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The First Stage of Inflation Has Already Hit, Next Up Is the Currency Collapse

Phoenix Capital Research's picture




 

One of the
biggest misconceptions about inflation is that the US Dollar needs to collapse
in order for inflation to occur. While a currency collapse often accompanies periods of heightened inflation, this is not
necessarily true.

 

Case in
point, the US Dollar actually rallied this year despite commodity prices exploding higher:

 


Asset

Price on 1/1/10

Price today

% Change

US Dollar
Index

77.5

79.29

+2%

Oil

82.75

88.86

+7%

Gold

1,137

1,392

+22%

Silver

16.81

29.44

+75%

Wheat*

201

274

+36%

Corn*

167

236

+41%

Poultry**

83

85

+2%

Sugar **

21

28

+33%

* per metric
ton

** cents per
pound

 

 

As you can see, we’ve had an inflationary spike in commodity prices in
2010 despite the US Dollar rallying
2% during that time. Indeed, the
inflation the US is experiencing today is rather unusual as it has been
accompanied by deflation at the same
time. As I write this, the US is experiencing deflation in housing prices and
incomes combined with inflation in the cost of living (energy, food, commodity
prices).

 

Thus, we see
deflation and inflation occurring
simultaneously. It’s not surprising as the Fed’s primary moves since the
Financial Crisis hit are:

 

1)   Buying
debt

2)   Pumping
money into the banks

 

The first
move was designed to attempt to stop debt deflation. As I’ve noted in other
articles, the Fed is failing miserably at this (bonds are tanking).

 

The purpose
of the Fed’s secondary move was to shore up the banks’ balance sheets (with
hundreds of trillions in derivative exposure and off-balance sheet toxic debt,
most US banks are insolvent).

 

Indeed, the
monetary base has more the doubled since the Financial Crisis began.

What you’re
looking at is the Fed producing $1.2 trillion of money out of thin air. The
reason we haven’t yet seen inflation in the form of a US Dollar collapse is
because:

 

1)   Europe
is imploding pushing the US Dollar up

2)   Banks
are sitting on this money (not lending) so it’s not getting into the economy

 

Regarding
#2, the below chart explains everything:

 

The above
chart depicts the amount of money US banks are sitting on in excess of what the Fed requires them to
hold (all banks must hold a certain amount of cash in reserves).

 

As you can
see, up until early 2010, US commercial banks were sitting on nearly $1.2
trillion in excess reserves. So in plain terms, the Fed’s money pumping (at
least the money we know of) has simply been sitting on banks’ balance sheets.
In other words, banks aren’t lending it out, so it’s not getting into the
economy (yet).

 

This is why
the US Dollar has yet to truly collapse: the Fed’s money pumps have yet to get
into the economy. Instead, the banks are just sitting on them. However, this
doesn’t account for the Fed money pumps that are non-public.

 

It’s no
secret that the Fed has been pumping hundreds of billions of Dollars to
financial firms without the public’s consent. According to the Neil Barofsky,
Special Inspector General of the TARP program, the Wall Street bailout could
end up costing the US up to $23 trillion before it’s over.

 

 

Obviously a heck of a lot of money has been flowing into Wall Street
that we don’t know about. And Wall Street has done what it does best, pour this
money into the financial markets… which has driven stocks, commodities, and
risk assets in general THROUGH the roof. This is also why stocks and
commodities have displayed such an unusually high correlation since the Fed
started its QE 1 program in March 2009: it’s all about Wall Street putting some
of the Fed’s money pumps into the markets.


 

Thus today
in the US we have debt and housing deflation
combined with cost of living and asset price inflation.

 

However, I
want to stress that the inflation we are seeing today is just a taste of what’s to come in the next
year. Indeed, our current inflation is all about loose money flowing into
commodities, pushing up the cost of living. This is the financial speculation
form of inflation and is just a precursor to the next, FAR MORE serious stage
of inflation: the currency collapse.

 

Yes,
deflationary forces remain a risk in the near-term given the systemic risk in
place today (we never cleaned up the 2008 mess properly). But ultimately
inflation is the end game. And when it hits in the form of currency collapse it
will be fast AND violent.

 

Good
Investing!

 

Graham
Summers

 

PS. If
you’re getting worried about the future of the stock market and have yet to
take steps to prepare for the Second Round of the Financial Crisis… I highly
suggest you download my FREE Special Report specifying exactly how to prepare
for what’s to come.

 

I call it The Financial Crisis “Round Two” Survival
Kit
. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).

 

Again, this
is all 100% FREE. To pick up your copy today, go to http://www.gainspainscapital.com
and click on FREE REPORTS.

 

PPS. We ALSO
publish a FREE Special Report on Inflation detailing three investments that
have all already SOARED as a result of the Fed’s monetary policy.

You can
access this Report at the link above.

 

 

 

 

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Sat, 05/21/2011 - 00:44 | 1297621 kummar
kummar's picture

Are you really trying to say that these psychics are saying that AIG will survive and continue to be successful they way they were in 2000? Let me know what you have to say, please. My e-mail address is 1993 Toyota Pick-Up Truck AC Compressor

Fri, 12/17/2010 - 16:53 | 813850 Triggernometry
Triggernometry's picture

Water
Food
Toiletries
Ammo
Interpersonal skills

Stock Up

Fri, 12/17/2010 - 16:29 | 813779 Common_Cents22
Common_Cents22's picture

Main street is getting screwed and bent over. 

Raw material costs going up.  Health care going up.

No credit available to expand/startup to create jobs or even cover working capital to STAY in business.

Income/jobs going down. 

ZIRP is crushing the fixed income retirement sector to finance the big money center banks and big business on the government tit.

Fri, 12/17/2010 - 16:40 | 813807 lynnybee
lynnybee's picture

and this is what wears on my brain so much, the worry about the innocent people, the elderly who through no fault of their own, could easily die of hunger .   This should be a national outrage against the FEDERAL RESERVE.    

Fri, 12/17/2010 - 15:54 | 813687 Victor Berry
Victor Berry's picture

Gold bugs beware!  CNBC's Jim Cramer just said he was bullish on gold!

 

Sat, 12/18/2010 - 11:35 | 815379 tekhneek
tekhneek's picture

Even a broken clock is right twice a day. He's 50/50 right anyway, we all know that.

 

Fri, 12/17/2010 - 22:17 | 814682 just_looking
just_looking's picture

Thanks for the heads up. I do not watch that show and that information does make me nervous.

Fri, 12/17/2010 - 15:47 | 813671 D-Falt
D-Falt's picture

What struck me was the fact that the gasoline price is inflating WAY faster than oil.  I was expecting a much higher commodity specific index than (1.07/1.02), given that gas was up 40%YoY the last time I checked US average prices on gasbuddy.

Fri, 12/17/2010 - 15:51 | 813678 SheepDog-One
SheepDog-One's picture

1st Christmas ever with gas avg nation wide over $3. This time around when gas reaches about $3.50 I think we'll see the real economic effects, with food prices already rising, just wait till truckers start cutting their routes and food becomes more scarce and ever more expensive. 

Fri, 12/17/2010 - 15:45 | 813667 Dirtt
Dirtt's picture

Why not hold cash reserves? It is a myth that they want housing prices to stablize.

Those big fat cash reserves are waiting for the deflationary washout in US housing.  Landlord Squidly to the rescue.  It's been part of the plan for a long long long time.

Fri, 12/17/2010 - 15:44 | 813663 DavidRicardo
DavidRicardo's picture

Why should it be strange that, in a statist economy (the Government directly controls 40% of the U.S. economy now), you can inflate some things and deflate others.  All it means is that some areas are still good for looting, some are not.  Housing is definitely over as a profit center; you can still wheedle coin out of gas prices.  So you do it.

 

And you will keep on seeing it done until.....

 

BLS Bachelors+ unemployment hits 20% (it's 5.1% now).

 

This is the only statistic that matters to ANYONE having power.  They should put it on the flag and fly it over the Capitol, because it's the only figure anyone in Washington discusses.

Fri, 12/17/2010 - 15:41 | 813656 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Silver dominates '10.  Stamp it.

Fri, 12/17/2010 - 15:32 | 813635 Rebel
Rebel's picture

Very nice article. The prices on commodities is a nice summary of the problem. Is there any place that one can find historical price charts of basic food items over time, like loaf of bread, gallon of milk, pound of tomatoes and pound of hamburger.

I have found anecdotal data, but no hard data. 

 

Fri, 12/17/2010 - 20:52 | 814472 Nigh Eve
Nigh Eve's picture

Although the following historical retail food price information may not be very comprehensive (with respect to the time periods shown), it may still be of interest to you...

http://www.census.gov/compendia/statab/2010/tables/10s0717.pdf

It comes from

http://www.census.gov/compendia/statab/

 

Fri, 12/17/2010 - 15:31 | 813634 Nacho.Libre
Nacho.Libre's picture

sounds about right.

Fri, 12/17/2010 - 15:28 | 813620 lynnybee
lynnybee's picture

I read a lot, especially on the most popular financial blogs, including my favorite, ZEROHEDGE.  Does anyone have a timeline as to when we will go into our currency crisis ?   I'm asking, as one who is not as knowledgeable as the rest on ZEROHEDGE.   

Fri, 12/17/2010 - 17:04 | 813875 ghostfaceinvestah
ghostfaceinvestah's picture

my best guess is two years.

Sat, 12/18/2010 - 14:19 | 815583 SheepDog-One
SheepDog-One's picture

2 years of what, skying commodity prices, $4+ gas and declining wages, jobs, and more $8 per day pumping stocks while losing  $40 billion per month? Whatever.

Fri, 12/17/2010 - 16:27 | 813771 Al Gorerhythm
Al Gorerhythm's picture

Crystal ball gazing is not my strong suit. Ask The Bernank. His foresight is as good as anyones.

Fri, 12/17/2010 - 15:44 | 813665 SheepDog-One
SheepDog-One's picture

When? I personally believe the timeline here is 3-6 months behind Europe...what we're seeing over there is what we'll be seeing here in a few months. Just a personal belief, nothing scientific behind it really, but I see the real end goal which is PLANNED implosion of world economies and currencies in order to institute their 1 world govt insanity, and I think theyre sprinting to the finish line now. Europe- basically complete. Next up for slaughter- USA by spring.

BTW for anyone wanting to see a bit of real history and reality of the Corporation of the USA, read here.

Crown 1  USA declared Bankrupt since 1933 and in receivership, starz n stripes and US Constitution has been a total illusion for the last 80+ years. 

Do NOT follow this link or you will be banned from the site!