One of the benefits of being a certain age is having had several different experiences while still being young enough to remember them. With that intro, I'd like to recount a diagnostic coup I observed and relate it to the financial matters mentioned in the title.
When I was an intern rotating through the Bronx Veterans Administration Hospital, I performed a history and physical exam on a newly admitted patient. He was clearly unwell, but the nature of his diagnosis was obscure in the extreme. I discussed the case with my senior resident, still a doctor in training but a year or two above me. I was puzzled; he was quite interested.
The next morning, the resident had quite the self-satisfied look. He announced that the patient had scurvy (a disease due to severe deficiency of vitamin C). Had the resident ever seen anyone with scurvy before? No. How did he know? He had correlated the symptoms with the patient's dietary habits. The patient basically lived on sardines. There was no vitamin C in sardines.
The patient was discharged on vitamin C and we all learned that there is no substitute for careful, case-by-case evaluations along with encyclopedic knowledge and an open mind.
That said, I wanted to correlated the above example with a post from Mish today titled Hyperinflation Nonsense in Multiple Places. This lengthy post is of special interest because not only is Mish one of my very favorite bloggers, but he approvingly quotes Jeff Harding of The Daily Capitalist from last fall on the prospects for hyperinflation in the U. S. As regular readers may know, I have agreed with Jeff about stagflation being the likely outcome for the foreseeable future.
I also agree with Mish that hyperinflation is not imminent, but I am mindful of the case of scurvy. Does the U. S. have the financial habits that can lead to hyperinflation, just as my patient had the dietary habits that led to the rare case of scurvy in New York City?
In a word, yes. Central bank monetization of large amounts of Federal spending is the key.
The politics of the day are in favor of this policy. The Democrats refused to raise taxes when, for two years, they controlled both Congress and the White House. Then they were all too happy to keep taxes as they were after the midterms, at least till the next election. Now they are happy to complain about the Republicans' position on Medicare while not saying how they will fund it. Presumably money will arrive from the tooth fairy AKA the Federal Reserve or a coalition of the unwilling and coerced. Net-net, my take is that the irresponsible fiscal and monetary policies that were followed when Bush the second was president have simply gotten worse in the Age of Obama.
So if the prediction of a significant global industrial downturn starting no later than summer is correct, there will be a cyclical factor working to restrain prices. But the trend in consumer prices is up, and with returns on bank deposits yielding much less than the rate of consumer price inflation, the hoarding mentality that can quickly lead to high and accelerating rates of inflation may take hold rapidly. Most Americans have never experienced anything approaching hyperinflation and are not as savvy as the brilliant doctor who sniffed out scurvy. In practice, all this continues to argue for possession of a significant and permanent holding of gold. Had the patient simply eaten some fruit or taken a vitamin pill, he would have had better health status. Similarly, gold and only gold is the classic way to hold long-term purchasing power when a government goes out of fiscal control, as the government of the United States may do sooner rather than later. There is no financial VA Hospital you can go to should the rate of loss of purchasing power vs. money rates paid by banks get worse. There may only be the Internet, depending on the point of view of any financial advisor(s) you may have.
I don't know anything about future choices that the authorities will make. Whether the U. S. goes in and out of deflation, as Mish predicts, is above my pay grade. All I can do is ask whether the U. S. is as deficient in financial prudence as my scurrilous patient was before he got sick enough to come to medical attention. Thus, my equivalent of financial vitamin C is gold.
BTW, in follow-up of my recent posts, I reversed trading course this AM and covered most of my shorts and also added more longs. The reason was that too many headlines were gloomy, and bearishness does not love company.
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