12/23/10 Los Perros, Nicaragua – Nothing comes from nothing. But what comes from something?
Did you see what happened? The Fed’s holdings topped $2 trillion for the first time ever. It took 95 years to get the Fed’s holdings to $600 billion. In the space of 3 years, it has added $1.4 trillion more. That’s something.
Extraordinary, no? Amazing, n’est-ce pas? Incredible, huh?
And yet, the feds expect this explosion of Fed assets to produce an ordinary firecracker of a recovery. They expect – or hope – that this fantastic increase in the base money supply of the US banking system will result in a rather run-of-the-mill rebound in the US economy.
The inflation rate (CPI) is only 1%…they think it will go to 2%. Long bond yields are expected to go up a little too – but not too much. Investor experts are predicting a 10% increase in stock prices in 2011. Almost every economist is talking about a “gradually strengthening recovery.” Unemployment is supposed to go down a little. House prices are expected to stabilize…and even rise.
In other words, an out-of-control monster of monetary inflation is expected to sire a pipsqueak of a recovery.
We’ve talked in the past about how nothing comes from nothing…and how you can’t produce real wealth with ersatz money. But what about this? Here we have the Fed doing something really big. Three times as big as anything they did in all the years since 1913.
And yet, economists expect nothing much to happen.
How likely is that? The feds don’t know what they are doing. They are juggling nuclear bombs…and testing runaway viruses on an unsuspecting population.
What might happen?
Here are some guesses:
1) It will create more speculative bubbles. We wouldn’t be at all surprised to see oil go to $100 and above, for example. The Fed’s money is, so far, not making it into the real economy. But it is available to speculators. And speculators are betting that they can make more money in commodities than in US T-bills. So, keep an eye open. Most likely, you’ll see some bubbles in 2011.
2) Emerging market stocks could soar. Imagine that you’re ‘trading’ for Goldman Sachs. You can borrow dollars for nothing. What do you do with them? Invest them in the world’s fastest growing economies! If you’re lucky, you’ll get 10%…maybe 20% return – on someone else’s money. And if you’re unlucky? Who cares? It’s not your money. And you won’t go broke. The Fed will give you more money.
3) Gold to $1,500. Why not? The IMF just completed selling. China, India and other emerging economies are adding to their stash. Speculators are getting in on the biggest and most reliable bull market in the financial world. Heck, even individual investors are catching on.
Passing through the airport in Miami last week, we noticed a gold vending machine! We had heard they were around. But this was the first time we saw one. How surprising would it be if more and more ordinary people started imitating the rich, who’ve been buying gold for years? Suppose people realize that their central bank is now working against them…and that they have to maintain their own real money reserves? We could easily see gold over $1,500 in 2011.
4) US bond yields rise; the bond market begins to break down. It looked like it was beginning a week or two ago. Bonds were going down just as Ben Bernanke was trying to push them up. Sooner or later, it’s bound to happen. Investors must eventually realize that buying US debt is a dangerous proposition; the Fed is actively trying to reduce its value. And if there is one thing the Fed ought to be able to do it’s to undermine the value of US debt. After all, the feds control the currency it’s calibrated in.
5) In contrast to this bubbly and bodacious outlook is a not-insignificant risk that the whole shebang will blow up. US stocks could crash. Bubbles can explode. Unemployment, housing, sales, consumer price inflation – all could get worse. Then what? Then, the US dollar and US debt will go up!
Well, which is it, you’re probably wondering. Inflation or deflation? Boom or bust?
Our answer? Yes!
It’s all coming. If not in 2011, then…later.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Haha! Bill is writing from a town called:
The Dogs, Nicaragua
are you going to spend XMas in The Dogs?
Have a Merry XMas Bill, wherever you are.
I won’t be too surprised to see the US dollar become the bubble of 2011. On the surface, even the idea seems ludicrous. Yet with the very real possibility of the Euro coming completely unglued, I don’t think the chance is that far out there. In such a scenario, the gold price may well continue to rally in nominally more valuable dollars which would only serve to drive the gold price even higher.
Hyperinflation or deflation? It only matters which from an investment perspective; for everyone else (Joe Sixpack) either direction means poverty.
To secure your the future of your family, not only buy real gold.
Grow your own food, produce your own energy by wind, water or the sun, build a high voltage fence around your house, buy weapons and bulletproof jackets, armour your car, and retreat there when masses of cityfolks get into panic.
I’m Joe Sixpack (at least in terms of what I make), but every spare cent I have is in gold, silver or gold and silver mining stocks.
Banks only want to make money. If you read ALL the stories, you get 1% of the truth.
Banks do not care one bit about you and I. Imagine. Everyone used to pay cash, for Everything! If everyone were live Within their means,the banks would not control us as they do. People were once like that. You just have to live with less Goodies. Revolt! Get rid of your credit/debit cards. Get ONLY what you need from day to day. Pay cash.