The Stage Is Being Set for a Global Inflationary Event
by Dr. Richard S. Appel
March 17/04
The U.S. Federal Reserve has aggressively inflated our money supply during
the past dozen years. It has performed this act in its effort to stimulate
our economy and forestall a potentially damaging period of economic weakness.
Prior to this time, and in ever increasing amounts as the years passed,
dollar credits have hemorrhaged from our nation. This was largely the
result of our unending and expanding balance of payments deficits that
were primarily caused by three events: 1. the increased liquidity in our
banking system that was generated by the issuance of inflationary purchasing
media, 2. the wide-spread availability of enticing, cheap goods offered
by our trading partners, and 3.the dollar has depreciated against other
currencies which raised the dollar cost of their offered items.
The expatriated U.S. dollars resulting from this massive dollar outflow
entered and swelled the central bank coffers of our trading partners.
This circumstance has systematically forced foreign countries to increase
their own monetary aggregates and threatens to spread inflation around
the globe.
The transfer of dollars from the U.S. to other countries resulted in the
temporary exportation of inflation from the U.S. to those lands receiving
our dollars. If this did not occur and the dollars remained within our
monetary system, the U.S. would have already seriously suffered from inflation.
Remember, inflation is essentially caused by the over-issuance of purchasing
media, in this case dollars. In effect, as the amount of circulating money
increases while the quantity of available goods and services remains essentially
constant, too many dollars are chasing the same goods, and nominal prices
are bid up by supply and demand.
Through a series of banking system transactions, much of the foreign money
acquired by a business or individual ultimately winds up in the vaults
of their country’s central bank. When a central bank receives another
nation’s money they generate a bookkeeping credit to the domestic
depositor’s account in the local currency. Further, the central
bank normally uses the acquired dollars to purchase U.S. Treasury Paper.
This allows them to at least earn interest on the foreign deposits. The
newly created local monetary units then enter their banking system and
increase the nation’s money supply. The end result which may take
time to work through the system, is the reduced purchasing power of those
monetary units already in existence, and higher domestic prices.
A good example of the effect of the above process was recently highlighted
in news emanating from China. As you know China is one of our nation’s
most important trading partners, and is likely destined to one day lead
the list. Their generally low prices have attracted an enormous influx
of U.S. dollars as American after American has sought the great bargains
produced in their country. While the flood of dollars used to purchase
their goods has helped their nation improve both their economy and the
state of their citizenry, it has also had a deleterious effect. Quoting
a recent New York Times article, “China’s inflation rate rose
to 2.9 percent in the first two months of the year...The cost of food,
which accounts for about a third of the index, rose 8.8 percent in February
after climbing 4 percent in January and 2.4 percent in December.”
Inflation is beginning to emerge there.
The January, $15.3 billion U.S. trade deficit with China was an individual
country record. Most of these $15.3 billion dollars will find their way
to their central bank which in turn will be compelled to issue new yuan
credits to their depositors. Thus, their money supply will be further
expanded. The final result will be the stimulation of future across the
board price increases for their nation.
I have used China as an example. However, all of the trading partners
with which we are in a balance of payments deficit are suffering a similar
fate. Japan, South Korea, Malaysia, European Union countries and a host
of other nations are also being similarly forced to increase their monetary
aggregates, and are thereby threatened with an upset to their domestic
pricing structures. This, in order for them to continue doing business
with the U.S.
As the United States continues to inflate its money supply, many other
countries have taken our lead. Japan, which has yet to extricate itself
from its fifteen-year economic malaise, numerous European Community countries,
as well as a number of additional states are pursuing a similar tact.
Their goal is not only an attempt to similarly stimulate their economies
via the printing press, but to also improve their competitive advantage
in the world’s markets by weakening their respective currencies.
The foreign accumulation of 2+ trillion U.S. dollars combined with the
fostered money supply increases by many of our trading partners has damaging
consequences. Not only have they been forced to increase their monetary
aggregates with each dollar that they acquire, but many are also aggressively
expanding their measures of money in order to cheapen their currencies,
and thus halt the dollar’s decline against their domestic monetary
units.
We are beginning to see the first signs of rising global inflation unfold
as depicted by China’s current experience. Several commodities are
already trading near or at all time highs. I believe that this trend is
destined to continue and will produce far higher prices for all commodities,
as they respond to the enormous issuance of fiat currencies by all of
the world’s major countries. At some point increasing prices will
feed upon themselves. One nation after another will experience higher
prices as both the cost of needed commodities and finished products, work
their way through their economies.
The hardest hit nation will be the U.S. This will occur because foreign
held dollar credits will finally return to our shores. These will swell
our already enormous pool of domestic dollars. Foreigners are just beginning
to sense that all is not right with the dollar. The first countries are
beginning to limit their U.S. dollar holdings. Russia, Malaysia, China,
Japan and South Korea have already announced their desire to achieve this
goal. Later, a flight from the dollar will occur.
Foreign entities will sell their U.S. treasury securities and will exchange
the received dollars for their own currencies. Our bond market will plummet
as will the dollar, and inflation will become rampant. Gold and to a lesser
extent silver will then act as life boats on a stormy sea. They will save
those who recognize their importance, and gold will again return to the
limelight as the only true and desirable form of money worth holding.
This series of events will not occur overnight. We likely have a few years
or more to prepare. Our government will fight the demise of the dollar
and the outbreak of inflation with all of the available methods at their
disposal. They will call in all of the favors owed them by other nations,
and will twist as many arms as is necessary to coerce the other countries
to retain their dollar holdings. In the end they will lose. I for one
hope that they will be successful for as many months or years as possible.
It will not be a pleasant experience when our dollars finally come home
to roost, but the stage is being set for an inflationary storm when they
return.
I publish Financial
Insights. It is a monthly newsletter in which I discuss gold, the
financial markets, as well as various junior resource stocks that I believe
offer great price appreciation potential.
Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.
CAVEAT
I expect to have positions in many of the stocks that I discuss in these
letters, and I will always disclose them to you. In essence, I will be
putting my money where my mouth is! However, if this troubles you please
avoid those that I own! I will attempt wherever possible, to offer stocks
that I believe will allow my subscribers to participate without unduly
affecting the stock price. It is my desire for my subscribers to purchase
their stock as cheaply as possible. I would also suggest to beginning
purchasers of these stocks, the following: always place limit orders when
making purchases. If you don't, you run the risk of paying too much because
you may inadvertently and unnecessarily raise the price. It may take a
little patience, but in the long run you will save yourself a significant
sum of money. In order to have a chance for success in this market, you
must spread your risk among several companies. To that end, you should
divide your available risk money into equal increments. These are all
speculations! Never invest any money in these stocks that you could not
afford to lose all of.
Please call the companies regularly. They are controlling your investments.
FINANCIAL
INSIGHTS is written and published by Dr. Richard Appel and is made
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Use of any information contained herein is at the risk of the reader without
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and is not a registered investment advisor. The information herein may
contain forward-looking information within the meaning of Section 27A
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