Many conservatives…including me…predicted that there would be high inflation due to Obama’s policies. It hasn’t happened (yet). Instead we have seen a period of deflation.

Why?

If inflation is too many dollars chasing too few products, then deflation must be too few dollars chasing to many products.

Think about that for a second.

First of all, our ability to produce products hasn’t changed much. There are no shortages. Can you think of a single thing that you can’t get? So the problem must be too few dollars.

Too few dollars? Where are they? I believe it is in two place.

The obvious answer is that business and people are holding on to cash. This is a result of uncertainty caused by new regulations (ObamaCare, finanical “reform”, expiring tax cuts).

Personally, I don’t think that is enough to cause deflation. So it must be somewhere else…and that somewhere else is government. Our money has been used to purchase treasury bonds. When you buy a treasury bond, you take money out of your wallet and pay a broker. He then sends the money to Washington in return for a piece of paper. They use the money to pay for things…and what are these things. 5% of the budget is interest (that is nearly two trillion dollars per year)…and much of that is interest paid to foreign investors. It’s not that the money is gone. It’s still out there, but it has left the national economy for a while. Foreigners still like holding the greenback because it is the most stable currency available.

Someday that money will return, and when it does there will be a flood of money. The teeter-tooter will flip and we will find ourselves with too many dollars chasing too few products.

You can leave a response, or trackback from your own site.