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The Inevitability Of Runaway Inflation

By: James R. Cook


Early August 2004

"The Fed can and does increase the money supply all the time, whether it be boom or recession. There hasn’t been a contraction of the money supply since the early 1930s, and there is not likely to be another in the foreseeable future. So now that the money supply always increases, prices in general are always going up, sometimes more slowly, sometimes more rapidly."

Murray N. Rothbard

Currently the economic writers I read warn about a faltering economy, a housing bust, lack of liquidity, stagflation or deflation. The Federal Reserve and Wall Street sound far more optimistic. They are cheerleaders for a renewed boom. If we are on the verge of a new recession (who knows), it could get nasty in a hurry with stocks falling and unemployment worsening. Recent strength in the dollar means dollars are more in demand (to pay down debt and renew savings). That would confound the Federal Reserve and terminate the great era of speculation, money creation and credit expansion. Some experts claim that the Fed doesn’t have a way to continue to issue credit, and their failure to do so will burst the financial bubble.

However, we don’t know exactly what the Fed has up its sleeve. Big budget deficits help them out. The Fed creates new money to pay the government’s bills. According to analyst Doug Noland, it could take as much as a trillion dollars this year to keep the mortgage bubble aloft, leveraged finance intact and the economy perking. In the past few decades our financial markets have been most creative. It’s probable that reflation will be a success. There may be some hiccups along the way, and even a mild recession, but long term, the Fed’s going to figure a way to inflate.

The alternatives are far too serious. We are an over-extended nation. Nothing brings fear to the debtor class like deflation. It means they can’t pay their bills and it means the loss of their leveraged assets (homes and cars). Nothing brings more fear into the hearts of politicians and central bankers. A nation gripped by fear will not hesitate to debase its currency. The only question is, how will it be done?

The depression of the 1930s was blamed on the inability of the Federal Reserve to expand credit. They say it was like pushing on a string. For one thing, the government was tiny then. There was no massive government spending. Nor did they have exploding assets to leverage; borrowers that became sound by lowering credit standards; massive foreign bond buying; huge quantities of money already in existence; stupendous non-bank credit creation, and intervention in the stock, bond and currency markets. There were no Federal Reserve governors talking about new and creative ways to expand money and credit, or dropping hints about the Fed buying corporate bonds and who knows what else.

I believe you can see the future in what Andrew Dickinson White wrote about the great French inflation, "At first, new issues [of money] were made with great difficulty; but, the dike once broken, the current of irredeemable currency poured through; and, the breach thus enlarging, this currency was soon swollen beyond control. It was urged on by speculators for a rise in values; but its simple fiat, could stamp real value to any amount upon valueless objects. As a natural consequence a great debtor class grew rapidly, and this class gave its influence to depreciate more and more the currency in which its debts were to be paid."

We already have significant levels of price inflation. The government claims otherwise, but their index relies heavily (according to articles I’ve read) on apartment or housing rents and the price of used cars. When you look at the price of new homes, health insurance and tuition to name a few, you know the government is cooking the books. Stock jockeys are always swooning on TV about low inflation, but I wish one of them would explain how a three-cent postage stamp that we used for years is now going for thirty-seven cents, or twelve times higher and there’s no inflation. Oil could soon be $50 a barrel and asset prices have gone bonkers.

I don’t have to tell you about real estate prices, especially in California. The rate of appreciation is rising. I pay attention to a wide variety of collectors items. Things you could have bought for several hundred dollars a few years ago are blowing people’s minds. An old Harley-Davidson sign just sold for $41,000. A Hires Root Beer syrup bowl brought $57,000. A carved, decorative Canada Goose was recently hammered down for $650,000. A series of early twentieth-century photographs sold for $200,000 to $400,000 each. Every collector I talk to, in every field of collecting, is in shock at the prices. If we have asset hyperinflation, this is how it would start.

Many necessities of life (clothing, furniture, building materials) come from overseas. Wal-Mart is full of consumer goods that originate in Asia. Low labor costs and greater efficiencies hold the price of these goods down. In a sense we export inflation, and Asian countries are now experiencing some inflation. They have accumulated huge dollar balances through trading with us. However, too many dollars can drive the greenback lower in currency markets. This causes raw materials and goods from overseas to be more expensive. Worst of all, this money can purchase U.S. assets to the extreme or ultimately be dumped to decimate the dollar. Exporting dollars for goods and bringing the dollars back by selling government bonds to foreigners may be a virtuous circle while it works, but, should it come unglued, it promises a firestorm of inflation.

The Fed will do everything in its power to keep inflating, even while it claims to be fighting inflation with tiny raises in the interest rates. The economist Murray Rothbard saw through this. "…the drumfire of propaganda that the Fed is manning the ramparts against the menace of inflation brought about by others is nothing less than a deceptive shell game. The culprit solely responsible for inflation, the Federal Reserve, is continually engaged in raising a hue-and-cry about ‘inflation,’ for which virtually everyone else in society seems to be responsible. What we are seeing is the old ploy by the robber who starts shouting ‘Stop, thief!’ and runs down the street pointing ahead to others."

We must either inflate or face economic perdition for a number of years. We are not going to take the necessary, but bitter, deflationary medicine now. However, the consequences are profound. London Times Editor William Rees-Mogg wrote, "Inflation gradually pushes the whole community towards speculation, since ordinary life begins to require speculator’s skills." The free market thinker, Henry Hazlitt summarized, "In a free enterprise system, with an honest and stable money, there is dominantly a close link between effort and productivity, on the one hand, and economic reward on the other. Inflation severs this link. Reward comes to depend less and less on effort and production, and more and more on successful gambling and luck."

Another great monetary thinker, Elgin Groseclose, explained the process we’ve employed in America for many decades. "By mortgaging the future, pledging the productive power of unopened mines, uncut forests, unbuilt factories and unborn generations, a tremendous demand may be created for wares already produced in the markets."

When you hear the media and left-wing politicians renouncing business, it brings to mind Henry Hazlitt’s explanation. "A period of inflation is almost inevitably also a period when demagogy and an antibusiness mentality are rampant. If implacable enemies of the country had deliberately set out to undermine and destroy the incentives of the middle classes to work and save, they could hardly have contrived a more effective set of weapons than the present combination of inflation, subsidies, handouts, and confiscatory taxes that our own politicians have imposed upon us."

Nobody knows the future. We can only guess. I make my personal financial decisions based on the belief that we will have worsening inflation and, ultimately, runaway or hyper-inflation. If we keep expanding credit, there comes a time when too many people no longer want to hold the money. They want to exchange it for goods and assets. Quite suddenly prices begin to run away and nobody wants to hold dollars because they are depreciating too fast. The economist Hans Sennholz said it best. "The ultimate destination of the present road of political fiat is hyperinflation with all its ominous economic, social, and political consequences. On this road, no federal plan, program, incomes policy, control, nationalization, threat, fine, or prison can prevent the continuous erosion and ultimate destruction of the dollar."

MINERS HELP TO KEEP THE PRICE LOW

By Theodore Butler

(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

One thing could end the silver manipulation in a heartbeat. If the silver mining companies stood up to manipulators, by withholding silver production, the silver tricks would end. What’s amazing is that the miners need to even be told to do this.

In a recent article, I suggested that the producing miners, Hecla, Coeur d’ Alene and Pan American Silver, as well as the silver resource company, Apex Silver, withhold one quarter’s worth of production, or put 10% of their cash on hand in real silver. I wrote it for all silver mining and resource companies. This was really the first time that the silver companies could withhold production or buy real silver, because all were flush with cash, as a result of selling new shares.

One silver resource company, Silver Standard Resources (SSRI), did buy almost 2 million ounces of silver. I subsequently praised the CEO, Robert Quartermain. Unfortunately, the other four mining companies I mentioned ignored my proposal, and Pan American reacted negatively.

I believe that there is overwhelming agreement among shareholders that the miners should be fighting back against the manipulators. The miners should be withholding production, buying silver with a small portion of the shareholders cash, and speaking out against the manipulation. They just don’t get it.

Without the benefit of a fair and free price for their silver, all their efforts can be wasted. The price of silver is the most important factor for producers. No one would invest in a silver mining company if they did not expect silver to increase greatly in price. At current silver prices there are no meaningful earnings or dividends. All the operating efficiencies in the world won’t compensate for the artificial low price of silver.

That’s why it’s important for the silver companies to try and do something now. I promise you if the silver producers started to fight the manipulators by withholding production, and the resource companies started to invest in real silver, and all started to openly question the manipulation, the price of silver would double or triple in short order. Even if I’m wrong, what harm could it do? The alternative is to keep getting kicked in the teeth.

It is absurd that the miners have abdicated all responsibility for getting the best price for their product through any legitimate means possible. Instead, they have ceded the pricing of their product to the industrial users and paper short sellers. The short sellers and users know that the silver miners will produce all the metal they possibly can regardless of how low the price may be. There would be a shock to the market if silver producers announced the withholding of silver production until fair and free prices were achieved. And you can’t say it’s never been done, because Codelco just did it in copper.

The silver producers are actually subsidizing the continued low price of silver. Were it not for the cash generated by massive sales of new shares, the silver miners would be more likely to try and do something about the low price. But they are flush with shareholders’ cash and don’t feel pressure to do rock the boat. What do they care? They can produce silver at a loss for a long time before they run out of money. Their jobs and benefits are secure. Sadly, they are disposing of a valuable finite resource for free. Investors have bought these companies for what’s in the ground, not how well the management can reward itself. That silver in the ground belongs to the shareholders. The problem is that the shareholders think the silver in the ground will be very valuable, while management doesn’t seem to. If they did, they wouldn’t continue to sell without a profit.

Silver, and silver share investors, are being hurt by the silver manipulation. The companies themselves are losing valuable and finite resources at uneconomic prices. The idea is not just to produce metal, but also to produce at a profit. If you can’t produce at a profit because your product’s price is too low, you shouldn’t just sit around hoping for a better day. You should try to do anything, and everything, you can think of about the low price. You should fight for the benefit of your shareholders, especially when they’re asking you to do so. While continued low prices only strengthen the long-term picture for silver, they could prove devastating to silver share prices. While there may be only dimes to the downside for real silver, it could be dollars to the downside for the mining shares. For the miners not to try to do anything to prevent that is irresponsible. I say, stop subsidizing the low price of silver.

SILVER IS FOR SERIOUS MONEY

By Theodore Butler

(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

There are three broad choices for serious, long-term investments – stocks (including mutual funds), bonds (including bank deposits) and all others. The "all others" category would include collectibles, real estate and tangible commodities (including gold and silver). For most people, there are only two choices, stocks or bonds. Among commodities and collectibles, choices are few. That’s one reason why the majority of investors gravitate towards stocks and bonds. Even if an investor held a strong conviction about holding copper or oil, there is no practical and simple way to profit, except to invest in the stocks of the companies producing those commodities.

The only real choice for diversifying is precious metals, principally gold, or to a lesser extent, silver. The predominant investment choice is gold mining stocks. However, there is risk in owning gold stocks. Mining in foreign countries carries a risk of nationalization and expropriation. Then you have the problem of mines petering out, superfund problems with mine closures, strikes, accidents, permitting problems and environmental concerns. We may not be able to say with certainty what the price of the metals will be 10, 20, or 30 years hence, but there should be no question they will exist. That’s something you can’t say with about a particular stock or bond.

Not only is there more above ground gold, the total value is 200 times greater than silver. Silver’s total dollar value is less than one half of one percent of gold’s total dollar value. If all investors dumped all their silver and shifted it into gold, it would hardly cause a ripple in gold. If only one percent of the world’s gold was sold and shifted into silver, a trade that makes sense to me, it would be impossible to calculate how high silver would explode. One percent of the supply of gold has more value than all the silver in the world. One percent is more than 15 times the current value of all the silver in the COMEX, the largest stockpile in the world.

Gold represents a true diversification from stocks and bonds. That’s because gold is outside the financial system and is no one else’s liability. It has prevailed through the ages and is recognized everywhere in the world. If there were no such substance as silver, gold would be the only choice for a precious metal diversification. But, amazingly, all the attributes of gold are present in silver, and to a much greater extent. If you like gold, you should love silver. That’s because, in addition to sharing and magnifying all of gold’s attributes, silver has two unique pluses of its own, namely, there is less of it, and that inventory is shrinking. Those two factors mean, in future investment performance terms, that silver is like gold on steroids.

I have continuously suggested that folks buy silver due to its low risk and potential high price. I’ve argued silver would do better than just about anything else. How has that recommendation held up so far? For the three years ended in 2003, the price of silver averaged $4.61 an oz. For the first six months of 2004, it averaged $6.48, 40% higher. Silver doubled in price from the low points of the last three years, to the highs earlier this year. For stocks, the S&P 500 is approximately 15% lower from the end of 2000 through 6/30/04, with the NASDAQ down about 30%. And stocks were much lower in the interim. Bonds are up in value around 10%, on top of a total income stream of 20% for the duration. I’d characterize silver’s performance as respectable, especially considering the low risk and still unrealized profit potential.

Generally, an investment becomes overpriced if it’s extremely popular with the masses. Clearly, that’s not the case with the precious metals. Silver is about as under-owned as an asset can get. There are many well-known and respected market analysts warning of danger ahead for stocks and bonds, while I see zero intelligent debate on the long-term downside on silver. In fact, I get requests from readers to direct them to those who make a legitimate bearish case for silver, so they can balance what I write. I don’t know where to direct them. Instead, I see more and more independent confirmation of silver’s bullish case.

Some experts say the stock and bond markets are manipulated by the government. I think there are elements of truth to that. In the long run, is it better to buy assets that may be artificially elevated (stocks and bonds), or artificially depressed (silver)? Everyday, there are more shares of stocks and bonds. There is more gold in existence every day. Only in silver is there less daily, the result of more demand than production. The law of supply and demand dictates prices must go higher.

What makes silver most attractive now is the low price. The current risk is relatively minimal. For instance, it is hard to imagine a sudden 3 or 4-dollar drop from $6 per ounce. But at $12 or $15, such a decline becomes more possible, even if temporary. More important than trying to time any market, is to acquire good assets at undervalued prices and let them ride, especially if there is no great risk associated with holding such an asset.

One of the world’s most successful investors, Warren Buffett, thought silver was appropriate for serious money seven years ago, when he bought a very large chunk. While the price may be a bit higher than what Mr. Buffett paid, the value is greater now. In the seven years since his purchase, we have 700 million ounces less silver in world inventories. It’s not everyday that the average investor gets the opportunity to invest serious money at a better value than did Warren Buffett.

SILVER PRODUCTS

"Until government administrators can so identify the interests of government with those of the people and refrain from defrauding the masses through the device of currency depreciation for the sake of remaining in office, the wiser ones will prefer to keep as much of their wealth in the most stable and marketable forms possible – forms which only the precious metals provide."

Elgin Groseclose

It’s time to think about acquiring more bags of U.S. silver coins. A lot of these coins have been melted down and if silver gets more popular, it could start to crimp the supply. Add some bags of circulated Kennedy Half Dollars and Franklin Half Dollars. These old half dollars were coin-of-the-realm in the U.S. up until 1964. Each bag contains 2,000 coins and 715 ounces of silver. These half dollars have been heavily melted and these are the survivors. You should own these great coins that are rich in silver. Each bag weighs 55 pounds and is the size of a bowling ball. We ship a bag in two separate plastic buckets weighing 28 pounds each. If and when you sell it back to us, you can use the same plastic container to ship it back.

Call us today at 1-800-328-1860 and get a few bags of these wonderful circulated silver coins.

Sincerely,

James R. Cook

President


-- Posted Monday, 16 August 2004



This article is brought to you in part by Investment Rarities Inc.



 



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