On Inflation from Casey research

Aug.17, 2008 in Market Outlook

Reported consumer inflation continued to surge on both a monthly and annual basis,
once again topping consensus expectations. The July CPI-U jumped to a 17-year high of
5.6% in July, while annual inflation for the narrower CPI-W — targeted at the wageearners
category where gasoline takes a bigger proportionate bite out of spending —
annual inflation jumped to 6.2%. The CPI-W is used for making the annual cost of living
adjustments to Social Security payments. The 2009 adjustment — based on the July to
September 2008 period — remains a good bet to top 5%, more than double last year’s
2.3% adjustment for 2008. Such is not good news for federal budget deficit projections.
Based on William’s calculations, which use the same CPI formula used by the Fed prior to the
jiggering of the Clinton years, the actual inflation rate is now running at 13.64%.
A good analogy to currency devaluation is a slow-moving hurricane that, once over warm
water, gains energy.

Right now the global inflation is a huge storm, slowly circling off the proverbial coast where it
is gathering strength from the hundreds of billions of dollars being fed into it by a U.S.
government desperate to avoid an economic collapse… and from pricing decisions being made
by everyone from manufacturers to local shopkeepers looking to cover rising costs.

And on the US dollar

At this point the skies are dark, the wind is rising, and the torrential rains are beginning to
sweep in. The radio is broadcasting warnings to move to higher ground, but the hurricane has
yet to hit the shore.
But when it does, it will be a Category 5 and maybe worse.
That’s because, in addition to the straight-up consequences of the U.S. monetary prolificacy
and businesses raising prices to try and stay afloat, there is something else feeding power to
the storm… something we have been warning about for years now: the rising odds that the
global fiat currency system will fail.
Let me add some nuance to that remark.
In recent years, the global financial community, reflexively looking for an alternative to the
obviously damaged U.S. dollar, has settled on the euro. But the euro is equally flawed, and
maybe even more so, than the U.S. dollar. Now that the trading herd has also come to that
conclusion, they are rushing back toward the dollar.
They are doing so not because the U.S. dollar is healthy, but rather because that is all that
they know… a heads-or-tails continuum running something along the lines of “If the ‘it’s-notthe-
dollar’ play is over, then it must be time to go back into the dollar.” The euro sinks, the
dollar goes up.
And so gold, viewed by these same traders only in terms of its inverse relationship to the
dollar, gets hammered.
What they are missing, but not for much longer, is that rushing back into the dollar is akin to
heading for the vulnerable coast, and not to the higher ground now proscribed. They are also
missing the point that gold’s monetary value is not limited to protecting only against a failure
in the U.S. dollar, but against any faltering fiat currency… a moniker that the euro deserves in
spades. Not only is it backed by nothing, but it is also backed by no one.
I hope that the above point is clear, because it is an important one. One way to think about it
is to think about Zimbabwe. If you lived in that blighted country and a year ago you could have
had an ounce of gold or a wallet full of that country’s failing currency, which would have been
the better bet?
The answer, while obvious, is illustrative… because the wealth preservation role that the ounce
of gold would have played for a citizen of Mugabe’s paradise had zero connection with how well
gold did, or didn’t do, against the U.S. dollar over the period.
Gold is viewed as tangible money right around the world, and has been for millennia. When the
trading herd wakes up to the fact that neither the U.S. dollar nor the euro, nor any other fiat
currency, will protect them against the monetary storm that will soon begin tearing the roofs
off their cozy offices, they’ll fall all over themselves in the rush for something that will: gold
and other tangibles.

Those of you who have been with us for some time know that the scenario just described is
one that we have forecasted for some time. If you think the thing through, precedent to the
global monetary crisis, the euro first had to stumble. Well, it now has. The next stage — and
given the volatility of the situation, I don’t think we’ll have to wait long for it – will be the
realization that there is no safe fiat currency. It is at that point that the massive hurricane, a
crisis of confidence in the entire fiat system, will begin ravaging the global economy in earnest.
Ambrose Evans-Pritchard of the Telegraph of London is one of only a very small handful of
mainstream financial writers who sees things our way. Here’s his take on the situation from an
article he wrote this week, titled “Stage Two of the Gold Bull Market Is Just Beginning.”

And further

The Fed has already invoked Article 13 (3) — the “unusual and exigent circumstances”
clause last used in the Great Depression — to rescue Bear Stearns. The US Treasury has
since had to shore up Fannie and Freddie, the world’s two biggest financial institutions.
Europe’s turn will come next. We will discover that Europe cannot conduct such rescues.
There is no lender of last resort in the system. The ECB is prohibited by the Maastricht
Treaty from carrying out direct bail-outs. There is no EU treasury. So the answer will be
drift and paralysis.
When EU Single Market Commissioner Charlie McCreevy was asked at a dinner what
Brussels would have done if the eurozone faced a crisis like Bear Stearns, he rolled his
eyes and thanked the heavens that no such crisis had yet happened.
It will.

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