The Fed continues to preach that high unemployment will stymie any chance of (hyper) inflation taking hold and stealing our collective wealth.  Michael Ponto of Delta Global Advisors believes just the opposite.

It absolutely amazes me how sanguine the Fed, Treasury and Administration are about the prospects for subdued inflation. What they and many economists like to point to as the source of their optimism is the high rate of unemployment, which is currently 9.4%.  But the truth is that inflation actually causes higher rates of unemployment, while it is false to believe that inflation can be prevented by a labor slack in the economy.

To prove his point, Mr. Ponto dives into the unemployment and CPI numbers from 1971, when Nixon closed the gold window, until today.  The conclusion he comes to is grim.  He believes high unemployment speeds up the pace of inflation as there are fewer Joes in the workplace to create goods and services to soak up the excess money supply.  He follows that the destruction of our collective purchasing power, eventually leads to the collapse of the middle class.

Those who are relying on a high rate of unemployment to keep inflation in check will be severely disappointed. There just isn’t any historical basis for that belief in this country or any other. In fact, there are some extreme examples today of countries that experience high rates of unemployment along with runaway inflation.

But you can’t have inflation when money isn’t moving. Something most people don’t realize is that inflation isn’t just the wanton printing of money (although it’s a big part).

In fact, you could print 0 dollars and still have inflation.

That’s because for inflation to occur, the velocity of money – or how fast it changes hands – must also increase.

Today, the Feds are printing trillions in an effort to speed up the velocity of cash. The hope is that ultra-low interest rates will lure people to start spending their money. But so far, banks aren’t lending. And so the velocity of money continues to slow down. Making problems even worse, is the fact that people are already too indebted. So most people are using any spare cash they receive to pay off their debts, not to buy anything new.

And even those that do have money to spare, are now saving it, evidenced by the fact that the U.S. savings rate is north of 6%.

Until the average person on the street begins spending money again, inflation simply won’t be a massive concern.

Last 5 posts by Contrarian Profits

• How and Why China Will Flood the Gold Market - November 25th, 2009
• Gold – getting in while the bull’s still hot - November 25th, 2009
• Gold – Not the end, but possibly a correction - November 24th, 2009
• How do retail sales stack up in an atypical recovery? - November 24th, 2009
• The Best Energy Investments in the World - November 23rd, 2009