Inflation's Too Easy

Buying Gold to get rich from inflation is just too simplistic...

The Financial Times interviewed our friend Hugh Hendry, of Eclectica Asset Management, writes Bill Bonner in his Daily Reckoning.

"I've never known a moment where a trade has become so crowded," says Hugh – "this absolute certainty that the future is going to result in inflation. And not just any old inflation. People are using quite severe language. And there are notable contrarians and commentators who are comparing America's monetary policy with Zimbabwe. And they're not just saying inflation, they're saying hyperinflation.

"[Yet] prices today...are falling, in America and in the British economy, and indeed across Europe. That never happened in the 1960s, 1970s, 1980s. 1990s. That's a new phenomena. It's almost as if we have this flood and yet people are buying fire insurance, and that's quite – you couldn't make this stuff up.

"When Japan hit the turbulence which we're experiencing now – when they hit it twenty years ago – their public finances were very similar to the public finances we had in the UK going back a year or so, and the United States, where gross public debt was no more than 40% of GDP. Now over the last 20 years, the Japanese have fought crisis after crisis by expanding the public sector debt. They've issued trillions, literally trillions of Yen, and debt is now approaching two hundred percent of GDP. What's happened to government bond yields? They've gone down.

"Here we are with the most profound collapse in industrial production, world trade, since the 1930s. That is not an exaggeration, that is reality. Okay? And yet today...they only proposed to grow the money supply at the rate at which it's expanding just now – it's expanding at like nine percent just now...history will determine that their steps were modest, and they were massively overwhelmed by this hysteria, which raised interest rates."

We can't find the passage...but one thing in what Hugh said stuck in our brain. He said the inflation narrative was "too easy to articulate" and too persuasive.

That's what's been bothering us too. It's too obvious. The Fed prints money. Prices go up. People who Buy Gold get rich.

Well, the Fed is printing money, but as Hugh points out...probably not enough to offset the economic collapse. Are prices going up? No, they're going down.

Should you be long or short bonds? The Dollar?

We suspect Hugh is right. In the short run, you should probably be long both US currency and US government debt. The correction has been underestimated. It will be worse than most people realize. Since a correction is fundamentally deflationary, the Dollar should rise. Its government bonds will prove safer than common stock or private debt.

But here at the Daily Reckoning, we're not smart enough to invest in the short-run. We never know how short short is. And we fear having our short positions when the long run finally arrives. So, we'd prefer to take the long-run position from the get-go. In the long run, we have faith in the feds. They may not be very good at causing inflation. They may have underestimated the downward tug of the correction. But give them time.

They'll keep emitting their I.O.Us...and keep propping up their dead institutions with make-believe money...and keep handing out their bonuses and benefits...until the country goes broke.