May 21, 2009

First Signs Of Inflation Starting To Show

Today, May 21st marks the first time I have seen inflation rear its head on various fronts of the economy. I knew inflation on a massive scale was inevitable, but I thought it would be a few months or quarters from now. So Why Do I Think This?

1) The USD index (the dollar measured against a basket of other currencies) hit 80, the lowest number I have seen thus far. In other words the major currencies of the world have seen their purchasing power increase relative to the dollar.

2) The Federal Reserve, who previously and continues to buy treasury bond (as part of their $300 billion dollar announcement in Feb in order to push down long term interest rates) has now purchased 7.5 Billion of GMAC debt (which we know is worthless). Long term treasuries showed this via a rather large increase in the yield of the 20-year.

3) Oil & Gasoline have risen sharply from just a few months ago, which to me is indicative of inflation due to the decrease in energy demand because of the accelerating crisis we are in.

4) There has been a significant positive shift in certain components that make up M3. In particular, institutional money funds and large time deposits (which have been declining or stagnate for the most part over the past several months). The annualized growth rate ending May 4th drastically increased to 38% when compared to the previous 8 weeks. My perception is that the velocity of money has increased for the first time this year (price and wage inflation begin when the velocity of money pick up after large increases in the money supply).

5) Both Gold and Silver have been rising no matter what the equity markets do (gold in particular has been looked at as a safe haven for a recession, but this shows investors now see it as protection against inflation). Remember inflation is a function of expectations!

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