The Inflation Balloon

I'd just like to preface this post by pointing out that yes, once again, Jim Cramer is an idiot (see here for my original rant). He was ranting on Friday (I was unfortunate enough to skip over his show for a split second) about how Ben Bernanke's rate hikes were foolish, but the 15 prior to that that Greenspan oversaw weren't that bad. Hmph.

Anyway. I thought I'd expand a bit more on the Chicago Tribune piece I mentioned in the previous post.

Think of the economy as a big balloon. You don't want the balloon to become too filled with hot air, otherwise it'll explode. On the other hand, you don't want it to become too deflated, because then you'll fall. The trick is to find the proper balance between air pressure and how many sandbags you have to propel you upwards at a nice, steady pace.

In your balloon basket, you have two pilots. Now, they can talk to each other, but they are co-equal partners and aren't technically allowed to tell each other what to do. For sake of argument, let's call one of these pilots Denny and the other one Benny. Now, let's just assume that Denny is bright-eyed and wants to soar with the birds...in other words, he wants the balloon to go as high as possible. Benny thinks heights are okay, but knows that both of them get vertigo when the balloon goes up too high, too fast. So it's in Benny's interest to make sure that whatever Denny does doesn't get out of hand and to keep the balloon on a level, steady course.

Unfortunately for Benny, Denny happens to be a bit ignorant of how the balloon works, so he'll start tossing sandbags off the balloon as fast as he can. The balloon rises. Denny, in a fretful burst of selfless responsibility, turns the hot-air burner down to try and prevent the balloon from rising too quickly.

The little situation above isn't the greatest example of the economy, but it's simplistic enough to work. For example, if I had said that Denny was in the pocket of the sandbag companies and wanted to make sure that the balloon company that Benny and Denny had rented their balloon from bought plenty of sandbags, or that the higher the balloon went, the more likely it would become tougher to control it due to the high winds, or that Denny hired Benny and was responsible to a great deal of his friends back home to break the world record for balloon height...then we might start getting a more representative picture.

For those of you keeping score at home...or for those of you that aren't fond of imagery...

Denny --> Allusion to Dennis Hastert, Speaker of the House of Representatives
Benny --> Allusion to Ben Bernanke, Federal Reserve Chairman
Sandbags --> Fiscal spending by the fed. govt.
Hot-Air Pump --> The money supply, controlled by the Federal Reserve
Upward Trajectory --> Economic growth
Powerful Winds --> Inflation

Make no mistake: inflation is more than just a number that's released every month. Inflation's like a virus within the population. Not only does it cut away at any gains you may have made, but it also terrifies and panics you. It's hard for anyone under the age of 35 or 40 to understand. We live in low-inflation times. If you ever want to wonder about how crushing inflation can be, ask anyone who fell upon hard times during the early-mid '70s.

A better time to go to understand just how debilitating inflation could be, though, would be Germany around 1932. Hyperinflation was running rampant as the Reichsbank (the German central bank; became the Bundesbank, which eventually gave way to the European Central Bank) printed German marks as fast as the mint could churn them out in order to help get some money in the pocketbooks of Germans. Artificially-produced demand caused the prices of everything to soar, which caused the Reichsbank to print more marks, which in turn...

Well, you get the idea. But even if you don't, think of it this way: prices of ordinary goods going up so fast that instead of getting paid every two weeks or so, you get paid twice a week. Instead of going to the bank the next time you get a chance, you get paid in cash, and you only have a few hours to spend it before everything becomes so expensive your paper money is now worth a few cents on the dollar. Forget about trying to save money; that's just foolish. Why stuff money into a bank that's likely to fail anyway while the hard-earned cash you put inside it depreciates by the second?

But you don't care about that, do you, Jim Cramer? No, you probably never took a history course in your life. All you care about is how much it costs your precious multinationals to borrow more money from foreign investors like China, blow our capital-accounts deficit even further out of proportion, and finance their hostile takeovers of smaller, more innovative companies.

Inflation is a beast perpetually lurking in the shadows, looking for healthy, plump economies to swallow. Anyone who thinks that 3.5% inflation is tame in a world with China and India bringing more and more workers into the global work force is foolish.