on what hyperinflation means, do a little research on what Germany experienced in the 1920’s. By contrast, a garden variety Japan style deflation would have seemed very tame. But it is too late for that now.