Many coffee shops are abuzz with this topic. With the amount of money this administration is pumping into the economy, the majority seems convinced that inflation is just around the corner. The reality: Most people want inflation whether they admit it or not.
An old friend and professor of mine once said, “Inflation is an awful thing. It makes many people who aren't very smart think they are.” Put another way, in inflationary times asset values go up and those who own assets (farmland) can pat themselves on the back about how smart they've been.
The reality, however, is wealth is a “relative” issue. Thus, during inflationary times very few people are increasing their wealth relative to anyone else.
Real opportunities in wealth development actually occur in deflationary times. The Kennedy family is a classic example. The mass amount of their wealth was generated in the stock market collapse in the 1930s. Wealth has also been developed by many farmers during past farm depressions. The biggest mistake to avoid is being leveraged at the top of the market.
I am in the camp that inflation is a long ways away; at least eight or 10 years. How can this possibly be? Remember that inflation is the result of not only money supply, but also money velocity (how fast we spend it). No matter how big the pile of money, it makes little difference if the pile just sits still.
That's where we are now. The pile is getting huge, but the rules have changed. This is a consumer-driven economy and consumers are out of work. More importantly, banks are tightening up on credit, and the ability of businesses to borrow money has dropped incredibly.
Even if employment starts to improve in this country, it will take years — and it may never happen — for average Americans to get back to the wealth they had two years ago.
THE WORLD IS DIFFERENT
The chart shows the massive amount of net worth U.S. households lost in 2008. It was an unprecedented year with losses primarily occurring in home values and in retirement accounts as a result of sharp declines in mutual funds.
A large share of the mutual fund declines was a result of the sharp drop in bank stocks. Though irrelevant where the losses occurred, they happened. This will change non-farm investor strategies for years to come, making people more conservative, less speculative and thus less inflationary.
In my opinion, deflation is here for the next several years. Disasters such as the 2008 financial markets will change attitudes forever. To think that agriculture is going to avoid these long-term deflationary trends in my opinion is somewhat unrealistic. This is going to have an impact on livestock prices and thus on grain prices. Don't count on inflation to bail people out of bad decisions.
Richard Brock is president of BrockAssociates, a farm market advisory firm, and publisher of The Brock Report. Fora trial subscription and information onBrock services, call 800-558-3431 orvisit www.brockreport.com.