The Perfect Inflation Storm

Tight credit is going to be one of the most important issues this year. The whole system becomes strained when credit isn't flowing.

Just imagine the agricultural industry and how much farmers use credit to produce the food we eat. Take a drive in the country during harvest season and you'll see enormous tractors and combines. Almost always, this equipment is financed either through manufacturer-sponsored purchase financing or by leasing. Any way you cut it, it's still credit financing, and when the money doesn't flow; the entire agribusiness industry breaks down.

Previously, I wrote about how tight credit conditions are making life difficult in the mining sector. The same analogy affects the oil business and the price we pay for gasoline at the pump.

Even though the big integrated oil and gas producers have loads of cash, tight credit makes life more difficult in the supply chain. It's a triple whammy in the oil business at this very moment. Company share price are way down, credit is tight, and the spot price of oil is way down. All this creates an environment where companies have little incentive to explore for more oil. It's just too costly.

So, just like the precious metals business, we're likely to be left with supply constraints over the coming years, because there isn't enough new exploration and development of the commodity. Just consider how long it took diesel prices to follow gasoline prices lower. It took a long time, because demand for diesel is fairly steady, and the fact of the matter is that, despite all the news, there isn't a lot of excess product in the system.

Add in huge government deficits and enormous amounts of newly printed money and you've got the makings of the perfect storm -- the perfect inflation storm in the not-too-distant future.

I guess that's a pretty gloomy outlook. Yet, I can't escape envisaging this situation. Sure, we might experience some price deflation in the very near term, reflecting the speed with which the economy is contracting. But, as Jim Rogers always says, history has proven that periods of excess money supply creation are always followed by periods of higher inflation. If this happens, then the current recession has the possibility of turning into a Japanese-style lost decade.

I'm left wondering if the only assets I want to own in the future are my home, cash, and gold. It's something to think about.

Profit Confidential

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