The Bank of International Settlements, aka the Bank of Banks, in a report titled The future of public debt: prospects and implications, says that out of control public debt, a weary public and monetisation will lead to inflation.
When the public reaches its limit and is no longer willing to hold public debt, the government would have to resort to monetisation. The result, consistent with the quantity theory of money, is inflation. And anticipation that this will happen may also lead to an increase in inflation today as investors reassess the risk from holding money and government bonds. In such an environment, fighting rising inflation by tightening monetary policy would not work, as an increase in interest rates would lead to higher interest payments on public debt, leading to higher debt, bringing the likely time of monetisation even closer.
Thus, in the absence of fiscal tightening, monetary policy may ultimately become impotent to control inflation, regardless of the fighting credentials of the central bank.
When the top dog speaks it’s probably in our interest to listen. The authors of this report, from the Monetary and Economic Department of the BIS, say that once inflation takes hold it cannot be stopped.
George Soros, in his book The Crash of 2008 and What It Means, discussed the problem with this economic crisis being a deflationary effect. His suggested response, which is now being implemented by governments worldwide, is what Mr. Soros believes to be the only solution:
There is no way to escape from a far-from-equilibrium situation–global deflation and depression–except by first inducing its opposite and then reducing it.
Mr. Soros, however, concedes that these steps may not work, and that they would be politically and technically difficult to achieve.
Forget about short-term movements of currencies, stock markets and bonds – and focus on the long-term.
Economic advisers to President Obama, many of whom seem to believe that a centrally planned governing structure is the only solution to this crisis, will continue to pursue policies that attempt to induce the opposite of what is occurring. Thus, rather than allowing the free market to rid itself of the leverage, excess capacity and stifling policies that have gotten us here, the powers that be will continue to intervene. This will, as the BIS reports suggests, lead to a loss in public confidence in the government’s ability to manage the economy and financial crisis, resulting in disastrous inflation across most developed nations.
This report is talking about not just US Dollars, but the currencies of developed nations – remember, it’s a central bank of central banks report, so they deal with all of the paper money out there. Trend forecaster Gerald Celente recently said that jumping out of one currency and into another is like going from the Titanic to the Lusitania for safety. The inflationary effect, for the most part, is going to be global with currencies like the Dollar, Euro, and British Pound all losing significant purchasing power.
While we are not suggesting you should dump all of your paper currency, some considerations to the long term effects of inflation are in order. Look at hard assets (tangibles) like precious metals, food, energy, even real estate (farmland anyone?), as ways to diversify out of paper and into assets that have actual worth.
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Comments…..Let ‘er rip then. Garden getting planted, deer in the freezer (my only hedges against inflation).Â
Those are great hedges MOmark!
We’re hedging in a similar fashion, including 50 lb buckets of commodities with no counter-party risk… 🙂
Today is a great day to take those ‘soon to be worthless U.S. dollars’ and pick up on some silver and gold eagles from APMEX or from Tulving.  Precious metal prices are lower thanks to the down day in the fraudulent U.S. stock market.   Â
You can’t eat either gold or silver. That being said, if you feel that you already have ALL of your other preparations made, all of your supplies purchased; then please consider pre 1964 US minted silver coins. They are 90% silver. You can either purchase ‘trash’ (badly worn, no numismatic value) silver or rolls of BUC (brilliant uncirculated condition) pre 1964 silver coins.
The trash silver will never be worth more than the current ‘spot’ price for silver. You will always have an opportunity for an increase in collector’s value of the BUC coins as well as any appreciation in the ‘spot’ market silver prices.
The small denomination of the individual coins; dimes, quarters, half dollars and silver dollars go a long towards the problem of making change in a SHTF situation.
There is no INFLATION coming and the dollar is destined to head up to 1:1 versus the Euro.
If you want to destroy your wealth, go ahead and continue to purchase Gold and Silver!
Bob, I agree with you there.. The Euro may see a bounce back up and strengthen in the near-term but it is going to get absolutely hammered on the longer term trend line… 1:1 is not unreasonable.
At the same time, however, my personal view is that BOTH currencies will lose purchasing power over time vs. hard goods.
While you may be right about the dollar, though I disagree on a long-term trend line regarding inflation, from a diversification standpoint I think putting all of one’s eggs into the dollar basket is a very dangerous game to play.
My personal investments into precious metals take the inflation argument into consideration, but my primary reason for investing in these assets is not because of a fear of inflation, but rather, to hedge against what I believe to be government instability on a geo-political scale. The public is losing confidence in governments’ (global) abilities to mitigate this crisis and I believe serious debt crises are ahead in the USA and Europe — when people are afraid of stocks, as well as government instruments like bonds the only safehavens that will remain are hard assets. That being said, I am a fan of these types of assets, including PM’s, agricultural investments, energy investments, and even real estate if the price is right. For me, PM’s seem to be the most liquid investments of all of these, hence my reasoning for investing a good portion of what little wealth I have.
Some inflation is occuring as we speak and read these articles, even as demand is abated by the Great Recession. That inflation, or lack of purchasing power of the dollar, is best evidenced by the price of oil, which eventually makes it way through the supply chain.
Don’t measure it by the price of a hotel room, for example, or you will miss it.