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If you follow the logic of ‘Code Red’ then inflation is coming as a nasty New Year’s present for investors

Posted on 01 January 2014 with 2 comments from readers

Was that a nine per cent increase in the cost of my monthly haircut that I just paid after the barber complained to me about the 33 per cent increase in his appartment rent in Dubai? Yes that was my New Year’s Eve’s inflationary tale. But then as I have just been reading ‘Code Red’ by John Mauldin and Jonathan Tepper that should come as no surprise.

This elegantly assembled potpourri of macroeconomics and Hollywood anecdotes has one essential conclusion: inflation is still coming down the pike as a result of QE money printing all over the world since the global financial crisis five years ago, and the chances of avoiding it are close to zero.

Second World War

I particularly liked the note about how inflation took off in the late 1940s as a consequence of all the money printing to pay for the Second World War. You can’t change the laws of economics. They just have time lags that allow investors to be lulled into a sense of false security.

That would appear to be almost exactly where financial markets sit as we enter 2014. Messrs. Mauldin and Tepper mull the chances of the Fed executing a perfect exit from the Code Red policies of the past half decade and can find no historical precedent for it happening and not much more than a cat in hell’s chance really.

To deflate would be absolutely disastrous as the Fed’s ruling elite know very well, so the chances of them putting the foot too hard on the accelerator and running over to inflation is overwhelming. Just because it has not shown up in official data is partly because that data is compiled in a misleading and fraudulent fashion and simply down to time lags.

Just as my barber in Dubai raises his prices because his rent has recently gone up due to the world’s highest house price inflation in 2013, so retail price inflation will begin to surface with a vengeance as the bank’s begin to put all that newly minted money back into the economy and its velocity of circulation will pick up from recent lows.

After all it is the velocity of circulation and not the quantity of money printed that actually counts as ‘Code Red’ explains. There are plenty of past precedents for this happening, and none at all for a continuation of low inflation after a massive bout of money printing, just a time lag that deceives many investors.

Inflating away debt

Of course this is also actually what the Fed wants to happen. How else to shrink the debt burden overhanging the global economy? The problem of course is that inflation is generally uncontrollable and quickly gets out of hand. In public the Fed will tell you they can sterilize inflation quickly, in practice things don’t work like that and they admit it in private.

So the authors of ‘Code Red’ discourse ad nuseum the monetary and fiscal policies of the past five years, including a very curious chapter on Japan and its imminent financial collapse. But when it comes to hard investment recommendations it is back to real assets like gold and shares in companies that benefit from inflation.

That sounds very much in accord with the ArabianMoney investment newsletter (click here) whose controversial New Year call is very similar, although we have our own selection of hot tips for our paying subscribers. Why not join them and get on the winning side for 2014?

Posted on 01 January 2014 Categories: Banking & Finance, Bond Markets, GCC Economics, Global Economics, Gold & Silver, Hedge Funds, Investment Gurus, US Dollar, US Stocks

2 Comments posted by readers:

Comment by steve from virginia - 02 January 2014

First of all, central banks do not ‘print money’ nor can they. Central banks are collateral constrained and can only lend at- or below the worth of the collateral they accept to secure the loans. Lend is what banks do, they never give for free.

If central banks offer unsecured loans they are instantly insolvent and there are bank runs … as there are no real guarantors for commercial- or deposit bank liabilities.

Central banks also do not increase broad money (nor can they decrease it, BTW). They can only lodge credits in commercial banks’ reserve accounts. These funds can only enter circulation if there is a call on reserves … for example, if the commercial bank balance sheets are collapsing and there are bank runs.

This occurred in 2008. When it occurs again the reserves will be insufficient as they always are and the banks will fail. If the central banks makes unsecured loans this will be the cause.

Right now there is about $55 – 70 trillion in credit market debt against $4 trillion on Federal Reserve balance sheet. It can indeed create enough refinancing credit to begin to replace this $50+ trillion remaining, but they better start working harder.

Private sector banks create new, unsecured debt which is inflation. Not inflationary … but inflation, itself. Much of our trillions in debt is unsecured. This makes plutocrats happy as they receive most of it. This will make them sad as there are no means to repay, and new loans are becoming scarce. Central banks are god-like but not gods. With ever loan they make the debt burden increases and their credibility falters. Even now they scrape the bottom of the barrel.

Comment by Eliot - 02 January 2014

“First of all, central banks do not ‘print money’ nor can they.” Obviously Steve from Virginia has never heard of the Federal Reserve.

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