Inflation Fears Are Overblown

The U.S. and global economies were flooded massive, unprecedented amounts of liquidity. This is exactly what many economists had feared for years. Namely, that would give up under pressure from all central banks and monetary discipline, simply print money to avoid a depression. It looks like they have done just that. And it's not just the United States, which is running the money printing presses at full steam guilty. European governments have approved a $ 5.3 trillion bank rescuePackage. That is more than the $ 3.3 trillion economy in Germany. And it is on top of the billions of euros into the economy by the European Central Bank pumped. China has also spent heavily on an economic stimulus package. It works, but M2 in China grew 26% rate in April 2009 and 25.7% in May. Clearly, the global economy is awash with liquidity. Now we want to find out whether any fears or Fiat paper money are justified. We will determine if the fiat money system works or failsIn a fit of undesirable, uncontrollable inflation.

During the Great Depression of the 1930s, the United States and other developed countries were on the gold standard. The amount of paper money, which could be printed, depended on how much gold was in the coffers. Studies in the 1960s and 1970s, noted that the countries from the first depression, and enjoyed the best recoveries, those who were either abandoned or fast to the gold standard. Never-the-lessthe gold standard prevailed until World War II. After the war was changed, and by what is called the Bretton Woods Agreement replaces. This agreement was a settlement for purposes of determining the exchange rate. The agreement introduces flexibility in exchange rates, but gold was the main backing for paper money. The 1960s was the stress test for the Bretton Woods Agreement, and it failed.

In the early 1970s, President Nixon was forced to the last link between gold and the U.S. cutDollars. The dollar was then traded freely on currency in the world. The dollar went every year for the rest of the decade. And inflation rose, reaching double digits in the early 1980s. Gold enthusiasts argue that the dollar's decline was in the 1970s, evidence that fiat money can not work. Their problem is not that other currencies, suffered the same fate. Fiat money was in other countries. In recent years it has worked remarkably well in China. The depreciation of the dollarand the rise in U.S. inflation in the 1970s, looks more like a political and economic failure of the United States as a true test of fiat money.

In the 1980s, stabilized the dollar, inflation fell and the economy flourished around the world. We have been through the collapse of communist economies, a currency crisis in Asia, a few stock market crashes, the arrival of the fast-growing emerging economies, the birth of the euro, Japan's lost decade, theBanking crisis in the early 1990s, the tech bubble and other tests. The U.S. and the global economy not only survive the tests, which they prospered. At least we have until the current financial crisis to prosperity. Now, all those previous crises seem small in comparison. This financial crisis literally took the world economy to the brink of the abyss. We have had experience in the area of depression. So this is the first really big stress test for the Fiat or paper money system.

WillFloods in the U.S. and the global economy are working with money? Is this an end to the recession and start-up to bring a sustainable recovery? If the central bankers have the power and political support to clean up the excess liquidity as the recovering economy?

The problem for investors is that we do not have a definitive answer to the question of inflation for two or three years. Inflation is the greatest long term threat. That was before the close of depression from 2008 and agreed to theInjection of large amounts of liquidity. And it will come true for years. Central bankers have a decline in liquidity and inflation remained in the last few decades. But the amounts this time are much greater. However, the chances favor of central bankers. You will have bases on their side for quite a while. We have excess capacity in all corners of the world. It takes years to get back to supply and demand to inflationary levels. That is, the centralBankers have to sell time to change course and raise rates.

There are two aspects of money and inflation, the amount and speed or rate of turnover. In the 1970s, when Fed Chairman Paul Volker was the biggest problem was the high velocity of money. In those days, the Fed's balance sheet is not swollen with credit and asset purchases. The task of slowing the rate of monetary turnover. The tool was used interest rates. Significantly higher rates ofBorrowing more expensive and savings rewarded. The velocity of money slows down, and tipped the economy into a recession. The situation today is very different. The velocity of money is too slow. The Fed will reduce short-term rates, but bank loans will remain low, and hoarded money, even though they earned virtually nothing. Under these circumstances, there is zero inflation threatens the speed aspect. In fact, everyone would be happier if the speed picked up. That wouldSignal a sustainable recovery.

The risk of disrupting the markets and economists from the set point. The Fed is pumping money into the system through the provision of credit and acquisition of assets. The U.S. Federal Reserve's balance sheet has swelled to unprecedented proportions. Eventually the Fed will change course and to considerably reduce the money supply or a significant increase in the inflation risk. Fear, therefore, had to give the impression that reducing the amount of money without sending the economyback into recession is a Herculean task. They are wrong. Recovery and reducing the quantity of money will go hand in hand. Reverses order to reduce the money supply the Fed policy. Instead of buying the assets the Fed recently bought to sell. When the Fed sells them raise money. Once in the hands of the Fed, the money from the system. This is a simplification. The process of buying assets at the Fed is complex. There is also a complex process, since the Fed sells assets.Leave the details to the Fed. What we need to understand is the big difference this time. The Fed has not acquired the intention of holding on to the property has. In fact, the Fed has already started the sale of assets and lease loans mature. To finish the job and get the quantity of money-back down the Fed must be a reasonable recovery and stable financial markets. Create the end of the recession and the beginning of the recovery, not only does not it inflationary conditions that the Fed will allowthe amount of money quickly.

Inflation is not a major issue until the velocity of money rises to a much higher level. Since all that has on cautious consumers to higher standards for bank loans that happens is probably years away.

Of course, it always made mistakes. Inflation could become a problem in countries that do not reduce the money supply rather than in their economy. But the main players are the United States, Europe and Japan is well positionedto clean up excess liquidity and prevent inflation. They are also well positioned to raise interest rates if the velocity of money rises too much. Inflation is not a current threat to the finances of the investors.

Hyperinflation is destroying the currency of a country, more a political than an economic risk. The key to prevention of destructive inflation is an independent central bank that is free, with the necessary tools to use to prevent inflation. Politiciansmay be tempted to print money and keep interest rates low in order to satisfy the voters. That's what did the United States in the 1970s. It was a mistake that cost President Carter his bid for a second term. The United States did not stay on the path to ever higher inflation in the 1970s. People do not like high inflation or bad recessions. Politicians who do not resist the temptation of inflation risk losing their jobs.

The end result is that neither inflation norHyperinflation is a real current risk situation. They are opportunities worth monitoring, but not reasons for developing a financial strategy.