If The Future’s So Bright How Come I Don’t Need Shades?

Nope. As a really good psychic once told me, psychics only see possibilities. The future is malleable. The distant future is composed of a pool of unthought thoughts. The near future is wet cement… constantly in flux as people project their intentions, hopes, and fears onto its matrix.

No, what we are going to attempt here is to use facts to accomplish the goal of glimpsing into our economic future. Admittedly, ‘facts’ can be open to interpretation. But this is the firmest ground that I am personally aware of. If upon examination of the facts, our perceptions shift such that we embrace the idea that we are indeed in a depression, we can conclude with some degree of certainty that the economy is in fact not yet recovering. Ergo, we can recognize that the markets have probably gotten ahead of themselves. Ergo, we can adjust our expectations, investment portfolios, and lifestyles accordingly. It’s that simple.

Keep in mind that the most common topic of conversation regarding the future of our economy normally revolves around whether America is about to experience massive inflation, whereby the cost of things will soon spiral upward due to all the money being injected into the system… or instead that we will get massive deflation with prices spiraling downward due to money being sucked out of the system because of the credit collapse. It’s a HUGE debate, and a question well worth addressing. So, are we going to address it here? No. The problem is, it’s hard to prove which x-flation thesis is correct because we don’t have all the facts. To take a shot at predicting, say, when inflation will hit hard, you need to have a reading on an economic indicator know as the velocity of money. This is an esoteric yet easy to grasp concept that can be explained in a couple of sentences. Assume you were able to perfectly counterfeit 100 trillion dollars and store it in your basement. How much affect would that 100 trillion dollars have on price inflation? Answer; none. Money sitting in a basement –or in a bank vault not being loaned out– generates 0% price inflation. It’s only when that 100 trillion gets into circulation that it stands a chance of forcing prices up as more dollars enter the economy. This is the ancient law of supply and demand. More dollars chasing the same number of goods and services tends to bid prices up. Most importantly, the factor influencing just how much inflation that 100 trillion would create is based on how fast all that money changes hands. The quicker people receive and then spend the money, the greater the upward pressure on prices. That’s money velocity in a nutshell.

Trouble is, we really don’t have the tools to measure how fast money changes hands on any given day. And, it’s really hard to estimate what money velocity will be tomorrow. Or the next day. It depends on how people are feeling, you see. So to estimate money velocity the experts speculate. Equations are created. Assumptions are made. Conclusions are drawn. But the experts disagree. Conclusions vary. From one point of view it can be argued that there is plenty of evidence to indicate America will go the route of Zimbabwe and hyper-inflate its currency to death. On the other hand there is equal evidence indicating we could mimic Japan, which has basically been in deflation since its credit collapse about 20 years ago. We just don’t have enough facts to pick our poison yet, so it serves no purpose for this essay to enter such a debate.

One last thing to say about x-flation before we move on from this topic that I said we were not going to discuss: Given what was just said about money velocity, one might draw the conclusion that inflation begets more inflation, because people tend to spend quicker if they expect prices to rise. Money velocity therefore increases. Conversely, one might speculate that deflation begets more deflation as people defer spending, expecting lower prices, thus slowing money velocity. Indeed, history seems to bear this assumption out, and is a nice little play on Isaac Newton’s First Law of motion, “An object in motion tends to stay in motion”…a law which can often be applied to human behavior.

So with the x-flation Ouija board off the table, yet still looking for some sort of view to the future, it seems more reasonable to instead address the recession vs. depression question. Here’s the punch line; We are in a depression because a number of economic bubbles are still due to burst, and it’s going to take some time for the affects of these bubbles to work themselves out. It’s as simple as that. Factually speaking we know that these bubbles will burst. Look back in history; Zimbabwe, Japan, Weimer Germany, Rome…..you name it. Financial bubbles always burst. So let’s talk about the bubbles.

Calling All Cars….We Are In a