Thursday, August 18, 2011

Bad = Good ??

Today, we learned that core consumer prices (CPI) have risen 3.6% over the last twelve months, way above the Fed's stated goal of 1.5% to 2.0%.

Tuesday, we learned that core wholesale prices (PPI) have risen 7.2% over the last twelve months.

Monday, we learned that import prices have risen 14% over the last twelve months.

Looks like a lot of inflation in the pipeline . . .

Despite our painful memories of the 1970s, inflation is not all bad.  It is the easiest way to de-leverage or to reduce the percentage of our balance sheet that is financed by debt.  For example, if you have a $200 thousand house with a mortgage for $150 thousand, your loan-to-value is 75% and your debt-to-equity ratio is 3-1.  Now, if your house appreciates from inflation to $300 thousand, your loan-to-value ratio drops to 50%, and your debt-to-equity improves to 1-1.  Inflation depreciates debt.

Governor Rick Perry slammed Fed Head Ben Bernanke for letting money supply increase too rapidly.  I don't believe for one second that Bernanke is trying to help re-elect President Obama, since he was appointed by President Bush.  He is increasing money supply to help create inflation, which will help the economy to de-leverage or reduce the heavy burden of debt that we have currently.  While this can never be admitted, it is being done.  And, I'm glad!

Of course, this can easily go too far!  Fortunately, we know inflation is much easier to control than deflation.  Inflation does have advantages!