By Jim Sinclair

PAUL VOLCKER IS CONCERNED...WE AGREE WITH HIM, AND WE ARE ALSO CONCERNED

Mr. Volcker most certainly understands in great detail what is going on in the world economy and world banking system.

He served as chairman of the U.S. Federal Reserve from 1979 to 1987.  He was a strong, responsible person who raised interest rates and brought an end to the U.S. inflation of the 1970's...although the interest rate increases helped contribute to a recession during his tenure.  In our opinion, a recession was a small price to pay to stamp out the virulent inflation of the 1970's.

Mr. Volcker was testifying before Congress last week, and in our opinion, with the following remarks, Mr.Volcker admitted to the very same concerns we have been describing about the outlook for inflation.  We also believe that he restates our concerns about the Federal Reserve's lack of desire to tighten monetary policy at this politically sensitive time (election year).

The New York Times article of May 15, 2008 entitled, "Act Now to Avoid Inflation, Warns Volcker" says it well.

"Testifying before Congress yesterday, Mr. Volcker warned of a resemblance between the inflation outlook today and in the early 1970's, when the economy featured and overall tendency towards rising prices, as well as big increases in energy and agricultural prices.

Mr. Volcker said the response from the Fed at the time had not been forceful enough in terms of tightening monetary policy.  He added, 'If we lose confidence in the ability and the willingness of the Fed to deal with inflationary pressures and sustain confidence in the dollar, we'll be in trouble'."

 

IT IS OBVIOUS TO ANY INFORMED OBSERVER THAT U.S. POLITICIANS DO NOT WANT TO TAKE THE INFLATION PREVENTION MEDICINE IN AN ELECTION YEAR

They will delay and give inflation a good chance to secure a foothold.  After the November election, and into early 2009 (when Congress finally begins to act to slow inflation) the new U.S. Congress will be seated.  Most political observers believe that the Democrats will be strongly in the majority.  Recent poll results show that even strong Republican seats are in danger due to the unpopularity of the current President's policies.

If history is any guide the Democrats will opt for higher taxation and re-allocation of wealth strategies, rather than economic growth prescriptions to cover current U.S. deficit problems.  In order to accomplish the goal, the higher taxes will eventually be joined by higher interest rates.  The combination of these will send the U.S. economic growth rate down longer term.  Only then, well into 2009 or later will they begin to address the problem of insidious and imbedded inflation.

 

WE ARE SORRY TO BE HARPING ON INFLATION, BUT IT AND A PATHETICALLY WEAK WORLD BANKING SYSTEM ARE THE REAL PROBLEMS

In a note from the U.K. Telegraph on May 15, 2008, Ambrose Evans-Pritchard states   "According to the OECD (Organization for Economic Cooperation and Development), the OECD's early warning signal is flashing clear signs of economic weakness across the world...The closely watched gauge has picked up a sharp deterioration in the Eurozone in March, notably in Italy and France where the advance signals are falling even faster than in Britain."

The article goes on to say "price pressures across the emerging world are reaching levels that may soon threaten stability unless governments jam on the brakes."

Inflation rates have reached:  Venezuela 22%; Vietnam 21%; Latvia 18%; Qatar 17%; Pakistan 17%; Egypt 16%; Bulgaria 15%; UAE15%; Estonia 11%, etc., and the article names Turkey, China , Romania, Argentina, Indonesia, the Philippines, and Saudi Arabia all as having inflation  between 8.5% and 9.6%.

"Many of these countries are now suffering the worst prices spiral in thirty years, setting off widespread riots."

 

GOVERNMENTS INITIAL EFFORTS TO FIGHT INFLATION OFTEN EXACERBATE THE PROBLEM

Trade barriers on commodities are becoming more prevalent as governments wrestle with climbing prices.  This creates inflation.  We anticipate that as politicians get more involved in the delivery, import, export, production, subsidization and other aspects of commodities, their policies will cause dislocations in the free flow of markets and cause shortages and hoarding...leading to even higher prices. Speculators, who are usually people trying to protect themselves from the stupidity of political manipulation are easy targets to place blame for the rising prices.

This is not new.  From ancient times, political powers have blamed speculators for the problems that they the politicians have created...and politicians will continue to exercise their perceived right to continue to do so as long as people live.

Be forewarned...expect higher commodity prices as politicians worldwide once again assert their right to dislocate markets with unwise statements and actions.  Then, later on, when trade barriers cease to work, and they have created bigger problems, and when blaming nasty speculators is ineffectual, the politicians will rely more and more on direct stock, currency and commodity market intervention, market manipulation and scare tactic statements like "gold is a barbarous relic" or my favorite "speculators will be punished".

 

WHAT EUROPE, JAPAN AND THE U.S. IS CURRENTLY EXPERIENCING IS THE BEGINNING OF STAGFLATION

Actually, it is already with us, and we should prepare for it...at the risk of being called speculators.