Thursday, January 13, 2011

Austerity vs. Inflation

With parts of Europe facing the prospect of government bankruptcy, there has been a move by the leaders of those countries to rein in govt. spending. This has caused riots in some cities, as those affected by increased costs of education, and reduced pension and retirement payments feel the pain. In this country there is talk of reducing govt. spending as well, and the recent changes in Congress has indicated that the American populace is generally in favor of reining in govt. spending here. Govt debt is what has caused the decline in the value of our currency for the last several decades. Since a decrease in the value of a currency results in higher prices, I surmise that the huge runup in the stock market over those same decades can be attributed to inflation. There is a lot of talk about the dangers of inflation lately. The price of energy, food, and general living expenses continues to rise. As of late the bond markets have been reacting to the specter of inflation by raising long term interest rates. This is putting a strain on the states in this country by raising the cost of money at the same time their tax revenues are down. There is in congress now a lack of will to do any more bailouts. This bodes ill for state and local governments. Pension funds are under attack. I wonder how Congress will react as states start to face bankruptcy. In the same way that the problems of Europe have caused a rise in interest rates there, our state troubles will cause the same here. How will our debt driven economy do as interest rates rise?
Watch the dollar. Over the long term, US Dollar prices have made a triple bottom recently. If we break through that bottom, there isn't much support below.Our Fed could be forced to defend the value of our dollar. That will be our "austerity".

No comments:

Post a Comment

All comments are appreciated as it will give me a chance to adjust my content to any real people who may be out there. Thank you. gh