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Make no mistake; the developed world is drowning in debt and there are only two viable options – a global economic depression or very high inflation. It is our contention that the policymakers have chosen the latter option and over the following years, we will experience the trauma of severe inflation. Words: 869
So says Puru Saxena (www.purusaxena.com) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Saxena goes on to say:
Look, the American government is staring at total obligations of US$115 trillion, America’s debt-to-GDP ratio is off the charts and the American public is also up to its eyeballs in debt. Under this scenario, you can bet your bottom dollar that the American establishment will try to reduce this debt overhang through a process known as monetary inflation. Over the past two years, the monetary base in America has expanded from US$827 billion to an astonishing US$1.93 trillion! Up until now, this surge in the monetary base has not permeated through the broad economy but once the money velocity picks up, the money supply will zoom and the end result will be surging price inflation.
It is notable that America is not alone in pursuing inflationary policies; most nations all over the world are printing money and debasing their currencies. In this era of globalisation, no country wants a strong currency and everyone is engaged in competitive currency devaluations. Given this reality, we firmly believe that this money and debt creation will cause an inflationary holocaust over the coming years.
Now, we are aware that many prominent commentators are still calling for deflation and their argument is based on the strength in American Treasuries. “After all, how can inflation be a problem when bond yields are so low?” seems to be their reasoning. Well, these deflationists seem to be missing the point because the American Treasury market is no longer a free market and we would argue that the Federal Reserve’s intervention is largely responsible for keeping bond yields artificially low. It is noteworthy that over the past several months, the Federal Reserve has purchased most of the newly issued American Treasuries. It goes without saying that the American central bank is engaged in this desperate act in order to keep interest-rates low. However, it is buying these Treasuries by creating money out of thin air. This is inflationary.
If our assessment is correct, somewhere down the road, the Federal Reserve will lose its battle and long-dated American Treasuries will plummet in value. As more and more bond investors wake up to the looming inflationary menace, they will start demanding a higher rate of return on their capital. When that happens, the dyke will break and the Federal Reserve will become irrelevant.
We have no doubt in our minds that over the next decade, various central banks will intensify their money-printing efforts and Mr. Bernanke will lead by example. After all, America has run out of choices and if the Federal Reserve does not inflate away this mountain of debt, the biggest sovereign default in history is guaranteed. Now, given the ability of the Federal Reserve to create confetti money, we are convinced that it will opt for the inflation tonic. Remember, inflation dilutes the purchasing power of each unit of money and it will make America’s debt more manageable. Of course, this inflationary agenda is not a secret and this is why many creditor nations with huge reserves are beginning to diversify out of the American currency.
It is our observation that throughout history, monetary inflation has caused asset prices to rise and this time should be no different. In the past, when inflationary expectations spiralled out of control, hard assets were the prime beneficiaries and this trend is likely to remain intact in this inflationary episode.
If our assessment is correct, over the coming years, stocks, precious metals, commodities and real-estate will appreciate in value versus paper currencies. Furthermore, on a relative basis, we expect precious metals and commodities to outperform all other asset-classes. Conversely, we anticipate that cash and fixed income instruments will probably turn out to be the worst assets to own over the next decade.
Bearing in mind the looming inflationary nightmare, we urge you to protect your purchasing power by allocating capital to precious metals and commodities related businesses. Finally, we suggest that you consider allocating a portion of your capital to the fast growing economies in Asia (China, India and Vietnam).
*http://www.321gold.com/editorials/saxena/saxena121809.html (Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com.)