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The Financial Storm Nobody Is ExpectingBy
Thursday, July 10, 2014
It is so easy for a country to print money...
Said another way, it is so easy for a government to create inflation.
Because it's so easy, nobody believes that DEFLATION – the opposite of inflation – is possible.
But it is...
Earlier this week, Republican politicians proposed a bill that would limit the powers of the Federal Reserve (more on that here).
Don't get me wrong, I'm all for limiting the powers of government... But if the Fed's powers are limited, its ability to print money would be limited... If this happens, persistent deflation could be an outcome – and that could trigger a financial storm that nobody is expecting.
"The most likely path of the Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off inflation," Jim Rickards writes in his excellent book The Death of Money. However, "the Fed may reach the political limits of printing."
This is a scary thought for the Fed.
"Deflation is the Federal Reserve's worst nightmare for many reasons," Rickards explains. The new bill proposed by the Republicans is an example of the Fed reaching the political limits of money printing.
For one, "Deflation INCREASES the value of government debt, making it harder to repay. If deflation is not reversed, there will be an outright default on the national debt, rather than the less traumatic outcome of default-by-inflation."
Even worse, deflation "feeds on itself and is nearly impossible for the Fed to reverse."
If deflation actually takes hold, how can we get out of it?
Rickards explains it: "The only way to break deflation is for the United States to declare, by executive order, that gold's price is, say, $7,000 per ounce, possibly higher."
"Deflation can be broken when the dollar is devalued against gold, as occurred in 1933 when the United States revalued gold from $20.67 per ounce to $35.00 per ounce... If the United States faces severe deflation again, the antidote of dollar devaluation against gold will be the same, because there is no other solution when printing money fails."
To be clear, Rickards isn't actually predicting deflation...
He says we're in an epic battle between inflation and deflation... where the government desperately wants to create inflation.
My money is on the government succeeding in creating inflation. But Rickards' book opened my eyes to how deflation could actually take hold.
The actions this week by House Republicans show me that Rickards is right – that there is a legitimate risk that the Fed "may reach the political limits of money printing."
I have been in this industry for decades. It's not often that someone opens my eyes as much as Rickards' book did.
I highly recommend you pick up Jim's book, The Death of Money... I'm sure it will open your eyes, too...
Good investing,
Steve
Further Reading:
Learn more about America's epic battle between inflation and deflation here:
The World's Most Important Financial Battle Is Coming to a Head
The world is witnessing a climactic battle between deflation and inflation... The Coming Death of the Dollar
"The Federal Reserve believes that it is managing a reversible process... [but] it is mistaken." What to Own as the Dollar Dies
If you're worried about a collapse of the U.S. dollar, you may want to start incorporating some of this advice into your portfolio today... Market NotesAN UPDATE ON ONE OF OUR FAVORITE GOLD STOCKS Gold is starting to rally... and that's great news for one of our favorite gold stocks.
Back in February, we explained why Franco-Nevada (FNV) is a great stock to own during a gold rally. In short, Franco-Nevada is one of the world's premier "royalty firms."
As regular DailyWealth readers know, royalty firms don't operate mines or explore for mineral deposits. They finance early-stage mining projects and collect royalties when those projects work out. This makes a royalty firm safer and more diversified than a company that "bets it all" on just one project.
To get an idea of how this works, we consult a "performance chart." Today's chart plots the past three years' performance of Franco-Nevada (black line), gold (gold line), and the gold-stock index (blue line). Remember, the gold-stock index consists of many "regular" mining companies.
Since early June, gold has rallied about 6%. In the same period, shares of Franco-Nevada have gone up more than 20%. As you can see in today's chart, this outperformance is nothing new. Over the past three years, Franco-Nevada has wildly outperformed both gold and gold stocks. It's a tremendous display of business and share-price strength. As you can see, there aren't many better ways to trade a gold rally.
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