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Positioning Myself Accordingly For Future Hyperinflation

17 December 2008 6 Comments

Today, the Fed cut rates to record lows, between zero and 25 basis points.  This is no surprise, but is simply another action in their course to encourage economic growth at all costs, even the cost of the dollar.  My position has been clear, that government officials want short-term economic results and have absolute zero consideration for long-term economic health.  This is strictly because short-term results mean re-election.

The result from these actions is surely going to be nothing except future hyperinflation.

Our government is flooding the world with more dollars in an attempt to stimulate economic growth.  Furthermore, our government is bankrupt and must rely on borrowing money from abroad.  It is all but certain, that at some point, countries will stop lending us money just as banks have stopped lending money to non-credit-worthy individuals.  It only makes sense.

The result when foreigners stop lending us money is further economic deterioration and severe inflation because then truly, the Fed will have nothing left to do but print money.

What About Deflation?

Everyone seems to think deflation is the main concern right now.  Deflation is the natural correction that is occuring temporarily due to an extreme overleveraging economy.  While this deleveraging process continues, we will see more asset prices deteriorate thus creating the deflationary environment.

Currently, two forces are fighting eachother.  Deflation, caused by a massive global economic slowdown and an extraordinary deleveraging process, is currently winning against the inflationary pressures caused by the ungodly amounts of money entering the system.  The tide will turn soon.

Do not be fooled into thinking that this is a permanent scenario.  Once the deleveraging plays itself out, deflation will come to an abrupt end and inflation will take over for the long haul.  It is completely unreasonable to conclude that there will be no side effects from the trillions of dollars being pumped into the system to try and prop up a failing economy.  These side effects will be inflationary as more dollars are available for a smaller set of goods; thus, rising prices.

Positioning Myself For Hyperinflation

Now back to the title of this post… positioning myself accordingly for future hyperinflation.  Namely, gold and gold stocks.  There is nothing that will benefit from inflation as much as gold.  I currently own GLD, GDX and AUY.  Physical gold is probably a great buy, but I haven’t gotten around to it.

Higher interest rates are probably a good bet as well.  I currently have a position in TBT.

Commodities, such as oil and gas, are likely to rise and if you believe in supply/demand fundamentals that support long term higher energy prices, this is a great play.  I currently own DIG and CHK.

What If I’m Wrong… What If I’m Right

When it comes to hyperinflation, I always end with this point.  If everything I’ve said here is wrong, then you will be fine.  Your dollars will retain their purchasing power and the American economy will be better off with a strong currency.

If I’m right, however, and you unprepared, you can be wiped out financially.  Do yourself a favor and get at least a position in gold to hedge against this nightmare scenario.  Again, what if I’m right?

6 Comments »

  • Doctor S said:

    If you are right you are going to be a very happy person! I do agree with many of your points and you make the appropriate decisions regarding your investments according to your stance. I think your stance reflects much of the majority these days but that is just my opinion. I hoping that,not only our domestic market, but also our world markets rebound with the upcoming year. However, I think a more reasonable synopsis would be the 2-3 year outlook. Great explanation. —doc

  • bob said:

    A question:

    What is the consequence of following your advice (buying gold, un-leveraged commodities) if you are wrong (no hyper-inflation)?

  • kevin duffey said:

    I would say that the consequence would be that you might lose money on your gold investment. However, gold will always be worth something and over the long term has always been a great way to keep the value of your wealth.

    The risk of holding gold is FAR LESS than the risk of holding all cash. With Obama’s administration projecting trillion dollar deficits from here on out, there is no way we get out of our debt without inflation.

    We might not get 1920’s Germany style hyper-inflation, but we’re sure to get inflation to some degree. Any inflation means gold will be a good thing to hold.

    I’ve yet to read a strong fundamental argument for a stronger dollar over the long term.

    Good luck.

  • Mom said:

    I thought you might enjoy reading this. It’s kinda basic but good financial planning information. Perhaps for your 401k??

  • Good Call I-cans said:

    Well you're positioning has definitely paid off the last few years! Good work.