The jury is out on the ultimate consequences of the financial crisis and Quantitative Easing (QE). Some see deflation, while others see inflation. Who is right? There is agreement that bond markets are being manipulated and that there will be consequences. It’s just not clear what those consequences will be. When QE started, one of the pundits said that if you have to pee on the fire (financial meltdown) to put it out, you can’t worry about cleaning up the pee. The time to worry is now. 

Inflationary pressures are mounting. The federal deficit exceeds $16 Trillion, and excludes the present value of future entitlements like Social Security and Medicare. Some say the “real’ debt is many multiples of the official figures. The monetary base is above $3 Trillion, due to quantitative easing. To put this base into perspective, if and when banks start lending again the multiplier effect could increase the money supply by $30 trillion. The following graph provides a sobering reality check. Debt is approaching the extreme of World War II.

US Federal Debt

For a painfully funny lender perspective on the situation, see the “Saturday Night Live” skit at China Worry. China is justifiably concerned that the U.S. will simply run its printing presses – inflate our way out of this mess.

If we’re heading for serious inflation, how serious might it be? The following graph shows the history of US inflation, and suggests that 20% inflation would likely be the highest we might experience:

US Inflation rate

But the U.S. experience has been quite favorable in comparison to other countries.  A recent study by the Cato Institute on “World Hyperinflations” suggests that inflation can be, and has been, much higher than 20% per year.

The Cato Institute study examines the 56 occurrences of hyperinflation across the globe. The table below is the first of three tables in the paper, and covers the 26 worst cases. Yes, you’re reading the table correctly: 200% inflation per day is not unprecedented.

The Inflation Table

Forewarned is forearmed. Real assets – precious metals, homes, commodities, etc – provide some insulation from the ravages of hyperinflation.

Tell us what you think!

Are you positioning your portfolios to protect against this eventuality? If so, how? 

Or do you think I’m being an alarmist? I certainly hope I am wrong.

Do you see deflation ahead rather than inflation?

To learn more about Ron Surz, visit  PPCA, Inc.