Tuesday, June 20, 2017

New paradigm of perpetual prosperity driven by financial innovation...

Central bankers are strutting around telling everyone that they have saved the world with their financial magick.  Personally, I think not.  Sooner or later their bullshit will translate into inflation.  The main question is when and the only thing that has any chance whatsoever of giving us any insight about the timing is the chart.

Inflation and deflation are directly related to the size of the money supply and the amount of goods produced (production).  Everyone focuses purely on the money supply aspect of this equation because central banks print money from thin air and if they get out of control then growth of the money supply outstrips growth of production.  But there is another aspect to consider which is that changes in production can also be responsible for inflation and deflation.  If things are overproduced then they are too common.  Since value derives from scarcity, the value of overproduced goods goes down.  This is why De Beers carefully controls the amount of diamonds that it sells into the market.

Many people think inflation can no longer harm us simply because it has been contained for some time even though the US fed and other central banks have been creating new money like crazy since 2008.  But this thinking fails to factor in how production has been increasing at the same time.  Increased production counterbalances increases in the money supply.

But what happens if production peaks for some reason?  Most of the global production has been coming from China and China is in deep debt because of it.  What if that production stops climbing and indeed begins to fall?  Well, this would be inflationary even without more money printing by central banks.  You see, the same amount of money in the economy would be chasing a smaller number of goods thus driving up prices.  That's simply supply and demand 101.

With that background I want to advise that we could well be peaking in a giant 5th wave of production right now.  Unless this can make a higher high very soon, it will turn into a failed 5th of 5 which I like to call an owl formation.  The minimum expected pullback from this would be to the level of the prior 4th (red 4) and it would likely happen quickly because like all economic things, stair steps up and elevator down applies.  That is true simply because it takes a lot of work to build up production but shutting the doors takes no time at all.

I also think we have to pay attention to the velocity of money chart which I have been telling people to watch for several years now.  5 waves down is nearly complete here, if not already so.

 Inflation is coming at some point and I expect that it will be accompanied by and in fact caused by shortages in consumer goods.  The smart person will have stocks of nonperishable product purchased at today's low prices tucked away for future consumption when prices could be much, much higher.

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