In Jim Cook's Archive


By James R. Cook

The government claims that there’s been little or no inflation over the past ten years. Wall Street and Washington love to hear about low inflation. They will believe anything if it keeps stocks pumped up. If you’re like me, you’re often perturbed by sticker shock. Last week I paid $8.95 at the airport for a paperback book. A tree service charged me $2,500 to cut down a tree, and they were the low bidder. Two years ago I paid $8.00 to park in a ramp over in St. Paul. Last weekend I parked in the same ramp for an hour to see my granddaughter’s dance recital. It was $10.00. My wife had a minor medical diagnostic test that came to $2,500. When the bill came, it floored the both of us.

The government is either fibbing about inflation or they are incompetent. I suspect the latter. This month a Picasso will be sold at auction for $70 million. There’s a lot of Picassos in the world. I attended an auction last week in Chicago where someone paid $630,000 for a pair of old wooden decoys. A lamp produced by Coca Cola in the 1930s that featured a coke bottle just sold for $45,000. The drawings for a Sunday Peanuts comic strip sold for $65,000. Collectors items, art and antiques are going ballistic. It’s nothing to pay $30,000 to $40,000 for an old Batman comic book or a baseball card. The best ones go for much more.

Everyone knows the story on land and real estate. It’s going up and up. A beachfront lot on Florida’s west coast that sold for $300,000 twenty years ago is now $3,000,000. If it has a house on it, they tear it down and build another one for $3 to $4 million more. There are no bargains in real estate. Nor are there any in collectibles or, for that matter, in the stock market. Everything is fully priced (expensive) with one exception. The precious metals have not experienced a similar explosion in price as most other assets. The recent gains in gold and silver amount to little when compared to the gains of other assets.

How can it be that gold and silver, which have always been a hedge against inflation, have not risen dramatically in price with today’s monetary inflation? It’s because the institutions, and most investors, believe the government when they say there’s no inflation. They don’t think they need to protect against currency debasement. The other answer is that precious metals have been purposely held down in price for one reason or another.

Let’s fact it, we’re living through one of the greatest periods of money and credit expansion in history. It’s bound to show up in the prices of everything. People want dollars but they want to spend them more than they want to hold them. I suspect we are in the early stages of hyperinflation. When asset prices explode as they have, it’s a sign of too much money chasing too few assets. That’s a classic definition of inflation.

We’ve never bought into the deflationary viewpoint. Not when the government can keep printing money. An excellent recent article by Alf Field argued against deflation.

“Deflation is a collapse of a debt pyramid when it becomes “excessive” and debtors cannot fulfil their debt obligations. This creates a self-feeding downward spiral of debt repudiation leading to recession or worse. The debts could be said to have been settled by the bankruptcy of the debtors.

“A deflationary collapse requires two special factors to be present:

1. A strong or desirable currency that people are content to hold;

2. An inability by monetary authorities to create new money at will.

“Those pre-conditions were present in the 1930’s when the convertibility of the dollar into gold ensured that the dollar was money that people could trust and were content to hold. The constraint of gold convertibility prevented the authorities from creating dollars at will and boosting Government spending.

“Those two special pre-conditions for deflation are not present today. We have fiat currencies that are nothing but pieces of paper that people are becoming increasingly reluctant to hold. Furthermore, the Federal Reserve Governors keep reminding us that we live in the era of the electronic printing press. They can instantly create any amount of new money whenever it is required – and they have already indicated that they would do so if this became necessary to avert deflation. They have the tools and they will use them. The odds are heavily stacked against a deflationary outcome.

“It has been said that excessive debt can be repaid by either:

1. The bankruptcy of the debtor; or

2. The bankruptcy of the currency.

“If the former is eliminated by the removal of the deflationary alternative, then the latter becomes more likely, indeed almost inevitable.

“[Some] see dollar debt as a short position against the US dollar and envision a rapid rise in the value of the dollar in the event of a deflationary event. The fact is that a short squeeze can only develop when the supply of the item concerned is relatively inelastic, i.e. the supply is limited. In the case of the US dollar, the supply can be instantly boosted by the Fed by whatever amount is required. Thus the conditions required for a short squeeze can be quickly eliminated.

“The real situation is that dollars will be created in ever increasing quantities. The huge US Government deficits and debts guarantee this. The necessity to counter any deflationary trends that develop in the economy also guarantee it. The dollar may be in a short-term technical rally, but the long-term trend is down, especially against real assets.

“The US economy is moving inexorably towards hyperinflation, the bankruptcy of the currency…..”

Mr. Field made the following interesting comments on surviving inflation. “One can learn much about how to handle investments in an extreme inflationary environment from the German hyperinflation of 1920 to 1923. The Mark’s link with gold had been severed during World War 1 and the German government had the ability to print new Marks in an unbridled fashion. For various reasons the German government proceeded to do this until the Mark was worth nothing.

“German investors holding cash and financial assets such as bonds lost everything. Investors who protected themselves by investing in precious metals and in foreign currencies (at that time the Pound, US Dollar and the Swiss Franc were convertible into gold) retained or improved their real wealth.

“Investors in German real estate and the German stock market had varied results depending on how they were positioned. Real estate investors who could not quickly increase the rentals received from tenants were bankrupted by higher interest rates and rising property taxes. Others who managed to eliminate their mortgages and had sufficient rental income to meet outgoings survived with anything up to 70% of their real wealth intact.

“The situation was similar for stock market investors. Depending on which companies they were invested in, some lost everything and while others managed to retain a modicum or even quite a large proportion of their real wealth. While the stock market indices rose to new peaks denominated in Marks, these indices failed to do so in real terms…..

“While the best investment in a deflation is likely to be 30 year US Government Bonds, in an accelerating inflation environment the best investment results will almost certainly be found in the performance of the precious metals…..”

That tells me there’s a huge upside in precious metals. If we see the kind of interest in gold and silver that we had in 1978 and 1979, we’re off to the races. All of these dramatic price rises we see in assets mean the currency is already depreciating mightily. People think their assets are going up and making them richer, when it may only be currency depreciation and an early flight from the dollar.

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