Bernanke and the Inflation Fear Bubble

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Here’s another data point that gold and other things that are supposed to trade up when inflation spikes are in a bubble: The prices of books about hyperinflation are themselves hyperinflated (from Fortune):

Jens O. Parsson’s out of print economic treatise, Dying of Money: Lessons of the Great German and American Inflations, is selling for $249.90 on Amazon, while an old hard-cover copy of Adam Fergusson’s When Money Dies: the Nightmare of the Weimar Collapse was recently offered at $1,705.63. A rushed paperback UK edition of Fergusson’s book has held onto the number one spot for business books on Amazon UK for more than twenty-six days and is now climbing Amazon’s US rankings, while a scan of Parsson’s previously unavailable book has been posted online for the hand-wringing masses worldwide.

Much like the stifling hyperinflation they describe, it remains unclear where these books first gained traction or exactly when they did. Reports indicated that the rush may have been spurred by the value-investing sage Warren Buffett, who allegedly had an Oprah moment and recommended Fergusson’s book to some banker friends. However, Buffett has since denied that report, saying he never heard of the Thatcherite’s circa-1975 tome. And even if he had, that doesn’t account for the fact that Dying of Money has become an inflated commodity as well.

Worry about hyperinflation has been bubbling up this year. And the weird thing is inflation fears cross ideological lines.  Hyperinflation could be the one thing that keeps both Glenn Beck and Michael Kinsley up at night. When it comes to hyperinflation though, you shouldn’t lose any sleep worrying about it either. Here’s why:

First of all, inflation appears not to be one of the fears that keeps Fed Chair Bernanke up at night either. Bernanke is out talking about the economy today, and he says he sees some risks. But one of those is not inflation. He is predicting that consumers and business spending will slowly increase. So he sees a recovery, but a weak one.

The thing that baffles me the most about the hyperinflation fears is this: There is very little regular inflation, let alone hyper. I would get being worried about hyperinflation if inflation was already running at 5% or 10% a year, which would still be a far stretch from hyperinflation. But we’re not even close to that. In fact, inflation has mostly been non-existent. On some measures it gets as high as 2%. But a number of times over the past year or so, the reading of inflation has been negative, meaning prices are not only not rising, they are falling. Prices look so weak that recently a number of large hedge funds have been positioning themselves to benefit from deflation.

This makes sense for a period in which we have weak economic growth. And since pretty much everyone thinks that will continue. It makes sense that low inflation will continue. But whatever way you lean on the inflation debate this one thing we should all be able to agree on: Either gold or Treasuries are in a bubble, but not both.

Gold prices have shot up because of fears about inflation and the US economy. At the same time, US Treasuries have shot up because the US is seen as a safe haven. The result is that US interest rates remain, despite rising debt and economic uncertainty, at all time lows. We often have more than one bubble forming at the same time. Real estate and credit. Technology stocks and venture capital funds. But these bubbles benefited from the same economic conditions. It is rare that we would have two bubbles that benefit from exactly the opposite investment thesis forming at the same time. Either gold or Treasuries is probably slightly overvalued. And one is really in fully inflated bubble mode, ready to pop. You decide. But you can’t pick both.

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