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
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on the stock market (this “insurance” paid out triple digit gains in the Autumn
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Again, this
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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.