10/28/10 Baltimore, Maryland – What’s the big news? Every headline you read implies the same thing. All eyes are on Ben Bernanke.
“Bernanke expected to announce hundreds of billions in new QE,” says one headline.
“Investors counting on support from the Fed,” says another.
“Fed easing could push stocks higher,” says a third.
The man is supposed to announce a program of quantitative easing. He’s supposed to do it next week. And if he announces too little of it, investors are going to sell risky investments – including stocks and commodities. In the meantime, investors are guessing.
Yesterday, the betting went against a big push into QE. Investors figured that maybe they’d over-estimated Ben Bernanke’s commitment to chicanery. They worried that the announcement next week might fall short of expectations.
The Dow retreated 43 points yesterday. Gold dropped back $16.
What will it do tomorrow? Who knows? The whole investment world has gone a little crazy. It’s all speculation now…speculation on how much new money the Fed will add to the system.
Investors aren’t buying in anticipation of higher earnings or looking forward to a healthier economy. They’re not padding their retirement nests with great stocks at great prices, or participating in the growth and prosperity of 21st century America by buying equities. Instead, they’re gambling that the economy will get worse…and that Bernanke will be forced to go boldly where only fools and morons have gone before….
…that is, on the road to hyperinflation.
Remember. There’s inflation. And there’s hyperinflation. Normal inflation is caused when people have more money to spend and less to spend it on. They bid up prices.
Hyperinflation is different. It comes not from an increase in demand for things…not from greed, that is…but from FEAR…raw, naked, unadulterated fear that paper money is losing its value.
What touches off hyperinflation? Sometimes the cause is obvious. Central banks print up bills with lots of zeros on them. Everyone knows the currency has become “funny money.” Everyone rushes to get rid of it.
Typically, this causes a collapse in the economy…which convinces the central bank to add more zeros!
The US central bank is not adding zeros – not yet. It is just threatening to add more currency. Will this new currency lead to inflation? Probably not much. The money will get into the hands of speculators at the big banks – those that can borrow from the Fed. It won’t get into the hands of small businesses and householders. So, most people will not really feel richer; they will not want to borrow. They will not want to spend. Demand will not increase. Prices won’t go up appreciably.
But while this new money probably will not create inflation, it could well create hyperinflation. We don’t know how it works…not exactly. There are so few examples in history that we have no sure model to show us. But speculators could suddenly lose faith in the US dollar. They could sell it off – in favor of land, stocks, collectibles or gold. Dollar-holders – large, institutional holders – might panic, realizing that their dollars are losing value fast. Householders might follow…desperate to get rid of dollars before the next nightly news report tells them that they have lost another 10% of their value.
All Hell could break loose.
But that is still in the future. Maybe 6 months ahead. Maybe a year ahead.
In the meantime, we are still at the beginning of a Great Correction. We have a long way to go. And we should expect high unemployment, low or negative growth, bankruptcies, bear markets, foreclosures…
The big trend is still biased in favor of generally low consumer and asset prices…maybe even deflating prices. Until Bernanke gets his cash machine running hot…that is…
Then, who knows what will happen?
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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Bill asks:
Then, who knows what will happen?
Right, a rehtorical question. No one knows.
For around 60 years now the world’s most successful and richest investor ever, Warren Bffett has steadfastly maintained that he cannot predict the short term future of stocks. Nor he says does he even really care.
He does believe that over the years the economy will continue to grow and the good companies will grow with the economy or faster.
On that basis he just tries to find the best investment avialable at any given time.
It has worked out “okay” for him so far.
Berkshire Hathaway is up almost 1 million percent since he took control of it at a share price that averaged about $14.50 in 1965. Those are the exact same shares that today ate at $120,400. If/when they get to $145,000 that will up an even 1 million percent.
Right now they are up about 855,000% and the way the math works they just need to rise by 17% more and we are 1 million percent higher than the $14.50 they were at in 1965.
But what does Buffett know?, he does not even invest in Gold!!!
No, but Warren does invest in Silver.
Mr. Buffett has benefited from the Keynesian Ponzi scheme of the last 40 years which may or may not be coming to an end in the near future.