Art Laffer: Inflation is on the horizon
Arthur Laffer certainly missed the current economic mess -- he famously offered to bet permabear Peter Schiff "a penny" that the real estate bubble would not go bust. Laffer argued that a "nice slowdown" was the worst we could get.You might think he would be discredited and would crawl back into his cave, but you'd be wrong. Like any good pundit, he's back with more prediction, this time in an op-ed piece in The Wall Street Journal. Now he appears to be joining Mr. Schiff in predicting serious inflation. He writes:
But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.So there you have it: The ultimate trickle down, supply side, monetary policy works economist is now predicting inflationary doom. This time though, his arguments seem to make sense -- and investors might do well to position themselves for rising asset prices and a declining dollar.
Laffer explains how monetary policy could be used to squelch inflationary pressures, but says that it's doubtful that that will happen.
It's tempting to dismiss Laffer as someone who simply sells the flavor of the month: When the economy was good he was bullish. Now it's bad and he's bearish. But however you feel about his policies, he's a pretty smart guy, and his thoughts on the future of the dollar are worth considering.
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Reader Comments (Page 1 of 1)
6-10-2009 @ 4:46PM
Iridium said...
Double digit inflation is already here an dhaving a uge impact on the average person's wallet.
A Big Mac meal at McDonald's cost $3.80 two years ago. It now costs $5.25 at most locations.
A gallon of gas costs 100% more than the historical average and looks to stay that way.
A gallon of Milk has dropped from the high of last year but still remains 15-20% higher than a few years ago.
True inflation is a measure of monthly expenses deducted from monthly income. If you have 30% less money per month after base expenses than you did a year before, then the real core inflation rate is 30%. This rate changes based on base costs that can vary wildly as we have seen over the past year. Many anaysts like to point out that we were in a worse position last year and $2.75 gasoline is a bargain. However if you chart this based on a 5-7 year pattern we have seen an overall inflation rate of 30% or more based on reduction of income due to increased base costs. Much higher than what the yearly core rate numbers would suggest.
Sure homes declined in value and a 50" Plasma TV is half what it cost 5 years ago but those are not purchases that affect the core average cost of living for the mass population. Those who did lock in a 30 year mortage over the past 6 months have reduced a major portion of a key living expense. This has not had an effect on increasing income, which would have a positive effect on the economy, because other aspects of living have increased to take up the slack.
This is how the the decrease in home values has kept inflation in check through overall reported numbers. The devaluation in housing offsets the increases. Although commodities and food have increased in the double digits, home values have declined by double digits. The end total is a low inflation figure.
Where the numbers lie is that not everyone was able to refinance or purchase a new home at the lower rates, so the deflationary counter to current inflation is not there for them. The majority of mortgage holders have only felt the effect of declining home values on paper if at all. That major expense was locked into base income a long time ago.
The reduction in the value of your home does not affect you unless you are buying or selling, or trying to tap equity. The rise in eveything else is the only thing you see. That inflation is what had led to the mass decline in the overall economy.
The end result is a reccession based on declining income and a plateau for others due to there not being a growth engine to create more income. Had commodities stayed at proper levels, those who did purchase new homes or refinance would have had greater disposable income to create a growth engine. That is why we saw increased economic activity earlier in the year. With that disposable income exhausted the small ammount of increased economic activity will cease creating a double dip recession.
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6-10-2009 @ 4:48PM
Ansley Whatley said...
Mr. Laffer is a laugh trickle down has never worked and never will. Money must start on the bottom where it can come up thru the economy and profit all. The rich always wind up with it but the standard of living for the poor is raised which is good for all. As a Christian nation we should insist that this be the Case. WWJD
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