Inflate, Inflate, Inflate, Stagflation!
Economics / Inflation Sep 20, 2007 - 09:15 PM GMT
Larry Edelson writes : What concerns me most today is not the mortgage meltdown in the U.S. That's because it's not the cause of our country's economic problems. Rather, the mortgage meltdown and credit market panic are just symptoms of a much deeper, underlying disease.
That disease is the fiscal and monetary fiasco I have been warning you about for the last several years. Specifically, I'm talking about Washington's reckless spending. The government is racking up public debts like there's no tomorrow!
As it stands right now, they're in hock to the tune of some $55 TRILLION!
The private sector isn't any better off. A lot of U.S. citizens have no savings. They're up to their eyeballs in credit card debt. And now, the assets they were counting on to provide security — their homes — are falling in price like lead shoes.
It's too bad, because this is one great country. But I'm afraid that we're all headed for some tough times ahead …
There are going to be scores of debts going bad, both at the corporate and individual citizen levels. There are going to be tens of thousands of people losing their homes in foreclosure.
And on top of all that, every one of us is going to lose real purchasing power in the years ahead. Here's why …
Washington Has One Main Weapon to Fight Off this Potentially Fatal Economic Blow: A Continual Decline in the Value of the U.S. Dollar
This should be abundantly clear now, especially since the Fed cut rates on Tuesday by a full half-point, not giving one hoot about the international value of the greenback.
Bernanke and company have no choice, of course. The economy cannot grow its way out of the mess it's in now. Not with so much competition coming from Asia and other emerging economies.
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| Bernanke's rate cut hurt the dollar's international value. |
The only choice central bankers and politicians have is to make darn sure that inflation rises. It's the only way to help alleviate the debt burden that is coming home to roost.
That's because inflation, by its very nature, makes asset prices appreciate. And when prices rise, debt burdens are eased.
Let me show you how a weaker dollar and inflation help alleviate debt woes …
Say you bought an asset for $1 million, and you borrowed $900,000 to buy it. Further, let's say the price of the asset is now falling. Maybe the property you bought is worth $800,000, or the business you bought is turning south and worth only $700,000.
The big problem: You still owe $900,000. The value of your asset is falling, but your debt stays the same.
Now, take the opposite situation. In an inflationary environment, the price of the property you bought may jump to $1.2 million … the business you bought is cranking, and is now worth $1.5 million.
So there's no problem. The $900,000 that you borrowed is covered by the rise in the asset price, and your balance sheet looks good.
The lesson: As long as central bankers can get prices back up, all is well — until the next crisis.
So, how do they get prices to rise? Simple. Whether they admit to it or not, they devalue the purchasing power of the dollar. This has been made easy in the absence of a gold standard.
And let me tell you, the dollar IS getting creamed, AGAIN !
Just last week it plunged to an all-time record low against the euro, and a 15-year low against a basket of the world's major currencies.
And look — by way of a number of key charts — what's happening to
inflation …
Chart #1: Gold
Probably the most sensitive inflation barometer in the markets, gold is soaring. As I put the final touches on this issue, the precious yellow metal had traded as high as $735 an ounce — a 25-year high!
Signaling inflation ahead? You bet it is!
Chart #2: Oil
Black gold is also soaring, hitting as high as $82 a barrel this week, an ALL-TIME record high. Think it's solely due to the hurricane season or worries about Iraq and terrorism? Think again!
Oil prices are rising because demand all over the world is continuing to grow … because oil supplies are low … and because the value of the U.S. dollar is plunging.
In my thirty years of trading the markets, rarely have I seen a chart as bullish as this oil chart. There's no doubt in my mind that my $100-a-barrel oil target will be reached by the end of this year, if not sooner.
Chart #3: Copper
If the global economy were softening, there is no way copper would be trading at over $3.50 per pound, a mere $0.66 below its all-time record high price of $4.16 per pound set in May 2006.
Copper prices are still strong because A) China and India continue to grow like crazy, putting severe upward demand pressure on the copper market and B) the dollar is plunging, forcing the dollar price of copper to rise.
Think gold, oil and copper are the only assets going up in price? Well, think again because the dollar is falling so badly (and demand — mostly from Asia — is rising so rapidly), that the prices of many other natural resources also continue to soar.
For example, wheat prices reached an all-time high of $9.1125 on Sept. 12 and have more than doubled in the past year. And in the past year, soybean futures have surged 74% to a three-year high of $9.77.
All told, one of the very best measures that inflation is really jumping is …
Chart #4: The CRB Index
This is a basket of 28 different tangible assets and natural resources. In the past seven months alone, it's up 14%!
So, you see, the strategy is working, from Washington's perspective. The dollar is falling … inflation is picking up steam … and that means ultimately that all of the country's debt problems will be a heck of a lot easier to manage.
There's only one BIG problem with all this — YOU are paying the price!
Washington is deliberately devaluing the purchasing power of every dollar you own to make this happen. They are effectively confiscating your wealth to help the country pay off its debts and to kick start the economy again, including the housing market.
Again, they have no choice. It's the only way they can do this. But you DO have a choice. You can either …
A. Let it happen to you. Watch your dollars be devalued, and purchase less and less in the months and years ahead.
Or …
B. You can recognize what Washington is doing and take action to protect your net worth — even profit — from it.
Naturally, you'll choose B, unless you just don't care about your money. And the best way I know of to accomplish those goals is by investing in the natural resource markets.
They are the assets that will rise most responsively to the falling dollar. They are the assets that can both protect your purchasing power, and put you in a position to profit from the Fed's actions.
Best wishes for your health and wealth,
by Larry Edelson
P.S. If you're already a Real Wealth Report subscriber, hold the course with the recommendations I've given you. And if you're not yet a subscriber, click here for my detailed analysis of why natural resources hold humongous profit potential.
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