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The Fight Between Inflation and Deflation is OverBy
Saturday, August 15, 2009
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.
– Ludwig von Mises
For most of 2009, I've had a friendly disagreement with several colleagues who believe a big deflation will be the end result of the 2008 financial crisis. I knew they were wrong. I knew inflation would become a problem sooner, rather than later. And in the past several months, I've been proven right. The mortgage and banking collapse of 2007-2009 saw total collateral values collapse between $5 trillion and $10 trillion. The response from our politicians and central bankers was massive: the largest creation of new money in credit since the Civil War. The Federal Reserve created roughly $2 trillion in additional credit and loaned it against all kinds of dubious collateral, things like Bear Stearns' mortgage book. (There's a handy and simple guide to estimating the Fed's credit quality. The more acronyms in the lending programs, the worse it gets.) The Federal government responded with a record annual deficit of at least $1.8 trillion. In the second half of 2008, the outstanding federal debt grew by roughly a 40% annualized pace (24% for the entire year). Thus, in only a few months' time, the roots – the money and credit – underlying our economy expanded at a record pace. In the second half of last year and the first quarter of 2009, the main question in the world's financial markets was: Can the world's government print enough money, fast enough, to forestall a deflationary collapse? I knew it was no contest. There is no way for an economy to outrun a printing press. The Fed has the power to create an unlimited amount of money or credit and the power to inject that money into the economy in any way it sees fit. Let's look at the numbers. Let's assume the total collateral damage of the banking crisis turns out to be $5 trillion. Yes, that's a huge hit – roughly half the output of our economy each year. It's the equivalent of sending every American household a bill for $50,000 – due immediately. However, in less than a year, the Feds have already created nearly $4 trillion in new money and credit. The hole in the system has already been plugged. It only took a few months. The fight between inflation and deflation is over. Deflation was knocked out in the first round. The big risk is what happens next. Having turned on the presses to save the day, who will have the political clout and the desire to shut them off? Barack Obama's budget calls for annual deficits in excess of $1 trillion for the next eight years. Thus, by the end of this year, not only will all of the damage from the mortgage collapse ($5 trillion) be replaced by new money and credit, there will be significant inflationary pressures in the economy. The good news in our economy this year, so soon after such a major collapse, means we will certainly have a massive inflation during 2010 and 2011. There's no such thing as a free ride. Bailing out the banks will carry a heavy price for anyone who doesn't have the resources or the knowledge to escape the dollar. How can you "escape"? First off, make sure you own plenty of gold bullion. I also recommend owning assets that will run higher in an inflationary environment, like vital transportation and energy assets. Also, own some good farmland. Food and land prices will go higher. Yes, the news is grim... but if you own gold and strategic assets, you'll survive and prosper in the coming inflation. Good investing, Porter Stansberry P.S. I just told readers of my investment advisory about another inflation strategy that should make you wealthy over the coming years. You see, ironically... we should buy companies that control vast amounts of assets with borrowed dollars. Since a debt deflation is impossible, then the companies that have borrowed the most money will become the most valuable. Their debts are measured in a currency dwindling in value. Click here to become a subscriber and learn about my favorite way to profit from this idea.
Further Reading:
This Chart Is the Simplest, Best Reason to Own Gold Market NotesYOU CAN MAKE A LOT OF MONEY IN LITHIUM!
This week's chart shows the amazing uptrend in one of the most important companies you've never heard of. And it shows that you can make a lot of money in lithium.
Lithium is a major ingredient in batteries... like the ones that go in laptops, cell phones, and cars. The argument for following this story is this: As we convert our transportation system to electrical trains and cars over the coming years, we'll create enormous demand for greater battery technology. In other words, batteries and electricity will replace gas tanks and oil. A name to watch on this trend is giant Chilean mining concern "Sociedad Química y Minera de Chile S.A.", aka SQM. SQM's main business is mining minerals for fertilizer... but it's also the world's biggest producer of lithium. As you can see from this week's chart, there's a lot of money to be made in fertilizer and lithium. SQM has returned investors over 1,900% in the past seven years. – Brian Hunt |
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