inflation

Peter Schiff is a mensch

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I enjoy the tenacity of Peter Schiff and his willingness to speak against the consensus. Schiff has been consistently critical of the debt bubble in the US and he predicted the fall of housing prices in the face of mocking and shouting down by other “experts”.  Consider this 2006 video from Fox News:

For a long time, Schiff has recommended precious metals and continues to do so despite many who say that gold is “hyper-overbought” (Dennis Gartman, September 29–when gold was trading at $1300).  Against those who think that there is a gold bubble, Eric Sprott claims, “I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it.”  Now, there is a new Tech Ticker debate between Peter Schiff and Gary Schilling.  If it is appropriate to call people who insist that gold is the best investment as “gold bugs”, then Gary Schilling is a “bond bug” because he is inflicted with a disease now appropriately named as “Fiat Currency Fever“, the irrational view that the US dollar is a the best and safest investment–despite the severe and secular bear market that the dollar has suffered since 1971 when it was taken off the gold standard.  At a certain point, Gary Schilling claims that the Federal Reserve doesn’t create money–a trillion dollars that banks have received from the Fed is just sitting in the banks.  But unfortunately Schilling seems to be dead wrong on this point, because the banks have been lending this money to the US government, and it has actually gone out into circulation in the form of food stamps, federal employee wages, unemployment benefits, Social Security benefits, etc.  There is some serious monetization of debt going on in America (cf. Monty Pelerin), for Bernanke is trying to re-inflate all the bubbles.

Despite being right most of the time, Peter Schiff still faces fierce opposition from critics, including economists–you know the guys with PhDs, who claim that gold is barbarous relic.  I agree with Schiff.  For I believe that only God can create something out of nothing, and when a central bank expands the volume of fiat money inflation is the inevitable result.  This is an immutable law of economics.  When hyperinflation hits in earnest, then all those who own precious metals will be very thankful that they listened to Peter Schiff.

US dollar not accepted from Tourists in India: Anectdotal evidence of inflation

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My in-laws have traveled to India four times.  In their first trip in 2004, vendors happily quoted them prices and accepted payment in US dollars.  They returned from their last trip a few days ago to say that vendors no longer accept US dollars.  Is this another sign that US dollar is losing its status as the reserve currency of the world?

Wine as currency

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During difficult economic times, it is often the case that hoarding becomes illegal.  It is punishable by severe fines. In Weimar Germany a law was even passed against gluttony.  Today, the USA faces a serious threat of hyperinflation.  During hyperinflation, paper money becomes worthless and unhelpful in exchange.  Therefore, people resort to bartering goods and services.  Bartering is a form of commerce that is frowned upon by government because it can’t be taxed.  If I fix your plumbing and you fix my roof in exchange, each of us spending three hours to do it, we’ve exchange services but there is no money,  no paper trail, and no receipt.  Two normally taxable events are reduced to zero tax.  So a doctor treats a lawyer’s son and the lawyer draws up the doctor’s will.  Neither reports the activity to the government and no money passes hands. It is just a friendly transaction in an underground economy.

I believe that hyperinflation is an inevitability in the US, and unfortunately here in Canada, there is going to be high inflation.  In such times, it is useful to build up a store of silver or gold.  But personally, I’ve decided to store up something that I could potentially barter.  I have been making wine from concentrated juice, grape juice and from grapes since 2004.  My wines are pretty good; I’d say the equivalent of at least a $10 CDN per bottle at our local provincially control liquor stores (called the LCBO-the Liquor Control Board of Ontario).  Wine is a controlled substance, and so I am not allowed to sell my product without a license.  But when times are desperate, and money is worth nothing, I figure that I should be able to barter bottles of wine for food or other goods and services that I might need.

So I’ve decided to stock up on wine kits.  These kits are $70 for two at Costco, or $45 for one at my local supplier. Each kit contains concentrated juice that will make 30 bottles. I know that the juice remains usable for at least two years maybe more. Once made into wine, the wine can be aged another two years.  It is not certain how long the wine will last after that.  So my minimum cost base will be $1.17 per bottle plus my labor (which isn’t worth anything). If I buy 10 kits at Costco at a price of $300, I’ll be able to hoard 300 bottles of wine in reserve.  This would give me $3000 worth worth of goods with which to barter, and the product itself has an indefinite shelf life.  I estimate that it would be about the same as buying two one-ounce coins of gold, at a cost of $300 CDN.

The great thing about alcoholic beverages is that they do not lose their “currency” in times of depression.  Indeed, people feel the need to celebrate or to drown their sorrows even more during economic hardship than during the good times.  If the economic crisis never comes to Canada, well I can consume my product or give it away as gifts.   Or if the crisis comes and I am unable to barter the product, my wife and I could consume the wine for the calories and it will stave off starvation for a moment.

Krugman vs. Rogers

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Krugman and Rogers are publicly exchanging barbs.  Krugman says that Bernanke’s quantitative easing is necessary to stave off deflation.  Rogers says it will cause a collapse of the dollar and surge in commodity prices, i.e., inflation.  Who is right?  Krugman or Rogers, the deflationistas or the inflationistas?

Krugman writes:

I’ve seen Rogers in action; he seemed to me to be confused about issues like the difference between assets and liabilities. And please note that inflationistas like Rogers have been wrong about absolutely everything this cycle (and the last cycle, and the cycle before that). 

[Read more: http://www.businessinsider.com/paul-krugman-jim-rogers-has-never-been-right-about-anything]

Now to be sure both men are rich.  But so far I’ve not heard that Krugman has made money investing–his money probably comes from his Nobel prize, writing, book royalties, and media appearances.  Rogers on the other hand is universally recognized as one of the world’s premier investors/traders, along with such names as Warren Buffet and the shady George Soros.  I would tend to accept the advice of a successful  investor over an egghead.

I first heard of Jim Roger’s and his advice to put money on commodities and shunning bonds on January 19, 2009.  I’ve maintained such a portfolio, and I think I’m doing very well thank you very much–not including some serious profit-taking along the way, our current DIY portfolio is 60% above book with mostly oil and gas and gold mining stocks; Rogers would approve.  Had I put my money in bonds, I’m afraid at the dismal interest rates, my portfolio would have slight nominal gains but would have lost some serious buying power.  Rogers is right, his recommendations have worked for investors.  Krugman may end up being one of the most ridiculed and mocked economists of all time.

The deflationista David Rosenberg said that there would be a double dip this Fall.  A friend of mine took his advice and sold some of his oil stocks and now regrets it.  It could still happen.  But my money is on Rogers not Krugman.