For the last 80 years or so, financial theory has held that inflation and deflation were mutually exclusive events. We’ve now seen that idea go up in smoke as deflation affects home prices and incomes in the US at the very same time that we experience inflation in energy and food prices courtesy of the Fed’s insane money printing.
Indeed, Ben Bernanke is a disciple of the belief that to battle deflation, one must inflate the financial system/ economy. Never mind that history has shown this to be total bunk (monetization has always inevitably led to higher inflation), Bernanke is an academic and has devoted his life’s work to this misguided belief.
As a result, the man with the greatest control over the value of the US Dollars you own is a man who is so hell-bent on proving his theories that he can and is completely ignoring hard evidence that refutes them.
Case in point, Bernanke and the Fed continually state that inflation is “contained” or “transitory.” This is simply incredible when you consider that food prices, energy prices, rent, and other measures of the cost of living are up double-digit percentage points year over year.
In fact, nothing proves just how insane these people are (either that or they’re pathological liars) than the claim that because iPads are other technological items are becoming cheaper, that overall the cost of living is not increasing much.
Yes, you read that correctly. High ranking members of the US Federal Reserve believe that because a one time purchase of an iPad is cheaper, the increase in the daily cost of food and energy is balanced out.
I bring all of this up, because the Fed is so afraid of de-flation that it is ignoring the clear signs that we are heading towards massive inflation and possibly even hyperinflation.
Throughout history all episodes of hyperinflation have been caused by the same actions: the monetization of debt to fund massive deficits.
This policy works temporarily until the country in question loses credibility in the bond market (bond investors are no longer willing to lend it money). At that point the country enters a currency crisis and experiences hyperinflation.
Sounds familiar, doesn’t it?
Indeed, the US Fed bought 73% of all debt issued last year to fund the US’s deficit. The only reason we’ve been able to get away with this is because the US has the most credibility of any country in the world (we’ve never defaulted on our debt).
However this credibility only goes so far. And we’re on very very thin ice: a 10% deficit and a Debt to GDP ratio over 100%.
I will be blunt here, we are following the precise formula for hyperinflation to a “T.” The only reason it hasn’t hit yet is because the US hasn’t lost all credibility yet. But at this rate, it’s only a matter of time.
So if you’re no preparing for inflation already, you need to get moving now. The Powers That Be are well aware that we’re in big trouble. Consider Mitt Romney’s recent admission that a former head of the NY Fed admitted that as soon as the Fed stops buying all the US debt we’ll have a failed Treasury auction and interest rates will soar.
Make no mistake, the time to prepare for higher inflation is NOW before this happens.
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Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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