The government's printing money 24/7 to paper over the bad debts of the housing bubble. We're about to enter a cycle of hyper-inflation that will devalue every dollar you own. Use any rally to diversify into assets that will hold value no matter what happens to the greenback.
Talk about deflation, Wall Street's current favorite "phantom menace," has reached near hysterical levels lately.
The spring slowdown in the economy ignited fear that falling prices and a stagnant economy are on the horizon. Even James Bullard of the Federal Reserve Bank of St. Louis, said recently that deflation is a real risk.
But facts are facts. The economy is growing, albeit at a snail's pace.
But the most important fact is that we are absolutely, positively at the epicenter of one of the vastest expansions of the money supply in history right now. Look at what the Federal Reserve is doing, they're creating enormous amounts of money – almost $2 trillion in new money in the last 24 months. Altogether, the government has already guaranteed $12.7 trillion in mortgages and debt.
And by buying more Treasuries, the Fed is monetizing U.S. debt by supplying credit to the U.S. government. That's the No. 1 action to take if you want to guarantee hyperinflation. It's Zimbabwe finance… straight out of the Mugabe playbook.
The Fed's actions are not only wrong-headed, they're criminal. It's paying back old debt with new money, a veritable Ponzi scheme. It's the inevitable endgame for every paper currency.
And the Fed isn't about to take its foot off the accelerator until it's too late. In fact,
inflation has already reared its ugly head, and it's only going to get worse.
So while the greenback could rally through the end of the year, especially against the euro, smart investors will take advantage of any surge to diversify away from dollar-denominated assets.
This free report identifies the reasons why the dollar is doomed. Plus, we'll show you the safest ways to avoid the coming carnage and grow your wealth…even as the dollar fades into oblivion…
Deflation Never Had a Chance
The case for deflation seems powerful, given excess supply, loads of see-through office space, double-digit unemployment, reduced capital spending and wage cuts.
What's more, the government would have you believe that the CPI actually dropped in the spring.
Even bond-fund heavyweight Bill Gross is bracing for a possible bout of deflation, a development that could cripple the world's economies and vaporize the markets.
But for one simple reason, it's time to shoot the messenger.
To put it in simple terms, if a government is willing to sacrifice its currency there is absolutely no way deflation can take hold in a modern monetary system.
It doesn't matter how large the debt contraction is–$10 trillion or $1000 trillion–any government with a purely fiat currency can, with the stroke of a computer key, print enough money to wipe out the debt.
In a purely fiat monetary system a government that is willing to sacrifice its currency can print enough money to mail every man, woman, and child a check for $1,000, $100,000 or a million dollars.
It would halt any deflationary force right in its tracks. Granted they will destroy the currency by doing so, but helicopter Ben and his cronies have shown they intend to keep the pedal to the metal, come hell or high water.
The fact is, the government's debt has almost doubled in the last two years alone, as Americans' personal wealth sank along with housing and stock prices. In fact, the U.S. debt crisis is only just beginning.
The depth of the budget problem was underscored when the Treasury reported that the government ran a $1.26 trillion deficit for the first 11 months of the fiscal year, on pace to be the second-biggest on record.
But even that appalling number is misleading. The federal government's Generally Accepted Accounting Principles (GAAP) financial statements show the actual annual fiscal deficit careening wildly out of control.
Including the annual changes in the present value of off-the-books liabilities, including Social Security and Medicare, the annual 2008 deficit was $5.1 trillion dollars. The 2009 actual shortfall likely was around $8.8 trillion, instead of the official cash-based $1,417 billion.
The result of all this spending is that not only has the U.S. done nothing to stimulate domestic production, it has discouraged foreign investment while destroying the purchasing power of the dollar. Sooner than anyone is telling you, prices for domestic and foreign purchases will be out of reach of the average consumer.
That makes inflation as inevitable as the sun rising tomorrow with 12.7 trillion reasons why. So the problem isn't the mortgage market or even the manipulation of rates, but the evisceration of the dollar.
To be sure, we don't have an impending deflation problem; we have a rapidly approaching inflation problem and a major currency crisis.
Hyper-Inflation On the Horizon
Regardless of government statistics that suggest inflation is under control, the reality is that inflation is already well underway in this country.
You're already feeling this by what happens with your wallet every day. The costs of education, medicine, and groceries are all up, up, up. Apparently, the government bean counters are the only ones who aren't feeling the squeeze.
A new report on retail prices of brand-name drugs shows that the 217 products most used by older Americans increased by an average of 8.3% during 2009, the largest increase in years.
Meanwhile, The Wall Street Journal reports that cattle prices are soaring toward records, and foodstuffs–including coffee, cocoa, barley and wheat, as well as nonedible products, such as cotton–have been skyrocketing.
Even the government admits the first half of 2010 saw a 2.1% annualized increase-even though everybody and his brother knows it understates inflation by a mile.
The truth presents a far harsher reality.
By eliminating food and energy from its CPI reports, the Fed is deliberately understating inflation and reducing the budget deficit. After dropping during the 2008 financial meltdown, the true inflation rate is already over 7% and rising. When it hits double-digits, the dollar will plunge like a rock.
And that's just the beginning…
The Fed announced recently that instead of allowing proceeds from maturing mortgage bonds to disappear from its balance sheet, it would take the "modest" step of using them to invest in new Treasuries.
In plain English, that means that the Fed is reinvesting into U.S. Treasuries the money it would otherwise bank from maturing mortgages to keep long term interest rates from rising.
By propping up Treasuries, the Fed is selling out the dollar long-term. It's a scenario that will end in disaster for U.S. consumers.
Dump the Dollar & Buy Hard Assets
The currency market may be about to provide investors with a short-term opportunity to exit the dollar. Trouble in Europe and currency fiddling by Japan could give the dollar a short-term boost.
Problems in Europe remain worse than most people imagine. European bankers are hiding far more toxic assets than they've let on…Greece and Ireland both need billions, as do banks in Spain, Portugal, and Italy.
If the debt crisis reemerges, look for a full bout of risk aversion to enter the market this fall as investors once again run for the safety of the U.S. dollar. The euro could trade as low as $1.15 by the end of the year. If that happens investors should plan to unload their dollar-denominated assets as fast as possible.
No matter what, don't save dollars. And don't count on whatever the government has promised you, whether it is a retirement or medical care. The government is bankrupt and it won't be able to deliver. Here's where to invest your dollars to protect yourself:
#1–Go for the Gold: Generally speaking, we don't like buying anything at all-time highs, meaning that pullbacks are key here. But we expect to see $2,000-an-ounce gold within the next couple of years – and possibly sooner due to the constraints that limit gold production. Significant new discoveries are rare. Virtually no new mines have been opened worldwide in 25 years. One gold strategy is to buy the SPDR Gold Shares ETF (NYSE: GLD): GLD holds more than 1,000 tonnes of gold, and has a market capitalization of $39 billion. As an investment, GLD is more convenient than buying gold bars directly. The fund's share price fluctuates in concert with the price of gold.
If you prefer to own bullion itself most dealers charge premiums of about 3% to 6% above the "spot" price for physical gold. Kitco.com has established a good reputation, premiums are fair and the selection is usually quite good. But be sure you get started soon. You'll pay much more if you wait for the economy to nosedive before stocking up. When things get hairy, premiums can go up by three to five times, with some dealers charging 10% to 15% above spot. Obviously, you'll be much better off buying gold on price dips and under calmer circumstances.
#2– Take "The Natural" Approach: We're referring, of course, to natural resources. The Gulf oil spill, coupled with new drilling restrictions and increasing Third World demand – is going to push the price of oil and other resources much higher. When the dollar tanks, oil generally heads in the opposite direction. For a direct play on oil prices, you might want to try an exchange-traded fund (ETF), such as the United States Oil Fund LP (NYSE: USO) or the iPath S&P GSCI Crude Oil Total Return Fund (NYSE: OIL).
The world's population continues to spiral upwards and that means more mouths to feed. Companies that make food and grain production more efficient will benefit. Everything from fertilizer to tractors will experience explosive demand. Currently, there are two Exchange Traded Funds (ETFs) that provide exposure to the global agribusiness sector: The first one is the Market Vectors Agribusiness ETF (NYSE: MOO) and the second is the PowerShares Global Agricultural Fund (Nasdaq: PAGG). For a more direct play, consider fertalizer makers Potash Inc. (NYSE: POT) or Monsanto (NYSE: MON). Potash has recently been targeted for acquisition by mining giant BHP Billiton (NYSE ADR: BHP) and Monsanto is a diversified chemical company with impressive global operations. Both are worth a look from investors looking for an alternative to dollars.
Editor's Note: Of course, there is one other way to protect your portfolio from inflation. Gold Dollars. Using a secure transaction from your own computer that takes just minutes, you can convert your dying dollars into U.S. Treasury-approved "gold dollars." Use them as you would regular cash – except as the price of gold goes up, you'll be able to buy more with 1 "gold dollar" than you could with an old George Washington! It's so simple; we'll tell you how to do it for free. Just go here.