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The Only Game Left In Town: Inflate or Die

Honest Money Gold & Silver Report

"'The cause of the lightning,' Alice said very decidedly,
for she felt quite sure about this, 'is the thunder - no, no!' she hastily
corrected herself, 'I meant the other way'.

'It's too late to correct it,' said the Red Queen:
'When you've once said a thing, that fixes it, and you
must take the consequences.'" [1]


We are not going to quibble over the various definitions of inflation, nor the many types of inflation, nor the order of which comes first as either cause or effect: all these subjects have been covered in previous papers, see: Scylla & Charybdis: The Scourge of Mankind. We know of no better definition of inflation than that of the great Ludwig von Mises; and so it shall be our standard:

"In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur." [2]

In other words, the more supply of money there is, greater than the demand for money, the more the purchasing power or exchange value of the money will fall. Thus all paper fiat monetary systems are destined to one fate - they must inflate or die, there can be no other way. Paper fiat's own self-destruction is inherent within its inner nature - as form follows function.

The House of Debt

"Every human being must understand that the Federal Reserve IS inflation. The Federal Reserve was established in 1913 to create inflation and its secondary role is to manage the public's inflation FEARS." [3]

This is a perfect description of the Federal Reserve: because of the inborn nature of paper fiat debt-money, which requires more and more money creation to sustain itself - the Fed's primary job is to create this ever expanding supply of money while deceiving the unwary soul of the debasement and loss of purchasing power of their money. The Fed wears the faces of Janus quite well, being both the harbinger of ill winds, and the false prophet of fortune's promise.

And how is the Fed handling their job of never ending money and credit expansion. Quite well according to Doug Noland:

"I have in the past referred to Alan Greenspan as the Great Inflationist - a modern day John Law. The Essence of The Greenspan Era is one of unprecedented "money" inflation, Credit inflation, asset inflation, financial wealth inflation, expectations inflation and obfuscation. The Essence of the Ongoing Greenspan Era is one of an historic Credit Bubble. His legacy should be based upon future circumstances and developments with respect to this Bubble and not how things appeared the afternoon he paraded out the door." [4]

Clearly well said. We can add nothing more. Even if we could, why spoil such a concise statement on such a complex subject.

Ever Expanding Debt

Thus the Fed's hands are tied. They must keep inflating the money and credit supply. The details of how the Fed creates new credit and money, thus increasing the money supply, are contained in previous articles, and we will not repeat them here. See: The Federal Reserve: Fractional Reserve Lending for further details.

Although the Fed creates money out of thin air, they only produce the principle part of the loan or credit extended that they grant. If farmer Brown goes to the bank and borrows $50,000.00 dollars for a new tractor, the bank loans him the $50,000.00 and records it on their ledger. However, Mr. Brown agrees to pay $10% interest on the loan. After all, the banker must receive something for his hard work.

The extension of credit by the bank has increased the money supply by $50,000.00 dollars, which did not exist before the loan was made. However, recall that Mr. Brown agreed to pay 10% yearly interest on the loan.

The bank did not create the 10% interest, only the $50,000.00 dollars of principle.

Where is Mr. Brown going to get the 10% of additional money to pay the interest? He is going to have to work and earn the money by producing goods he can sell in the market place. He can then use the income derived therefrom to make his loan payments with.

However, take all the collective loans made in the United States. When the loan is extended the banker actually creates the money by the very act of lending: simply by a stroke of his pen as he enters it upon his ledger, nothing more needs to be done. The mystical enchantments of double-entry bookkeeping does the rest. But not so with the interest - it has not yet been created. The banker leaves that job for the borrower.

This means that the interest on all new outstanding loans has not yet been created. Hence the money supply needed to service the debt (make interest payments) must expand at the minimum rate of the interest due on all new loans, otherwise there would be no money (in aggregate) to service the loans.

The supply of money must increase at least by the prevailing rate of interest. Central bankers must yearly create at least as much new money as needed to service the outstanding debt. Monetary growth cannot be below the rate of interest on an aggregate basis. They know that the principle is never going to be paid off, as it can't be, it is impossible - all they want is the perpetual interest rate stream on the principle.

Thus the use of paper fiat debt-money condemns the users to a life of debt servitude that cannot ever be paid off. They will be fortunate if they can maintain the service on the debt - the interest rate payments, let alone paying off the principle of the loan. For further details see: The Greatest Scam on Earth.

The Ebb & Flow

As can be seen by the above quote, Mr. Noland is of the opinion that a bit of inflation has taken place under Mr. Greenspan's watch. I couldn't agree with him more. Mr. Bernanke has stepped into a monetary liquidity pit of quicksand - the more he struggles to get out, the deeper he sinks. We wish him well.

Excessive credit expansion has fueled a monetary sea of liquidity the entire globe finds itself awash in. For the time being the money has flowed into investment assets. It first visited itself upon various stock markets, especially ours the last several years, and previously to Japan's.

The U.S. bond markets have mopped up an even greater amount of the liquidity, as did Japan's. Funny how one never hears much mentioned about the killing made in the Japanese bond market during their terrible bout of deflation.

Back in America Mr. Greenspan assured the world that whomever would lend their money to the U.S. would be duly compensated by continually lower interest rates, providing a guaranteed profit. The world obliged, and so too did Mr. Greenspan. A truly symbiotic relationship of the nth degree. One hand washes the other.

But a high price has been exacted, as the money that the bond market siphoned off from productive business endeavors has greatly affected the United States capacity to produce goods and services for export. We are now a nation whose largest export is inflation - of paper debt issuance; no longer are we the world leader of industry, of the production of tangible goods we once were. We now hold the infamous distinction of being the world's largest debtor, we used to be the world's largest creditor. How things change. Cui Bono?

Now China and Japan accept vast amounts of Federal Reserve Notes in exchange for their goods and services. They then turn around and send huge sums of money back to the U.S. in exchange for Treasury Bonds and Notes. The money may not even leave New York thanks to the miracles of double entry bookkeeping.

Collectively China and Japan fund almost 50% of our debt market. If they ever repatriate that money interest rates will rise to attract other buyers. It is not a question of if - but when - similar to taxes and death.

Unreal Estate

Domestically, real estate has seen an unparalleled rise in speculative investment for several years now, reminiscent of the good times in Japanese property markets once upon a time. Perhaps they were ahead of the times. The resulting asset inflation has garnered the attention of both BIS and IMF officials to publicly state that the proliferation of speculation in real estate, coupled with our deficits and lack of savings, is a recipe for an accident that could have negative GLOBAL repercussions. It must have taken awhile to figure that one out.

"Global growth last year was again very rapid, in spite of higher prices for energy and other commodities. Moreover, core inflation generally stayed low even as headline inflation rose. Yet, as the year wore on, fears began to grow about prospective inflationary pressures. Concerns also began to mount about the growing imbalances in the global economy, not least the low saving and high investment levels in the United States and China, respectively, and record current account imbalances."

"However, several features of the current global upswing are less positive: fiscal deficits are large; household savings seem unsustainably low in a number of advanced economies; investment levels remain low; and global current account imbalances have reached unprecedented levels." [5]

Interest rates around the world are beginning to rise, even in Japan, the home of zero bound interest rates. Here in the U.S. the Fed has raised rates 17 times. Stock markets around the world have taken pretty good hits the last few months: some in Asia are down 50% and just recently the U.S. markets were on the brink of collapse, pulled back once again from the edge of the abyss by its guardian angel.

Now we hear rumors that the real estate market is tapering off, and may be headed for a hard landing. Where there's smoke - there usually is fire.

"Total housing inventory levels rose 3.8 percent at the end of June to 3.73 million existing homes available for sale, which represents a 6.8-month supply at the current sales pace. By contrast, in June 2005, there was a tight 4.4-month supply on the market."

"The Mortgage Bankers Association Purchase Applications Index declined 3.3% this week. Purchase Applications were down 23% from one year ago, with dollar volume down 24%." [6]

August 2 - Bloomberg: "California home-loan defaults rose at the fastest pace in 14 years in the second quarter as slowing price appreciation made it harder for homeowners to sell and pay off mortgages, DataQuick...said. Banks and other lenders sent 20,275 default notices to California homeowners in the second quarter, up 67.2 percent from a year earlier and up 10.5 percent from the first quarter..." [7]

What is the Fed to do? They will do what they always do - inflate. The question is where will the money flow to? Where will it rest and call home, and for how long? Talk about a cat on a hot tin roof.

The stock market is overpriced and wobbly as is. The bond market will take some but it doesn't have that much room left to move - it will oblige, however, as best it can for as long as it can. Real estate appears to be over the top as well. More conundrums, just what we need.


When we look around the world we see one dominant theme or paradigm that is attracting money flows: paper is out and tangibles are in. Commodities have been the recipient of large flows of liquidity, and have responded in kind.

This includes not only the precious metals and energy assets such as oil and natural gas, but commodities of all descriptions such as copper, nickel, and aluminum - all have been going up in price (attracting money flows).

This is a major paradigm shift from paper into tangibles that we have written about before, see: The New Paradigm for further details. The table below lists the 19 different commodities in the CRB Index and their weighted percent of the index.

CRB Index

Why have commodities been going up in price or receiving such a large portion of the world's money flows - because they were the most undervalued asset class existent. For the last decade commodities have been in a bear market downtrend. They were cheaper than dirt.

When prices are at their weakest, producers cut back on production because the demand for their goods, as well as the price received for them, are at rock bottom. Investment in new production facilities comes to a halt. Supply and demand balance out and then the pendulum starts to go the other way. Tick tock, goes the clock.

The chart that follows shows the unmistakable bullish trend that commodities have experienced.


In other words - commodities had no where to go except up. The only cycle that one can be sure of in the markets, is the cycle whereby asset classes go from overvalued to undervalued. The human emotions of fear and greed drive the markets to and fro.

Commodities (real tangible goods) were undervalued in a world where paper debt was believed to be the way to salvation. Now paper fiat debt-money is being perceived for what it really is: nothing - perhaps even less than nothing.

When do you shop or spend your hard earned money - when things are on sale - when you get more bang for your buck. The same is true for investing: the time to buy is when stuff is at its lowest price - when the blood is running in the street as they say.

At such times your downside risk is minimal while your upside potential reward is great. Investing is about risk versus reward, as is all of life. Money management, risk management, and asset allocation are key.

What do all three of the above have in common: discipline - exactly what's missing in many an investor's portfolio.


The rule of investing is to find asset classes that are in a bull market, preferably in the early stages of one. All markets are in one of four (4) stages:

  1. Basing/Consolidation

  2. Rising/Advancing

  3. Stalling/Topping

  4. Falling/Depreciating

The best time to own an asset is when it is moving out of stage one (basing) into stage two (rising). When an asset starts to top out (stage 3) it is time to get out - to move on. Take the money and run. When the crowd gets wise, the wise get out.

Notice that after a hard fall (stage 4) assets will then begin to base (stage 1). After a hard fall is the time to start watching and waiting for stage one (basing). When the asset breaks out of its basing range/channel its time to buy: stage two is off an running.


How does one know if an asset is in a bull market? Because it starts to rise in a stair step fashion making higher highs and higher lows. When an asset is in a bear market it makes lower highs and lower lows.

A bullish signature rises from the bottom left hand corner of a chart up to the top right hand corner. A bearish signature descends from the top left hand corner of the chart to the bottom right hand corner. They are the mirror image of one another.

Paradigm Shift

Besides bull markets there are also paradigm shifts that occasionally occur. They involve the change of major belief systems. For example: when the earth was said to be flat and then round; when the sun was said to revolve around the earth and then the earth around the sun; when it was said that man could not fly but Wilbur and Orville did alright, although Icarus had a bit of a problem as we recall.

The evolution from barter or direct exchange to indirect exchange was a paradigm shift. The change from gold and silver as money to paper fiat was another paradigm shift. Now paper fiat debt-money and other forms of fiduciary money are being seen for what they are: debt, plain and simple. Paper "securities" are on their way out - tangible or real assets are now taking center stage.

Gold & Silver

Gold and silver are returning to whence they belong: as the Sovereign of Sovereigns: Honest Money - Sound Money - Hard Money. Money that is no one's obligation but is the only honest ways and means to pay off obligations: debt obligations.

Debt cannot pay off debt. Only Honest Money pays off debt. The world is starting to understand that debt is not the way to a free and unencumbered life. Debt is a yoke that chains one down to a life of servitude to the man - rather than the freedom occasioned by the accumulation of one's honest savings as wealth. The fruits of one's labor.

Gold and silver are the most bullish assets available today with the energy commodities of oil and natural gas close behind; and close behind those are the other commodities listed above: copper, aluminum, nickel, etc. Investors have learned the hard way that real honest things are more valuable then mere scraps of papers with numbers written thereon.

The Triumvirate

There are three (3) major asset classes that are presently in bull markets:

  • Gold & Silver and Precious Metal Stocks

  • Energy Markets of Oil & Natural Gas and Related Stocks

  • Commodities & the Companies that Produce Them

The best investments today are found within the precious metals, energy, and commodities. These are bull markets that are only in the first stage of their development. They have a ways to go until the tide changes. But there will be corrections along the way - such is the way of all markets.

This isn't just about bull markets - it's about paradigm shifts that are causing bull markets. Its about debt versus Honest Money: Gold and Silver Coin - the only game in town, where the house doesn't have the advantage - you do. Make them play straight up. Vote accordingly.

"The easier it looks the hotter it hooks
There ain't no such thing - as easy money" [8]

Come visit our new website: Honest Money Gold & Silver Report
And read the Open Letter to Congress
See our Gold Stock Portfolio

[1] Looking Through The Hour Glass
[2] Ludwig von Mises - The Theory of Money
[3] Puru Saxena - Inflation The Invisible Tax!
[4] Doug Noland Feb. 3, 2006 - The Essence of the Greenspan Era
[5] BIS 76th Annual Report 26 June 2006
[6] The Mortgage Bankers Association
[7] Bloomberg News
[8] Ricky Lee Jones - Lyrics To Easy Money


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