The specter of “Somethingflation”

There is a moment in every horror movie between the first appearance of a ghost and the pretty lady’s scream. It begins with an unrecognizable shape, a strange color, or the glimpse of a sudden unexpected movement on the periphery of vision. The heart leaps, the adrenaline flows, and the brain begins a wild search for pattern recognition. Our nation’s economy has been stuck in this moment for the better part of two years. (Think Vincent Price on valium). Hollywood will never produce an economic horror movie.

The general public is skittish, as are the markets, and understandably so. The emerging shapes and colors of our present difficulties are vague and mysterious. Like synapses firing, the deflation/inflation debate in the financial opinion pages offer patterns at random, that never quite explain what we are facing. Paul La Monica, of CNN Money, has coined a name for this apparition, “Somethingflation.”

The barrage of conflicting patterns we’ve been subject to, can be lessened by a few rational observations. The increasing or decreasing prices on common items, such as a gallon of gas, a loaf of bread, or a pair of basic shoes can be used to determine inflation or deflation. Note: Any American female, from pre-teen to grandma, is a good source of information on these things.

In his book, The Return of the Great Depression, author Vox Day identifies a more nuanced way to determine what Somethingflation might be:

Econometric Uncertainty Principle… the inevitable pressure on the measuring agency and subsequent bureaucratic manipulation of any statistic identified as a politically significant macroeconomic measure.

Priceless. But, separating politics from political economy is more an art than a science. Of the six possible scenario’s in Day’s book, two of which are relevant here, inflation can be determined by the spot prices of commodities. Gold provides a good benchmark of inflation.



The deflation scenario states that the rising supply of debt will be met with a dwindling demand from buyers. The Greek near-default earlier this year is an example, only in our case, there’s no group large enough to save the U.S. The yield on Treasury Bills is a good indication of demand. With the Fed Funds rate already at zero, the 10 Year T-Bill is our next best option.


Source: Dept of the Treasury

So there is our outline of Somethingflation; a slightly rising gold price indicating inflation, and a slightly falling Treasury yield indicating deflation. These two trends cannot continue together. One must inevitably give way to the other. Whatever this ghost turns out to be, friendly or otherwise, screaming is optional.

The Currencies Of Last Resort

As one of my favorite bloggers, Sybil's Star often says, "you can take the gold out of the standard, but you can't take the standard out of the gold." A case in point was the 1970's.



In 1971, President Nixon took the U.S., and the rest of the world, off the gold standard. Gold prices went up, as expected, but soon began to settle. The OPEC oil embargo of 1973 caused another bump, but again gold prices soon began to settle. Then, inflation kicked-in, and the gold market has been a roller coaster ride ever since.

Flying under the radar, silver (the poor man's gold) is even more instructive. Inflation causes more uncertainty about the future than even warfare.



The first little bump is war with England (1812-15), the second is the Civil War (1860-65). World Wat I (1914-18) caused a minor ripple, while the depression and World War II were non-events, as far as silver was concerned. Then there is the inflation of the 1970's.

But why is this so? Everyone knows that gold has no intrinsic value, and silver has very little. As is often argued, the metals have no more real value than the circular rock money used by the people on the Pacific island of Yap.



Gold and silver are only rocks too. It is the value we place on them that determines their worth. Given the resources we have, there is nothing else to use.

In a recent interview, President Obama said:

“A lot of independents, Democrats and Republicans -- all are concerned about is what are we going to do about this long-term debt,” Obama told ABC’s Jake Tapper Monday. “We've got to show people that we are responsible stewards for their taxpayer dollars and that we're taking some serious steps to at least lay the foundation -- the pathway -- for bringing those deficits down over the next several years.”


An unnamed White House official followed up; “Democrats have to reassure voters we are not being reckless.” Here's why.





Inflation is coming. Got rocks?

Bernanke's Inflated Market

There's not much argument that Ben Bernanke has been one of the more active Federal Reserve Board Chairmen. The "cash injections", covert buys of Treasury Notes, and some rather strange occurrences in the metals markets over the past year, has everyone outside the CNBC cheerleaders wondering if this stock market rally is real. A look at the straight line gain in the S&P 500 since March is reminiscent of the kind of charts convicted hustler Bernie Madeoff used to produce.


The tip-off that the recovery may not be as certain as claimed is found in crude oil prices. Crude oil started its predictable fall in August, but then a strange thing happened; instead of the typical post Labor Day crash, it went back up.


With gold over $1,000/oz., and Treasury bonds selling at auction at a brisk pace, it would seem that everybody is buying everything; Let the good times roll. Except, it can all be explained by a weakening currency.


Rising prices are only the result of reduced buying power of the dollar. If that's not inflation, then what is?