Inflationary Depressions in a Global Economy

I’ve had this argument with any number of people for several years running about how you can have (even dramatic) inflation during a recession or depression.  Of course, anyone who’s followed or read the likes of Jim Rogers or Peter Schiff already know the answer to the question, but this article from CNN might help with a current example:  gasoline.

Gasoline is a global commodity.  It’s price (in dollars) can go up even in the face of (domestic) demand destruction.  This is a function of:  where its made, who’s still buying it, and in what currency is it priced.  No matter that US demand for gasoline is still depressed.  No matter that it is processed here.  What matters is that there is still global demand for it and it is priced in dollars.  Devalue the dollar and you will pay a price that rises accordingly.

This is why food, in particular, and, perhaps, other energy costs will continue to rise in direct opposition to our ability to pay those rising prices.  It may also be worth adding here that “hyperinflation” is, at least in part, a psychological phenomenon that is triggered by growing recognition that the buying power of the currency is declining faster and that one’s economic survival depends on converting it into hard (or otherwise useful) assets as quickly as possible. 

Thus, we might not feel compelled to rush out an buy a computer or iPod, but we might worry about that next tank of gas or basket of groceries.  

HT

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