By Richard Daughty, GoldSeek

The pills that I thought were tranquilizers turned out to be vitamins, and although I am on the verge of some kind of mental breakdown because of the mix-up, I feel great!

Turning to the old tried and true, I soon learned that I had started too late, and I was not nearly drunk enough to have properly anesthetized my nerves when I chanced to read Agora Financial’s 5- Minute Forecast report that “The CBO’s latest numbers reveal that President Obama’s proposed fiscal 2011 budget would add $9.7 trillion to the national debt over the next 10 years.”

My hands shook and my guts churned at the horrific prospect of adding $9.7 trillion to the money supply, which means (I gulp in horror at the prospect) inflation in pieces like you never saw! Yikes!

I mean, (my voice rising in pitch and volume) the entire GDP of the USA is about $14 trillion, and the government wants to increase, over ten years, government spending by 70% of everything that this country currently makes!

Apparently eager to change the subject since I seem to be getting worked up about this and could, possibly, probably, almost certainly, damned near guaranteed, erupt into some loud Mogambo Hysterical Tirade (MHT) and make a shambles of everything, The 5 says, “Further, the CBO projects the national debt will be 90% of GDP by the end of this decade”, which I guess they thought would calm me down or something, but it didn’t, which was bad enough to cause me to have chest pains accompanied by loud howls of pain and outrage in another tiresome Screaming Mogambo Fit (SMF), but then went on to make it all worse by saying that debt will equal 90% of GDP, which is “higher than the 83.4% recorded at the end of fiscal 2009 last fall.”

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By Dr. Jeffrey Lewis, GoldSeek

The Obama administration and the US Congress have together made inflation the real monetary policy of the United States.  While pundits and talking heads focus on the bailouts and loan packages, they’re missing the bigger picture.  It isn’t what the US government outright purchased (stock, debt, and real estate paper), but it’s what the US government is guaranteeing that will make all the difference.

Exposure to Real Estate

The US Government, the Federal Reserve, and ultimately the citizens of theUnited States have more exposure to real estate than they could have ever imagined.  The US government owns huge positions in several large banks, as well as individual debt obligations from others.  However, dwarfing all of these real holdings is its massive exposure to real estate through Fannie Mae and Freddie Mac.

Calculating the Risk

Though politicians and pundits have labeled the total US exposure to the mortgage/lending business at the cost of TARP, which is roughly $700 billion, obligations to back the full losses of Fannie and Freddie extend into the trillions.  The duo, which have grown to represent 90% of the secondary mortgage market in the United States, have home loan portfolios worth roughly $6 trillion, an amount equal to the entire money supply of the United States and half of the national debt.

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By Richard Daughty, GoldSeek

I am a guy who thinks that such huge explosions in money supplies around the world and the explosions in government deficit-spending around the world will lead to catastrophic explosions in inflation in prices, probably around the world.

I am also a guy who thinks that inflation in prices is the Thing Most Feared (TMF) in the whole world in terms of total sheer misery and suffering, judging by the entire last 4,500 years of history, except for, maybe, the plague.

Naturally, for one so dyspeptic and predisposed to paranoia because the people in charge are apparently overpaid, corrupt morons, I am visibly shaken at the news from Bloomberg that “The consumer-price index increased 0.2 percent for a fifth straight month, led by higher fuel costs, Labor Department figures showed today in Washington.” Yikes!

Inflation never stops! Even in a recession/depression like we have now! It’s terrifying!

Anyway, since insane levels of massive governmental deficit-spending of fiat money created by central banks is a world-wide phenomenon, there will be a massive inflation in consumer prices as a result of all of this unbelievably much new money being poured into the economy via governmental deficit-spending, and already the government is forced to report 2.6% inflation.

This is actually down from last month’s 2.7% inflation, and so immediately I get angry emails from people saying, “Dear Mogambo Stupid Head (MSH), You say that inflation is raging because of all the money that the Federal Reserve is creating, so how do you explainBloomberg reporting ‘Excluding energy and food, the so-called core index unexpectedly fell 0.1 percent, reflecting a drop in new-car prices, clothing and shelter’? You can’t explain it because you are stupid and you are wrong and everybody hates you! Sincerely, Anonymous Reader.”

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By Peter Warburton, GATA

April 9, 2001

More than 20 years ago, I was a research officer in a forecasting unit at the London Business School. We called ourselves international monetarists then and we had a model that determined the inflation rate from the growth of money stock per unit of output, with long and variable lags. The value of a currency was determined, in the long run, by its monetary growth per unit of output in relation to that of the rest of the developed world. Being a young man, I was heavily into econometrics — or economic tricks, as some would have it — and our research group published papers showing how well this model fitted the data of that time. Basically, we had it sown up. We knew how to predict inflation; we knew the equilibrium value of currencies and the untidy realities of economic life were mopped up in the balance of payments. We felt sure that if the authorities could regulate the growth of the money supply, all would be well. How wrong we were.

By the mid-1980s, central bankers had begun to enjoy a measure of success in controlling inflation, not by strict regulation of the money supply, but as a by-product of financial de-regulation and the liberalization of credit. Even allowing for the lapses of 1988-90, there was a growing confidence that the battle against inflation was won. Throughout the 1990s, economists were absorbed by the issue of the permanence of low inflation, as measured by the annual change in a weighted basket of consumer goods and services, the CPI. But was inflation dead, or merely sleeping? Residual fears that it may only be a long sleep led the US authorities to establish the Boskin commission, whose charge was to deliver inflation a heavy blow to the head. Stunned into submission, the CPI took a long while to stir from its slumbers and did not do so until higher oil prices came along last year. However, it is far from certain that this surge will persist, and quite conceivable that it will recede later in the year in response to weakness in the real economy. To all intents and purposes, inflation in its popular form looks dead or comatose.

The paradox of disconnection

During these past 15 years, the Anglo-American economies (US, UK and Canada) have experienced episodes of weak growth in broad money (M2 or M3) with moderate inflation (in the early-1990s) and episodes of strong monetary growth with little measured inflation of consumer prices, as now. As a result, most economists have given up on the monetary aggregates as a useful guide to anything important. Government economists, who have remained skeptical of monetary transmission mechanisms throughout, feel especially vindicated. They argue that, if double-digit money supply growth can sit happily alongside a 2 or 3% inflation target and an appreciating currency, then surely the argument is settled.

I no longer regard myself as a monetarist, but I retain a deep respect for the behaviour of bank liabilities and their close substitutes. There are some things that only money can do. However, there are many other things that credit can do just as well. The avalanche of non-bank credit that has swept across the economic landscape over the past 20 years has altered it beyond recognition. On the one hand, it has enabled the monetary aggregates to grow much more slowly than the credit aggregates, helping to keep inflation lower. On the other hand, the non-bank credit avalanche has enabled a furious pace of fixed investment in physical assets that has promoted structural global excess capacity in virtually all manufactured products and exerted downward pressure on product prices. The particularly vigorous investment in information and communications technology has served a dual purpose, through the spectacular lowering of capital goods prices and by connecting disparate market participants to a common network and database.

And what of the periodic bouts of monetary excess, in late-1998, late-1999 and again over the past 3 months? These can be explained by the increasing fragility of the financial system. The more obvious are the system’s weaknesses, the greater is the fear of collapse and the larger the demand for liquidity within the financial markets. In these stressful episodes, it is the financial markets themselves that are the principal driving force behind the monetary expansion. Hence, there is relatively little monetary impact on the product and labour markets, that is, on prices and wages.

In this way, we can arrive at a crude understanding of the paradox of disconnection: how volatile and often rapid monetary growth rates can be consistent with seemingly low and stable inflation outcomes. In the US, the annual price deflator for GDP has been below 2.5% in every year since 1991. Consumer price inflation has been no higher than 3% in every year since 1991. In Canada, the record is slightly better; in the UK, slightly worse. To parody Paul Samuelson’s quip about the productivity “miracle,” credit excesses are visible everywhere except in the inflation figures. Time and time again, respected commentators and analysts have warned of the approaching inflationary backlash from the credit and monetary excesses, only to be humiliated and discredited by events. This is not because their instincts were at fault, but because they were looking in the wrong place.

However, this does not explain the strength of the US dollar: surely the value of the dollar in relation to euros and yen has to collapse under the weight of excessive money supply growth and a huge external payments deficit? Well, I certainly thought so as recently as December 1999 when I wrote a bulletin for Flemings entitled “US dollar: selling the silver and leasing the gold.” Now, I’m not so sure. I am coming round to the view that the external value of all major currencies is eroding and that this general erosion is able to substitute for at least a portion of the decline that one might expect in a particular currency versus its peers. Allow me to explain.

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By Daniel R. Amerman, GoldSeek

Overview

The Federal Reserve was well aware of the severe inflationary dangerswhen it directly created almost a trillion dollars as part of its separate bailout of Wall Street.  If this cash – which exists in highly liquid form right now – escapes into general circulation, the result could be immediate and major inflation that would devastate the value of the dollar and all of our savings.  Therefore, even as it created the trillion dollars, the Fed set up a series of barriers to contain the new cash and ultimately return it to the void from whence it came, lest the new cash break out and wreak monetary havoc.

While described in detail in Federal Reserve Chairman Ben Bernanke’s own speeches, the creation of the new money, the barriers to contain it, and the strategy for destroying it are understood by very few in the media or on the web.  Yet, the significance is profound and there are powerful, game-changing implications for the economy, the housing market, the inflation / deflation debate and the very fundamentals of long-term and retirement investing.

In this article we will illuminate what looks on paper to be a brilliant economic strategy, and then cut through the theory to get to the real world bottom line for all of us:  you and I stand to lose everything if an ambitious but profoundly dangerous strategy goes awry, while the bonuses and future rewards continue to go straight to those whose short-sighted greed created this mess in the first place.

Hard Assets Investor submits:

By Brad Zigler

Real-time Monetary Inflation (last 12 months): 2.2%

This week’s dip in commodity prices gave the Fed yet maneuvering room to keep interest rates unchanged.

Key inflation markers for the week ending Thursday:

• London gold prices slipped another 1.1 percent at the morning fix to an average price of $1,095; the average spot COMEX settlement was $1,090, reflecting a 1.7 percent decline; COMEX activity was dominated by long liquidation as average volume jumped 21.1 percent to 296,000 contracts and open interest fell 7.8 percent to a daily average of 517,000 contracts.

• Three-month London gold lease rates ticked up a basis point (0.01 percent) as forward rates slid lower on Thursday.

• COMEX gold stocks declined by 16,590 ounces; at 9.87 million ounces, inventories cover 19.1 percent of COMEX open interest.

• Junior gold mining stocks, represented by the Market Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ), under-performed senior issues for the second week in a row, falling 5.6 percent; the Market Vectors Gold Miners ETF (NYSE Arca: GDX) eased 3.6 percent, while the S&P 500 Composite dipped 2.9 percent.

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By CAPTAINHOOK, GoldSeek

If asked the question, most ‘financial experts’ would likely tell you the possibility of a return to extreme bubble dynamics in stocks during 2010 is the most unlikely possibility, not after all the ones during the last decade. Besides the possibility of deflation Prechter and the likes sell to a public that sees the risks, which are in fact very real, because this is widely known and being countered by central authorities, a risk of opposites must also be considered – or so the charts tell us. That is to say, not only because of the true state of inflation, but also because of the mechanisms influencing and controlling the direction of our faulty and fraudulent markets, which will be discussed in further detail below, you should know the chances of returning to a state of extreme bubble dynamics in stocks does in fact exist moving forward, this, and all that goes along with it.

What all would go along with renewed bubble dynamics in stocks? Well, for one thing, on a relative basis price managers would have an easier time keeping precious metals out of the limelight for a while. After all, who needs gold or silver when one can use rapidly appreciating tech stocks as currency, right? Heaven knows given the opportunity the Boys From Brazil (they are a bunch of not so little Hitlers) on Wall Street will surely find ways to exploit all avenues. Of course another aspect of all this would be that although gold and silver would not be in the limelight in terms of percentage gains, still, they would appreciate, taking them ever closer to where they should be. And later they would move back front and center again, once all the excitement in stocks had settled down, when the hangover associated with another credit binge began to set in.

Another credit binge – impossible right? Wrong. It’s not impossible for the desperate bubbleheads running our governments and central banks who are fuelling the most profound inflation in history everyday on your behalf, with all the new bailouts, spending, and entitlement programs that must be paid for somehow. Like the Fed’s own birth in the eleventh hour on Christmas of 1913, new health care entitlements in the US will ensure the printing presses will need to be cranked up a few more notches – an inevitable outcome of an unfunded social state. Monetize this and monetize that will increasingly be the norm in 2010 if the charts don’t lie, and the looming breakouts discussed below become a reality. What’s more, this also explains how the system should be able to handle a rate hike or two, given not much past this would likely maintain the ‘smoke and mirrors’ for long.

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By Michael S. Rozeff, GoldSeek

Suppose that I am thinking about buying a bond and its yield is 3.5 percent. This is a nominal yield before taxes and before accounting for price inflation. To estimate my real return, I need to estimate future price inflation. If, for example, I think that price inflation is going to be 3.0 percent, then I expect my before-tax yield will be only about 0.5 percent.

Most analysts use the CPI or some variant for measuring price inflation. I prefer to use the growth rate in the monetary base, also known as M0. By this measure, price inflation is much worse than you thought if you use some version of the CPI.

I use the growth rate of the monetary base for three main reasons. First, it is a very accurate measure of the inflation in bank notes of the Federal Reserve (FED). Second, the FED’s bank note inflation is a major cause of changes in prices in the economy. Third, the CPI has major flaws and difficulties.

The inflation measurement problem is something like measuring the changes in average weight of all the fish in the ocean. The FED’s note inflation is like fish food. As it is dropped by helicopters into the ocean, I assume it produces weight gain that otherwise would not have occurred. Measuring the CPI is like measuring how much weight the fish in the ocean have gained. Measuring the change in the monetary base is like measuring how much fish food has been dumped into the ocean.

It’s easy to measure the amount of food the FED drops. It’s very hard to measure the weights of all the different fish. There are so many of them. Some fish will eat the food. Others will not. Some food will be eaten right away. Some will float around for a long time before the fish eat it. The absorption of the feed has lags. New fish will be born and others die, just as new products come into existence and others disappear. Some fish will be so hard to measure that it just won’t be done, just like many services that the CPI simply does not measure.

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By Adam Brochert, GoldSeek

Gold’s getting ready to have a short-term correction if it didn’t start today. Trying to game short-term corrections in a raging bull market is a fool’s game and there’s no reason to do it. Simply buy on sharp pullbacks and hold on. It’s not rocket science for those with a time horizon of more than a few days. One simple 10 year monthly log-scale chart can tell you where the current secular bull market is:

Anyone who has studied prior secular bull markets knows that a 4 fold gain over ten years is not a bubble and is not anywhere a secular top, but “bubble” calls are everywhere in the mainstream financial community regarding Gold. First, they don’t see it coming and say it can never happen and then they call “bubble” the second it does! I love it because Gold is still climbing a wall of worry. Yes, the short-term speculative froth is a little high, but long term (I am not a day trader), Gold has a long way to go regardless of what paperbugs think.

There is too much confusion regarding Gold and its role in society. This confusion, of course, is not by accident in a paper currency regime. The deflation versus inflation debate, it seems to me, has become the democrat versus republican debate in my opinion. In other words, it is a distraction and unimportant to serious Gold investors. Those who thought a democrat (i.e. Obama) would fix our country’s structural problems and stop the senseless warfare against innocent third world nations hopefully now understand and will learn from their naive mistake.

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Bullion Vault

Just holding cash still leaves you exposed to financial and inflation risk…

IT’S A WELL-KNOWN TRUISM that every investor needs to start with savings,writes David Morgan of Silver-Investor.com. But what if those “savings” give the investor too much exposure to risk?

What investors or people in general need in this financial environment is savings that don’t deteriorate. We are in an environment now where the idea of making money, which is kind of the preamble to being American, is going away. In other words, in today’s environment, he who loses the least wins, and the way that you do that is to hold savings that don’t devalue over time.

There really are only two currencies able to do this – Gold and silver.

I remember starting my quest in silver in the mid 1960s. Silver was the coin of the realm here in America, through 1964. Then in 1965, coins were minted but they did not contain silver. (Just to be accurate about this, there were some exceptions with the 50-cent piece.)

The futures market back in the late ’60s and early ’70s had two silver markets, actually. There was the Bullion market that we still have, and there was also a coin bag market. The bag market consisted of “junk silver” as it was referred to, which is US coinage that is 90% silver.

And I remember people asking questions such as, how can you make money by buying money?

In other words, the link between the Dollar and silver had been cut, but people didn’t even understand it, because it hadn’t drifted that far – they didn’t get it. Paper money, silver money, what the heck is the difference?

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