Bubble-Gum Face and Other Inflation Tragedies

So many of us have done it. Eight years old, half a mouth full of bubble gum and our friend challenges us to a bubble blowing contest: Biggest bubble wins. So there we go, blowing harder and bigger until that bubble is double the size of our head. But still not satisfied, we try that ONE MORE LUNG FULL of air and...POP...we're peeling gum off our face and out of our hair for the next few days!

That's what happens when bubbles over-inflate. But bubbles are not limited to chewing gum. In fact, talk of "bubbles" has reached almost common-place usage in the economic and financial world. And still, like our 8-year old self, we think maybe we can squeeze one more breath in there...

Today, I was reading a report from the good folks at Casey Research, a fine outfit for financial news from the proper perspective. The report was entitled "What Inflation Could Look Like In 2014" and it had some very interesting information. In particular, it made an historical survey of past "inflationary" episodes in our country and found that drastically higher prices usually followed a "benign inflation" within two years. Here are their findings in chart form;

Now the reason I put the word "inflation" in quotation marks above is because I know, as the Casey writer does, that higher prices are NOT inflation, but rather the symptom of an underlying cause. And what is that cause? In two words: monetary debasement.

Monetary debasement (true inflation) always occurs when new money is introduced into the economy without a concomitant increase in productive output. In simpler language, inflation is the increase in the money supply without any increase in goods or services. It is the DEVALUING of every existing dollar. This, necessarily, results in higher prices since it takes more of these lesser valued dollars to buy the same amount of product.

So here's the bad news: We (our country and its leaders) have already inflated wildly. Again, from the Casey report, "the US monetary base stands at $2.72 trillion, a 168% increase since October 2008." Did you catch that? 168% increase in currency in three and a half years! That bubble is mammoth and still we hear talk of "stimulating the economy", "quantitative easing" and "bailouts"...maybe we can blow one more lung full of air in there...??? Rising prices are not an "if", they are a "when". Of course, we have already seen significant increases, but I'm afraid that a four-fold increase in the inflation rate (or more) is very likely in our near-term future.

The good news is we can do something to protect ourselves. Our Casey reporter again has a very nice suggestion: "If 10% of your total investable assets (excluding equity in your primary residence) aren't held in various forms of gold and silver, we think your portfolio is at risk." I would second that motion, but add to it the recommendation I recently made to my clients: Up your "intrinsic worth items" to 15% and diversify in that category. In other words, take 15% of your total net worth and put it into tangible, real, useful assets, including gold and silver, and get learning how to use them.

And, of course, never forget to pray!