Friday, November 13, 2009

Too Much Money Chasing Too Few Goods

One of the best economic minds of our generation is Dr. Arthur Laffer of Laffer Curve fame. So when he talks, I listen. You should, too.

In a report published yesterday entitled, Market Expectations and Causative Reasons For Inflation he argues that conditions are ripe for the CPI to move rapidly from deflation to "the 2.5% to 3% range" over the next three months. And higher from there.

His argument is two-fold but is driven largely by the Federal Reserve's decision to increase the monetary base. "The current increase in the monetary base (Sept-08 to the present) is more than 10 times larger than the next largest percentage increase (last half of 1999) during the past 50 years."

All the while the manufacturing sector of our economy is contracting. Consider, a dramatic rise in the supply of money, fewer goods being produced; can it mean anything other than higher prices? Econ 101: Inflation = too much money chasing too few goods.

But that isn't the biggest worry as far as I am concerned. Dr. Laffer reminds: "No economy will prosper if:

  • Tax rates are rising;

  • Government is overspending;

  • The Fed is printing too much money;

  • The economy is being overregulated; and,

  • Foreign trade is being restricted."

Check. Check. Check. Check. And check.

With the markets staging a robust recovery from last year's lows and considering the economic news, current monetary policy and the looming fiscal policy changes, investors would be wise to balance their portfolios with commodities, technology and steady, stable consumer-non durable companies.

And hunker down for a long, cold winter.

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