Hyperinflation is now here

Monty Pelerin makes some interesting observations about Gary Shilling’s investment advice, saying that it works when things are normal, but the global financial situation is anything but normal today.  Indeed, I believe that the signs of hyperinflation are now here, and I’m not the only one.  Even some of the mainstream papers are starting to see it (e.g., the Globe & Mail).  Indeed, I have virtually no fear now that my portfolio is going to plunge like it did in 2008–I have the Bernanke put to count on.  If asset prices go down, he’ll just monetize more debt and it’s back to races.

So I made this comment on Monty Pelerin’s article:

I follow a blog whose author likes Gary Shilling. His portfolio was static in 2009 and he didn’t bother telling us his returns in 2010. By contrast, our own portfolio is up high double digits (See DIY 2010 summary). Whose advice am I following? Jim Rogers, Marc Faber and Peter Schiff–long commodities, esp. gold and oil. This is an anti-inflationary portfolio and it is already up handsomely. I don’t think we have to wait for high inflation or even hyperinflation. I believe that hyperinflation is already here.

Look at the international situation. (BTW, I loved the video of Jim Grant that you recommended.) The Chinese and others who hold US treasuries are scared to death of the devaluation of the dollar, but they can’t dump them all at once or their hyperinflationary fears become instantly realized. So they are buying up assets, diversifying their holdings. Billions of Asia dollars have been sunk into the Canadian resource sector, while the Chinese have essentially ended their net purchases of US treasuries. So how does the Fed react to this? Buy, buying the debt, and monetizing (pun intended).

When the bubble finally hits the commodities market–and I don’t think there is a bubble yet by any stretch of the imagination since Americans can still afford gasoline and food–I think I will dump the commodities and purchase a farm. But until them, I’m still very long on Canadian resource companies, especially junior oils. The Chinese want what Canada’s got, and they are the most liquid players in town.

See also http://www.beatingtheindex.com/weekend-edition-expect-more-energy-deals-in-2011/

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“Printing money” is a worn out metaphor: reflections on what is real

Our current economic system confronts us with a metaphysical dilemma.  Niall Ferguson writes in The Ascent of Money (30-31; emphasis mine):

Today, despite the fact that the purchasing power of the dollar has declined appreciably over the past fifty years, we remain more or less content with paper money … Even more amazingly, we are happy with money we cannot even see.  Today’s electronic money can be moved from our employer, to our bank account, to our favourite retail outlets without ever physically materializing.  It is this ‘virtual’ money that now dominates what economists call the money supply. … Anything can serve as money, from the cowrie shells of the Maldives to the huge stone discs used on the Pacific islands of Yap.  And now, it seems, in this electronic age nothing can serve as money too.

Gary Shilling has maintained that the electronic money that the Federal Reserve has been creating has remained on the bank books as excess reserves because the banks are too afraid to lend it out.  On the other hand, Gonzalo Lira has argued that all the virtual money that the Federal Reserve created and used to buy up toxic assets was in turn lent to the Federal Government by the banks.  Then, the Federal government spent that virtual money on government employees, welfare recipients, medicare, social security, food stamps etc.  Thus, Shilling misses a big point that the bank’s toxic assets and debts of the government have been monetized by this arrangement–and the virtually inflated money is now already in circulation, forcing up the prices of commodities.  Lira calls this phenomena “stealth monetization”: in Weimar Germany, people needed wheel barrels to carry their money.  Today, all that virtual money can be carried in a credit card or a food stamp debit card.  I would estimate that over 95% of my transactions are done with virtual money.  The scary thing is that now central banks are able to create stealth inflation, while lying about the inflation rate which they erroneously confuse with their manipulated Consumer Price Index, because most of the money that exists today is not real–it is not even printed on paper presenting the people with a tangible, visible clue as to how fast it is expanding.  At least in Zimbabwe today, three zeros are added at each new print run–this is inflation that you can see. The US Federal Reserve, the Bank of Canada and the other central banks today create virtual money which gives us nothing tangible with which to see the inflation which is taking place.  The Federal Reserve, until a few weeks ago, was keeping its books a tightly guarded state secret, and so no one except the members of the cabal knew how much virtual money Bernanke was creating or who benefited from it (see Monty Pelerin and My Budget 360).

Now I think of my virtual trading account in which I create virtual wealth through electronic trades on a virtual trading floor, where after three days virtual money and virtual shares change hands.  Then it is recorded in a virtual trading e-confirmation and I’m provided a monthly e-statement with my virtual holdings.  I have healthy net worth, but only as long as others are willing to accept my virtual money, or I can liquidate my virtual assets which are in the form of stock shares that my brokerage account holds for me electronically.  I feel that my investment life is trapped in the Matrix, and I wonder when someone will offer me a choice between the red or the blue pill.  “Welcome to the real world”.

There are today investors insisting upon physical delivery of precious metals.  Banks have perhaps taken massive short positions, selling virtual gold and silver without having much or any of the real stuff.  The word on the street, e.g., is that J. P. Morgan has a massive short position in silver (see Eric Fry); Mish argues that J. P. Morgan probably has a hedged position, but he is admittedly speculating:

If JPM is hurting as the silver bulls claim, pray tell why does it not show up somewhere? Where is the proof JP Morgan is naked short silver?

To be fair, I do wish JPMorgan would comment on this. Why don’t they?

Why don’t they indeed?

Is it possible to create virtual inflation?  What would it look like? I know this: the metaphor of saying that the central banks are “printing money” is worn out and does not adequately reflect the vast quantity of virtual wealth that has been create ex nihilo.  So I suggest we call it instead “virtual money”–or the like, so that we the people can began to get our heads around what the banks are doing to our assets.