Deflation generally refers to falling prices and is often caused by a reduction in money supply or credit. Deflation could also be caused by reductions in government, personal, or investment spending and often has the side effect of increasing unemployment in an economy.
If you were on an island and there were ten equal goods for sale and ten $1 bills available on the island to purchase them with, we could assume that each item would end up costing $1. If the quanity of money increases to $20, the price would likely increase to $2, which is inflation. But, if the quanity of money decreases to $5, the price would likely fall to $0.50, which is deflation.
If the amount of money supply stayed the same but the quanity of goods increased, you would also see price deflation.,However, this deflation would be good, because it would mean goods are likely being manufactured more cheaply which could increase everybody's wealth.
Today, we are seeing short-term deflation in the U.S. as consumers are hoarding their Dollars and businesses are heavily discounting their inventories and having going out of business sales. With the U.S. government likely to print trillions of Dollars in the years ahead for its stimulus plans and bailouts, there will soon be too many Dollars chasing too few goods. We believe this short-term deflation will soon turn into a high level of inflation and ultimately hyperinflation.
What is Inflation?
Inflation is a hidden tax imposed on citizens and too hard for many ordinary people to understand.
Inflation could either be referring to Monetary Inflation or Price Inflation.
Monetary Inflation means there is an increase in the supply of money. This has historically been the favorite form of taxation by governments since ancient times and leads to Price Inflation.
Price Inflation means prices of goods rise and it takes more money to buy the same items.
When there is an increase in the amount of a currency in circulation, the currency loses its purchasing power and prices of goods and services rise.
We believe that the U.S. government will soon be printing trillions of Dollars to fund its stimulus plans and bailouts and it will lead to massive inflation in the U.S. and ultimately hyperinflation.
Right now in the U.S. forced liquidations of hedge funds that own commodities along with companies going out of business and liquidating their inventories have created the short-term appearance of deflation, which has given Federal Reserve Chairman Ben Bernanke the cover to lower interest rates down to 0%. We believe Bernanke's actions were a major mistake and will cause the next major inflationary crisis in our country.
What is Stagflation?
Stagflation is a sluggish economy coupled with a high rate of inflation and unemployment.
Stagflation occurs when an economy isn't growing but prices are, which is not a good situation for a country to be in. The word was coined during the inflationary period of the 1970's.
It is our belief that we will soon see far fewer foreign products imported into the United States, which will more than offset the diminished demand brought about by the recession, causing consumer prices to rise.
So while American consumers will be buying fewer products, they will also be paying substantially more for these products.
As the money supply in the U.S. grows and the liquidity in the system increases, people will need to spend the money as quickly as it is printed just to be able to afford necessities.
By the Federal Reserve lowering interest rates to 0% and increasing the money supply through bailouts, they are ensuring that we will soon see Stagflation and eventually Hyperinflation.
What is Hyperinflation?
Hyperinflation is basically a very high level of inflation that eventually spirals out of control until the value of the currency becomes practically worthless.
Hyperinflation is caused by a massive and rapid increase in money supply without being supported by growth in the output of goods and services. The result is too much of a currency chasing too few products which leads to prices of consumer goods skyrocketing to astronomical levels. The imbalance between the supply and demand for the currency leads to a run on the currency with everybody rushing to purchase real things for their money.
The most notable example of hyperinflation was in Germany during 1922 and 1923 when the average price level increased by a factor of 20 billion.
Here is a picture taken in Germany during 1923 of a woman feeding her stove with currency notes, which burned longer than the amount of firewood they could afford to buy with the money.
The most recent example of hyperinflation is in Zimbabwe, where they recently printed a $100 billion banknote which was only enough to purchase 3 eggs at the time it was printed.
We believe the United States has taken on many of the same monetary policies as Zimbabwe and we are now on an unavoidable path towards hyperinflation.
President Obama and Federal Reserve Chairman Ben Bernanke appear to be committed to printing an infinite amount of U.S. Dollars out of thin air to get our economy out of recession, and all they are doing is creating the upcoming hyperflationary crisis, which will be a much bigger problem than the present financial crisis we have today.
Our country could've survived a steep recession, which is necessary and healthy to clean out the excesses of the past decade. We eventually would've recovered from a steep recession, but it will be impossible for the U.S. to recover from a complete and total collapse in the value of the U.S. Dollar.
All of the wealth and savings in the United States could soon be wiped out completely. We are fast approaching a run on the Dollar and rush into Gold and Silver. Unfortunately, by the time the average American figures out the truth we will likely see Gold over $5,000 per oz and Silver over $300 per oz and it will be too late for them to preserve their purchasing power.
M1, M2 and M3 and Gold
M1 measures the most liquid forms of money and is limited to currency actually in the hands of the public. M1 includes checking accounts, travelers checks, and other deposits against which checks can be written.
M2 includes M1 plus savings accounts, time deposits under $100,000, and balances in retail money market mutual funds.
M3 includes M2 plus time deposits above $100,000, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the U.K. and Canada.
The chart above shows the M3 money supply (Green Line). M3 is an estimate of the total money supply of Dollars in our banks and economy. In the Spring of 2006, the Fed stopped publishing official M3 numbers to supposedly "save money". M3 was about $10.3 Trillion at the time. The Dollar, which is said to be a "unit of account", no longer has any accounting.
A private company began keeping track of M3, and M3 has since soared past $13.5 Trillion, hitting a high of 17% in annual change year over year. The Federal Reserve is accountable to you, but only if you do something about it, such as buying gold and silver. In 1971 when the rate of annual change reached a high of 16% we saw massive price inflation in the years ahead that sent gold through the roof to as high as $850 which when adjusted for inflation equals $2,300 per ounce! With Bernanke taking interest rates to 0% and simultaneously printing Trillions of Dollars out of thin air, we could see gold head to these levels or higher within the next 3 years.
Even though the U.S. Dollar isn't backed by gold anymore, anyone with Dollars could smarten up and start buying gold and silver on their own. China, for example, could spend their $1.3 Trillion U.S. Dollars reserves and start buying all the gold and silver they can find. We could see the Dollar seriously collapse overnight and there isn't a single thing the U.S. could do about it.
As you read this central banks are running short on gold and are starting to buy it up again. Currently, the U.S. "officially" has 261 Million ounces of gold. If U.S. money-$13.5 Trillion in M3- were backed by "U.S. gold", there would be over $51,724 Dollars for every one ounce of gold.
The total value of all the paper money and bonds in the world is about $100 Trillion, and all the gold ever mined in all of the human history is just under 5 Billion ounces. Think about it, world money, divided by world gold, gives a figure of $20,000 per ounce!
In summary, at about $1,000 an ounce, there is about $5 Trillion Dollars worth of gold in the world, but there is $500 Trillion in derivatives, $100 Trillion worth of bonds and $40 Trillion worth of paper money. The fact of the matter is, bonds and paper money will inevitably go down and gold must go up!
U.S. following the path of Zimbabwe
The Zimbabwe government announced this month that it has now slashed 12 zeros from its currency and therefore 1 trillion in Zimbabwe dollars is now equivalent to 1 Zimbabwe dollar. The old notes, 100 trillion being the highest (not enough to buy a loaf of bread), will remain valid until June 30th and then cease to be legal tender.
Zimbabwe's hyperinflationary crisis started in early 2006 when Gideon Gono announced the government had printed ZW$20.5 trillion to pay off IMF arrears and by mid-2006 they announced they would print another ZW$60 trillion to pay for a 300% increase in salary for soldiers and policemen.
In August of 2006, Zimbabwe slashed 3 zeros from its currency and 1 Zimbabwe dollar became equal to 1,000 of the prior Zimbabwean.
In June of 2007, Gideon Gono was ordered by President Robert Mugabe to print an additional 1 trillion of the new currency for civil servants' and soldiers' salaries that were hiked by 600% and 900% respectively.
In November of 2007, it was reported that the money supply of the revalued Zimbabwe dollars reached ZWD$58 trillion and by the end of 2007 the money supply reached ZWD$100 trillion,
On January 20th, 2008, Gideon Gono reported a money supply of ZWD$170 trillion and said it would reach ZWD$800 trillion by the end of the month.
Banknote supplier Giesecke & Devrient reported in March of 2008 that they were printing an astonishing ZWD$170 trillion a week and in July the company bowed to political pressure from the German government and stopped printing money for the Zimbabwe government.
In July of 2008 it cost ZWD$100 billion just to buy three eggs and some businesses were demanding that customers write a check for double the amount of a purchase because costs would go up by the time the check cleared.
Inflation rose from an annual rate of 32% in 1998 to an official estimated high of 231,000,000% in July of 2008 according to the country's Central Statistical Office,
It is amazing how quickly Zimbabwe's hyperinflationary crisis spiraled out of control and the same thing could happen in the U.S.
Over the last five months the U.S. Federal Reserve has printed over $1 trillion to acquire bad mortgage assets from private enterprises. To legitimize the process the Federal Reserve puts the toxic mortgage notes on their balance sheet as an asset and the money they deposit in the accounts of bailed out banks as a liability, but it is our belief these assets are worthless and the Federal Reserve is doing nothing more than printing the money out of thin air.
With Obama's $787 billion stimulus now passed, where will this money come from? None of it is budgeted for in the current fiscal year. Either the money will have to be borrowed from the rest of the world and our $11 trillion national debt will increase, or it will just be printed like in Zimbabwe.
When Federal Reserve Chairman Ben Bernanke speaks of "unconventional measures" to fund our stimulus plans and bailouts, you should think of it as nothing more than printing money and inflation.
Silver - More Upside Than Gold?
About 10 years ago, M3 was about $4 Trillion, and silver was at $5 an ounce. By the spring of 2008, M3 exceeded $13 Trillion, and silver was at $20 an ounce. Relative to the recent increase in money supply, silver is as cheap as it ever was and we believe along with gold it is an opportunity of a lifetime.
The historical price ratio of gold to silver shows that about 15 ounces of silver would buy one ounce of gold, a 15:1 ratio. Today, the gold to silver ratio is about a 70:1 ratio (with silver at about $14/oz and gold at about $980/oz.) If the gold to silver ratio returns to historical levels within the next 5 years, from 70:1 to 15:1, you could potentially make almost 5 times more money investing into silver rather than gold.
More than all of the silver produced by mines each year is consumed by industry, jewelry, and photography which leaves little to no room for substantial investment demand. In our opinion, a marginal increase in investment demand will drive prices sky high. Think about it, when gold is becoming too expensive to be used as money and paper money fails, silver is the only thing left to use as money. We have consumed nearly all the silver in the world, we continue to consume more than we mine, and the world has totally abandoned silver as money. But whether you know it , or can accept it, silver is money. Silver is the only commodity that can be used as real money besides gold. The problem is most people don't know what real money is. Let us break it down for you.
To function as money, a monetary item should possess a number of features:
To be a medium of exchange:
• It should have liquidity, and be easily tradable, with a low spread between the prices to buy and sell, in other words, a low transaction cost.
• It should be easily transportable; precious metals have a high value to weight ratio. This is why oil, coal, or water are not suitable as money even though they are valuable.
• It should be durable. Gold or silver coins are often mixed with 10% copper to improve durability, and coins are made with ridges around the rim to prevent coin shaving or debasement.
To be a unit of account:
• It should be divisible into small units without destroying its value; precious metals can be coined from bars, or melted down into bars again, with a low percentage cost.
• It should be fungible: that is, one unit or piece must be equivalent to another, which is why diamonds, works of art or real estate are not suitable as money.
• It must be a specific weight, or measure, or size to be verifiably countable. You must be able to weigh, measure, and count, your unit of account!
To be a store of value:
• It should be long lasting, durable, it must not be perishable or subject to decay. This is why food items, expensive spices, or even fine silks or oriental rugs, are not generally suitable as money.
• It should have a stable value.
• It should be difficult to counterfeit, and the genuine must be easily recognizable.
To be anonymous:
• Money should not be subject to government tracking
• It should be useable for purchases in a black market
• It should not require equipment, tools or electricity to use
• It should not require a mark, or image, to be valuable, but rather, be a just weight, and measure.
So, if you want to “make money”, you should try to acquire things that have the above characteristics aka “real money”.
Did you know the average one ounce of silver on eBay is selling for about $20 while silver is currently trading for only about $14 per ounce? This is an unbelievable 43% premium people are willing to pay on eBay for physical silver. This is an important sign that silver is undervalued and poised for a huge rally.
It is highly possible we could see silver move much faster than gold this year. If silver heads back to its historical gold to silver ratio of 15:1 and gold goes to $5,000 within 5 years, we could potentially see silver head to $333 an ounce. This is a 2,279% gain from the current price. In the shorter term if gold goes to $1,500 by the end of the year and the gold to silver ratio drops to 35:1, the price of silver could go to $42, a 200% gain from the current level.
Our $10 trillion bailout exposure will lead to Hyperinflation.
Between the loans being backed by worthless assets, equity investments into companies with negative shareholder equity, guarantees on derivatives and other collateral, along with other bailouts and stimulus plans, the Federal Reserve and U.S. Treasury have so far taken on approximately $10 trillion in exposure during the current financial crisis.
We are absolutely outraged that Congress supported the $700 billion bailout along with Obama's $787 billion stimulus, especially considering that these were broad mandates with no checks and balances. It is our belief that almost all of the $10 trillion in exposure so far, will indeed be spent.
An equity infusion into a company with a terrible balance sheet like Citigroup or Bank of America, is nothing more than pouring the money down the drain. There is absolutely no chance of this money ever being recouped.
The only right decision the government has made so far during the financial crisis was allowing Lehman Brothers to fail. While many incompetent people in Washington point to the failure of Lehman Brothers as being the cause of the collapse in the equity markets, the decline in stock prices we have seen is simply the free market trying to correct the imbalances and excesses of the past decade.
By bailing out every single financial institution since the failure of Lehman Brothers, the U.S. government is insuring the collapse of the U.S. Dollar down the road, which will be the end of the whole entire financial system.
To understand just how big the $10 trillion in exposure is, it is larger than the money spent for World War II, NASA's all time budget, Vietnam War, Iraq War, New Deal, Korean War, World War I, S&L Crisis, Afghanistan War, Marshall Plan, Gulf War, Civil War, American Revolution, War of 1812, and the Louisiana Purchase combined.
In fact, the entire cost of World War II over five years was less than half of the pledges made by the Federal Reserve and U.S. Treasury over the past three months.
Up until now, the U.S. Treasury has been lucky enough to fund most of our spending by selling new Treasuries to foreigners seeking refuge and safety in the U.S. Dollar and government bonds.
However, we are approaching a point where the rest of the world is no longer going to want to fund our irresponsible spending. We already have an $11 trillion national debt with no way of paying it back. The world will soon figure out that it is time for them to cut their losses with the U.S. and the Federal Reserve's only choice will be printing the money out of thin air.
We believe there will soon be a huge rush out of the U.S. Dollar and Treasuries and into Gold and Silver. We are on a path towards hyperinflation and if we are going to avoid it, Obama needs to reverse course immediately by ignoring our current recession and doing everything possible to preserve any confidence that is still left in the Dollar.
The World is Awashed with Dollars
We are now at a point where the world is awashed with U.S. Dollars and the Dollar has become the largest bubble the world has ever seen.
It's a real shame that those who lost most of their money in the stock market and Real Estate bubbles, and are now finally selling out after these markets have already collapsed, are positioning themselves to get wiped out all over again through massive inflation.
We believe both the U.S. stock and housing markets are likely to fall another 30% nominally from these levels. However, priced in Gold, which is real money, they will likely fall 80% or more in the years ahead.
As the inflation being created today starts to work its way through the system, U.S. stocks and Real Estate will eventually start rising in value again, but Gold will rise at a significantly faster rate. Silver, we believe, could eventually start rising at an even faster rate than Gold.
Most of the money that is presently being created by the Federal Reserve is being hoarded during this temporary deflationary phase. As the government continues to bailout every bank in existence and pass larger stimulus's, all of the Dollars being squirreled away around the world will soon come out all at once.
With many retail stores in the U.S. liquidating their inventories and going out of business, there will be a lot less products available for purchase and combined with the storm of Dollars, prices of everything from food to clothing will go through the roof. The government, instead of dealing with the cause of rising prices, will likely institute price controls. This will only exacerbate the problem and lead to empty shelves.
We cannot solve problems that were created by getting into too much debt, by multiplying our deficits and getting into much larger amounts of new debt. It will be impossible to all of the sudden "mop up" the massive amount of Dollars being printed. We are practically guaranteed to see substantially higher interest rates in the future, that will raise the annual interest on our national debt to trillions of Dollars. The United States will have a choice to either default on its debt or create Hyperinflation.
The wealthiest countries in the future will be those who control all of the world's Gold production. The world's largest creditor nations, mostly Asian countries, will have the best chance of accomplishing this. There are some Gold and Silver stocks that could gain by thousands of percent in the years ahead. With GE, formerly the world's largest company, headed towards bankruptcy, companies like Newmont Mining and Barrick Gold could be on their way towards becoming the world's new largest companies of the future.
The only good thing that will come out of the upcoming inflationary crisis for our country: students that were conned into investing hundreds of thousands of Dollars for worthless college degrees will be able to easily pay off their debts. Hopefully they will learn how to become a Gold miner or a farmer, and produce real things for our country, instead of destroying wealth like those on Wall Street and in Congress have done.
The Federal Reserve hasn't learned from its mistakes
The United States today is in a short-term deflationary phase caused by forced liquidations, deleveraging, going out of business sales, and other temporary factors.
It is our belief that the monetary policies of the Federal Reserve and United States Treasury will soon put an end to this deflationary phase, and we will see massive inflation in the U.S. that could ultimately lead to Zimbabwe-style Hyperinflation.
Total funds allocated by the Federal Reserve and United States Treasury during the financial crisis have now reached $10.3 trillion. Although only $2.6 trillion or 25.5% of these funds have so far been spent, it is our belief that the Federal Reserve has been taking worthless assets onto its balance sheet. Not only is it possible that the whole $10.3 trillion will be spent, but this could be just the tip of the iceberg.
The United States currently has an $11 trillion national debt which it has no way of paying back. Sure, we have an annual GDP of $14 trillion, but most of this comes from consumption and not production.
In the year 2000 when the United States was facing a bursting dot-com bubble, former Federal Reserve Chairman Alan Greenspan lowered interest rates from 6.5% down to 1%. The inflation Alan Greenspan created did not go back into dot-com stocks, but instead went into Real Estate and created the housing bubble. By current Federal Reserve Chairman Ben Bernanke taking interest rates from 5.25% down to 0-0.25%, we believe the Federal Reserve did not learn from its previous mistakes and is creating the next bubble. This time, instead of money flowing back into Real Estate, it is our belief that Americans will want tangible assets for their Dollars that they can hold in their hands, and we could see a rush into Gold and Silver.
The world is currently hoarding their U.S. Dollars because they perceive it as a safe haven. The fact is, the U.S. Dollar is fundamentally no different than the Zimbabwe Dollar. It is a fiat currency that is backed by nothing but confidence that its supply will be kept scarce and it will always be accepted as money.
However, with Ben Bernanke and Treasury Secretary Timothy Geithner seemingly willing to bailout every single financial institution in America due to unfounded fears of systemic risk, the confidence people have in the U.S. Dollar could quickly evaporate.
House Speaker Nancy Pelosi said on Tuesday that another stimulus package might be needed to help the economy and she directed House Appropriations Committee Chairman David Obey to begin drafting a new stimulus proposal.
Well, we all know that President Bush's $170 billion stimulus led to oil and food prices surging to record highs. We haven't even begun to feel the inflation that is coming from President Obama's $787 billion stimulus. With another stimulus already being considered and no one there to keep Nancy Pelosi in check, we are practically guaranteed to see massive inflation down the road that could wipe out the savings of most Americans.
The United States is for all intents and purposes bankrupt and the main reason our country has been able to continue operating with an $11 trillion national debt and $55 trillion in unfunded liabilities is the Dollar's status of being the world's reserve currency.
As the world's reserve currency, U.S. Dollars must be held by central banks around the world in order for foreign governments to pay international debts and purchase important commodities like Oil.
The U.S. Dollar became the world's reserve currency because it was backed by Gold. Today, it is backed by nothing but faith that it will always be accepted as money. With $11.4 trillion now being allocated by the Federal Reserve and U.S. Treasury for bailouts and stimulus's, the world is beginning to realize that the purchasing power of their U.S. Dollar reserves is about to be drastically debased.
Russia announced last week that they are calling for a discussion at the April 2nd G20 summit in London on how to replace the Dollar as the world's reserve currency. China followed this week, also calling for a replacement of the Dollar; even going as far as to suggest using a special basket of currencies comprised of Dollars, Euros, Sterling and Yen to serve as a super-sovereign reserve currency that would not be easily influenced by individual country's policies.
While China's idea would be a step in the right direction; ultimately, we believe the world needs to return to a currency that is backed by Gold. If the U.S. had remained on a Gold standard, the world would not be in the financial crisis it is today because we wouldn't have had the dot-com and Real Estate bubbles of the past decade.
Its insane how there is now talk of creating a new Systemic Risk Regulator in the U.S., when it is the Federal Reserve itself that created the booms and busts with artificially low interest rates. Systemic risk is a fallacy. Sure, the collapse of Lehman Brothers brought down some other financial firms, but so what. Companies like AIG need to fail in order for the economy to start rebalancing itself and have a chance of ever recovering.
The only thing our country can't afford to have fail is the Dollar, because millions of baby boomers are getting ready to retire and will be relying on their pensions and savings to live. The politicians in Washington don't care if these people are able to retire or not, all they care about is keeping our fake economy propped up for another year or two in order to get reelected.
They will soon learn that you can't reinflate a bubble as Americans start to wake up and begin pouring their Dollars into real, hard assets like Gold and Silver. Don't be the last person out of the Dollar.