Inflationary Depression Forecast Revisited…

Going back a few years ago, I made a forecast that America would be heading toward an inflationary depression. I made that forecast during 2007 and early 2008 when the federal government’s policies were very bad.

Today in 2010, the federal government has replaced the bad policies of a few years ago with much, much worse policies today. It is mind-boggling how bad these policies are and it is astonishing that most politicians and many economists don’t see the obvious dangers.

A forecast of an inflationary depression is actually two forecasts since a “depression” and “inflation” are technically two separate events. Therefore, I have to make clear that we are talking about two separate forecasts.

It is an old saying that the “road to hell is paved with good intentions”. Well, in recent years, that road has been changed to a super-highway! America was put on that super-highway a few years ago and right now we are traveling at break-neck speed toward the financial abyss.

PART 1 OF MY TWO-PART FORECAST: DEPRESSION

I believe that my forecast of a “depression” is accomplished. If you think that our experience of 2008-2009 was a garden-variety recession, I would ask you to re-consider that. The trillion-dollar spending policies enacted during the late Bush years and now the Obama years are extraordinarily dangerous. The federal government (and the state & local governments, too) are spending beyond our means as well as theirs. Bankruptcies, foreclosures, business contraction and unemployment are certainly at depression-level. Talk of a recovery is wishful thinking since the effects of still more bad policies are on the horizon. Look at what we have right now:

1. Unemployment is at 17%. I am not talking about the much reported yet highly inaccurate “official unemployment rate” which is a sham; I am talking about what is called the “U-6” employment rate that the Bureau of Labor Statistics compiles. It is a much less reported yet more accurate measure of unemployment. This statistic includes those counted in the “official unemployment rate” and adds in those that dropped out of the job search; the so-called “discouraged” unemployed. U-6 also includes those that are “under-employed” which means those that want full employment but have had to settle for part-time employment.
2. Foreclosures are at all-time highs.
3. Bankruptcies are at all-time highs.
4. Personal debt is still at record levels.
5. Government debt is at a mind-boggling all-time high and still soaring.

Then couple the above list with what is coming:

1. The tax-cuts enacted in the past decade are set to expire by January 2011. If this goes as planned, the effect is a tax increase that would deliver a body-blow to an already weak economy. A tax increase is nothing more than money taken by force by the government from the private economy. Basically that would mean less income and less invest-able capital for the private sector as the government forcibly siphons these resources and redirects it to a bureaucracy that is already the biggest in American history.
2. Congress and the president’s economic team have made noise about a “Value-Added-Tax” which is dumb during good economic times and quite stupid during bad economic times. Even the name is idiotic since taxes don’t add “value”…it merely increases the price or cost of that particular product or service.
3. The same folks are still considering pushing through what is called “Cap-and-Trade” legislation that would raise energy costs greatly since the legislation is nothing more than a huge hidden tax on energy usage. This legislation would do little (nothing?) for the environment but it would do much harm to our economy.

Therefore, consider the depression here and now. If taxes, regulations and other burdens and risks are not decreased immediately and substantially, then this depression will continue.

PART TWO OF MY FORECAST: INFLATION

Some readers have asked about the prospects for inflation. I am on record that I think that inflation is not an “if” but a “when”. As the federal reserve keeps creating trillions of dollars out of thin air, there will be consequences. Technically, they are indulging in “monetary inflation” but of course most people think of inflation by its symptom which is “price inflation”. Since many observers don’t see price inflation, they assume that deflation is winning the day and will be here for the foreseeable future. This is wrong.

If you have read my prior essays on inflation, I point out that inflation will become evident when two conditions occur:

1. The excessive creation of money (again, this is “monetary inflation”)
2. …When this money circulates through the economy (also referred to as “velocity”)

If the government creates trillions of dollars and these dollars do not circulate, then velocity will not occur. But just keep in mind that “velocity” occurs where there is DEMAND. This is a key reason why I am a long-term bull on commodities in general and “human need” commodities in particular. I believe that this is such an important consideration for investors that I even did a national seminar on commodities investing.

There are many areas where there is simply no substantial demand (such as housing and autos). Money will not flow there in this economic environment. However, money does flow to areas of “human need”.

For example, a recent report has shown that the price of wheat has gone up 71% during the past 12 months. I think that similar price movements (or higher!) are in store for many essentials. Commodities tied to “human need” will definitely see their prices continue to zig-zag upward.

I also believe that gold and other precious metals such as silver will continue their bull market. Why?

I consider gold and silver to be “human need” essentials in today’s economic environment. As inflation unfolds among essential commodities, people will need a “store of value” as the world’s major currencies keep on being over-produced. When people start to see that the dollars they hold (or other currency) start to lose value as the government over-produces it, they will then see that having cash is not a “safe harbor”; inflation will erode its value.

They will then seek to replace currencies that are “depreciating” or losing value and shifting their resources to that which holds value…gold and silver.

In fact, as people world-wide see the problems with fiat currencies (dollar, euro, etc.) and with paper assets (stocks, bonds, etc.), they will migrate into those things that will hold value or appreciate over time. The flight will be from “paper” to “stuff”. “Stuff” like precious metals, food, water and other essentials.

THERE WILL BE LITTLE OR NO INFLATION IN THOSE THINGS THAT PEOPLE DO NOT NEED.

The corollary to that (and this goes back to my forecast) is this…

THERE WILL BE SEVERE INFLATION (EVEN HYPERINFLATION) IN THOSE THINGS THAT PEOPLE DO NEED.

We have a huge world population and their needs will be addressed. When you couple this demand with expanding money supplies across the globe, rising prices will be the result.

The stage is being set for historic price inflation…in those commodities that are “essential”. Investors need to prepare.