Alex’s notes: This is an outstanding article on inflation. Understanding what inflation truly is holds the key to understanding what is happening in our economy, and how wealth will be transferred to a select few over the next decade.

Inflation Is Baked Into the Cake
By David Galland
17 Mar 2008 at 03:45 PM GMT-04:00

STOWE, Vt. (Casey Research Advertorial) — The word “inflation” covers two different concepts, and it’s important to keep them separate. One concept is monetary inflation, which is when the supply of money increases faster than the supply of goods and services. The other concept is price inflation, which is an increase in the overall level of prices for goods and services.

The relationship between the two is the relationship of cause and effect. Monetary inflation causes price inflation. But while almost everyone sees price inflation when it happens, few people notice the monetary inflation that is causing it. And so they tend to blame the producers of goods and services for higher prices - rather than the money-creating government that is the true culprit.

And make no mistake, as government spending continues on a steep ascent, piling up debt, there is no question that the government has to continue creating money like there’s no tomorrow. This situation is not unique to the U.S. Quite the opposite: the adoption of fiat monetary systems is now universal.

The results of over three decades of unhindered monetary creation are increasingly being felt in a rising tide of price inflation, whether it be the 7.4% increase in producer prices reported by the U.S. in the most recent quarter, or the news just out of China that consumer price inflation now tops 8% and is worsening … or, in the most extreme example, Zimbabwe, where the utter lack of restraint by an insane dictator now burdens that economy with an inflation rate of over 100,000% annually.

The Casey Research Global Inflation Survey

To get a better sense of things, Casey Research recently conducted a survey of the world’s top 30 economies, broken down on a region-by-region basis. The snapshot below offers a glimpse at the big picture.

Commodities on the Rise

Most pundits focus on commodities as a central culprit in today’s higher price inflation. Why are commodity prices rising? There are many reasons, most importantly: supply and demand fundamentals, speculation and a weakening U.S. dollar, the “universal currency” in which oil, gold and many other commodities are priced.

Of those factors, supply and demand and speculation are fairly fluid. Which is to say they can vary over time based on politics (a threat to cut off oil sales by Venezuela, a war in the Middle East, legislation favouring biofuel production) or for more technical reasons (power shortages impacting mining in South Africa, or the shutdown of the Gulf of Mexico during a hurricane). This relatively short-term variability largely neutralizes the value of these factors as predictors of future inflation. Simply put: who can know the unknowable?

Instead, we look to longer-term trends. In that regard, two are apparent. The first has to do with the concept of “peak” commodities. While it has been Marion King Hubbert’s theory of Peak Oil that has received the most attention, credible arguments can also be made for peak metal (the dearth of major new discoveries), and even peak food. While these arguments have merit, they were beyond the scope of our survey, other than noting them as potentially rising in significance over time.

The second long-term trend is, in our view, of immediate consequence and worth a more detailed discussion: per above, the limitations and risks inherent in the fiat monetary systems now in universal favour around the world. It is this fiat monetary regime – the attempt to manage monetary policy based on flexible guidelines, and without the anchor previously provided by a gold standard – that we believe is the single most important driver of the rising price inflation now apparent around the world.

Losing Control

Simply, while the central banks of a handful of countries are (just) managing to contain inflation through restrained monetary and fiscal policy, the vast majority are finding the task politically inexpedient and are losing control. While we may point with some well-deserved derision at Mr. Mugabe’s comedic attempts to paper over his inflation with yet more paper, all nations are currently making the same errors, albeit at differing levels of failure.

To understand this point, we share a simple but accurate way of thinking about inflation as the result of too much money chasing too few goods. On that front, the chart just below paints a picture of the largely unfettered global growth in money since the early 1970s plotted against industrial production, a proxy for “goods” in their many varieties.

That chart begins to get under the hood of the problem, but one further view is necessary to understand what happened in the early 1970s that unleashed the tidal wave of money. The chart below presents a ratio of the above two measures, and includes a marker indicating President Nixon’s cancelling of the link between the U.S. dollar and gold in 1971 as the likely trigger. Once this anchor was removed, all that remained was a pure fiat monetary system.

While cancelling the gold standard was a U.S. policy decision, its impact was felt around the world. That is because of the historic Bretton Woods agreement struck between representatives of over 40 countries in 1944, as World War II came to an end.

Leveraging its position as “last man standing” following the devastating war, the U.S. pushed forward a wide-ranging set of agreements - the net result being that, from that point forward, the U.S. dollar would be the de facto global reserve currency, with all the nations of the world pegging their currencies to the dollar. New institutions, including the International Monetary Fund and the International Bank for Reconstruction and Development, were fathered at Bretton Woods, but they were nothing more than enforcers for the new regime, ensuring that the other countries stayed in line, buying and selling dollars as needed to maintain a stable peg.

For its part, the U.S. guaranteed gold convertibility at $35 “forever.”

But as is inevitable when dealing with governments, “forever” really means “for as long as it is politically expedient.” When it became inconvenient, in the late 1960s when the French under Charles de Gaulle decided that they’d prefer to have the gold, Nixon cancelled convertibility.

Once President Nixon cancelled that convertibility, which took effect in 1971, the world’s central bankers, left with no other immediately obvious or more viable alternative, continued using the U.S. dollar as a key component of their reserves. It also continued to be used in international trade, to price globally traded commodities, such as oil. Yet the end of gold convertibility represented a fundamental change; from that point forward the creation of U.S. dollars and, by extension, all of the world’s currencies, was restrained by nothing more than political expediency.

It is our contention that the size of the politically motivated governmental spending, spending which has no “hard” limiting factor or defined discipline, will continue apace and, in fact, significantly worsen due to compounding interest on government borrowing and the coming wave of irrevocable social commitments – on Social Security and Medicare in the U.S., for example. Against the backdrop of a global fiat monetary regime, the only limitation to government spending is that which the politicians believe will be politically unacceptable to a population. This is, generally speaking, no real limitation at all, given that the public is now apathetic about, and numb to, the real world implications of large numbers.

Inflation: Baked in the Cake

In light of the cause and effect between monetary inflation and price inflation, and given the clear findings in our “Global Inflation Survey,” we can only conclude that inflation in both its commonly understood forms is now baked into the proverbial cake.

As investors, that keeps us focused on gold, the world’s longest-serving form of money and an investment we have been profitably beating the drum about since 1999. Importantly, a quick scan now finds that gold is rising against a large number of currencies. This is a very useful view of the current inflation trend in that it demonstrates that the trend has expanded considerably beyond just a weakening U.S. dollar, and is now affecting fiat currencies around the world, almost without exception.

Are we seeing the end of the experiment in fiat monetary systems? It’s too early to say one way or another, but it’s not too late to shift at least some percentage of your portfolio into gold and, for leverage, gold shares.

© Casey Research, LLC. 2008

David Galland is the managing director of Casey Research. The above was excerpted from the Casey Research Global Inflation Survey. The full 38-page survey, which includes commentary by Casey Research Chairman Doug Casey and an interview on the inflation/deflation debate with Casey Research Chief Economist Bud Conrad, is available on request.

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This isn’t some unexplained phenomenon. Martians have not invaded the US Treasury. There are real, measurable reasons behind the dollars demise, and its not rocket science.

Many of you may not remember when gasoline was .25 per gallon. There was a time, if you do not remember or were to young to remember, that this was the case.

Some people think the value of gas has really gone up ten times since then, but has it really? Or is there some other, sinister power at work here?

Interestingly, when you could buy four gallons of gas for a dollar, we also had a very different type of money.

The USD once upon a time was ‘backed’ by gold and silver, which meant that you could take a ’silver or gold certificate’ (what our money used to be called) and hand it in at the US Treasury, the the Treasury was required to give you silver or gold for it.

Todays systems is very different. If you pull a dollar bill out of your pocket, and you look at the top, you will see that is says “Federal Reserve Note”. What does that mean? Well a note, in financial terms, is a promise to pay something of value at a later time. The question here is, pay what?

Today, if you took your Federal Reserve Note to the US Treasury, and asked them to give you ’something of value’ for your ‘Note’, what do you think would happen? They would probably call the police and have you carted off, is what would happen.

So back to the point of the article, why is the Dollar Collapsing in value? The answer is, that because the dollar is no longer backed by anything of value, then the government can create as much of it as it wants, as you can see by the chart below:

So what affect does this have on the Dollar’s Value? Well simply, whenever there is more of something it is worth less. One of the fundamental requirements of money is that it remains scare. If Dollars were as common as rocks lying on the ground, they wouldn’t be worth very much now would they?

We see this taking shape in the form of less demand for Dollars, all around the world. OPEC is in discussions of de-pegging from the dollar, oil producing nations are starting ask for payment in oil in currencies other than the dollar, China has indicated it intends to diversify is national reserves out of Dollars and into other assets, and you have Trillions of Dollars in newly created Sovereign Wealth Funds, whose sole purpose is to buy hard assets around the world with ’surplus’ Dollars before the Dollar becomes worthless. It has gotten so bad, in fact, that the Dollar, once honored and coveted in China, is now seen as your neighbors garbage.

It can’t be that bad, you say. Well actually, it can. The chart below shows how far the purchasing power of the Dollar has fallen since 1913 when we created the Federal Reserve System:

So if you think about it, its not that gasoline, food, real estate, vehicles, etc have actually gone up in value, perhaps its more like your dollars buy much less than they did even 4 years ago, so maybe it takes more dollars to buy the same thing?

So now that you have me really depressed you might ask, what the heck is the solution?

The solution dear reader lies in gold and silver. Gold has retained its purchasing power for thousands of years, while governments have messed with various currencies that go up and down in value. An ounce of gold thousands of years ago would clothe a man very well. Today, and ounce of gold will also clothe a man quite nicely.

If you really want to preserve your wealth, take a serious look and investigate gold.

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While I have to applaud Mr. Greenspan for wanting to assist the poor nations of OPEC in managing inflation, it also is a bit concerning to see that my prior predictions are indeed coming true: The Oil Producers are going to de-peg and take payment for Oil in non-Dollar currencies.

Why is this an issue? Because we have front row seats to round 5 of the death spiral of the dollar.

Depegging from the dollar and then choosing to take payment for oil in non-dollar currencies will be a one-two punch for the worlds ailing reserve currency the US Dollar. By de-pegging, it signals a lack of confidence in the good ‘ole US Dollar. And a lack of confidence not from just anyone, but one of the Dollars biggest customers. If the US Dollar were a product (which it is), and the US were a corporation, we just lost our second biggest customer. The effect? The world is not likely to ‘not notice’ this. OPEC is a massive consumer of USD, as we pay for oil in Dollars, and have for many years. As the world notices that some of the USD’s largest customers have decided to move on, so will the rest of the world. Result? Continued lack of demand for the USD, and continued devaluation.

JEDDAH/ABU DHABI (Reuters) - Former Federal Reserve Chairman Alan Greenspan said on Monday near-record Gulf Arab inflation would fall “significantly” were the oil producers to drop their dollar pegs, in contradiction to Saudi policy.

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Money Tales

A precious metal that’s not just an investment but a worldview too

By Rob Baedeker, Special to SF Gate

Last week, gold hit a record high of $958.40 an ounce. In 1959, the average price of gold was around $35 an ounce. That’s the year Burton Blumert opened his Camino Coin Company in Burlingame.

To the outside observer, it would appear that the rise of gold is a success story for long-time dealers and investors like Blumert and his clients. And in many respects it is. As Blumert told me on the phone from his home in El Granada, “I retired at the top of my game.” (After giving the Camino Coin Company to a long-time employee last year, Blumert, 79, stays peripherally involved, helping out occasionally when needed).

But there is, so to speak, another side to the coin. “If you want a dismal view of the future, talk to a gold dealer,” Blumert adds. The high price of gold may represent a handsome return on investment, but it’s hardly been a steady ascent, and for Blumert and other “goldbugs” it’s also an ominous sign.

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by Bob Chapman
The International Forecaster
Thursday, 18 February 2008

The following are some snippets from the most recent issue of the International Forecaster. For the full 20 page issue, please see subscription information below.

…

The Illuminati have a huge problem. They have buried it and no one in the media is talking about it, at least not in the correct order of magnitude. They are quaking with fear as they consider the possibility of this problem being unleashed. The problem lies in the Land of the Rising Sun, or should we call it the Land of the Sinking CDO. You have already heard the tripe about there being about $400 to $500 billion of CDO and other asset-backed derivative losses worldwide, and we have already shown you that these losses are way understated and that the delays in their recognition are downright fraudulent. We also showed you that total losses on asset-backed bonds and derivatives could be as much as $4 trillion in this past issue of the IF, and that does not include the tens of trillions in potential losses in credit default swaps and interest rate swaps. So why does Japan represent a potential ground zero for the biggest financial catastrophe of all time? You saw our previous report that of the $400 to $500 billion of potential losses admitted to so far, $150 to $200 billion of those losses may have Japanese banks as their “proud” owners. Yet we don’t hear a peep from Japan.

We have Citigroup, Northern Rock, SocGen, UBS, IKB, Merrill, JP Morgan, Morgan Stanley and many others from the US and Europe who have already written off over a hundred billion with sovereign wealth fund bailouts of 75 billion and some being on their way to partial or even total nationalization, but not so much as a hiccup emanates from Japan. Could it be that Japan is also undergoing a catastrophe somewhere along the lines of George Romero’s “Night of the Living Dead?” Well, if Japan has 30 to 40 percent of the paltry $400 to $500 billion that has been admitted to, what if they have 30 to 40 percent of the $4 trillion. That could wipe out their entire forex surplus, the largest in the world, and take the whole financial system down with it when it goes. Where’s the connection to the rest of the world financial system? You need look no further than the Ultimate Yen Death-Star. When the magnitude of these losses are finally grasped by the Japanese and foreign investors alike, the Nikkei isn’t just going to tank, it is going to be vaporized! And when all that liquidation occurs, guess what happens. Everyone sells their equities and corporate bonds and toxic waste and gets yen and Japanese bonds in return (along with truckloads of gold).

That will drive the yen and gold into the ozone and the carry trade and yen shorts into the deepest, darkest depths of Mordor! Your looking at a sub-100 yen and the biggest financial double-whammy of all time as the toxic waste ignites the Ultimate Yen Death-Star in a thermonuclear pyrotechnics display that will be remembered for millennia. The hapless Japanese bankers must be sick as they gather together to discuss these problems. This is not just about saving face. They are completely and utterly terrified! We suspect wakizashi short swords may be in short supply in the not too distant future. Sepuku anyone? All that liquidity, over a trillion dollars of carry trade bets, plus leverage, will be totally drained from the system in a matter of days, and stock markets worldwide would crash and burn like the Hindenburg. This would make 1929 look like a drop of water dripped into an Olympic-sized swimming pool. Oh, and incidentally, any sovereign wealth funds or other investors who try to bail out any of these banks, investment banks and bond insurers in Japan or anywhere else in the world is a first class moron. By the time this whole thing plays out, those who try to bail these flim-flam operations out may well never see so much as a penny of their investment back again. They may as well load 100 dollar bills into earth movers and then back them up and dump them into the cauldron of an active volcano for a crispy critter Crane confetti cookout! What idiots! How about buying billions in gold instead, knuckleheads?!

Silver and oil were the big performers this week and supported gold well as it yawned at the IMF news that its perpetual gold sale was on again. Spot silver went on a rampage to a new 27-year high of 17.60 on Tuesday after gold came close to testing its all-time high on Monday, hitting about 927, only $10 per ounce short of a breakout. Oil finished the week strongly by peaking out at 96.67 and settling at 95.50. Gold and silver will consolidate along with resource stocks in the near term and we see new records being set in the weeks ahead. And don’t forget that the IMF sales, even if approved, will not take place until well after this seasonal rally is over. Economic new is simply abysmal and precious metals are going to continue to shine under these circumstances. We note that some 3000+ contracts of February gold futures are still open as of Thursday’s close. Could it be that someone is holding out for delivery? We’ll have to see. That would be a nice test case of 10 metric tonnes. Large specs must seriously start to consider building cash to demand some physical delivery. Central banks are all insolvent. Their gold is parked and it ain’t goin’ nowhere. Let’s get radical!

The Fed’s interest-rate cuts last month have failed to lower borrowing costs for many companies and households. That means soon there will be one or probably two more ½% cuts.

Taxpayers should ask Congress why they are bailing out borrowers, lenders, investment banks, bank and brokerage houses who all committed fraud?

There are urgent proposals before Congress and the neocons for a bailout of the banking, investment banking and insurance industries. This would allow them to keep profits and lay off the losses on the public. There is more than $1 trillion in loses still to be accounted for. You can be sure our Parliament of Whores will sell us out again.

Market adjustments worldwide triggered by the real estate and CDO (Collateralized Debt Obligations) and SIV (Structured Investment Vehicle) collapse and the credit crisis has triggered the loss of $5.2 trillion – 50 of 52 share indexes worldwide ended January lower.

Wait until the investors and Wall Street see the write-offs over the next two years and the drop in earnings as a result. In January the Turkish market fell 22.7%; China 21.4%; Russia 16.1%; India 16%; Paris 12.3%; London 8.9% and New York was off 6%. Just under half of the major markets lost more than 10% of their value. The FTSE in London lost 9% and 16.5% over the past three months. Paris lost 15.3% over the past three months.

Published and Edited by: Bob Chapman
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