At this point we have a good idea of what inflation is, why it happens, the leading indicators for, and it’s effects.
So in our opinion, and only time will tell if we are correct, here is our probability of coming inflation and most importantly why!
No inflation and the government is able to extract the recent stimulus perfectly. While difficult, it is not impossible for a perfect outcome concerning the next few years.
Paul Volcker was able to stop inflation in the late 70’s and took a lot of criticizm for doing so. Currently Volcker is chairman of the Economic Recovery Board and may provide valuable insight into a soft, non inflationary recovery.
The government extracts too much, too quickly, and throws us back into another recession.
Little known, and mostly by historians, the great depression lasted longer and was deeper due to an early recovery being squashed as the government became over confident of the recovery and hiked rates too fast, throwing our country into a second “double dip” recession. Bernanke is a student of the economics and specializes in the Great Depression, we find this possibility, possible, but unlikely.
Inflation rises and takes several years to stop as the economy overheats and begins showing signs of supply demand mismatches.
Our key thesis for this event is two fold: 1. Where we have been and 2. Re-election.
- Point 1: Given the amount of dollars, companies lost and employment figures we have experienced we think it highly likely an error on the too hot side or inflationary, is in the cards.
- Point 2: Obama is extremely smart and knows time is of the essence in turning our country around in order to be re-elected. He currently has two years to get the country in shape in order to thwart his opponents in the next election. We think he will error on the side of too hot of an economy, rather than take a chance of a slowdown near election time.
Only time will tell if we are correct in our thesis and probabilities, but we have outlined the possibilities in our opinion, and will update them in the future as new facts arrive. We hope you have enjoyed this four part series. JK