Contradiction in the Balance of Economic Forces

Bill Bonner — Thu, 17 Jul 2008 05:33:03 +0000

As you recall, just when it looked as though inflation had the upper hand, the forces of deflation began a major counter-offensive. The artillery barrage began only a couple of weeks ago. Since then, the battle has shifted dramatically.

“The balance of economic forces is contractionary,” writes Martin Wolf in the Financial Times.

He notes that inflation is not completely whipped. On the very cover of the FT is the news that “inflation hits 16-year peak.” Also, gold rose strongly, which the dollar fell to a new all-time low against the euro. Still, the gods of financial war seem to have gone over to the deflation camp.

The banks are collapsing. The roof is caving in on housing. And yesterday, even the oil price slipped. It closed down $9 bucks.

So far, the black goo has confounded economists. The world economy is slowing down. People are cutting back on their use of energy. In the United States, families are taking vacations closer to home, for example.

Also, the Bernanke Fed was hinting strongly that it wouldn’t be lowering rates further – and might even be raising them. Under those conditions, the dollar was widely expected to go up...and the price of oil to go down.

It didn’t happen. And even now – with the price of oil dropping – you’d expect the dollar to go up and gold to go down. Nope. Didn’t happen. Speculators are wagering that the United States will soften up the dollar still further...they’re betting on more trouble, that is... They’re dumping oil, because it will inevitably and eventually respond to the drop in economic activity. But they’re buying gold, because they also want safety – from the dollar...from defaults...from bankruptcies...and from the claptrap solutions of public officials.

“If the ongoing deleveraging of the US economy weakened US consumption,” continues Wolf, “the economy might go into a deep recession. US fiscal deficits would then soar and long-term US interest rates might jump. This could make the debt dynamics of the US government look very unpleasant. A flight from the dollar and dollar bonds might even ensue.”

Bill Bonner
for The Daily Reckoning Australia

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Contradiction in the Balance of Economic Forces