Guest Post: Preparing for Inflationary Times

Tyler Durden's picture

Submitted by Jeff Clark of Casey Research,

"All this money printing, massive debt, and reckless deficit spending – and we have 2% inflation? I'm beginning to believe that either the deflationists are right, or the Fed's interventions are working." – Anonymous Casey Research reader

The CPI, in our view, does not accurately measure inflation, which accounts for some of the discrepancy our reader is pointing out. However, the proper definition of inflation is "an increase in the quantity of money," which we've had in spades. We've not experienced the concomitant increase in prices, which is what we're addressing in this article.

It's logical to assume that when you create more of something, you dilute the value of what's already in existence. That's exactly what has happened to the US dollar since the 2008 financial crisis hit. Economics 101 says this should lead to higher inflation – yet official Consumer Price Index (CPI) levels remain benign.

It's this unexpected development that led a reader to pen the above quote. Is the inflation argument dead? If so, does that mean gold's big run is over? It's a timely question since the current selloff in gold is largely attributed to low inflation expectations.

This is the first installment in our in-depth series of examining the next big catalysts for the gold price. This month we're looking at inflation. While a low CPI may be puzzling in the midst of massive, global currency abuse, there are three realities about inflation that convince us it's not only coming, but will catch an unsuspecting citizenry off guard.

Let's take a look at why we're convinced inflation will be one of the next big catalysts for the gold price…

Reality #1: History shows that high levels of debt and deficit spending eventually lead to inflation.

This statement makes sense on the face of it, but seminal research has been done that confirms it. A country simply cannot escape high inflation when carrying oversized debt levels and/or running massive deficits. Sooner or later, these sins catch up to you, regardless of what the current thinking may be.

Debt. The first of these historical studies is detailed in the book, This Time Is Different by Carmen Reinhart and Kenneth Rogoff, who've extensively researched the impact of high debt on inflation and gross domestic product (GDP).

Based on a comprehensive study of global incidences, Reinhart and Rogoff gave the following conclusion:

  • Debt levels over 90% of GDP are linked to significantly elevated levels of inflation.

When specifically studying US history, they again observed that:

  • Debt levels over 90% of GDP are linked to significantly elevated inflation.

When US debt levels met or exceeded 90% of GDP, inflation rose to around 6% – roughly triple current levels – vs. the 0.5% to 2.5% range when the ratio was below 90%.

However, with regard to timing, they state:

  • There is no apparent pattern of simultaneous rising inflation and debt.

In other words, inflation is a clear and definite result of high debt levels, but it's not a day-to-day link. This likely explains the current lag between high debt and a low CPI reading.

So are we nearing that 90% mark? Bud Conrad, chief economist of Casey Research, estimates we're currently at approximately 110%. Further, he projected from his research in December that…

  • Using my assumptions, gross debt to GDP crosses 120% in 2014. That is well past the danger point of 90% that Reinhart and Rogoff cite. What's scary is that my assumptions are not even close to a worst-case scenario, so the situation could be much worse.

Bud does not expect to see much more deflation. One reason is because…

  • In essence, much of the deflationary pressures have been cleared out. Going forward, there should be fewer outright losses from bad loans, and thus less deflationary pressure. For that reason (and many others), I expect higher inflation sooner rather than later.

Deficit Spending. Peter Bernholz is widely considered the leading expert on the link between deficit spending and hyperinflation. He conclusively states from his research that…

  • Hyperinflation is caused by government budget deficits.

The US budget deficit totaled $5.1 trillion during Obama's first term in office. The longer deficits last and the bigger they are, the closer a country moves toward very high inflation levels.

The Congressional Budget Office (CBO) recently reported, however, that the 2013 deficit will drop to $845 billion. Good news, right? Not exactly, because the reduction is largely a result of higher taxes. The CBO was therefore forced to admit…

  • The fiscal tightening from higher taxes and lower spending will slow economic growth to an anemic 1.4 percent by the end of 2013, causing the unemployment rate to edge back higher.

It turns into a vicious cycle, because if unemployment grows, money printing will continue and even increase. The CBO further admitted…

  • Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.

If deficits grow – or even just remain elevated – we inch closer and closer to the hyperinflation Bernholz warns about. Breaking this cycle will be very difficult, if not impossible... at least not without serious consequences.

These studies present clear and direct evidence that spending more than is brought in and continually adding to the national credit card leads to higher inflation. Sooner or later, this type of reckless behavior catches up to an economy. The sobering reality is that avoiding moderate to high levels of inflation in our current fiscal state would be an historical first.

Unfortunately, that's not the only inflationary fear we have to contend with.

Reality #2: History shows that inflation can occur suddenly and grow rapidly.

Not only is higher inflation a near certainty, history tells us that once it grabs hold, it can quickly spiral out of control. Given our crumbling fiscal state, we must consider the possibility that price inflation could kick in abruptly and rise rapidly.

Amity Shlaes, a senior fellow of economic history at the Council on Foreign Relations and a best-selling author, provides some examples from the past century of US inflation that was at first subdued but then abruptly rocketed to alarming levels. Look how quickly inflation rose in just two years from "benign" levels.

According to Shlaes, US inflation was 1% in 1915 (based on an earlier version of the CPI-U). Within just two years, it soared to 17%. As she states, it happened because the Treasury "spent like crazy on the war, creating money to pay for it…"

In 1945, the official inflation rate was 2%; it accelerated to 14% in 24 months. Inflation registered 3.2% in 1972 and hit 11% by 1974.

It's clear that the arrival of inflation can be sudden, and that prices can quickly spiral out of control. Given the profligate amount of money being printed by many countries around the globe, we could easily become victim to rapidly rising inflation. If we matched the increases in the chart, our CPI would register 11%, 15%, and 19% respectively, by February 2014.

Regardless of the timing, though, this is a clear warning from history: expecting the CPI to remain low indefinitely is a dangerous assumption.

Reality #3: Most developed-world governments need inflation.

It is a fact that high inflation reduces the real cost of servicing debt. Our debt levels have grown so high that the only politically acceptable way to deal with them is to inflate the currency. Politicians and central bankers have no incentive to stop, and thus will continue until disastrous price inflation emerges. Just because it hasn't occurred yet doesn't mean it won't.

Other political solutions simply aren't realistic. There is no amount of politically acceptable increase in tax revenue or austerity measures that can meet existing and future obligations. Printing money is the only viable solution. Once you internalize this, an understanding of the most likely consequences becomes clear.

Even if deflation in select asset classes persists or we get another deflationary event like 2008, we can rely on central bankers to concoct more rescue schemes financed with freshly created money. Perhaps just as likely is that the economy does improve and all the money that's been held back enters the system and sparks inflation.


Based on these realities, we can draw some well-grounded conclusions about the coming rise in inflation.

  1. The onset of higher inflation isn't certain, but the outcome is. These realities make clear that higher inflation is virtually ensured at some point. It's thus imperative we prepare for it.
  2. What we use for money will experience a significant – perhaps catastrophic – loss of purchasing power. As shown, this is not speculation, but a process of cause and effect observed repeatedly throughout history. As a result, you will likely use some of your gold and silver to protect your standard of living – that is, after all, one of its purposes. The point here is to make sure you own enough ounces to offset a significant decline in purchasing power.
  3. When inflation begins rising, precious metals will respond and move to higher levels. We don't know if this is the next catalyst for gold, but we're confident it will be a major driver of future prices.
  4. Keep in mind that gold tends to moves in anticipation of inflation – think of it as inflation insurance. By the time inflation is "high," the big moves in gold and silver will have most likely already occurred.

Stay vigilant, my friends, because higher inflation is coming – and as a result, so are higher gold and silver prices.

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Scarlett's picture

you guys are going to love this -->  I think these partyboyz are in for a surprise after loss of reserve status

DoChenRollingBearing's picture


Perhaps not as exciting as rich doofus kids, but here for anyone interested:

"Review of Barron's -- Dated 1 April 2013"

Boris Alatovkrap's picture

To decide is gold price inflation or deflation...

- Will risk in assets increase or decrease?

- Will Central Bank ease or tighten?

- Will interest rate increase or stay to ZIRP?

- Can discount rate or Treasury Rate increase without drain Bank reserve capital force confrontation of duration mismatch?

- Will Britany Spear have more mental breakdown?

TwoShortPlanks's picture

In our new PermaSale world, disposable razor cartridges are the best gauge of inflation.


1. Difficult to make much cheaper
2. Oligopoly (Schick, Gillette, Bic) allows for price setting
3. Need (borderline), not a want
4. Consumable product, not durable
5. High consumption rate
6. Sales do not directly affect key industries or the economy

Keep an eye on the number of cartridges per pack and the price increase.

Since 1996 the average razor cartridge has increased by 265%...or...about 6% compounded.

TwoShortPlanks's picture

TSP Prediction: Before Dec 2014, you'll be able to buy Aust/S.A./Chinese Gold in Yuan Spot from HKME or SME over USD Spot.

Broader Scope: This will facilitate China's takeover of Oil Futures Markets. didn't think China wanted Gold to back its' currency, did ya?!

new game's picture

some things are unstopable...
timeless tradition sewen in garments

short buffons never split.

silver gone at 30 and 29>just too manipulated for my likeing

gold, though, much harder to control...

lead for trade> nice 50+ percent trade s.t.(yea i'm one of those assholes selling bricks at gb).

good luck> buy low sell high...

TwoShortPlanks's picture

Buy low, buy high, buy at any price.

When you have what the Oil entities want to keep accumulating, the Elites already have, and every country needs in order to fund their ongoing future energy're already in 'The Great Game', without knowing it, aren't you, Prince Andrew?!

...oh, and Prince Andrew, you might be a Royal, but you stuck your dick in something I never would have...and married it! You filthy fucking animal. LOL

Kirk2NCC1701's picture

Si, esto es verdad!  Ja, ganz genau, affen geil!   No matter in what language you say it, there are several different outcomes possible to the dollar's dethronement as reserve currency.  And only one of them is a "gold" standard.  The other 3 are not pretty at all and are all worse than what we got now.  So, careful what you wish for.

eigenvalue's picture

Bingo! Last year this author also penned another piece of "pump and dump" advocating owning gold and silver. However, anybody who followed his advice saw the portfolio underwater.

King_of_simpletons's picture

Developed is a synonym for bankrupt or on the verge of bankruptcy.

It all makes sense now.

old naughty's picture

"...portfolio underwater"

So, are you saying it will again not moving much this time?

bigkahuna's picture

he's referring to all of the boating accidents...

Long_Xau's picture

A very tragic and inexplicable curse, indeed.

Professorlocknload's picture

It's caused by putting too much on one side of the boat. 

Oh THAT kinda under water. I remember when I got a coin there in the late 90's for $300. Misplaced it, and had to replace it for $275 in 2000. But I found it again. That $25 loss was hard to take though!

new game's picture

if you have a timeline.

but what if you dont?

how fucking stupid of a comment

underwater, no safe and secure you fucking idiot...

got paper?-fuck off

Long_Xau's picture

Alas, this is true. I followed such an advice a while ago and accumulated a modest stack of gold and silver. It all went underwater in a very unfortunate sampan boat accident.

SubjectivObject's picture

C'mon people, eiginvalid trys so hard to be early in the thread, certainly that chutzpa has to be worth something? 

C'mon eiginvalid, show 'em your reeeel stuff.  You show 'em all how the price of paper metal relates to the value of the physical metal, how the avialability of paper metal relates to the avialability of physical metal, and how to correctly predict those relationships going forward, and in our Fed manipulated markets, no less.  C'mon, hit it Pikachu!

nofluer's picture

Post deleted due to my poor memory.


All Risk No Reward's picture

Watch out for deflation before the hyperinflation - that's how the mega banks bankrupt everyone, eliminate their competition, turn their debt holdings into physical assets and buy up Earth for pennies on the dollar with all the looted bailout cash.

When they most of the physical Earth and are buried in debt themselves, THEN they will hyperinflate to erase their own debts...  BUT NOT YOUR DEBT BECAUSE THEY WILL WIPE YOU OUT FIRST.

That's why they are giving 3.5% 30 loans to all comers right now.

It is going to happen...  it is what makes sense from their sociopathic self interest analysis.

markettime's picture

Commodities have not gone up in price because all of benny-lava's funny money has been purchasing dow & S&P indexes while going short on commodities. Also the velocity of money has not increased due to the banksters hoarding cash. They are hoarding cash because they are afraid of runs on the banks. What better way to protect the banking system? 

nofluer's picture

Ummmm.... which "banksters" are you referring to? The FED and his pet Megabanks are the only ones in a position to hoard anything. Bennie is holding all the money for the non-megabanks in "excess reserve" acounts that he pays minimal interest on (so the accounts can be cash equivalents and thus have a value on the balance sheets - so the banks - even though they have no money, can be considered "solvent.") All part of the Fed's charitable "buying" of the nearly 1.5 to $2 TN in MBS' which the FED is now collecting mortgage payments from. (Most of the MBS mortgages actually WERE AAA loans!)

new game's picture

they are firmly in control and yes price will fall first because the money is spiraling in their black hole, not lost though.

no velocity, now the upper middle to lower uppers(last holders of  larger amounts)get corzined-macmansions with high taxes and heating/cooling bills a fucking dime a dozen. things start collapsing as desparate sellers (and gold too-keep wick dry)push everything down as shalom amps printing; then finally v. temp relief b/4 weinmer 2014 2nd edition best seller...


HeliBen's picture

2% is a joke to begin with. We've been at 2% for what, 15 years now? Yet prices have doubled and tripled at least. That's not 2%. That's 8-10%.

God forbid we get to 10% plus in Cpi cause it will be a factor of 4 or 5 in actual life.

Beam Me Up Scotty's picture

Inflation is 2% because they have tricked us into believing its 2%.


1. Changing the parameters of how inflation is calculated

2. Changing container sizes.--If they give you half as much and it costs the same amount, thats 100% inflation.

3. Things are made cheaply--they don't last as long--if something lasts half as long, but costs the same amount, thats 100% inflation

It's all an illusion.

Long_Xau's picture

Probably more like a power of 4 or 5, not a factor of.

Since the last FED policies were announced (the inflation and unemployment targets) it should be clear that the statistics2 that the BS (Bureau of labor Statistics2, formally in the executive branch as part of the DoLe (Department of Labor)) reports publicly are now to be forged according to whatever pleases the FED (to some degree, at least formally also determined by the con-gress), or at least what the executive thinks would please the FED. Therefore, for all intents and purposes, this figure is now the propaganda about what they want you to see as the inflation figure.

Ribeye's picture

16 dislikes???

A bit to subtle eh,

Hat tip to the 3 people who knew what I was saying,

nofluer's picture

Maybe more would have got it if you'd said "potatoes"?

ShortTheUS's picture

One day, American central planners are going to stumble onto the fact that they can cure the debt problem and the money supply/inflation problem by just confiscating people's bank accounts.


Stoploss's picture

"Stay vigilant, my friends, because higher inflation is coming"


If i had a dime for every time i heard that......

kito's picture

Silver dime or modern one??????????

fonzannoon's picture

It's looking like you are looking pretty damn smart kito. 85 bil a month and it can't keep up with the beautiful deleveraging. Banks are just grabbing stuff now because the printing is not keeping up with the implosions happening. Cash is king.

I truly can't wait to see the day CNBC, which has been talking endlessly about the fed's exit strategy, has to explain why Ben doubled down again to 170 bil a month.

85 bil a month and we need guest posts assuring us that inflation is coming. I would have thought we would have $200 crude here and now at this pace of printing. But it's not enough. The will print until the engine explodes though. Apparently we ain't seen nuthin yet.

ekm's picture

What is deleveraging?

fonzannoon's picture

as I understand it there are two types of deleveraging. Paying down debt, and debt being eliminated through bankruptcy/foreclosure etc.

fonzannoon's picture

Depends on who's asking...also depends on which type. But my personal belief is we are seeing a hell of a lot more of the bankruptcy/foreclosure type of deleveraging which is tearing a hole in the banks. It is deflationary in nature and it is what the fed is fighting to prevent.

Beam Me Up Scotty's picture

House prices are starting to rise again in lots of areas however, and sales are happening at a faster pace.  What happens if people start to feel like they have money again?  I finally got some positive equity in my home equity line of credit a few months ago.  Could home ATM's trigger inflation?

fonzannoon's picture

i bought my house in 07. If i could get what i paid for it now i'd sell in 2 seconds flat and downsize. I may see some more paper dollars on my statements but we all know it will be evaporated in a millesecond.

kito's picture

moving cellulite and fat deposits from your ass to your stomach doesnt mean youre losing weight ekm..........assholes like dalo have the temerity to call it deleveraging when the debt just gets moved from the individual onto the collective...............................all the while the banks are made whole..................

Long_Xau's picture

Why are you taking the same point of view as the cartel/establishment by presuming it is bad? I advise you to take a neutral point of view when asking such important questions.

nofluer's picture

Swimming upstream here...

"What is deleveraging? Why is it bad?"

It is but at the same tijme it's not. You see, things move in cycles. You know - what goes up must come down, what goes around comes around, etc. Everything moves in cycles. Some cycles are loooong, some are short - but everything moves in cycles.

Some people do better on the up cycle than the down cycle. Some do better on the down cycle. So what you get is a resistence to both.

BUT TRUTH is that if you don't let the cycle proceed, the forces that REQUIRE cycles start to build up pressure to complete the cycle. And the prssure builds and builds until it BLOWS UP and the cycle is completed - but not in an orderly fashion. ie The continuation of an impeded cycle does vast amounts of damage to the system.

The Powers That Be (PTB) do well on the economic up cycle. So they seek to prolong it as long as possible. And when it should reset, they prevent it from doing so. While the pressures build, these PTBs know what is coming and so delay the reset as long as possible while positioning themselves for the explosive reset and the resulting down cycle. So we see the same people/powers that benefit from the up cycle, taking over the down cycle, and using the destruction caused by the explosive turnaround to set up the next upcycle - with them on top again.

So the "bad" part of cycles is when they are artificially interfered with and they cause destruction, which the PTBs benefit from - and the rest of us suffer from.

But the thing to remember is that the cycles MUST RESET and WILL RESET. If the cycles were left alone, ie protected from artificial manipulation, then everyone benefits from the up and down renewal caused by the cycles... which the bad people do not want.

kito's picture

fonz, printing is part of dalios beautiful deleveraging.....its so beautiful....banks get oodles of free money to recapitalize and the fed takes all their shit and shoves it into bens boxer shorts.........................savers get robbed........................ citizens get loads of debt thrown onto their sovereign shoulders...........but hey....its all good....its beautiful......good times are right around the corner........mcmansions for all..............3 home equity loans.............trips to the mall with the 5 new amex cards........................too bad dalio doesnt see the massive structural, not cyclical problems this country the fact that america is now a welfare state and the middle class is slowly slipping away.......................................

Just Ice's picture

yeah, banks get free moolah and regular peeps get bubbles in their fuel and grocery pricing...beautiful only for those that spend barely any percentage of their take on necessities...ugliness elsewhere

CrazyCooter's picture

LMAO Kito!



masterinchancery's picture

Latest Shadowstats CPI, using govt methodology until changed in 1990, 9.62%. Unless you are stupid enough to believe the US government stats, higher inflation is here.

fonzannoon's picture

It is clearly not keeping up with deleveraging. That's all I am saying.

CrazyCooter's picture

Correct. That is why the DHS bought all the ammo. My newest theory is that it isn't for the US to use, they will dump it into the hands of drug cartels, mobsters, etc so we can have a nice police state when shit crashes and lots of shooting starts.

Fast and furious was just the first step.

Time will tell ... but time is short!



Missiondweller's picture

Thanks for sharing. looks like it was 6% at end of 2012 but I'm not a subscriber so I don't get to see up to date info.

Looks like that $85B /per month is going somewhere!

orez65's picture

Just paid $0.99 per pound of potatoes.

Is that inflation?