And, I think it is coming. In fact, in many ways, it’s already here, just not yet widely recognized. The deflationists still hold sway in the bond market, where investors happily accept puny yields.
Be that as it may, deflation today is an argument facing death by a thousand cuts. Every day, evidence rolls showing that the dollar is buying less. In a recent edition of The Wall Street Journal, one headline reads, “From Cereal to Helicopters, Commodity Costs Exert Pressure.”
The WSJ article goes on to point out what is painfully obvious to anyone who follows commodities and companies. The cost of nearly everything is going up.
General Mills will boost the price of a quarter of its cereals to reflect rising prices for grains. Kraft is raising prices. Domino’s Pizza hasn’t said it will yet, but it did say the price of cheese is up 29% from a year ago.
Profit margins are suffering in the meantime and there is a long list of companies battling rising costs of the commodities.
The Journal article goes on to point out “Corn is up 44%, milk is up 6.5%, hot rolled coil steel is up 4%, copper is up 29% and oil is up 14% from a year ago. Across Corporate America, more companies are wrestling with when and how much to raise prices as raw materials costs climb.”
Still, the Journal’s article had no discernible effect on the optimistic bondholders. The bond market seemed bored and yields are up a bit however the 10-year note pays a whopping 3.35% (circa late December 2010).
By the time the bond market increases enough to say inflation is here, it will be too late — too late for bondholders.
In the meantime, the prices of gold and silver are up too. All of these things point to the obvious: The dollar is buying less.
Let us the count the ways. There is the U.S. government bleeding red ink and heavily in debt. Both portend bad things ahead. How will they square the circle? The easiest — and the most politically expedient — way is to print more money.
There is the jawboning going between central banks of the world all trying to cheapen their currencies. The rationale is to stimulate exports, but don’t be fooled. The real effect of a cheapened currency is that your dollar will buy less.
There are all kinds of fancy names for what the Fed is doing — “quantitative easing” comes to mind. But the bottom line is that they all mean the Fed will create more money.
At a recent Investor Conference in NYC, Jim Grant, the host and editor of the excellent newsletter Grant’s Interest Rate Observer, said: “Don’t you sometimes get the feeling that the economists are pulling our leg? A bartender would call it watering the whiskey.”
That is a good way to think about it. More dollar printing simply dilutes the buying power of all dollars. And so we see today the beginnings, the mere sprouts, of a fully fledged inflation. It can and will get much worse.
Don’t pay attention to that thing called the Consumer Price Index, or CPI. It is running at about 2%. It is an engineered figure and not to be trusted. Oskar Morgenstern, who along with John von Neumann contributed so much to game theory, once described it as a “mere index of doubtful validity,” as Grant relayed.
Nonetheless, on the basis of this suspect fluff, the Fed tells us inflation is under control. In fact, it is complaining that the inflation rate may be too low. As Grant quipped, “That’s like the New York Police Department complaining about the lack of crimes.”
Bernanke would have us believe the Fed can calibrate inflation within tolerances of 100 basis points. But it way overestimates its powers. Once the inflation train gets going, it will be very hard to slow down (remember former Fed Chairman Paul Volcker chose to raise interest rates to 22% in the early 1980s to whip inflation). One day, the Fed will wish inflation were only 2%.
In the meantime, what to do? Obtain more financial education and learn how to protect yourself during these trying times.
I favor a quote from Steve Forbes … Forbes says that pursuing additional financial education and the resulting increase in our financial literacy will open our eyes to being savvy with our money and using alternative wealth creating strategies; this will be they key to resolving our financial crisis.
To gain the necessary financial education, it is best to pursue association with, access to, and membership in, a wealth creation community. As a result, you will learn about alternative wealth creating strategies and consider investments in non-dollar denominated assets … perhaps emerging markets … perhaps energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … perhaps precious metals, rare earths, water rights, oil, natural gas, potash mines, or gold mines … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.
For those wanting protection of their purchasing power in gold, there are several ways that may be appropriate to obtain this protection. These include direct ownership in minted coins, use of gold exchange traded funds, gold mutual funds, and junior gold stocks. Many are investigating having part of their IRAs in gold, silver, precious metals, and non-dollar denominated currencies.
In addition, for those that truly believe sovereign risk is the greatest risk we all face, it is wise to learn how to implement a multiple flag strategy to diversify this risk or provide protection against higher taxes, capital controls, hyperinflation, civil unrest, erosion of personal liberty, and the rise of a police state. With a multiple flag system, you consider taking preparations like, but not limited to, establishing a foreign bank account, purchasing some real estate overseas, seeking alternate sources of income, dual citizenship, and carrying multiple passports.
I will continue to provide examples of things we need to learn, the secrets of the insiders, as part of being savvy with our money, and introduce alternative wealth creating strategies, in future articles and updates at my blog over the next few weeks.
In addition, a good book to read would be “Bad Money” by Kevin Phillips; it describes Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.
In closing, be sure to Meet Me at my website, WhoIsMikeFarrell; Read Posts about my Internet Marketing Business at aspenIbiz blogspot; and Obtain Some Tips About Being No 1 on Google at aspenIbiz My Go-To-Market Partners website; and Learn How to Live Longer at aspenIbiz My Life’s Advantage Today site.
Finally, I would like to provide Best Wishes for a Happy Holiday Season and a Prosperous New Year!
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