By Jordan Roy-Byrne, GoldSeek

In his weekly letter, John Mauldin concluded that we have not experienced hyperinflation (despite massive Fed “printing”) due to the fact that the money multiplier has fallen and fallen below 1.0. This means that for each additional $1 added to the monetary base, the money supply is changing by less than $1. In other words, banks are not lending and so the velocity of money is declining.

This is correct as to why we don’t have REFLATION.

There is an important difference between REFLATION and HYPERINFLATION.

Reflation occurs when inflationary policy is successful. Examples of this include 1933-1937, 2003-2007 and to some degree, 2009. In a reflationary period, Commodities outperform everything, including Precious Metals.

Mauldin and many others make the assumption that hyperinflation can’t occur without some kind of economic demand. It is the mainstream theory that money has to make its way into the economy (via bank lending and then business investment or consumption) for price inflation to occur.

The private sector or even the Federal Reserve isn’t the root cause of hyperinflation. Hyperinflation occurs when a country’s bond market breaks. In other words, the sovereign nation is no longer able to fund itself. Its bonds fall (yields rise) to the point where the government has to print money or default. Rising interest rates cause the interest payments to consume too much of the overall budget. The government or central bank then begins to print money to fund its deficit. Then the citizens start to consume, knowing the currency is rapidly losing value. Demand has nothing to do with the cause or the onset of hyperinflation.

Why didn’t Japan have hyperinflation in the 1990s? It didn’t have to monetize its debt. It had the internal savings to be able to finance its budget. The same thing is true with the United States in the 1930s. Even though we devalued the currency, the bond market remained strong into the early 1940s, thus preventing runaway inflation.

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By James Turk, FGMR

The US Treasury has taken another step on the road leading to hyperinflation.  It announced that it will borrow $200 billion and leave this money on deposit with the Federal Reserve.  The announcement was made with bald disinformation aimed at camouflaging the true impact of this step.

The Wall Street Journal dutifully reported that taking this step “will make it easier for the Fed to raise interest rates when the time comes.”  This red herring is obviously intended to make the Treasury’s overt dollar debasement appear reasonable.  The WSJ statement itself is nonsensical.  How can raising interest rates be made “easier” than it already is?  All the Fed needs to do is pull the trigger and interest rates go up.

The Fed of course is lacking the will to do that.  It may also be lacking the insight that the system is broken, but I doubt that point.  The Fed must know the system is broken, but because it is a captive of vested interests who benefit enormously from the situation at present (anyone mention banker bonuses recently?), it works solely to keep the system from falling apart.

Therefore, more gimmicks and more disinformation are the order of the day, like this latest Treasury announcement, which was no doubt cooked up by the Fed.  You see, the Fed has a problem.  The federal government is borrowing too much.  When it borrows, the federal government is soaking up savings.  These savings come from throughout the world because of the dollar’s reserve currency role.  But if people with savings choose not to lend to the federal government because they recognize it is in basically the same situation as Greece and every other over-indebted country, the Fed must step in.  It always has and always will.

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By John Rubino, GoldSeek

A while back a reviewer dismissed the idea of a dollar collapse by asking “Collapse against what?” His argument was that the other major currencies are a mess too, so in relative terms the dollar will be fine. This of course misses the point, but in a useful way because it illustrates how words that seem clear to a field’s insiders (in this case gold bugs and other gloom-and-doomers) can be confusing to normal people.

After all, “collapses” do happen all the time. The stock market craters once a decade at least, and oil and houses have seen epic bear markets in just the past couple of years. It’s bad if you own this stuff, but life goes on, so what’s the big deal? And since, as the reviewer said, the dollar is valued in relation to other currencies that also seem shaky, why would it have to collapse at all?

Reasonable questions. Taking the second one first, it’s true that the dollar is quoted in terms of its exchange rate versus the euro, yen, and pound. But its value lies in the amount of stuff it can buy. It is thus possible to for the dollar buy a lot less oil, wheat, and land (that is, to collapse) while maintaining a stable exchange rate, if the euro and yen are falling just as fast.

But the first question is the big one: Is a currency collapse different from oil going from $150 to $40 or the NASDAQ falling by 80%, and if so, how? The answer is that it’s very different, because money is more than just another commodity. It’s the glue that holds a society together. Savers work in order to store value for later in life. In the U.S. their savings take the form of dollars, and the effort they expend today depends in part on how much they expect their dollars to be worth tomorrow. Borrowers, meanwhile, calculate their obligations in currency, and moderate their borrowing based on their sense of how much the currency they’ve promised to pay back in the future will be worth. In other words, all that’s holding them back is fear of having to repay their loans. So when you devalue a currency and you hurt the ants and enbolden the grasshoppers.

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By James Turk, FGMR

Contrary to common belief, hyperinflation does not arise from too much bank lending.  The sole cause of hyperinflation is always too much government spending.  The pattern is as follows.

The government spends more money than it is receiving in taxes, which forces it to borrow.  As these deficits grow, they eventually exceed the market’s capacity or willingness to lend money to the government.  Invariably, the central bank steps in and provides the government with the money it needs by creating it – as the saying goes – ‘out of thin air’, or what governments today call “quantitative easing”.  The central bank does this in either of two ways.

In cash currency economies, where most commerce is completed by making payments with paper-currency, the central bank cranks up the printing press.  Examples are the Weimar Germany hyperinflation in the early 1920s, and just recently, Zimbabwe.

In deposit-currency economies, where most commerce is conducted by making payments through the banking system with checks, wire transfers, plastic cards, and the like, the central bank uses electronic bookkeeping made possible through computers to put the newly created money directly into the government’s checking account.  There are numerous examples of deposit-currency hyperinflation in the monetary history of Latin America, like the one that devastated Argentina in 1991.

These two different ways in which hyperinflation manifests itself are made clear in the following quote by Ben Bernanke before he was appointed chairman of the Federal  Reserve: “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”

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The Daily Reckoning

The finance ministers of the Eurozone met yesterday and they’ve tried to stem the euro’s (EUR) rise… But they’ll need more than words to get the job done! And so we begin a new day…

Front and center this morning, the currencies – which had given background overnight to the dollar – are back in rally mode, and are taking liberties with the dollar once more. For most of the night, that was not the case, though. The dollar had rallied back and sent the euro, for instance, to the 1.48 handle, after the single unit spent yesterday at 1.49 and change… There seemed to be a move to the dollar, but that didn’t last long, and the currencies are once again rallying versus the dollar this morning, and the euro has pushed to 1.4970 as I write.

Daily noise, eh? Yes, you have to wade through it most days, and keep your eyes fixed on the horizon…

OK, I mentioned above that the finance ministers of the Eurozone met yesterday, and tried to stem the dollar’s decline by backing the US administration’s stated preference for a strong dollar… Of course we all know that the US administration’s stated preference for a strong dollar is a bunch of horse dookie! So… What was it that the Eurozone FMs were backing? A false statement by the US? Now, that’s something to hang your hat on, eh? The dolts just continue to mount daily don’t they?

But, you can’t be too hard on the beaver (Eurozone FMs) for they have to sound like they don’t want their euro to get too strong, for if they really said what they wanted to say, the euro would be back to 1.60 with a bullet in a heartbeat! So… In the end, I don’t think currency traders were swayed by the Eurozone FMs, at least not for too long!

Yesterday, I talked about Canada and the Bank of Canada (BOC) and how I thought that the BOC would remove their statement about interest rates remaining on hold until the second half of 2010… I had a few readers question me on this, saying that Canada’s economy is in no shape to withstand a rate hike… OK… Hear me out on this… I’m not saying that the BOC will hike rates now, or even in 2009… But, if Canadian energy prices of oil, natural gas, and coal continue to get stronger, I’m afraid the BOC will have to entertain thoughts of raising rates to fight inflation… But not now… So… I hope you get what I’m saying here.

So… The US fiscal deficit for 2009 was $1.42 trillion… Remember how I used to take the previous administration to the woodshed for posting $450 billion fiscal deficits? How did we go from $450 billion to $1.42 trillion (if that’s really the number)? Well… That’s not a question to really answer, folks, we all know how we got here… But now that we’re here, what happens next?

I came across this when putting the two monthly newsletters together on Sunday; I think it would be appropriate to share it with you here…

Peter Bernholz (Professor Economics in Basel) studied the world’s 12 most important periods of hyperinflation and discovered that the tipping point occurs when deficits amounted to 40% of the expenditures.

For the United States we have arrived at exactly that point. The deficit of $1.5 trillion amounts to 41.7% of the $3.6 trillion in expenses.

You see, that Peter Bernholz rounds some numbers, but for those of you keeping score at home, the real point is that the US deficits are greater than 40% of expenditures… And you know me, I truly believe in this history repeating itself.

The point I’m trying to make here is that according to Mr. Bernholz, we can soon expect a bout of hyperinflation! OH BOY! Where do I sign up for that? Not only do we have a falling dollar causing us to lose purchasing power, but what purchasing power we have left is going to be eaten away with inflation! Like I said, OH BOY! Gee Willikers, that sounds like the cat’s meow! NOT!

So… Here we go again, with me getting on the soapbox and telling you that the only way to protect yourself from a falling dollar and hyperinflation is to diversify with non-dollar currencies and precious metals.

OK… I get emails all the time from readers that say, “OK Chuck, you tell us to diversify, but you don’t tell us what to buy”… Well… To the untrained eye, that would be true… But to long time readers they know better… So, keep reading, and it will hit you right between the eyes one day, and you’ll slap your forehead and say, “I could have had a V-8”!

The boys and girls over at Citigroup have written a letter to their clients telling them “the dollar is weakening because foreign central banks are diversifying their reserves and US investors are buying high-yielding emerging market assets.” They went on to say, “The Australian and Canadian dollars are likely to rise to parity against the US currency.”

So, there’s one more on the roster that believe Aussie dollars (AUD) and loonies (CAD) will go to parity against the dollar… The loonie isn’t exactly the same stretch of a forecast as the Aussie dollar, as loonies are almost 97-cents right now, with Aussie dollars trading near 93-cents…

Doesn’t that make sense given the talk we just had about hyperinflation? What currencies are going to help protect you against hyperinflation? The commodity currencies! Aussie, kiwi (NZD), Canada, Norway (NOK), Brazil (BRL) and you can even throw in the S. African rand (ZAR), for those who like Mr. Toad’s wild ride!

The folks at Citigroup also had this to say about the euro, which I found to be quite interesting… “The euro will extend gains against the US dollar and the British pound, and may reach parity against the UK currency in 6 to 12 months.”

I would think that for the euro to reach parity with the pound, it would involve the pound falling quite a bit from current levels… And that makes sense to me… Did you see the report the other day from the UK where they reported bad bank debt to be twice the forecast amount? YIKES!

You know… The Asian currencies – which never really participated in the first bout of dollar weakness – are still stuck in the mud… Well, they are being manipulated to be stuck in the mud, for the most part… But, something’s got to give here sooner or later. Why do I say that? Well, as I’ve told you for months now, the Chinese economy was the first to exit their slowdown/recession… Shoot Rudy, even Japan is showing signs of economic growth! And then we have India going strong too… And of course you have the “kind of Asian countries” of Australia and New Zealand… Where we already know that Australia has raised rates and New Zealand would love to raise rates… So, this region is leading the world out of the recession… Hmmm… I thought only the US economy was allowed to do that! Uh-Oh… Looks like we have a shift in how the world works!

Hey! Even Big Ben Bernanke sees the Asian countries as leading the world out of the global recession! Big Ben said… “Asia appears to be leading the global economic recovery.” Hmmm… See, even a blind squirrel can find an acorn! HA!

I had to laugh when I read this headline this morning… “Yen rises as Fujii repeats reluctance to stem currency’s rise”… I laugh because the last time Japan’s new finance minister talked about not intervening to stop the yen’s rise, he back-pedaled and said that traders mistook him to say that he was not going to intervene… So this on again/off again love affair with Fujii and intervention, just makes me laugh! I would think that after getting burned on Fujii comments a couple of weeks ago, that Traders would not get too lathered up when he talks about not intervening.

OK… Here in the US while we are still a sovereign nation, the Fed Reserve, is doing some testing of reverse repos as a means of drawing the excess liquidity/stimulus out of the markets… I don’t think we have to put too much into these tests right now. But it will be a method that the Fed uses at some point in the future… The IMF is against removing any stimulus now… So, that may carry some weight.

Gold prices rose yesterday for the first time in a couple of days, pushing back above $1,060… I would think that until we know for sure that the Fed is removing stimulus, that gold would remain well bid… When we do know that stimulus is being removed… Gold might take a step or two back… But then we’ll have to wait-n-see what happens with inflation.

I read where ETF holdings of gold are sluggish… Well, that certainly makes sense to me! With what we’re seeing these days from our government pushing us toward who-knows-what, physical gold is the thing people want right now… And you can’t get physical gold out of an ETF! So… All those people that have long said that the ETF was just as good as holding gold either in your buried coffee cans in the back yard, or in pooled accounts, are wrong, when it comes to physical gold demands.

And I don’t know about you, but I filled my gas tank the other day, and the price of gas has really shot up recently, eh? And a quick look at oil prices tells it all… Oil prices have risen to $79, while trading at $69 just a month ago! Is oil the proxy for rising inflation?

OK… To recap… The dollar rebounded a bit overnight, but has given back to a currency rally this morning. Citigroup believes Aussie and Canadian dollars will reach parity to the US dollar. The Bank of Canada meets today. Our fiscal deficit reached 40% of our expenditures, which historically is a harbinger to hyperinflation, and gold is back above $1,060 this morning…

US Hyperinflation? originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets.

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Oct. 6 (Bloomberg) — Gold rose to a record on speculation that
inflation will accelerate and erode the value of the dollar, boosting
the appeal of the precious metal for investors seeking to preserve
their wealth.

Gold futures climbed as high as $1,038 an ounce
in New York, topping the previous record of $1,033.90 in March 2008.
The spot price headed for a ninth straight annual gain, the longest
rally since at least 1948. The dollar fell as much as 0.6 percent
against a basket of six major currencies.

“Gold is acting
like the ultimate currency,” said Chip Hanlon, president of Delta
Global Advisors Inc. in Huntington Beach, California. “Central banks
are following the same monetary course and trying to stimulate and
inflate their way back to growth. Everyone’s concerned about the
dollar, but it’s not like you can hate the dollar and fall in love with
the euro or the yen.”

Gold futures for December delivery
climbed $17, or 1.7 percent, to $1,034.80 an ounce at 9:36 a.m. on the
Comex division of the New York Mercantile Exchange. Prices may reach
$1,400 within six months, Hanlon said. Gold for immediate delivery in
London gained as much as 1.9 percent to a record $1,036.60. The metal
gained 17 percent this year.

Federal Reserve Chairman Ben S.
Bernanke said Sept. 15 that the worst U.S. recession since 1930s had
probably ended, and billionaire investor Warren Buffett said his
company was buying equities. Central banks lowered borrowing costs and
the Group of 20 nations has pledged about $12 trillion to revive
economic growth, leading to record inflows in some of the gold
industry’s largest exchange-traded funds.

‘Just Begun’

“Gold has just begun its ascent,” said John Brynjolfsson, the chief
investment officer of Armored Wolf LLC, a hedge fund in Aliso Viejo,
California. “As central banks print more and more money, the private
demand for gold as an investment and inflation hedge is destined to
grow. It’s pretty clear that gold will be at $2,000 by 2012, and it
could happen a lot faster.”

Expectations of higher consumer
prices are building. The difference between rates on 10-year notes and
Treasury Inflation Protected Securities, which reflects the outlook
among traders for inflation, widened to 1.84 percentage points from
almost zero at the end of 2008. It averaged 2.2 percentage points in
the past five years.

“Even though the current inflation rate
is low, the risk of a blowup in inflation in the future is becoming
higher all the time,” said Adam Farthing, Deutsche Bank AG’s head of
metals trading in Asia. “Gold is pricing that in.”

Metal Projection

Farthing projected the metal will reach $1,150 by the end of the year.

U.S. President Barack Obama increased the nation’s marketable debt to
an unprecedented $6.78 trillion as he borrows to spur the world’s
largest economy. Goldman Sachs Group Inc. predicts the country will
sell about $2.9 trillion of debt in the two years ending next
September.

“Many are expecting gold to trade at $1,050 an
ounce within the next few weeks,” said Miguel Perez-Santalla, a Heraeus
Precious Metals Management sales vice president in New York. “They are
talking about this on the back of hyperinflation. Investment money is
the driver.”

Gold held in the SPDR Gold Trust, the biggest
ETF backed by the metal, reached an all-time high of 1,134 metric tons
on June 1 and was at 1,098.07 tons yesterday. The fund has passed
Switzerland as the world’s sixth-largest gold holding.

Consumer Prices

U.S. consumer prices will expand 1 percent this quarter and 1.8 percent
in each of the following two quarters, according to the median estimate
of 49 economists surveyed by Bloomberg.

Central banks’ net
gold sales may drop to 16 tons this year, 93 percent below last year
and the lowest since 1988, researcher GFMS Ltd. said Sept. 15. That,
combined with futures trading regulation, will support demand for gold,
Deutsche Bank’s Farthing said.

The U.S. Commodity Futures
Trading Commission has tightened trading rules and pushed enforcement
of position limits amid concern that speculation drove commodity prices
to records last year. So far, new and anticipated limits have affected
the largest agricultural, natural-gas and broad-based commodity funds
in the U.S.

“There’s definitely switching going on out of
energy and agricultural commodities into gold,” Farthing said.

Other precious metals have outperformed gold this year.

Silver Futures

Silver futures for December delivery advanced 3.8 percent to $17.155 an
ounce on the Comex. The metal climbed to a 13- month high of $17.69 on
Sept. 17 and is up 52 percent this year.

An ounce of gold now
buys about 60.3 ounces of silver in London, according to Bloomberg
data. That’s down from a high of 84.4 ounces on Oct. 10, which was the
most since March 1995.

Palladium futures for December
delivery rose 70 cents, or 0.2 percent, to $304 an ounce. The
best-performing precious metal this year has gained 61 percent in 2009
on expectations for a revival in auto demand.

Platinum
futures for January delivery jumped $10.70, or 0.8 percent, to
$1,312.50 an ounce in New York, increasing their gain for the year to
39 percent. Automakers account for about 60 percent of platinum and
palladium use.

Crude-oil futures, used by some investors to
forecast inflation, have soared 60 percent this year in New York.

Capital Gold Group, gold group, gold, gold prices, gold news, gold coins, gold bullion, gold IRA, IRA
gold

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The Daily Reckoning

On one hand, the deflationists are claiming that given the extremely high debt levels in the West, further inflation is impossible. On the other side of the argument, many proponents of inflation are calling for Zimbabwe style hyperinflation. In this business, everyone is entitled to their opinion; however it is my contention that we will get neither deflation nor hyperinflation. If my assessment is correct, once business activity picks up, our world will have to deal with high inflation.

Although I have great sympathy for the deflation crowd, given the reckless attitude of the central bankers and their ability to create debt-based money, I do not believe deflation (contraction in the supply of money and total debt) is very likely.

For sure, in this post-bubble environment, American consumer debt continues to contract, but this is being more than offset by the expansion in federal debt. Over the past year alone, federal debt in America has surged from US$9.645 trillion to US$11.813 trillion. In other words, during the past twelve months, American federal debt has risen by a shocking 24.47% and it now stands at 83.52% of GDP! Now, given the ability of the American establishment to essentially create dollars out of thin air, I have no doubt in my mind that it be able to inflate the economy. However, this will come at a huge cost and the victim will be the American currency.

In fact, the recent weakness in the US dollar is a sign that central-bank sponsored inflation has started to dominate the private-sector debt contraction in the West. Furthermore, over the past few weeks, various governments have issued US dollar-denominated debt and this suggests that the carry-trade is back in vogue. In a startling move, Germany recently announced that it plans to borrow money in US dollars!

Now, given the ongoing federal debt inflation, debasement of paper currencies, sky-high budget deficits and competitive currency devaluations, the macro-economic environment has never been better for precious metals. Yet, both gold and silver continue to frustrate the bulls by staying below the record-highs recorded in spring 2008.

So, what is going on here? Have we already seen the end of the precious metals bull-market or are we about to witness an explosive rally? Before I attempt to answer this question, I want to make it clear that even though gold failed to better its all-time high during last autumn’s panic, it was the only asset, (apart from US Treasuries) which stayed relatively firm. And looking at the various markets today, gold is the only asset that is flirting with its all-time high. So, whether you like it or not, gold deserves some credit for fulfilling its role as a safe haven.

Now, unlike some of the die-hard gold bugs, I don’t believe that gold is the ultimate asset to own at all times. Without a doubt, there have been times in history when gold has proven to be a lousy investment. For instance, between 1980 and 2001, the nominal price of the yellow metal fell by an astonishing 70%. This horrible price action spawned an entire generation who grew up hating gold and up until a few years ago, the vast majority considered gold a barbaric relic.

However, during other periods in history, when macro-economic uncertainty was high and inflationary expectations were running out of control, gold turned out to be a fantastic asset to own.

If my take on the macro-economic situation is valid, then we are in such a period now and gold must form a part of every investment portfolio.

You may remember that over the past year, central banks have injected trillions of dollars into the banking system and it is only a matter of time before inflationary expectations start spiraling out of control. Up until now, this ‘stimulus’ money hasn’t permeated through the economy in the West but once money velocity picks up, prices will start rising and the investment community will become very concerned about inflation. When the deflation scare abates and people start protecting the purchasing power of their savings, capital will start to flow towards precious metals.

Long-term clients and subscribers will recall that about two years ago, I highlighted gold’s tendency to rocket higher every other year. Figure 1 captures this trend perfectly and you can see that since the outset, gold’s bull-market has been punctuated by lengthy consolidations and the yellow metal has surged to a new high every alternate year.

Figure 1: Is gold about to shine?

So, if gold remains in a bull-market and its trend consistency is intact, its price should surge over the following months. Conversely, if the price of gold fails to climb above its all-time high before year-end, it should start to ring alarm bells as this would open up the possibility that the bull-market may be over. Remember, certainty does not exist in the investment world and savvy investors should remain open to all outcomes.

Now, given the uncertainty in the world today and the ticking inflationary time-bomb, my view is that gold will soon embark on its north-bound journey. So, I suggest that investors hold on to gold and the related mining companies which will probably continue to perform well until next spring.

As far as silver is concerned, it has always been a high-beta play on the direction of gold. If the next up leg in gold’s bull-market materialises, the price of silver will also head towards the heavens. Accordingly, investors may also want to allocate a portion of their investment portfolio to silver bullion and silver producing companies.

Regards,

Puru Saxena
for The Daily Reckoning

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

Inflation is Our Future

More articles from The Daily Reckoning….

The country is looking for an alternative to its hyperinflation-ravaged Zimbabwean dollar that was replaced by multiple currencies in January

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By Sol Palha, GoldSeek

The current administration promised to produce a rather lofty number of jobs in a given period of time. To do this they were going to stimulate the economy by focusing on the antiquated infrastructure of the country, on developing alternative energy supplies, etc., but just 5 months after inauguration, the emphasis seems on what is politely called social services but the more accurate label would be welfare. Money is being thrown into every possible program out there that will produce little to nothing in terms of long term benefits and by comparison in the areas that could produce a long lasting effect hardly any money is being allocated. We are not going to list all the programs for they are constantly mentioned in the news.

Based on the number of programs that need funding and the rate at which money is being spent, federal deficits could average a trillion dollars a year over the next decade. The year is not done yet and the deficit is already over 1.1 trillion dollars. To give you and idea of just how massive these numbers are consider that this time last year the deficit was roughly 290 billion dollars. These projections are based on current economic conditions and not worsening conditions; if the outlook should deteriorate then these projections are going to increase significantly. The deficit in the 2009 fiscal year which ends in September is now projected to hit 1.8 trillion dollars so we are already off to an incredibly bad start. Last year the US government raised 708 billion worth of new debt; this means it now has to find buyers to purchase almost 3 times the amount of debt it raised last year. Who is going to want to continue dropping huge amounts of money into a currency that appears to be headed down without strong incentives; the only incentive that will work is higher interest rates. Sooner or later the Feds will be forced to raise rates otherwise they will find out that they are the only ones left at the bidding table.

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Bullion Vault

As the US fights deflation, credit inflation is alive and well in China…

The INVESTMENT COMMUNITY is divided at present as to whether the world economy faces hyperinflation or deflation, writes Puru Saxena of Money Matters and Puru Saxena Limited in Hong Kong.

Some observers are convinced that the central banks’ printing press will take the world towards hyperinflation whereas others believe that the ongoing contraction in American private-sector debt will result in outright deflation.

But what will the future bring? It is my contention that we will get neither hyperinflation nor deflation.

What is more likely is that, over the coming months, we will get another deflationary scare. Any sell-off in the markets later this year will be met by an even larger stimulus from the policymakers and this will ultimately result in high inflation.

So I maintain my view that due to the unprecedented policy responses around the globe, the world’s economy will face high inflation over the medium to long-term. And the general price level will double over the coming decade.

In the near-term however, we will probably get another period when the market will (once again) become concerned about the prospects of a lengthy economic contraction. It is conceivable that the ‘green shoots’ hype currently doing the rounds will soon be replaced by more economic worries as a second wave of foreclosures hits America later this year.

It is therefore possible that before year-end we will witness large corrections in stocks and commodities. Conversely, we are likely to see big rallies in US government bonds, the US Dollar and Japanese Yen.

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