And The Winner Is Inflation!

As I mentioned in a previous post about Exxon being the new whipping boy, I’m trying to find out whether the US economy is more likely to head into an inflationary period or slip into recession.

Based on several sources, I feel we will see inflation. According to Financial Sense,

the U.S. is headed for another recession. Given the under-reporting of inflation, which overstates GDP, we may already be entering one. The only difference between the two camps is how it unfolds. As the U.S. enters into recession, tax revenues will decline and government spending will increase as a result of rising entitlements. Deficits will get bigger and the U.S. will have to borrow and monetize more of its debt. War, entitlements, and lack of fiscal restraint means more debt, more borrowing and debt monetization. Eventually the dollar is going to collapse through the weight of the twin deficits. Inflation—not deflation—will be the result. Our debts will only get larger. They will have to be inflated away. Our situation is beyond salvaging as Volcker did back in 1979-1987. It is now inflate or die. Eventually the debt will be paid or expunged, but it will not be through payment or default. Instead, as The Bank Credit Analyst stated in its July, 2003 issue, “The only way to avoid a destructive end to the super-cycle of rising debt and illiquidity may be to try and devalue accumulated debts through increased inflation.

Next year the new Medicare prescription benefit kicks in. In subsequent years the first batch of baby boomers will begin to draw on Social Security. Each year entitlements like Social Security and Medicare rise and then escalate as the retirement population expands. The War on Terror and Iraq War will cost even more money in the years ahead. Declining U.S. oil and natural gas production as well as increasing global energy demand will mean higher energy prices and bigger trade deficits. That will translate into a lower dollar. Today’s U.S. is not the same U.S. of the 1930s. We are no longer self-sufficient in manufacturing, capital or energy. The savings rate in the U.S. is now negative. The 1930s was a different time. We were a different country. We were morally different than what we are today. In summary a different time and a different country mean a different outcome. Inflation— not deflation—is inevitable.

As of this writing the global monetary base has expanded by 20% over the last two years, the highest rate of expansion since 1975. The monetary aggregates are expanding again, with an increase of $30 billion in one week and $42 billion in the most recent report. Recent money growth is approaching 12.5% annualized. Contrary to popular opinion, money is not tight, but loosening. As shown in the previous graphs of the 1970s, high interest rates do not stop inflation. The only thing that can stop inflation is the limitation of new money and credit. Does anybody really believe that American voters will tolerate a recession before calling on government to end it? There are already calls for price controls on oil, natural gas, and gasoline. Got gold, silver or oil?

Also of note, was this post on the Big Picture.

“We get the distinct impression that consensus thought right here is that “inflation is a lagging indicator.”

Funny thing about this sentiment info is that the people who’re telling us that “inflation is a lagging indicator” are the same people who’ve told us all along that “there’s no inflation,” the same people who said gold couldn’t rally, the same people who said oil wasn’t going to stay at high levels, and the same people who said tech would be a leader, the same people who said the “Fed’s done raising rates” for a year, and the same people who said the Yanks were out of the race.

Plainly, these people are dangerous and we think inflation will work higher.”

So whats the best way to hedge yourself against inflation? Invest in Gold, Silver, Oil wells, foreign currencies & mining stocks.

Incidentally, the WSJ reported today that inflation is up [only] 2.5% on an annual rate, the highest in 11 years.[yeah right!] The dollar slid, stocks were down and gold and oil were up.

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