Let Inflation Begin!

Pure economic theorists will tell you that you shouldn't have inflation when an economy is being staggered by a recession. But, in reality, an economic situation, called stagflation, can happen and create inflation during a time when it shouldn't happen and when the economy is in the worst shape to absorb it -- like the current recession. Typically, stagflation results from too much micro and macro management of the economy that forces external factors to have a greater effect on the economy than would otherwise be seen.

Stagflation can be disastrous during an economic downturn because it can either exacerbate or lengthen the recession. It hurts the poor and the lower classes the hardest because their salaries are unable to rise as fast as prices are rising. This is because recessions and high unemployment have a heavy impact on salaries because there are just too many unemployed "workers" available in the market place to replace those who are not willing to work for less. Further, because prices tend to rise faster than salaries, the consumer winds up with less money in their pockets to buy stuff.

Right now, stagflation and the potential of excessive inflation is at our doorsteps. Despite falling demand, oil prices have more than doubled to the current $73 a barrel from a previous low of around $32 a barrel in just less than 6 months. Corn prices are up by 37 percent. Gold is up 50% from $700 an ounce in just a few months. Similarly, other strategic metals such as silver, palladium, and platinum have had also had 50% gains in the last few weeks. Other grains and rice are also on the rise.

The rise in oil is especially troubling. This is because its rise affects almost everything we buy or do. For example, gasoline prices have jumped a full dollar in pricing at the pump from a low of $1.61 a gallon. Oil is also heavily used in plastics, paints, and fertilizers. Everything has to be shipped to its point of sale and, for that reason, the high cost of oil affects the price of all products that are being sold throughout the US. For sure, grocery prices will be going up because of the heavy influence of energy costs and the costs of fertilizers.

Oil is being driven by three factors.

First, proven reserves for oil began dropping this year (for the first time in 10 years) because no new oil reserves have been found this year. In fact, our Congress passed a bill earlier this year to protect known reserves in this country from being drilled on. This means that production will be declining as the demand keeps rising. Like anything with high demand and with limited supply, this makes oil very valuable. Further, Obama's plans for "oil independence" are being shirked-off because his plans for wind turbines, solar panels, and high mileage vehicles won't really reduce this country's and the world's dependence on oil.

Because of this, we have the second reason why oil is on the rise. There are mammoth amounts of cash in this world that are just sitting idle and not earning much money at all. This cash is the money that was pulled from the housing market and the stock markets when the recession reared its ugly head. That money is now finding its way into oil futures; thus, driving the prices up. Some say this is speculation. However, the people buying those tankers full of oil in terms of oil futures know exactly what they are doing. True speculation implies that traders blindly buy into something without any real knowledge of what they are buying. The people driving the price of oil know exactly what their doing and see only limited risk. If oil goes down, they can turn on a dime.

Lastly, oil is increasing in value because the U.S. dollar is falling. In fact, in just the last month, the U.S. dollar has been cheapened against other world currencies by about 16 percent. The dollar is losing value because of our high debt load under this President/Congress and because of the increasing possibility that we can't repay that debt. Since most of our oil is imported, the devalued dollar causes the importation price of oil to rise. That in turn, causes all oil in the world marketplace to rise. Besides oil, everything we import becomes more expensive. Because we import more than we export, this means that most everything we buy will be sold to us at a higher cost.

The massive accumulation of debt since Obama took office is the driver that could ultimately cause hyperinflation and, at the same time, destroy any possible recovery from this recession. Too much debt means that the one generating the debt becomes a higher risk and, because of that, will have to pay higher rates of return to compensate for that risk. That's why high risk credit card holders are charged a higher rate than low risk holders. The same is true with this country's increasing debt. In the recent weeks, the 10-year U. S. Treasury bond has jumped from a low of 2.56 percent to a high, just this week, of nearly 4%. This is because our bonds lack buyers; buyers not sure about the risk. The 10-year bond is key to the health of our economy because it is integral in setting mortgage and other credit rates. In essence that jump in rates from 2.56% to 4% will cause any new $100,000 mortgage loan payments to increase from about $398 a month to $477 a month on a 30-year basis. That is almost $1000 more per year for a $100,000 mortgage since Obama took office. This will ultimately keep marginal home buyers out of the market for new or existing homes. And, let us not forget, it is the housing market that got us into this recession and it is the housing market that has to become healthy in order to lead us out of this recession. Rising mortgage rates aren't going to make that happen.

The inflated costs for home loans is just the tip of the inflation iceberg. Obama's plans for "Cap and Trade" will impose high costs on everything that we manufacture and sell in this country. The average family might get hit for as much as $6000 more per year in inflated energy and product prices. The green technology effort will be more expensive than today's well-established energy pricing components. That too will add to the cost of everything that is made and sold in America. Obama's health care plan will probably cost the average family in excess of $1000 or more per year for the things they buy. Furthermore, if the full cost for all these Obama programs isn't passed onto the consumer, then that means that tax revenues will go down with profits going down and less taxes will be paid. That will only result in the need to raise taxes on everyone. That's inflationary too.

Lastly -- speaking of taxes -- taxes are being raised at a rapid rate by state and local legislators as a means to offset the loss of tax revenues during this recession. Real estate taxes, auto fees, sales taxes, and income taxes are all being raised and that is inflationary.

It really doesn't matter if it's high gasoline prices or if it's higher taxes or if it's higher prices for products we buy, all of these things put together are impinging on the buying power of the consumer. That's why this recession is probably going to be with us for a long, long, time.