Monday, February 2, 2009

Nuking Deflation

Deflation is our worst nightmare. In deflation the cost of everything goes down. Goods and commodities get cheaper. Doesn't sound that bad, does it?

But, here's the kicker. In a deflationary environment everything gets cheaper but the amount of debt you owe stays the same. So, in relation to everything else your debt actually feels like it goes UP.

We don't need that right now because the country, the government, the consumers are all awash in debt. During deflationary periods (which is what we have right now and have had for months) what you owe on your assets gets heavier while the value of your assets shrinks. This is the sub-prime mortgage fiasco on steroids.

We have to create inflation. It is the only way to make the debt manageable because as things inflate the perceived weight of the debt comparatively goes down.

Jack Schannep sent his subscribers a mind-blowing graph today. This the "monthly reserves and monetary base" for the Federal Reserve Bank in St. Louis.

Click the graph to enlarge it. Briefly, in 1918, the monetary base was $4.8 billion. By 1942 it had reached $20 billion. $50 billion in 1966. $100 billion in 1976. $200 billion in 1985. $500 billion in 1997. In January 2008 it stood at $855 billion. Then things got really crazy. By October it was at $1.1 TRILLION. And at year end 2008 the monetary base was a whopping $1.7 trillion. See all the data here.

The exponential rise in the monetary base represents the enormous and unparalleled gravity of our financial crisis. It is almost beyond comprehension. The Fed is determined to flood the economy with unheard of amounts of cash and credit and liquidity. Under ordinary circumstances this could create hyperinflation. Yet the clutches of deflation remain firmly around our necks...along with historically high public deficits and personal debt. It's almost like trying to force a glass of water down a drowning man.

I hope they win this battle. I want inflation. Besides having cash, my largest investment for the past 7 years has been in gold. If things go according to plan my gold - which has already more than doubled in value - should at least triple, maybe more. If not, well, then we're all in a world of shit.

The current monetary policy by Fed Reserve chief Ben Bernanke is nothing short of a nuclear attack on deflation. The crazy thing is there is no alternative. We asked for this.

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