I had a life-changing event this week. I went grocery shopping. As a result, I’ve decided to give up writing and hosting radios shows for a living. I’m gettin’ into the big time: cattle rustling. The price of food is rising, but here at Dallas, Texas, the price of beef is exploding.
Two weeks ago, I bought four steaks on sale for $25. Yesterday, I saw an equivalent bundle of four steaks on sale at the same grocery store for $35.
To heck with that. I went to Walmart. They’re always cheap. But, lo and behold, Walmart beef was just as expensive as the first grocery store’s—so I decided to curb my appetite for beef and buy some chicken thighs. They’re always cheap.
I walked over to the Walmart chicken thighs and was shocked (shocked, I tell you, shocked!) to see they were priced at $3.47 per pound. I looked at that price, squinted, walked away shaking my head in disbelief. Then I thought, “No, I must’ve made a mistake,” so I walked back to take a second, deliberate look and, sure enough, the chicken thighs were still $3.47 per pound!
Who knows? Maybe the Walmart computer screwed up. Maybe there was a data entry error. If I went over there today, chicken thighs might be priced at 85 cents per pound.
But yesterday, I saw $3.47 per pound. I saw it twice and it only confirmed what you and I have seen for at least three years. The price of food is rising. It’s rising quickly and not showing any sign of falling any time soon.
That’s evidence of inflation.
Anyone who drives knows that the price of gasoline is also rising dramatically.
That’s more evidence of inflation.
Inflation is usually characteristic of increasing demand and a strengthening economy.
So, is the economy strengthening? If not, why are we seeing inflation?
• Despite obvious increases in the prices of food and gasoline, government assures us that inflation is a modest 2.93%. Others claim the real inflation rate is closer to 10%. Judging from the price increases I’ve seen in steak, salmon, bell pepper and even chicken thighs, I’d bet on 10% before I bet on 3%.
Still, there’s evidence to support the government’s inflation estimates: falling housing prices. During the past 18 years, the average price for homes rose 124% from $127,000 (1994) to $285,000 (2006) and then fell 30% to today’s price of $197,000.
Even after the recent 30% fall, since ’94, the actual price of homes is still up 55%—almost 2% per year. That’s not so bad. Homeowners can remember the euphoria they felt from 1995 through 2006 as their homes’ prices rose higher and everyone seemed to be getting richer.
But were homeowners really getting richer? When you adjust for monetary inflation, today’s average home price is only $128,000 as compared to $127,000 in ’94—that’s less than 1% up in 27 years. (Takes all the fun out of home ownership, doesn’t it?)
When we compare the price of homes adjusted for inflation to the actual price of homes, and recall the euphoria of homeownership from 1995 to 2006, we can begin to see that we were deceived into thinking American homes were increasingly valuable, when in fact, they weren’t. Our homeowner euphoria was as artificial as a crack addict’s dream.
How was that deception achieved? Gov-co made easy credit available to all (even sub-prime borrowers). Where’d they get the easy credit? They spun it out of thin air. In order to stimulate the economy in the late 1990s, gov-co specifically stimulated the housing markets by inflating the credit available to home buyers and thereby creating a demand for homes where there was none.
This “better-living-by-stimulation” strategy seemed to work pretty well for about a decade, and then the illusory “bubble” popped, reality reasserted itself, and the economy nearly crashed. We were artificially “stimulated” by monetary inflation to buy houses we didn’t need, couldn’t afford and didn’t deserve. In retrospect, we can see that monetary inflation did not create an economic reality so much as stimulate an economic illusion.
But, however you figure the price of homes, it’s clear that those prices have fallen for the past 6 years.
Falling prices are evidence of deflation. Deflation is usually a symptom of falling demand and an economy in recession or even depression.
• Employment and wages are also falling.
A friend of mine installed the electrical system in small factory at Dallas. Earlier this week, we visited the factory. There were about 40 employees. Some White, some Mexican, mostly Asian. Most were being paid less than minimum wage. I was surprised that any employer could get by with employing people at less than minimum wage. I was amazed that employees would accept a job that paid less than minimum wage.
According to government, the US unemployment rate has fallen from a peak of over 10% in A.D. 2009 to about 8.3%.
According to Gallup, unemployment measured without seasonal adjustment, is currently 9.1% and rising. Gallup also claims than another10.0% are working part time but want full-time work. As a result, Gallup’s U.S. underemployment measure (which combines the percentage of workers who are unemployed and the percentage working part time but wanting full-time work) rose from 18.7% in January to 19.1% in February.
John Williams (ShadowStats.com) calculates the unemployment figures without the modern gimmicks that are used by government to create false or misleading results. He claims the true unemployment rate is actually about 22%. For American youth, 18 to 25, the unemployment rate runs nearer to 40%.
Unemployment rates below 10% are consistent with a recession. Unemployment rates over 20% can be symptomatic of a depression. So, where are we? In recession or depression? Are we headed for inflation or deflation?
Falling employment and falling wages are evidence of deflation and at least recession—and probably depression.
• My point is that we’re seeing mixed evidence of both inflation and deflation. This isn’t unusual. There was probably never a time when any economy was purely deflationary or purely inflationary. There’is always a mix of rising and falling prices in any economy. The question of whether we’re in inflationary times or deflationary times depends on predominance and degree. If most prices are rising, we’re in an era of inflation. If most prices are falling, we’re in an era of deflation. If the price increases (inflation) are mild, the economy is probably doing well. If the price decreases (deflation) are predominant but mild, the economy is probably in a recession. If price decreases are both predominant and significant, the economy is probably in a depression.
Knowing whether the economy is in recovery, recession or depression is vital to making investment decisions.
• So—in an economy where the prices of food and gasoline are rising . . . but the prices of housing and labor are falling—where th’ heck are we? Inflation or deflation? Recovery, recession or depression?
The answer as to which trend—inflation or deflation—predominates, might be found in the government’s attempt to “stimulate” the economy by pumping additional trillions of fiat dollars into the US and global economies.
In A.D. 2009, Congress argued bitterly over whether it should or should not inject $600 billion or even $1 trillion into our economy. Congress eventually enacted the American Recovery and Reinvestment Act and settled for the seemingly massive injection of $800 billion in economic “stimulus” (monetary inflation) into the economy. This $800 billion was the largest economic recovery program in history. Adjusted for inflation, it was nearly five times more expensive than FDR’s Works Progress Administration. It was bigger than the Louisiana Purchase, the Manhattan Project, the moon race and the Marshall Plan.
However, last year we learned that, about the same time that the federal government openly injected $800 billion into the economy, the Federal Reserve secretly injected $16 trillion to US and foreign banks and corporations to try to inflate prices, inflate profits, and jump-start the US and global economies.
$800 billion is an enormous sum of money, but $16 trillion is a lot more. $16 trillion is twenty times greater than the $800 billion our Congress debated vociferously in A.D. 2009. $16 trillion is more than the US annual Gross Domestic Product. In retrospect, the Fed’s $16 trillion makes the congressional debate over $800 look trivial, silly, unimportant.
But the $16 trillion “injection” also demonstrates just how far the gov-co will go to stimulate the economy by means of inflation. (Given the Fed’s secret dispersal of $16 trillion circa 2009, who’s to say that the Fed isn’t secretly dispersing another $32 trillion right now?)
Distribution of the Fed’s $16 trillion and the government’s $800 billion (plus additional hundreds of billions) is evidence that the gov-co is absolutely determined to cause enough inflation to save us from imminent deflation and depression.
If the gov-co’s massive injections fiat currency provide some cause for optimism (the gov-co is struggling hard to stimulate the economy), the results of those injections are cause for pessimism. So far, all that freakin’ bail-out and stimulus currency has done is prevented (or at least postpone) the US and global economies from falling into a full-blown depression. That’s a good thing. But all that freakin’ fiat currency has done little or nothing to actually stimulate and improve the economy—and that’s shocking. The gov-co injected over $18 trillion in fiat currency into the US and global economies, and the net result was no gain. All they did was buy some time.
This signals that the forces favoring deflation and economic depression are huge. The US and global economies seem figuratively exhausted by unsustainable debt obligations incurred during the last 40 years of fiat currency “partying”. During those 40 years, our economies were “over-stimulated” by continuous injections of fiat currency. Now, those economies need to rest, to sleep, to rebuild. But the gov-co, like a meth dealer, is trying to keep the party going by injecting the economies with ever more stimulant.
It’s certain that the meth (fiat currency) addicts that comprise our economy must eventually crash. They can’t party forever. Sooner or later debts must be paid or openly repudiated.
But, will the fiat currency addicts crash this year—or next? Will our friendly local “meth dealer” (the gov-co) distribute enough new “meth” (fiat currency) to keep the “addicts” (consumers) partying for another 2, 3 or even 5 years?
• Even more importantly, will the partyers lose their appetite for “meth”? That is, will fiat dollars lose their status as the consumers’ “drug of choice”?
We’re going to see monetary inflation. The gov-co wants inflation so it can repay its enormous debts with cheaper dollars. More monetary inflation will cause rising prices and further declines in the purchasing power of the fiat dollar and those paper debt-instruments like stocks, bonds and pension funds denominated in fiat dollars.
We might even see hyperinflation. Note that while moderate inflation might be justified as a means to at least temporarily “stimulate” an economy, hyperinflation is not intended to stimulate the economy—it’s intended to erase existing debts. If the government causes 5% or even 10% inflation, that level of inflation will wipe out some of the existing debt but, for the most part, may stimulate the economy—at least temporarily. But if the government causes inflation of 26% per year for three years or more, that will wipe out 60% of the purchasing power of the fiat dollar and 60% of the value of paper debt-instruments denominated in fiat dollars. Prices will double; savings will be destroyed. That’s hyperinflation. The result is ruin for all creditors who saved their wealth in the form of fiat dollars or paper debt instruments.
As creditors’ wealth erodes under the weight of inflation, there’ll be less collateral available to make loans and extend credit to create new jobs and businesses. This leads to higher unemployment and more “sub-prime” consumers unable to borrow from private sources. If the unemployed can’t borrow, they can’t spend. If they can’t spend, the economy declines more rapidly towards depression.
Solution? More government “sub-prime borrower” and welfare programs. But where will gov-co get the currency to lend to our sub-prime consumers and welfare recipients? If it can’t borrow more currency from foreign sources, it’ll be forced to “spin” more currency out of thin air. That means more monetary inflation.
More inflation means creditors with savings in the form of fiat dollars or fiat-dollar denominated debt instruments, will continue to lose the purchasing power of their savings. The loss of creditors’ assets will tend to collapse rather than stimulate the economy.
Given our gov-co’s determination to inflate the fiat dollar, how long can inflation persist before the public abandon the fiat dollar and seeks an alternative currency and alternative medium for preserving their wealth?
Faced with persistent monetary inflation, creditors who wish to preserve their savings will have no choice but to abandon fiat dollars and paper debt-instruments and move their wealth into something tangible like farm land, gold or silver.
• It’s difficult to see for sure if we’re in a period of inflation or deflation and whether we’re merely in recession or already in depression. Our confusion was triggered by our abandonment of gold and silver as our national currency. We’ve now had over 40 years of economic madness (fiat currency) and we’re left in a place where reason seems increasingly tenuous and facts harder to find.
But, when I balance the forces of inflation against the forces of deflation, it seems inevitable that we’re heading for deflation and an economic depression. We may see significant inflation or even hyperinflation before we see deflation, but we’re going to see deflation. If deflation is not the predominant trend today, it will be.
If deflation predominates, we’ll slide into a depression and “cash” will once again be “king”—just as it was in the Great Depression. But during the Great Depression our paper cash was backed by silver. The real cash that was “king” was silver dollars.
In the next, Greater Depression, it’s improbable that people will accept any paper or digital currency as “king” unless it’s also backed by gold or silver coin. I’m convinced that in the event of another Depression, the “cash” that will be “king” will be gold and silver coin.
If I’m right that: 1) we’re headed for a depression and 2) the next “cash” to be “king” will be gold and silver; then those who currently have savings denominated in fiat dollars should: 1) get as far away from fiat dollars as possible; and 2) purchase all the gold and silver they can find.
If I’m right, those who turn their savings into gold and silver will (at least) preserve their purchasing power. If I’m wrong, we continue on into inflation and prices of gold & silver will rise, and those holding gold/silver should profit handsomely.
If inflation, gold bugs profit. If deflation, they preserve their wealth.
In these uncertain financial times, there’s no place left to go but gold and silver—not because positive returns are necessarily guaranteed, but because gold and silver are the best investments currently available. Gold and silver will not make hair grow on your bald spot. They won’t make you 20 or 30 years younger. They will guarantee your salvation. Nevertheless, if you have wealth that you’d like to save for the future, at this time, there’s no superior alternative to silver and gold.