It Looks Like I Was Wrong

My last post almost seems obsolete from the news of the past week. Almost. There I was arguing that prices are not rising because people are not spending despite the flood of cash into the economy, and we get the June retail sales figures. In Canada, up 23% from the month before. With so many retail chains going out of business, I have to wonder who made all those sales. Maybe Walmart and Amazon. 

I notice that larger capital goods are increasing in value: houses, RVs, boats, etc. People are spending money. And look at the stock market --- the U.S. market is trading the all-time highs. That surprises me. Up until not so long ago, the chart was looking a lot like 1929-1930, and I was expecting a crash, but investor liquidity is a lot better now than it was in 1929, plus it is so much easier to trade than it was then. So I guess I shouldn’t be surprised. I think now that my earlier expectation of a deflationary depression that would turn inflationary is off. It appears we may be in an inflationary depression. I’m still betting on the depression. A depression is mainly characterized by a decrease in the production and distribution of goods and services, and that is what has happened. Changing price levels do not alter that fact any more than putting rouge on the cheeks of a corpse can resurrect it. 

We have grown accustomed to seeing interest rates rise in inflationary times. I don’t see that happening this time. Interest rate is a function of money supply and demand. The supply is large. It would take a huge increase in demand to outpace the growth of the supply. Perhaps rising prices of major assets that buyers want to finance will be enough to create that demand, but in order to avoid being bankrupted by higher interest costs on their atrocious debt levels, national governments will inflate the supply of money to outpace the demand for money. At least, that is what I expect. 

If I am right, it sounds like a great time to leverage the purchase of investment assets --- rising prices obtained by using someone else’s money for low cost.  The problem is that doing so would be a huge gamble with liquidity and ability to pay. People get scared in a depression and the demand for assets may suddenly disappear, leaving the borrower with a lot of debt secured by assets that are crashing.