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Stock Ideas Investors Daily Edge The Solution to Inflation that Washington Ignores
Stock Ideas Investors Daily Edge The Solution to Inflation that Washington Ignores 
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| The Solution to Inflation that Washington Ignores |
| Wednesday, 18 June 2008 | ||||||||
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There is a misconception among IDE readers that I want to clear up. Most of you think I’m liberal. I’ll admit I AM socially liberal. But I’m also fiscally conservative. With that said, I have a beef with something Barack Obama recently proposed. You see, Obama thinks it’s a good idea to funnel another $50 billion into the economy by means of rebate checks. I’m left wondering, what ever happened to personal responsibility? Will Obama send checks every time someone misses their credit card payment too? How about just buying everyone a car and a home? You see, my problem with this rebate check is that it doesn’t really help the economy. Last time I checked, inflation was a huge concern. And it became an even bigger concern AFTER Bernanke decided to lower interest rates under the rate of inflation (that’s negative real interest). Anytime that happens, inflation kicks in. To make matters worse, inflation was already a concern about a year ago. In fact, just last year I made the mistake of thinking that Ben would be more responsible than his predecessor. So I thought interest rates would stay where they were or rise. Man, what a screw up that was. Ben freaked out in August when the credit markets started locking up. So what did he do? He dropped interest rates in the face of rising inflation. In fact, he completely ignored inflation and instead focused on economic growth. Did he forget that stimulating growth adds to inflation? I guess he just gave into the political pressure. Now he’s trying to make up for it by talking tough. He says that the Fed won’t let inflation expectations erode. Yet, in a recent University of Michigan survey, respondents saw inflation rising 5.1%.
And have you seen import inflation? That’s been ticking higher at 15.4%. You’d think inflation would be a far larger concern than the Fed is making it out to be. Instead, the government continues to spend relentlessly while the Fed keeps the printing press working. To make matters worse, the Bush administration projects the U.S. budget deficit to increase to $410 billion this year compared to $162 billion last year. And that is going to make inflation rise even faster. The solution? Jacking up interest rates quickly to slow down U.S. growth (even more), which in turn would slow down global growth. The fact is until global growth slows, inflation will push higher. Of course, implementing this solution would be akin to political suicide. Most people simply don’t understand that recessions are necessary. All they understand is that they have lost a job or are taking a pay cut. That’s not to say that I don’t sympathize with anyone in that situation. I hate seeing people suffer just as much as the next person. But recessions are economically necessary. They take overinvestment and move it into more productive sectors of the economy. Trying to avoid recessions is foolish and will only cause more harm than good. In fact, this inflation spell is completely due to the Fed trying to engineer a permanent expansion. If I thought it would help, I would punch Bernanke in the face to convince him of this fact. That’s how strongly I feel about all of this. But I don’t want to be arrested. So all I can do is see what the government does and try to profit from it. That’s something you can do too. In the end, inflation is what makes gold, silver, and commodities such a great investment. Unfortunately, as long as investors and speculators view commodities as a great investment, it will continue to push prices higher, spurring even more inflation. Now if only Obama (or McCain) could understand that ‘basic’ of economic theory. Sincerely, Charles P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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