海角大神

Since the feds can鈥檛 grow their way out of debt鈥�they鈥檒l have to try to inflate their way out.

Trouble is, first鈥�central bankers don鈥檛 have that good a grasp of inflation. They can control the amount of money in the monetary base at the Fed. But they don鈥檛 really control what happens to it next. For a long time, prices don鈥檛 necessarily react鈥�because, in a depression, the velocity of money slows down to a crawl. The banks don鈥檛 lend; the money doesn鈥檛 get around鈥�and it doesn鈥檛 feed into consumer prices. Then, all of a sudden, people realize that there dollars are losing value鈥�suddenly, they are eager to send them on their way. Velocity increases 鈥� fast. It is as if they had put cash in a particle accelerator. Instead of 6% inflation, the CPI goes to 12%鈥�or 25%鈥�or 100%.

The other problem is the 鈥榖ond vigilantes.鈥� You remember them. They鈥檙e the ones who so impressed Bill Clinton that he said that if he died, he wanted to be reincarnated as a bond trader. Because those guys are the ones with the real power, he noticed.

America is going to need to borrow an additional $1.6 trillion this year. And then keep borrowing $1 trillion-plus for years and years to come. There are no surpluses 鈥� ever again 鈥� in any plausible budget forecasts.

But what will the bond vigilantes make of this? What if they see inflation increasing? What if they no longer want to lend? What if yields on the 10-year notes (which go up when bond prices go down) rise to 5%, or to more than 15%, as they did in the early 鈥�80s?

Then, instead of a deflationary depression we will have an inflationary depression. How it will play out exactly is beyond the scope of today鈥檚 Daily Reckoning. Besides, we don鈥檛 know. But one thing is almost certain 鈥� that gold will go up.

Gold is what people buy when they fear a crack-up in the monetary system. As the day of reckoning draws near, gold will shift from being a means of storing wealth鈥�to a hedge against inflation and/or a monetary crisis鈥�to a speculative play.

Currently, you see ads for companies that offer to buy your gold 鈥� in exchange for paper dollars. The public still has no idea; if they knew what was coming they鈥檇 want to hold onto every piece of gold they own.

Sometime in the future you鈥檒l see ads with the opposite message. Companies will want to sell you gold 鈥� at prices far higher than those today. Then, cab drivers will give you tips on which is the best penny mining share to own鈥�and hair dressers will opine on their favorite gold coins.

When that happens, we will have to remember to sell. But that is still way in the future鈥�

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