Big Inflation Coming 3
Well, Americans voted and the winner is inflation. Half our voting populace inexplicably decided to award a second term to Obama. Four more years of mind-boggling record deficits and record national debt growth! Obama's Administration spent roughly 50% more than the government took in, which can essentially only be financed in two ways. Borrowing from foreigners and running the printing presses.
The latter of course is pure inflation. And the Fed bent over backwards with its quantitative-easing campaigns to buy massive amounts of the Treasury debt Obama ran up on our children's credit cards. It created trillions of new fiat dollars out of thin air to purchase Treasuries to finance Obama's trillion-dollar-plus annual deficits. And with Obama sticking around, this dangerous trend is only going to accelerate.
The ironic thing is inflation wreaks the most damage on the people with the least. Its corrosive effects on purchasing power are felt most at the margin, among the poor and minorities whose overwhelming support of Obama carried him to victory. They apparently didn't care about the crushing unemployment rates among blacks, Hispanics, and the young from Obama's policies, but they will care about inflation.
Inflation is a simple supply-and-demand phenomenon, economics 101. When the supply of money grows faster than the economy, the underlying pool of goods and services on which to spend it, it takes more money to buy anything. Relatively more dollars are competing for relatively fewer things, bidding up their prices. With more dollars in circulation, each one is worth less. So prices inexorably start rising.
For most of the half of Americans working hard enough to actually owe income taxes, inflation's price impact is generally manageable. I don't care if my bills double next year, I can afford it. But for everyone on fixed incomes, including all the Obama supporters receiving debt-financed government checks for welfare or social security, inflation is devastating. Deficit-driven rising prices will slaughter them.
Unfortunately inflation is widely misunderstood, which is just the way the pro-big-government Democrats want it. They need to spend far more money than the productive American taxpayers can pay in order to bribe the unproductive lazy for votes. And if they can convince the Fed to print money to "pay for" all this excessive spending up front, the tremendously negative economic impact can be hidden for years.
Inflation is the most nefarious and regressive stealth tax possible. It slowly strangles and starves the poor, who lack the resources to avoid it. Meanwhile the rest of us simply deploy our capital in tangible assets like gold, silver, and real estate that will preserve our purchasing power through the inflation. So Washington has a huge vested interest in keeping Americans as complacent as possible about inflation.
Thus the primary inflation gauge, the US Consumer Price Index, is heavily watered down. A wide variety of statistical manipulation and subterfuge is deployed to make prices look like they aren't really rising as fast as they are. Per the CPI, prices have only risen 9.6% since Obama took office. This is about 2.4% a year. But if you look at your own financial records, you'll find your expenses rising far faster since then.
Many contrarians believe the true price-inflation rate in the States is closer to 8% to 10% annually, which certainly seems far more realistic given how fast the costs of living are rising. One of the best ways to get a read on future inflation is to look at its cause, monetary expansion. If you want to estimate how much smoke is going to be produced, start by investigating the fire. The Fed's monetary growth has raged.
If the Fed insists on helping to finance Obama's rampant overspending by ramping the US dollar supply much faster than the US economy is growing, then rising prices are inevitable. Once this new money has been created by the Fed, it is baked into the pipeline. History has proven countless times it will eventually adversely impact price levels as too many dollars start chasing too few goods and services.
The broad measure of the US money supply today is known as MZM, or money of zero maturity. It is a liquid measure that includes all currency, checking accounts, savings accounts, and money-market accounts redeemable on demand. It excludes time deposits such as certificates of deposit. Since it is the best US-dollar-supply yardstick available today, it is also probably the best indicator of future inflation.
This first chart looks at MZM over the past 9 years, Bush the Younger's last term and Obama's first. The yellow line is the actual MZM money supply reported weekly by the Fed, in trillions of dollars. The blue line shows its absolute annual growth. Finally for comparison's sake, the year-over-year growth of the CPI is also shown. Though its custodians try to hide rising prices, it is somehow still widely accepted today.
During most of Bush's second term, before he appointed the notorious inflationist Ben Bernanke to take the Fed's helm, MZM growth tracked closely with CPI growth. The Fed gradually increased the money supply, so prices only gradually rose. Rather conveniently for Bernanke, an academic with a long pro-inflation record, the Bureau of Labor Statistics changed its CPI's methodology in mid-2006 shortly after he assumed office.
Politicians get uncomfortable with headline inflation above 4%, as Americans start to become aware of it. It also drives up the interest rates the US Treasury has to pay on its debt, making borrowing more expensive so politicians are forced to spend less. So the BLS bowed to its political masters and revised its index to more aggressively edit out rising prices. Maybe if it would simply claim inflation wasn't a threat, its real-world impact would magically vanish.
Bernanke started seriously ramping MZM growth in late 2006 and 2007 in response to the subprime crisis. His academic career had been spent asserting that no matter what the problem, injecting more money into the system is the solution. He believes the Great Depression happened because there was too little inflation! And as the mighty Fed Chairman, he could put his theories and research to the test.
The MZM growth rate surged in 2007 and early 2008 as a global-stock selloff arrived hot on the heels of the US mortgage meltdown. The broad US money supply rocketed by 8%, 10%, 12% annually. At its peak growth in early 2008, MZM was up a staggering 16.4%! The number of dollars in circulation ballooned by nearly a sixth in a single year, yet the underlying US economy in which to spend them lagged far behind.
Soon general prices were rising so fast that even the heavily massaged CPI couldn't mask reality. So its growth started surging dramatically in late 2007 and early 2008, ultimately hitting 5.6% in the summer before the stock panic. There was still a huge gap between true monetary inflation and its popular gauge, which was pretty suspicious given the 2006 methodology change to blunt the CPI's price-level read.
The Fed's gigantic money-supply growth spike in response to the mortgage crisis was never unwound, and shortly after 2008's once-in-a-century stock panic hit. So the Fed responded again the only way it knew how, flooding the system with new fiat-paper dollars. When your only tool is a hammer, everything looks like a nail. Since the printing press is the extent of the Fed's arsenal, it is quick to spin it up for anything.
MZM growth remained staggering during 2009 in that first post-panic year, averaging 10.2%. But once things stabilized a bit in the markets, the Fed tried to turn off its spigots before all its new dollars kindled some hellacious price increases. But MZM growth only went negative briefly, which barely made a dent in the existing money supply. The Fed's epic 2007-to-2009 money-supply growth stayed in the system!
Thanks to plunging commodities prices, which have nothing to do with monetary inflation, the BLS reported sharply-falling CPI growth during and after the panic. But since all that new money remained in the pipeline, it soon started to manifest itself so decisively that even the BLS's statisticians couldn't massage the rising prices out of their reports. Ever since, even CPI inflation has been trending higher.
Largely in direct response to stock-market weakness, the Fed launched a series of debt-monetization campaigns between early 2009 and today. Under the benign-sounding label of quantitative easing, the Fed created trillions of dollars out of thin air to buy up mortgage and Treasury debt. Make no mistake, if Bernanke's Fed hadn't done this there is no way Obama's deficits could have ballooned so gigantic.
Without the Fed's inflation directly monetizing Treasuries, demand would have been much lower and therefore interest rates would have been much higher. The free markets would have forced the profligate Obama Administration to act more responsibly, to get closer to living within its means like everyone else has to. But thanks to the Fed, Obama was able to run record deficits to mushroom our debt by record amounts.
Broad money-supply growth reflected this, surging back up to the 8%-to-10% range in recent years that was previously only seen in severe crises. This excessive growth resulted in a massive new surge in the US-dollar supply. All these new dollars have to go somewhere, so they are bidding up the prices of goods and services as the stunted Obama economy struggles near stall speed. Big inflation is already baked into the pipeline!
Even the watered-down CPI is reflecting this as it gradually trends higher. And since half of Americans apparently loved Obama's crappy economy and record deficits and debt growth, this trend is only going to continue. Obama will keep spending vastly more than the taxes Washington can take in, which will force his lapdog Fed to keep conjuring dollars out of thin air to inject into the system to monetize this debt.
Since Obama's dark reign began in January 2009, the broad MZM money supply has soared 20.7%. This is far closer to the true inflation rate than the CPI's 9.6% rise. But for some technical reasons from the way the Fed calculates MZM, I suspect the true Obama inflation rate is higher. Between the day he took office and this week, the ultimate inflation investments of gold and silver rocketed 100.6% and 185.1% higher!
Some economists argue that the narrow money supply is a superior inflation indicator to the broad money supply. And the narrowest measure is known as the monetary base, or M0 (zero). It is simply the physical currency (paper and coins) in circulation, currency in bank vaults, and the reserves commercial banks have on deposit with the Fed. This is the base of all money we use for all our daily transactions.
It is called the monetary base because it is the foundation from which fractional-reserve banking multiplies the money supply. It is the high-octane core that ultimately controls the size of the rest of the money-supply measures. And as this half-century chart shows, the Bernanke Fed's growth of the monetary base has been staggering beyond belief. This seriously heralds big inflation coming.
For 48 years before the stock panic and the plague of Obama, the average annual growth in M0 was a fairly reasonable 6.0%. This wasn't too far beyond the baseline growth in the US economy, so inflation was moderate. But during the stock panic, Bernanke truly panicked. This great inflationist literally doubled the monetary base, sowing the seeds for incredible inflation whenever the multiplier kicks in.
Though this unsustainable growth soon abated, it recently surged again. This resulted in post-panic average M0 growth of 34.6% annually! Note that the Fed never unwound either the gargantuan panic spike in the monetary base nor the recent smaller spike. All this incendiary inflation fuel is still in the system. Shortly before Obama took office M0 was near $0.9t, and since then it has nearly tripled to $2.6t!
Now pro-big-government Keynesian economists often argue that money-supply growth doesn't matter if the banks aren't making loans and effectively multiplying it. And that may be true over the short term. But all throughout history all around the world, governments and central banks have found that the inflationary genie can't be stuffed back into the bottle once it is unleashed. There is no turning back.
With both narrow and broad money supplies surging dramatically higher in recent years, price levels will keep on rising. The dollar supply has grown vastly faster than Obama's weak economy, leaving relatively more dollars chasing relatively fewer goods and services. Record monetary growth, the underlying fire, will eventually create record inflation, the billowing smoke. Bernanke's financing of Obama's overspending guarantees it.
This past week Americans had a rare opportunity to reverse this monetary disaster, to force Washington to live within a budget and spend less than it takes in. But half of our peers decided the economy didn't matter. They were more worried about whether or not they could murder their babies in the future, or celebrate the destruction of traditional family values, or do drugs, or live illegally in the US, or get paid from their neighbors' incomes for sitting around doing nothing.
So we will all reap the whirlwind. Obama's victory, no matter how narrow, validated his failed policies. Americans foolishly rewarded him for his disastrous economic mismanagement, guaranteeing more of the same. He will continue to run huge deficits that fuel enormous debt growth. And the Fed will continue creating new money out of thin air to partially finance this excessive government spending.
Obama's first term saw big inflation even though the manipulated CPI attempted to obscure it. Don't take my word for it. Go back and review your own financial records from late 2008, how much you were paying for housing, food, gasoline, utilities, education, insurance, and other necessities of life. After just one Obama term, the Fed flooding the world with dollars has dramatically raised general price levels.
And with Americans just patting Obama on the head and telling him great job, give us four more years, what will he do? Keep on overspending, aided and abetted by the Fed. The inflationary fruits of Obama's first term have yet to fully roost, and these problems will be greatly exacerbated by his second. Big inflation is coming, and ironically it is going to hurt those the most who voted for this incompetent fool.
Thankfully while Obama's poor supporters starve as inflation prices food and shelter out of reach for them, the rest of us have a fantastic refuge. Gold and silver. As mentioned above, during Obama's first term the gold price doubled while silver nearly tripled! And since it takes money-supply growth time to work its way through the system and bid up prices, much of the last four years' inflation is still coming.
And with the Fed fully onboard the big-government bandwagon with its inflation engine already running full steam, the next four years look to be far worse. So if you aren't already invested in gold, silver, and the stocks of their best miners, don't delay. This imperative is even more urgent since Obama's win will almost certainly bludgeon the general stock markets into a new cyclical bear market now due anyway.
At Zeal we are ready. We've been loading up on fantastic high-potential gold stocks and silver stocks since this past summer, when their prices slumped to incredibly undervalued and oversold levels. We continued adding new positions aggressively in October during a short-lived gold seasonal slump. And now since half the voters wanted more of Obama's disastrous policies, inflation will be supercharged.
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The bottom line is big inflation is coming. As Obama recklessly spent 50% more than our government could take in, the Fed inexplicably decided to aid him in running these record deficits. So it accelerated its monetary growth towards panic-like levels, even directly creating new dollars to monetize Treasuries. All of this inflation is already baked into the system, and it will inevitably keep bidding up general price levels.
And then half the American electorate bizarrely decided trivial peripheral issues were more important than feeding their families. So they ordered more of the same, and won. Now we are in for four more years of gigantic deficits and debt growth, and enormous monetary expansion to partially finance it. The best refuge for prudent investors is the precious metals. They are poised for a massive inflation rally.
Nov 09, 2012
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