- Although, the buzz word is deflation at the moment. Many are of the opinion that inflation will kick in soon because of the massive amount of money printing. Inflation is always a monetary phenomenon. I see inflation coming in a big way. Governments will not be able to control inflation much like they have not been able to prevent the economic collapse. Western governments are essentially the cause of the problem and not the solution. Puru Saxena writes:
Make no mistake; the developed world is drowning in debt … there are only two viable options – a global economic depression or very high inflation. It is our contention that the policymakers have chosen the latter option and over the following years, we will experience the trauma of severe inflation.
Look. The American government is staring at total obligations of US$115 trillion, America’s debt to GDP ratio is off the charts and the American public is also up to its eyeballs in debt. Under this scenario, you can bet your bottom dollar that the American establishment will try to reduce this debt overhang through a process known as monetary inflation. ….. over the past two years, the monetary base in America has expanded from US$827 billion to an astonishing US$1.93 trillion! Up until now, this surge in the monetary base has not permeated through the broad economy but once the money velocity picks up, the money supply will zoom and the end result will be surging price inflation.
It is notable that America is not alone in pursuing inflationary policies; most nations all over the world are printing money and debasing their currencies. In this era of globalisation, no country wants a strong currency and everyone is engaged in competitive currency devaluations. Given this reality, we firmly believe that this money and debt creation will cause an inflationary holocaust over the coming years.
In fact, those who erroneously believe that deflation is unavoidable should review Figure 2 which highlights the mind-boggling expansion in the balance sheets of various central banks. As you can see, America alone is not the only nation guilty of printing money; the Europeans have also jumped on this train to Inflationville.
Now, we are aware that many prominent commentators are still calling for deflation and their argument is based on the strength in American Treasuries. “After all, how can inflation be a problem when bond yields are so low?” seems to be their reasoning. Well, these deflationists seem to be missing the point because the American Treasury market is no longer a free market and we would argue that the Federal Reserve’s intervention is largely responsible for keeping bond yields artificially low. It is noteworthy that over the past several months, the Federal Reserve has purchased most of the newly issued American Treasuries. It goes without saying that the American central bank is engaged in this desperate act in order to keep interest-rates low. However, it is buying these Treasuries by creating money out of thin air. This is inflationary.
If our assessment is correct, somewhere down the road, the Federal Reserve will lose its battle and long-dated American Treasuries will plummet in value. As more and more bond investors wake up to the looming inflationary menace, they will start demanding a higher rate of return on their capital. When that happens, the dyke will break and the Federal Reserve will become irrelevant.
We have no doubt in our minds that over the next decade, various central banks will intensify their money-printing efforts and Mr. Bernanke will lead by example. After all, America has run out of choices and if the Federal Reserve does not inflate away this mountain of debt, the biggest sovereign default in history is guaranteed. Now, given the ability of the Federal Reserve to create confetti money, we are convinced that it will opt for the inflation tonic. Remember, inflation dilutes the purchasing power of each unit of money and it will make America’s debt more manageable. Of course, this inflationary agenda is not a secret and this is why many creditor nations with huge reserves are beginning to diversify out of the American currency.
It is our observation that throughout history, monetary inflation has caused asset prices to rise and this time should be no different. In the past, when inflationary expectations spiralled out of control, hard assets were the prime beneficiaries and this trend is likely to remain intact in this inflationary episode. If our assessment is correct, over the coming years, stocks, precious metals, commodities and real-estate will appreciate in value versus paper currencies. Furthermore, on a relative basis, we expect precious metals and commodities to outperform all other asset-classes. Conversely, we anticipate that cash and fixed income instruments will probably turn out to be the worst assets to own over the next decade.
Bearing in mind the looming inflationary nightmare, we urge you to protect your purchasing power by allocating capital to precious metals and commodities related businesses. Finally, we suggest that you consider allocating a portion of your capital to the fast growing economies in Asia (China, India and Vietnam).
- With the 1 and 3 months treauries hovering at virtually 0.0% and the 6 months at 0.1x%, what is the bond market signalling? Why are investors buying short term treasuries in droves and driving short term interest rates to zero? Could the smart money be signalling their concerns about a coming crisis within the next few months? The last time short term interest rates went to zero was during the October 2008 crisis!
- Why would investors buy treasuries at zero percent return? It does not make any sense. Could they be afraid of leaving their money in the banks because they sense major banking crisis up ahead? It is not a return on investment but a return of their money they are concerned with.
- It is a matter of time before this massive treasury bubble pops. The market no longer makes sense because of market manipulation and QE. When investors realize that treasuries are not a safe haven, they will flee to real money: Gold! Shanghai Daily reports:
IT is getting harder for governments to buy United States Treasuries because the US’s shrinking current-account gap is reducing supply of dollars overseas, a Chinese central bank official said yesterday.
The comments by Zhu Min, deputy governor of the People’s Bank of China, referred to the overall situation globally, not specifically to China, the biggest foreign holder of US government bonds.
Chinese officials generally are very careful about commenting on the dollar and Treasuries, given that so much of its US$2.3 trillion reserves are tied to their value, and markets always watch any such comments closely for signs of any shift in how it manages its assets.
China’s State Administration of Foreign Exchange reaffirmed this month that the dollar stands secure as the anchor of the currency reserves it manages, even as the country seeks to diversify its investments.
In a discussion on the global role of the dollar, Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington continued to issue more Treasuries to finance its deficit spending.
He then addressed where demand for that debt would come from. “The United States cannot force foreign governments to increase their holdings of Treasuries,” Zhu said, according to an audio recording of his remarks. “Double the holdings? It is definitely impossible.”
“The US current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world,” he added. “The world does not have so much money to buy more US Treasuries.”
China continues to see its foreign exchange reserves grow, albeit at a slower pace than in past years, due to a large trade surplus and inflows of foreign investment. They stood at US$2.3 trillion at the end of September.