Monday, August 2, 2010

The Inflation Bubble

Remember the good ol' days when the value of your home actually increased with the passing of time? During bad economic periods, values remained fairly stagnant. The rest of the time appreciation put added net worth in your wallet.

The normal cycles gave way to the abnormal towards the end of 2004 and lasted into 2006. During that time frame, values went ballistic. There were "bidding wars" for homes where the asking price set the low end of the bids even though it was 50% higher than the same home one year earlier. The demand for homes caused a rapid, upward spiral in prices. Once this began, we were bombarded, on almost a daily basis, with the warnings of "the bubble is going to burst!"

"The bubble", what did they mean? The bubble was the artificially high home prices which were increasing at rates around 5% per month. This was not realistic or sustainable as to the rate of increase or the level of prices. Despite the warnings, the temptation to get in the game and make quick bucks off of flipping houses was irresistible for many. The ignoring of "unrealistic" and "unsustainable" bubble warnings fueled the hot air that continued to expand the bubble.

The bubble was the appearance of substance which did not exist. It took on a life of its own but all that was under it was vapor. In 2006, the artificial expansion popped and the substance vaporized. The bubble burst, just as prophesied. Now, for approaching four years, the balloon has been flying around the room, backwards. In many areas, we have not only lost the bubble appreciation, but we have landed in a crater. At the present time, we still cannot see the bottom.

In at least America, we have another bubble. As opposed to the housing bubble, where the numbers were growing by artificial means, this new bubble is suppressing the numbers by artificial means. We have an inflation bubble.

Our government is printing extra paper money by the trillions of dollars. They are preparing to print another trillion dollars that can be thrown into the economic system. To make matters even worse, we as a country are also borrowing trillions of dollars. What is the reason we are adding so much additional cash to the economy? The cash has become the new "hot air". We have an artificially propped-up economy. The more the Feds throw cash at the recession, the worse it seems to get. So; instead of stepping back and observing that if we keep doing what we have done, we will continue to get more of the same results, only worse; they devise another program to inject more cash into the system.

The real economy remains on a slippery slope, finding itself sinking ever deeper and deeper into the abyss. But, on the surface, even though things aren't real good we expect to cycle out of this recession just as we have done so many times in the past. This notion that we are walking on solid, economical ground and that things are beginning to recover, is truly only a pin-prick away from a bursting bubble.

We cannot inject trillions of paper dollars into a struggling economy without the ultimate, resulting inflation. The more money the Feds add to the money supply, the bigger the bubble and the louder the "pop" will be down the road. Paper dollars are being used to prop up an artificial floor in order to give the appearance that the platform is the actual economic picture of the country. It is not!

Based on recent and current policy, inflation must happen. Inflation will be the result of too much cash in the money supply. Each dollar will be worth less and less, and it will take more and more of them to buy the same item. This is inflation. Things will cost more than they do right now.

I believe that inflation is inevitable at this point. The only question is how bad will it be. There are those warning of "hyper-inflation". I don't know about you, but I do not like that sound of that! Other countries have experienced hyper-inflation. The loaf of bread that used to cost two dollars now requires a stack of money. Folks, we do not want to go there!

On a national level, we have to STOP pumping dollars down a black hole. Our country has taxed and spent, borrowed and spent, and just plain spent and spent. It seems that they do not know any other solution other than let's spend some more.

If the housing bubble had burst in March of 2005, the housing crisis would be a distant memory by now. Instead, it grew substantially larger prior to it's collapse. Our inflation bubble can be dealt with now with the pain that will accompany a burst of it's size, or we can continue to inflate the bubble with more dollars and let it burst later with even more drastic results.

You could look at the housing bubble as an inflation bubble, only on the scale where one industry was affected. It took more dollars to buy the same thing of value. Now take that same example and apply it across the board, affecting our whole economy and all industry.

Personally, prepare for inflation. You might want to reconsider your investments, if you have some. It might be wise to own some thing of value rather than paper value. Become as self-sufficient as you are able to accomplish. Prepare your personal finances for harder times. Be wise in your spending and purchases.

You might be thinking, if you are still reading this, "enough with the doomsday forecasts!" I hope I am wrong and that our wise government will lead us to the land of prosperity. But, there are no signs on the horizon to cause me to believe that is the direction they are taking us. Practically every thing they are doing has the strong potential to hurt our economy.

Just remember this warning, "The bubble is going to burst!"

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