Since our economy is fantastically debt based and debt is the medium of exchange, more debt is likely to produce higher prices given the same amount of goods. Typically this equation is leveled at the money supply but our system is one in which debt rules supreme. While households are in the painful process of deleveraging, debt has increased overall because of banking bailouts but also government spending. For this, we are seeing consumer inflation pickup.
The inflation rate has been moving up since the crisis hit a trough in 2009. Americans are facing higher prices in a variety of sectors including healthcare, energy, food, and higher education. Ironically inflation is hitting in many of the cornerstones of what was once thought to be part of a middle class lifestyle. The recent push in prices has largely come from the higher prices in energy:
Total energy costs are up 7 percent over the last 12 months while wages have gone stagnant. Gasoline has seen the largest push up in the last year moving up by 12.6 percent. Looking at food, the total cost of food has gone up by 3.9 percent over the last 12 months. Of course much of this is synergistic with the rise in energy given that food is transported and also produced with high levels of energy usage. The interesting point here is that energy usage overall has not necessarily surged in the US to justify this movement. This is largely being driven by an overall depreciation in the US dollar.]
In the FED’s most recent public statement, FED Chairmen Ben Bernanke has skillfully suggested that maybe the FEDs inflation target of 2% may not quite be enough. He went on to say that it may do the nation well for them to loosen up the inflation control and pursue a higher rate of inflation to stimulate growth since the ‘recovery’
As long as the masses who transact in these fiat currencies believe that the almighty source of these paper labor vouchers has the world under it’s control, then they will continue to transact in the vouchers and their policy adjustments will continue to have some effect as currency is trusted for the time being, but when that trust begins to dissipate so too does the value of those dollars. This reduction in value is a direct result of those attempting to exchange dollars with a provider of goods and services who does not feel comfortable with the value of the exchange. Stated differently, if you put 10 hours into creating a product that you would sell for $100 and you exchange it for a fiat currency worth $100, you need to be confident that NO MATTER HOW LONG YOU HOLD THE $100 FIAT DOLLARS, YOU WILL BE ABLE TO EXCHANGE THE MONEY FOR $100 WORTH OF GOODS OR SERVICES WHEN YOU NEED THEM, HOWEVER LONG THAT MAY BE. If you don’t feel that you will be able to get back the equivalent of your 10 hours of labor in the future, but instead only get lets say 7.5 hours, then you would obviously elevate the exchange price of the original good to lets say 12.5 hours of labor or $125.00 to compensate for the coming depreciation. This is inflation to offset dollar devaluation.
We are beginning to see this very phenomenon happening worldwide, except for a very dangerous twist has now begun to manifest as the world is moving to a dramatically different solution to the problem. This solution is a risky proposition for the United States and our allies as it entails the global economy evolving past the dependence on the US Dollar as the world reserve currency and moving towards a more balanced arrangement that would favor a collective of countries rather than centralizing all the monetary power in one nations hands. Whether or not this turns out to be a better option remains to be seen, but either way it means the dollar will become more of a national currency and ALL OF THE NEWLY CREATED DOLLARS SINCE THE HOUSING CRISIS BEGAN WILL ALL COME HOME AND WRECK HAVOC ON THE ECONOMY BEYOND WHAT WE HAVE ALREADY SEEN.
At this point you should be smart enough to realize that Wall Street isn’t going to make you rich nor do they really care if you lose all of your retirement investments. Maybe its time to seriously do some thinking about what the future holds and where you see things going. If you believe that you have the secret to knocking it out of the park in stocks then keep doing what you are doing, if you realize that the more you learn the less you know then maybe playing it safe is a better option. Knowledge is power & ignorance breeds fear. Believe me ignorance will bring about a fear that the world has never seen if a dollar panic begins and at this point it looks like other nations and central banks are getting a little jumpy. Establish your “Plan B” in physical gold & silver bullion today and remove yourself from the collateral damage zone of the US dollar and the federal reserves coming QE3 announcement.
# # #
SGM Metals strives to offer not only wealth preservation precious metals investments to offset weakness in the economy, but to help educate our family of clients to better identify the threats to their financial security.