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In
current economic analysis, inflation is largely in the eye of the beholder,
and depending on how you choose to look, very different stories emerge. In
the U.S., food and beverages count for just 16.4% of the CPI calculation. The
Chinese apparently believe that the basic necessities of life should count
for more, assigning a 33% weight to the nutritional components. These
differences in measurement are partially responsible for the divergent
inflation climate in both countries, and make most people believe that
inflation is fickle and localized. From my perspective, inflation is a global
wave that will ultimately swamp all shores.
As the
world's economic leaders gather in Davos Switzerland, much of the discussion
has been focused on a report jointly issued by the Global Economic
Forum and McKinsey & Co. which forecasts a $100 trillion
increase in global debt in the coming decade. The authors of the report argue
that such an increase will be needed to maintain global economic health.
Strangely, while acknowledging how the massive increase in credit caused
the global financial crisis of 2008, the report's authors admit no
fear of even greater leverage today. They conclude: "Credit is the
lifeblood of the economy, and much more of it will be needed to sustain the
recovery and enable the developing world to achieve its growth potential."
But
the global credit stock has already doubled from $57 trillion in 2000 to $109
trillion in 2009, with disastrous consequences. The WEF report wouldn't
be so alarming if it wasn't emanating from a gathering of global central
bankers, business leaders and politicians. These are, unfortunately, the
folks with all the power to turn these ideas into reality.
In
his State of the Union address, President Obama kept pace with the madness in
Davos by vowing to "slash" government debt by just $400 billion in
10 years. However, almost simultaneously the Congressional Budget Office
upped its 2011 deficit projection to $1.48 trillion, which is over $400
billion more than it previously forecasted -- effectively wiping Obama's cuts
before they are even formally proposed.
The
myopia extends into the legislative branch. In a recent appearance on NBC's
Meet the Press, Senator Harry Reid said, "When we start talking about
the debt, the first thing people do is run to Social Security. But Social
Security is fully funded for the next 40 years." Apparently the Senator
pays no attention to the non-partisan CBO either. Last week the office states
that Social Security will run permanent deficits beginning this year, 5 years
sooner than expected. If we aren't going to be honest about the insolvency of
Social Security and Medicare, how can they possibly be fixed, and how can the
costs ever be contained? The unfortunate truth here, once again, leads to the
conclusion that financing our nation's entitlement programs will be done
courtesy of the Federal Reserve.
The
CBO also said that the government will run up an additional $12 trillion in
debt over the next decade if current taxing and spending policies remain in
effect. Their report contained this foreboding comment: "...a growing
level of federal debt would also increase the probability of a sudden fiscal
crisis, during which investors would lose confidence in the government's
ability to manage its budget, and the government would thereby lose its
ability to borrow at affordable rates." The fact that our elected
leaders fail to understand basic economics, or simply bury their heads in the
sand, underscores why inflation will be a major factor in the years
ahead.
For
me, there is no escaping the conclusion that inflation will continue to
surge. Inflation is, after all, the increase in money supply. And there
appears to be no escaping the likelihood of massive floods of new money
rolling off presses around the world, especially in Washington. But to a
degree that is virtually ignored by many economists, a currency's purchasing
power is not only affected by money supply growth but also from the mere
perception of it. Just like Enron shares became worthless overnight, if the
U.S. is deemed to be insolvent because it cannot pay back its debt, the
currency could plummet in a very short period of time, even if that pending
supply of dollars has yet to be printed.
When
you understand these basic issues, the decision to include precious metals,
and other stores of value, in investment portfolios becomes a foregone
conclusion.
Michael Pento
Senior Market Strategist
Delta Global
Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone:
800-485-1220 Fax: 800-485-1225
A
15-year industry veteran whose career began as a trader on the floor of the
New York Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to
increase portfolio returns. He is also a published economic theorist in
the Austrian school of economic theory.
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