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Thoughts from the Frontline

The Cure for High Prices

April 16, 2011

Choose your language

Today we once again think about the inflation/deflation debate, turn our eyes to Europe and the very interesting election happening there this Sunday, and speculate a little about what could derail the US economy.

But first, a quick note to Conversations subscribers. We have just posted a new conversation I did with Rich Karlgaard (Forbes publisher) and Andy Kessler. A found it fascinating to talk with two rational optimists who live in Silicon Valley and have watched the scene there for a very long time. I will soon be doing two more Conversations, the first with Neil Howe (The Fourth Turning, and one of the most astute experts on demographics) and the second with Albert Edwards and Dylan Grice of the Global Economics desk at Societe Generale and two of my all-time favorite thinkers.

For new readers, Conversations with John Mauldin is a subscription service where I sit down and talk with interesting people and let you listen in. You can learn more at If you want to subscribe or renew, use the code conv and get a 25% discount, plus access to all the previous conversations, plus a recent piece with George Friedman of Stratfor. Now, let’s jump into today’s letter.

The Cure for High Prices

The old line is that the cure for high prices is high prices. When prices rise, businesses tend to respond by producing more. If the price of something gets too high, then people buy less, which then leads to too much supply, which lowers prices. Rinse and repeat.

Last week I wrote about what I think is the potential for inflation in the US to rise to…

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Morris Bryant

April 17, 2011, 8:46 p.m.

Hey John,
At least you get to wear a boot because you were exercising for health.  I’m wearing one for falling off a ladder!  At least it has slowed me down and given me time to read Endgame!

John Collette

April 17, 2011, 6:26 a.m.


Here’s what I don’t quite understand.  As we watch the opening salvos in the big budget restructuring, the talk is of trillions here and trillions there.  It’s going to be really tough, right?  But, where is the clear definition of the goal? 

Consumers know that their monthly mortgage payment shouldn’t be more than 30-40% of their total income.  Why can’t we have a similar convention for federal debt?  We hear that 140% is really bad, but what is good?  What’s the normal, reasonable, healthy debt to GDP ratio?  Or the % of annual tax collections that can/should be allocated to loan payments? 

The various plans to reduce the deficit and cut government spending are going to be really tough.  How can we possibly make those hard decisions without a really good understanding of the goals of the reductions?  I’ve been reading your newsletter for a couple years and I think I’ve developed a much improved grasp of the general goings on, but this basic point is one that I don’t understand and feel somewhat rudderless for its absence.

Matt Blackman

April 17, 2011, 2:31 a.m.

The first challenge with this discussion John is to consider CPI or core inflation as valid statistics. They are little more than government-generated electioneering tools engineered to help re-elect incumbent parties with very little connection with reality. If you are looking for proof, look no further than the election cycle. Real inflation, based on any credible measure, is somewhere between 6 and 10% per year. Just look at the Fed balance sheet and correlation with commodity prices. There is your real inflation measure!

Deflation risk only really exists in the warped minds of Federal Reserve economists. In real terms, it is pure fiction, nothing less, nothing more. We live in the later stages of a fiat paper currency meltdown and one only has to study the history of fiat currencies to understand where we are headed.

Jeff Martin

April 16, 2011, 9:22 p.m.


Another great article but I have a question. Why is all of the “inflation” we are seeing coming from raw materials that are traded on futures markets?  If we have real inflation, why did my house lose another $40,000 this year?  Why can I buy a Honda Accord for the same price I did 5 years ago? Why are computers, tv’s, Kindles or anything electronic dropping in price? Could this be a market phenomenon and not an economic one?
As a former NYMEX trader, I understood that futures exchanges were there to limit risk for producers and end users of a variety of raw materials.  Speculators provided liquidity but the real price of oil was determined by the cash market for oil based on the supply and demand dynamics of the physical commodity.  On the last day of trading, spot settlement and cash were the same and cash was trump.  Futures markets were never intended to be capital markets. The high degree of leverage and volatility was never for investors; only speculators.  Today, however, the number of paper barrels of oil is so much greater than the amount of real oil that the paper barrel is now the “real"price and that price does not necessarily have anything to do with the supply and demand of the underlying commodity.  Cushing is awash in WTI. Demand is flat to slack.  So why are we at $108 a barrel? The reason is that these markets were never intended to handle the massive trading by hedge funds and money managers that are only looking at maximizing profits for investors.  The laws of supply and demand have been repealed.  The cash price is now determined by the futures market which is opposite of how it’s supposed to be. In the past, spot settlement and cash were the same, with cash as trump.  The spot futures settlement was determined by the cash market price at the time of expiration.  That is no longer true and many companies that rely on futures markets to hedge risk are being hurt, as are we the consumers. 
Here’s my solution to our “inflation” problem. It will reduce the price of all raw materials traded on futures exchanges by 25% in a week. One, raise speculative margins to 50% of contract value, 75% for spot month.  Two, decrease speculative position limits to no more than 35% of all outstanding contracts and three, prohibit speculative trading in the last 7 days of a contract. It’s worth a try. Futures are a zero sum game and the losers, the public, aren’t even allowed on the field.

Jeff Martin
East Northport, NY

Dame-Anna Wang

April 16, 2011, 6:46 p.m.

Sorry to hear of your heel ‘bursitis’, John.

Reminds me of my son who came home last January with swollen knee-caps.  When I asked what could have caused this, he told me he did lots of walking around the Dubai airport on his stopover from Austria to Singapore.

I took him shopping for a pair of MBT sneakers ; within a couple of days, the swelling subsided!

You should try this pair of cushioned sneakers, good for excessive walking and exercise.

Hope you will recover soon to get up and about to write another post.

Your ever ardent reader.