2008 In Review - Part III

Unfortunately, recent inflation levels are only a temporary result of current market conditions. The downturn in the economy, the threat of job loss, the outstanding loans, and the losses in the equity markets has caused many Americans to spend less and save more, and to build up their cash positions. Likewise, banks have horded cash as well, as seen by the contracting credit markets.

This bleak outlook has resulted in a demand for dollars, which are sitting untouched in people's savings accounts and on banks' balance sheets. Since the money is not being used, there is less money circulating in the economy, and as a result there is a deflationary effect on prices.

Eventually our government's spending frenzy will undermine both the demand for dollars, and the value of the dollar itself.

Now we have an environment where everyone is hording cash, and it appears to be a deflationary affect on the dollar (dollar strengthening). However, the money supply is actually growing.

The government can generate money in three ways: 1) Taxes, 2) Selling Treasuries, 3) Printing money.

Step 1 already has Americans paying about $40 out of every $100 earned back to the Government.

Step 2 is really borrowing money with interest. So there's an added cost to get that money - a future burden which will eventually have to be funded by either Step 1 or Step 3.

Step 3 is really like step 1. Printing money is really a tax. The only difference is, printing money is faster, they don’t need permission, and it taxes everyone who owns dollars.

The only way our society can pay back the national debt is if we add value, innovate, increase productivity of our resources and through that added value (income) we would be able to pay back a debt. The government, through its bailouts of non-productive companies, is inhibiting the market from readjusting itself toward productivity.

Sooner or later -- with government intervention it will most certainly be later -- some companies will become more profitable than they are today, but the problem will be that their profit will go to pay for the debt that was created for these bailouts. In absolute terms, equity value of stocks which are denominated in dollars will be worth less because the government will have to take those profits to pay back for their current borrowings and expenditures, whether it comes in the form of higher taxes or devaluation of the dollar through more inflation.

Part IV