With so much money circulating in the economy in the 2000's, how is it that the country did not grow?  The problem is that much of the money was stale.  By stale, I am saying that it was not circulating and adding to the "velocity" of money.  In the late 1990's, the ultra-wealthy invested in venture capital and alternative investments that contributed to the creation of new businesses and industries.  The money helped grow ideas into what are now some of the world's leading companies.

Then, the hedge funds emerged.  They diverted the funds of the ultra-wealthy into vehicles of leverage and speculation, rather than investments such as venture capital.  Venture capital is an investment.  A hedge fund is speculation.  The diversion of so much wealth out of legitimate investments into levered speculation was a major catalyst in the downfall of the US economy.

How long have we been hearing that inflation is dead in the US?  How long have we seen reports of the CPI increasing only 0.1% or even 0% per month?  Aren't we hearing about how the biggest risk now is deflation?  It's been at least 10 to 15 years as far as I can remember.  I've been hearing that for about as far back as my house was 1/3 the value it was at its peak and milk was 1/4 the price.  It started at least when gas was $20 per barrel, before it spiked to $150.  Through all this, the CPI somehow managed to stay relatively stable.  And this is what employers used to justify little to no inflation adjustments to salaries.  How did this happen?

What happened was hidden inflation.  Through tricks, smoke and mirrors, and shell games, the inflation that actually happened in the US was hidden in artificially low interest rates and government-sponsored economic data showing little to no price increases (the "ex food and energy" trick).  How can any logical person say there was no inflation when 90% of consumer expenditures spiked in price?  Home prices, energy, metals and food prices all spiked from 2000 to 2008.  What "baskets" of goods actually remained flat in the decade to justify the tiny CPI numbers?  Computers?

So when I now hear about the risk of deflation, I realize that it is just part of the bubble popping.  Unfortunately, the inflation of the 2000's did not transfer to wages, but I fear that the deflation will.  What employer won't take advantage of the opportunity to lower salaries?  As long as the Bureau of Labor Statistics says that the CPI is falling, no employer will implement an annual wage adjustment, and many will go as far as to offer less for the jobs they fill after the layoffs.

While all of the government agencies and economists pitch the pending deflation, get ready for the real risk that is looming...inflation so high that it can no longer be hidden.

About a year ago a friend of mine saw an infomercial...it told him that now is the best time to buy gold.  The economy is a mess and the only safe place to keep your money is in gold coins.  It's the best investment you can make!  So my friend went to a coin shop and dropped $1000 on a pure gold coin with a buffalo on the front.  It must be a good investment...a buffalo is a hard worker and is sure to do plenty of work to make some money.

So for a year this lazy buffalo just sat in a drawer.  It didn't go out to work in the farm, it didn't plow any fields, and it didn't sell anything for my friend.  It couldn't even have a bake sale to make a few dollars.  So for a year now this lazy buffalo has just sat around and has not made a dime.   And surely no foreign person called wanting to buy the coin to pay for imports.  It just sat there on its fat buffalo butt. 

What now?  Maybe there's a bigger fool out there now who would be willing to buy this lazy buffalo coin?  There are plenty of infomercials telling us that now is the best time to buy gold.  There are about twice as many as last year.  Are they right?  That lazy buffalo surely proved that the best time wasn't last year.  Maybe my friend needed to buy the one with the Indian on it.  Maybe the Indian coin is better at making money.  Or perhaps a vase of tulips will make more money.

My friend's best bet?  His best bet is probably to wait around to find a bigger fool who believes that a buffalo coin will make money for him.  My friend learned that a good investment is not a piece of metal that serves little practical purpose.  The gold standard ended in 1971.  If you want an investment whose value dates back to the 1960's you're better off buying stock in a company that produces peace signs and bell-bottom jeans.