Tuesday, December 16, 2008

Why there is zero risk of inflation



Inflation occurs when the economy is growing faster than its ability to produce given its resources and available capital. We are nowhere near this. Look at some of the current data:

Total industrial capacity utilization at 75.4 percent
3.1 million unsold cars
5.3 million unsold homes
10 percent more oil inventory than same time last year
10 million people unemployed
Wholesale inventories up $33 billion y-o-y
Real earnings by workers 17 percent below 1973 peak
40 million people without health care
Half of all families can't afford to send their kids to college

How do you know when the Fed and/or government has done too much? When the slack and excess in those numbers go away. We are a long way from that anytime soon. Another way to say that is that we are living far below our means.

If you had a child that had incredible talents and abilities you'd strive to make sure that he used those attributes to the fullest. Yet, when it comes to the economy, we are resigned to live below our means (become poorer, vis-a-vis the rest of the world) because of fears of deficits.

2 comments:

Jeff said...

Hey Mike!

Thanks for the interesting statistics. I agree that we're in a secular deflation, so I recently bought some corporate bonds, which, according to the experts, are discounting default rates of multiples of that experienced during the Great Depression.

Mike Norman said...

Jeff,

If Obama's stimulus package is anywhere near the figures being suggested, you should be in good shape with those bonds.