HardAssetsInvestor

Written by Brad Zigler  |

August 23, 2010

Follow The Bouncing Disinflation Ball

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I have a friend—let's call him Steve—who was fretting about the economy over the weekend. Steve does that a lot. Frets. Worries. Some may say he even obsesses about an imminent collapse of the U.S. economy.

The source of Steve's latest agita (he's Italian-American) was a pronouncement by Gerald Celente, head of the Trends Research Institute, that there's no risk of a "double-dip" recession because the first "dip" never ended.

Worse still, Celente believes we're heading for an awful economic morass.

"We're looking at the Greatest Depression," Celente told Yahoo News' Tech Ticker. "There's no way out of this without productive capacity. You can't print [money to get] out of it."

Steve puts a lot of faith in Celente's prognostications, which have included calling the 1987 stock market crash, the unraveling of the Soviet Union and the bursting of the subprime mortgage dam.

The picture painted by Celente isn't pretty. He sees a world headed for social unrest and class warfare brought about by government-imposed austerity measures à la grec.

That could be, but I believe we've actually had a double dip already. That's at least what the monetary inflation chart indicates.

Monetary inflation measures the dollar's gold purchasing power vs. the world's second reserve currency, the euro. Inflation—an erosion of dollar strength—peaked in spring/early summer 2008 and again at year-end 2009. Disinflation—reactionary pulses characterized by relative strengthening of the greenback—reached nadirs in November 2008 and in June 2010.

Real-time Monetary Inflation

We now appear to be rebounding—inflationwise—from June's dollar muscle-flex but we're still below last year's rate (hence the negative number in today's headline. The question facing investors now is whether we're headed for a third significant dip before inflation takes hold.

The last time I calculated the odds, the likelihood of disinflation/deflation trumped inflation's prospects in the near term.

Pointing out such variances in the economic environment does little to relieve Steve of his dyspepsia.

"This reminds me of rolling a tennis ball down a staircase," he quips. "It's going down, but it bounces up higher and higher as its downward velocity builds. Eventually it just rolls to a stop at the bottom ... and stays there."

Well, I'll certainly concede the downward trajectory. Even an increase in velocity. But a full-scale stop at the "bottom"?

Dollars aren't likely to disappear, Steve. There may, at some point in the future, actually be more of the bloody things than we know what to do with.