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|User Info||Inflation or Deflation .. Let's get it on record; entered at 2009-06-18 13:31:08|
Registered: 2007-08-29 Silver State
Deflation Now: May of 2009|
The rate of inflation (CPI-U) has fallen to -1.28%, its lowest rate since January 1950, and the first time it has been negative since 1954.
Rate of Inflation since 1914
Through March 2009
Inflation in the Future
Printing money has always caused inflation in the past, and eventually the devaluation of currencies, so why not this time?
The answer is that it takes time for the effects to be felt, but count on it, they will be felt, as the following charts suggest.
This chart shows the monthly change in the Monetary Base -- the total quantity of circulating currency and bank reserves -- since 1998. In four months the base has jumped by 75%, and in fact it doubled from $900 billion to $1.8 trillion in the last eight months.
Monetary Base -- Monthly Change
Through March 2009
The arrows highlight the Y2K increase produced by Alan Greenspan in anticipation of a crisis resulting from possible computer problems, and the increase generated immediately after 9/11 for the same reason. Both of these increases were quickly reversed, but it still took a few months to accomplish, so as to avoid problems resulting from a sudden decrease in liquidity.
Think how long it will take to reverse the current flood of liquidity
The final chart in the series permits us to compare the current increase in the monetary base to what was done at the time of the Great Depression and during World War II. The plotts are logarithms so similar percent increases appear the same size. It is clear that the current increase is unprecedented both in size and speed.
Unfortunately, the immediate reaction to the 1929 Crash was to reduce rather than increase the monetary base, and that did much to deepen the recession and turn it into a depression. The first increase (left arrow) was made in late 1931, far too late to avoid serious problems, and the second was made in March 1933 after the election of Roosevelt. The two increases plus the continued expansion during the next four years generated a much improved financial life, but if you go back to the inflation chart above, you'll see that inflation rocketed by 15%, from -10% in 1934 to plus 5% in 1936.
The inflation caused the administration to quickly reduce the monetary base in 1937 (third arrow), which plunged America back into a depression that produced even more hardship than in the early years.
This is what we face now, an increase in inflation leading to an increase in gold is virtually locked in, but it may take a few years to happen. To make things potentially worse, there are $600 billion dollars of unspent stimulus money and a minimum of $1 trillion dollars of proposed new spending on healthcare anticipated in the next decade. Both will add to the deficit and both will result in an increase in interest rates and further inflation.
Last modified: 2009-06-18 13:52:58 by yyb