Inflation in Zimbabwe and the U.S.A.

Inflation is a real problem, created by real actions of central banks. Zimbabwe is currently in a state of utter meltdown, as this article attests. And Iran is nearing a similar state, more reminiscent of the American Jimmy Carter era, which is why some of us believe attacking that nation is unnecessary. Why not simply allow it to implode on itself? But that's another argument.

My point today is not to focus on the economy in an African nation run by a despot or a paper tiger in the Middle East. Instead, my focus is on America's own inflation problem. For many years, I've been expressing concern about the inflationary behavior of the Bush administration. It has long been clear that their economic policy was much more reflective of a Nixon-Ford-Carter type of Keynesianism, than the more stable monetarist-leaning policies of a Reagan or Clinton. In fact, to my chagrin, the increasing pressure of added dollars being pumped into the economy has not had the expected result of rising goods and services prices. I've complained for years about the wild spending sprees and borrowing of this government. So far, it has led us to a real estate bubble, and we've seen rising commodity and oil prices, and some select services, such as education, have skyrocketed in price. But thus far, we haven't seen the "across the board" price increases that typically come from a highly inflationary economy.

The primary reason for that is that we've been importing and outsourcing. Some would argue that the loose standards on the border allowing millions of illegals entry has also been an influence. What we've seen is food prices remaining stable due to low-cost labor, the cost of technology remaining stable due to outsourcing of technical jobs, and the cost of clothing and household items remaining stable due to cheap imports. In the end, it's been a period of some success for those educated workers, but has contributed to a widening of the gap between rich and poor. More importantly, it has put down the roots of a disaster in the waiting. For inflation rarely, if ever, lays dormant for long. A depreciating currency will, over time, accelerate its depreciation. In fact, as people begin to move out of that currency, the acceleration may compound itself, leading to hyper-inflation, much like what Zimbabwe now sees.

In the U.S., the massive spending increases over the past 8 years have been largely financed by loans from countries like China and Saudi Arabia, who have been dutifully buying our bonds while we cooperate by allowing their own foibles to go unnoticed. Furthermore, central bankers worldwide have been using the "stable" U.S. dollar as their reserve currency stored in their banks. But what happens when that fabled stability becomes a thing of the past? When the dollar begins...er, continues...to fall on the international markets... Would we be surprised to see central bankers across the world to begin selling dollars on the open market and using a Euro, Yen, or even a Canadian dollar standard? No, I think not. There's little point to using a reserve currency that falls in value on a regular basis. Lest you think I'm puffing smoke, check out the fall of the dollar vs. the German mark/Euro here, and more generally here. Suffice to say that the U.S. dollar is very weak, and current policy is only leading toward a weaker dollar. The spending and borrowing alone must eventually lead there.

It's easy to say that we need to start thinking about owning commodity stores of capital, such as gold, silver, and precious gems. The problem with that is that these types of holdings are never more than a store of value. They don't grow! Yes, we may benefit by having an occasional upsurge in price that provides a profit, but that's not a long-term strategy, merely a way to turn a quick buck while we're in transition. Longer-term, we need a strategy that will help us make money in what may be tougher times.

If my analysis is correct, the strategy for this next period is to become an international citizen. Patriotic fervor and devotion to all things American can only set us back, if our government is intent on devaluing our currency. It will become increasingly important that we have some of our assets either denominated in foreign currencies or held in commodities.

Of course, we're headed into a presidential election year, and we could see a wholesale change in the way our economy is managed. I'd like to be optimistic here and anticipate the best, but what I've heard from most of the candidates is less than encouraging. Most of the Democrats tend toward an expensive, unfunded social program cornucopia, starting with the scam known as national health care. Sadly, most of the "top tier" Republicans are selling "Democrat-lite", including one who has yet to explain how his form of national health care differs in substance from the socialism of the left-side party.

Neither side seems to have a real solution to Iraq, a costly headache that seems likely to drag on incessantly at a cost that simply cannot be maintained without dragging our economy into a pit. Republicans, for the most part, are advocating more war without victory, while the majority of Democrats advocate less war without retreat. I would argue that either victory or retreat would be vastly preferable to this endless war strategy that is reminiscent of Vietnam.

One might be cautiously optimistic were Bill Richardson to win the Democratic nomination. His economic policies are probably the most similar to the Bill Clinton administration, probably even moreso than Mrs. Clinton's. And his strategy in Iraq is to simply end it and move on. While many would complain that this may lead to anarchy, some of us wonder how that differs from today. Moreover, it is at least a strategy, which is somehow superior to most of the bluster that passes for policy ideas coming from most of them. Yet, Richardson's chances are slim in a race carrying such big names with strong campaigns. Both Hillary Clinton and Barack Obama have strong support and backing from insiders with pull in the party. Neither appears likely to deflate anytime soon, and it doesn't seem likely that anyone else, with the possible exception of protectionist John Edwards, stands much of a chance. Even if Richardson were to win, we'd still be uneasy, as his credentials are not exactly those of a tax-cutter or inflation-fighter. He just appears to be the best alternative among the Democrats, given the choices. Mike Gravel, an anti-war former Senator from Alaska also has some decent proposals (among others that any free-market advocate would find insulting), but his chances appear to be even weaker, and he doesn't appear to be making much headway at present.

On the Republican side, the competition is much closer. The so-called "front-runners" are not particularly strong, have fair-weather support, and offer no novel ideas. Most of the candidates who represent a return to traditional Republican principles of low taxes, and controlled spending, have been relegated to the "2nd tier". John McCain joins 2nd tier candidates Mike Huckabee, Ron Paul, Duncan Hunter, Tom Tancredo, Sam Brownback, and Tommy Thompson as fiscal conservatives. One could easily throw non-candidates Fred Thompson and Newt Gingrich into that camp as well. Each would likely be an improvement over the current administration on spending and certainly on taxes. Only one, however, has outlined a clear understanding of inflation and demonstrates knowledge about monetary policy. That candidate is Congressman Ron Paul. While some of the others may mean well and attempt to cut rampant spending, only Paul can speak authoritatively on the inflation menace, and since this is probably going to be the biggest issue facing the next president, it behooves us to elect one that knows what it is. Unless you want to suffer through another decade like the 70's.

Given the overall weakness of the frontrunners, Paul's election, or the election of any of the 2nd tier candidates is a possibility, but not a certainty by any means. However, unlike the other party, Republicans seem more likely to choose an unlikely candidate. Dissatisfaction with the frontrunners, most of whom represent the old "Eastern Establishment" ties that Goldwater and Reagan struggled against, will probably lead to some shuffling before the final decision is made, but it's a gamble at this time to try to predict anything authoritatively. Polls are relatively meaningless at this point, because so few people in the country are engaged in the political sphere yet.

Inflation probably sounds like a meaningless term for those under 30 who have never lived through the Jimmy Carter years. Alas, most of us have only fleeting memories, but I do remember FarmAid concerts that Willie Nelson designed to help people keep their farms. The biggest fear was that all the family farms in America would be foreclosed upon as costs skyrocketed, and debts mounted. Overall, inflation leads to a "twilight zone" economy where saving is punished and debt is incentivized, while debt is risky and savings are needed. Prices rise while savings fall, and the middle class becomes poor. Not a nice time to live. Let's not return to that.

President Ron Paul has a nice ring to it, and he could probably bring inflation under control, but given the odds - I give him no more than a 20% chance of being elected at this stage - we need to be thinking about strategies to protect ourselves from the depradations. Three alternatives exist: holding commodities or commodity-based stocks, holding foreign assets, and buying inflation-indexed bonds. Each has its pros and cons, and the balanced strategy would encompass each. Given the current situation, though, ignoring inflation may become increasingly dangerous.