Inflation Cures What It Doesn’t Kill

By: Barry_M_Ferguson

The US and China seem to be at opposite polarity. The US rulers are trying to inflate the economy and thereby reflate the stock indices. China is trying to deflate the economy and thereby restrain their stock index. To Ben Bernanke’s credit, he has been specific about his desire to see inflation rise in the US. To his discredit, real inflation is already locked in with a rear naked choke hold that is turning the consumers face blue already.

The Fed and the US government have of course always lied about real inflation and they have changed formulas to match their desired story. China, on the other hand, is now openly trying to contain inflation that they measure at an annualized rate of over 5% as they announced this week. One wonders why the Chinese don’t just lie about inflation like the US does. In truth, the Chinese recognize that an over-heated economy eventually crashes and that is the scenario they are trying to avoid. The US, on the other hand, has already pushed the plunger of economic destruction and only has one option left - the Zimbabwe option. They are going to try to inflate their way back to prosperity.

The interesting thing is the effect inflation has on the stock indices. The chart below clearly shows this effect by comparing the Dow Jones Industrial Index in gold to the Shanghai Composite in Red since the ‘magical’ Fed induced lows of March, 2009. As we look back, that was the point at which the Fed threw trillions into the markets via the banking system while the Treasury spat out trillions in new debt to do everything from lending support to the Fed to buying failed US corporations. We mustn’t be hard headed - trillions of dollars injected into the system does have a positive effect.

The chart shows us that the Dow has outperformed the Shanghai Composite pretty handily since the March ’09 lows. During this same span, the Chinese economy has expanded at three or four times (at least) the rate of the US economy. Yet, the stock indices would imply the opposite. Can we simply infer that that stock indices are more of a function of inflation more so than anything else? It would seem so. Back to Zimbabwe, it would be hard to find an index that performed better than the Zimbabwe Industrials in 2008. But again, their economy was completely disintegrating but the printing presses kept inflation racing higher by the hour.

That brings up an interesting question. Where would the Dow be trading if not for the extraordinary manipulation and intervention of the ruling Fed? Consider this. The Dow is about where it was ten years ago when the nation’s debt was less than $6 trillion. The US has essentially committed to another $8 trillion to keep the Dow from falling. Without that $8 trillion, might the Dow be at 1,000? We can certainly presume that the 4,000 point rally from the March ’09 lows were due to massive commitment of debt to the cause. If that rally had gone in the other direction, the Dow would be at least below the 3,000 mark right now. Further, the capitalization of the US markets is somewhere in the $13 trillion range right now - give or take a trillion. Take away that extra $8 trillion in debt and the charts would show a different story.

Debt is of course money that neither lenders nor consumers really have. Since the US is not a saver nation, we must assume that the consumer spends everything they have and everything that anyone lends to them. We can also factor in to our scenario that the fractional banking system turns a trillion into ten trillion. So again, where would the indices be if not for an extra $8 trillion in debt to inflate the credit system to inflate the stock indices? Look at the chart of the Dow and the China Composite. If we want the Dow to continue higher, we must hope that Ruler Bernanke keeps flooding the system with credit supported by increased US debt. Sure, the resulting inflation would destroy the economy in its path and the poor suckers that eke out a living from such economy. But screw them! All that matters is a rising Dow Jones Industrial Average. Besides, while the suckers are drowning in a rising sea of inflation, they will be tricked by the rising Dow into thinking they are just taking a swim. By the time they lose sight of land, it will be too late.

It would seem apparent that the Dow could make new highs within a year or so. All we need is for the national debt to rise by a few more trillion. Now, if the national debt could just rise to $50 trillion or $100 trillion... Aww - I’m dreaming now! Do we really want congress to cut the deficit? Maybe we should check the chart one more time!

Since March, 2009 - DJIA in gold and Shanghai Composite in Red/Black
Chart courtesy StockCharts.com

Barry M. Ferguson, RFC
President, BMF Investments, Inc.
Primary Tel: 704.563.2960
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Barry M. Ferguson, RFC is President and founder of BMF Investments, Inc. - a fee-based Investment Advisor in Charlotte, NC. He manages several different portfolios that are designed to be market driven and actively managed. Barry shares his unique perspective through his irreverent and very popular newsletter, Barry’s Bulls, authored the book, Navigating the Mind Fields of Investing Money, lectures on investing, and contributes investment articles to various professional publications. He is a member of the International Association of Registered Financial Consultants, the International Speakers Network, and was presented with the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services in 2009.

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