In Jim Cook's Archive


This week’s edition of Newsweek Magazine claims that the recession is over.  The lead article explains how America pulled itself back from a meltdown and why we are destined to prosper.  Says Newsweek, “America is coming back stronger, better, and faster than nearly anyone expected – and faster than most of its international rivals.”

Contrast this optimism with newsletter editor John Williams, who closely tracks money supply data.  “The pattern of the worst annual contraction in modern economic reporting of real broad money supply continues signaling looming deterioration in U.S. business conditions, and an intensified economic downturn or ‘double dip recession.’”  He claims this will wreak havoc on government budgets, create more banking problems and cause a big sell-off in the dollar.  Ultimately, he predicts runaway inflation.

These two opposing views leave me scratching my head.  I don’t totally trust Newsweek because everything with them is political.  If a Republican were in office they would no doubt temper their optimism.  On the other hand, a number of economic statistics are improving.  The Central Bank and Mr. Bernanke claim to be ending money printing and debt monetization.  They no longer intend to buy dubious mortgage debt.

The newsletter, Contrarian Investor thinks the Fed will blink.  They explain, “For all the printing the Fed has done, over the past year the acceleration in M2 money supply has been negligible at best.  Credit cycles are built on M2 growth.  So the question becomes, if they stop printing as they have promised to do in March, will the money supply magically start growing again or at best even stay flat in the months and quarters ahead?  That could only happen under one scenario, and that scenario is that bank loans and leases stop contracting immediately and losses in the asset backed securities markets literally stop right now.  In plain English, that means that we can have no more residential foreclosures, no more commercial real estate foreclosures, no more credit card losses and all home equity lines are now money good . . .

“From our perspective, the Fed will never tighten in earnest until private sector credit starts to expand.  This is the bottom line.  Everything else is just noise . . .  Our bet here is that the credit losses do not stop.  M2 indeed starts to contract, and the Fed is forced to restart the presses and will need to further inflate its balance sheet with asset purchases.”

The real fear is consumer inflation kicked off by the Feds loose money policy.  I’ve always felt the government fudged the inflation number.   Inflation has always been understated.  Not too long ago we were shocked by numbers in the billions.  Now it’s trillions.  You don’t need a booming economy for inflation to roar.  A falling dollar can exact a toll on purchasing power as commodity prices ratchet up.

I’ve condensed an article by author Martin Hutchinson, which explains another factor impacting commodities.  “The current commodities boom is qualitatively different from those of the past.  This time, a commodities boom is occurring while the global economy is still far from full capacity and unemployment worldwide remains high.  Chinese and Indian demand, which did no more than dip for a few months in 2008-09 before rebounding strongly, has driven up the global consumption of commodities to unprecedented levels.  What has not been fully realized is this change is likely to be more or less permanent.  Now, with consumer demand growing at 6-10% annually among 2.5 billion consumers, the upward trend in energy and minerals usage has become much more rapid than we were used to.”

The combination of credit problems, money printing, and increased commodity demand has caused some analysts to sound the alarm.  Editor Peter Souletes warns, “The dangers of holding fiat paper have never been so pronounced since Weimar, Germany.”  Columnist Javia Blas writes, “The commodities market is screaming inflation.”  Editor Richard Doughty confirms, “Real in your face inflation is already reflected in the commodities index compiled by the Economist Magazine, which is showing double digit inflation in the dollar-prices of everything.”

How can there be such discrepancy between these dire warnings and the low inflation expectations of the Washington-Wall-Street axis?  They’ve been terribly wrong in the past, so we’re placing our financial bets on things like precious metals which Wall Street doesn’t  like.  Newsletter editor Howard S. Katz confirms our view.  “The vast majority of people do not understand what is happening.  The printing of money is a counterfeiting racket run against them by their own government.  To avoid being robbed, they must be in gold.  This is why every organ of establishment opinion denounces gold and tries to scare you away from it.  If you value your hard earned wealth, do not listen to them.”

The ugly reality undermining optimism about the future is runaway government spending.   It’s lofted our national debt to an unimaginable $11.4 trillion (the interest is close to $200 billion).  Dow Theory editor Richard Russell sums it up.  “With the total national debt rising by  probably a trillion dollars a year as far into the future as we can see, and interest rates also rising, the U.S. is caught in the jaws of a compounding ‘meat grinder.’  There’s no way the U.S.  can continue over-spending by a trillion dollars a year in the face of rising rates.  A collapse in the system or outright inflation (none of this stealth inflation of the last decade) will be the result.”

As for recent reports of low inflation and growth in retail sales John Williams suggests, “Such happy reporting will prove fleeting . . . consumers lack the income and credit growth needed to support expanding consumption . . .  retails sales face plunging activity in the months ahead.  On the inflation front, the effects of higher oil prices again are pushing through the system . . . Key to explosive inflation growth ahead remains a savage sell-off in the U.S. dollar . . . or heavy monetization of U.S. Treasury debt by the Federal Reserve.  Both factors are likely to come into play in the next year, as an intensified economic downturn – ironically signaled by declining annual real growth in the broad money supply – blows apart projections for the federal budget deficit and related U.S. Treasury funding needs.”

For the past decade silver and gold have protected those who owned them.  Views about the economic future may be far apart but silver should flourish in any scenario.  We’re betting on a decline in the dollar and rising inflation.  No doubt the future will be full of surprises, most of which will be good for silver and gold.  For the most part investors are buying into Wall Street optimistic outlook and renewing their stock market bets.  Few if any are holding a minimum of 10% in precious metals.  We strongly advise to postpone doing anything until you have a minimum of 10% of your net worth in silver coins and bars in your possession.

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