Here we go again - for the last time on economics.

Thanks to Steve for his comment - I think you may be fooled, I'm not that smart.

Nancy, thank you for defending me but you give me way too much credit.

Scott and Deguello - thank you for your comments, I'll try to address the issues in this post.

Last week I wrote a blog on the economy of the U.S. and Ecuador without much detail, kind of a heads up type thing. An opportunity has arisen in the western part of North Carolina in the last 30 days and has forced me to run the numbers through my forecasting model. Sounds real educated but the truth of the matter is my forecasting model is putting things in its simplest terms so I can understand them and using some fundimental formulas to gauge where the economy is going - mostly common sense. I'll admit that I have been a little slack in tracking the economy for the last year and a half because I am not confronted by the rising food prices and gas prices and high utility bills in the U.S. every day but I am aware of the devaluation of the dollar and feel it here in Ecuador.

Something you need to understand is that I don't talk (write) to hear my head rattle. I stake my future on my forecasts, I don't regurgitate what other people think and because no one but me pays my way, I could care less about opinions. I've been wrong before and had to pay the price, I just can't remember when.

By the comments that were made on that blog you folks have restored my faith in humanity, I was convinced that most people have their head buried so deep you can't see the other end. So here we go, the world according to some old fart who probably doesn't know his butt from a hole in the ground.

Ecuador has a fixed exchange rate to the U.S.. This means as the dollar is devalued they follow the devaluation as a rate of inflation. They can not use monetary policy to stabilize their economy because the dollar is not in their control. The inflation rate in Ecuador is running at 10% because of the dollar and price inflation at about a 50/50 split. The only thing they can do is stop using the dollar as their currency. I don't know how the exchange rate will pan out but in combination with the H.I.R.E. acts 30% witholding from money leaving the U.S. it might not be so good.

There are 2 types of inflation, price inflation ( you know, supply and demand ) and there is monetary inflation ( the killer ). When you go buy gas for your car and the price has gone up since the last time you bought gas, that's price inflation. Lots of demand on the world market and supply is being slowed by O.P.E.C. to raise the price to account for the devalued dollar and euro. There is a bunch of other stuff in there too but the fact is supply is being manipulated in this instance and that causes the price of oil to go up, there isn't a darn thing any one can do about that in the short run. Monetary inflation is caused by ecessive growth of the money supply, you know the funny money the Federal Reserve prints so the politicians can institute a policy of quantitative easing because the Central Bank ( Federal Reserve ) has lowered the intrest rates and the rediscount rates so low that they are in a liquidity trap. The idea behind quantitative easing is to increase the money supply by buying bank assets so banks will lend more money, business will increase production, hire more people, who will pay more taxes, buy more products, increase business revenue..................... The problem is the banks are holding the money so the only thing quantitative easing has done is to increase the money supply by upwards of 5% while the rate of growth of the economy (GDP) is at best 3%. This is the definition of hyper inflation, when money supply grows faster than economic growth. There is no real way to track the money supply because like the CPI the government doesn't track the money supply anymore - I wonder why ?   The end result is a endless cycle of ever decreasing value in the money supply.

So where do we go from here ?  I don't think it can be fixed, not for a long time. If you stop quantitative easing that constricts the money supply, so how do you pay for this new health care thing, how are you ever going to get people to drive these new coal fired cars ? The Federal Reserve has committed to a policy not to raise intrest rates until it reassesses in 2014, so that ain't going to happen. What good are low intrest rates when the bank doesn't lend money or business is so unsure of the future they don't want to borrow money? The government is reporting low inflation numbers - remember these numbers are the new CORE inflation rates, it  doesn't include the costs for energy or food. Gas alone will account for a 3.3% inflation rate if your consumption is only 10% of your budget. What about food ? How about some of the other costs stripped out of the CPI, add that to what the CORE inflation rate is and you are approaching 10%. My own personal inflation rate living in Ecuador would be 18% if I didn't make 30% following the market here. Don't ask, I'm not telling.

I've done my best to keep my friends and family from being blind sided by misinformation. What you do is up to you, just remember this - if you don't keep up with the rate of inflation,whatever that rate is, is the exact amount you will lose in your standard of living. A 3% raise in a 10% economy is a loss of 7% in your standard of life, the first year, it's 17% the second year.................................I hear Alpo makes a pretty good stew.