By Adam Lass
The whispering began around Halloween in the back alleys of Wall Street and odd outposts of academia: “It’s not about inflation anymore.”
For three straight years, the dollar had been falling against global benchmarks for one simple reason: Washington had been on a printing binge for years, multiplying dollars in circulation by an order of magnitude.
The original goal: shock the economy out of recession by reducing the price of available cash. Heck, if Greenspan could do it to save Clinton’s hash, he could do it to save Bush’s.
Crises (Real and Otherwise)
After all, this time it was a “real” crisis: We’d been attacked! (Of course, this wasn’t really true at all. In terms of depth, if not length, the “Great Tech Crash” was two-thirds over by September 11th.)
Unfortunately, free money is like heroin: both the dealer and the user get hooked in an unbreakable loop of illusory well-being, dependency and eventual collapse. And just as with Clinton’s Tech Boom, when the time came to take away their fix, Wall Street quivered and whined like the worst street junkie: “The recovery is too weak and the dollar so strong. Please, just a little more, and we’ll be alright.”
And so the money flowed and flowed and flowed, mostly into housing and then housing derivatives.
Inflation is Always Deliberate
We already know what happened next. Inflation soared, oil climbed to new heights, food prices jumped, the dollar collapsed externally as well, the great American Consumer was busted, and Wall Street collapsed.
All of this havoc – these insane booms and terrible busts – have directly resulted from Washington’s profligate inflationary printing habits. As Milton Friedman was wont to say: “Inflation is always and everywhere a monetary phenomenon.” Deliberate inflation at the command of Wall Street for short-term monetary gain and the compliance of Washington for short-term political gain has brought this country to its knees.
But now they are whispering that this isn’t true, that despite Washington and Wall Street’s strongest efforts, it is deflation that is now the real threat.
The Universal Cure…
Who is propagating these rumors, what are they saying, and most importantly, why are they saying it? There has always been a core group of “Neo-Keynesians” rattling around Washington, promoting the idea that any problem could be cured through the proper application of the government’s printing press.
We all know how our previous Federal Reserve Chairman, Alan Greenspan, claimed in 1996 that our lusts were irrational – only to succumb to the lure of promiscuous popularity, “giving up the whole cow” just when he ought to have been withholding our milk.
But current Chairman Ben Bernanke is no slouch in the printing department either. He earned the sobriquet “Helicopter Ben” after a 2002 speech in which he stated that “the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money.” Bernanke summed up by recommending helicopter drops of cash in this circumstance.
The neo-Keynesians’ brightest star, Princeton professor Paul Krugman, has taken the metaphorical cake as it were. He has just won a Nobel Prize for his theories stating that there was no easy middle ground – one either delivers up the easy capital Wall Street craves, or one falls into the horrible maw of deflation.
…Or a Bigger Shovel?
So now we are faced with a total collapse driven entirely by inflation. And yet the only cure for collapse Keynesians know is to print more money and give to their friends. And that would only drive us deeper into the hole they already dug.
So they needed a pretext, an excuse, a way to claim that inflation was not a problem. Fortunately (for them, if not us) even our massive inflation does not necessarily move in a perfectly straight line.
Indeed, Wall Street’s losses have burned through a fair portion of the excess dollars that were in circulation. The collapse in U.S. purchasing power (and spike in unemployment) is leading to a genuine decrease in demand for goods.
Finally, Europe has been trailing the U.S. by six to eighteen months both on the upside and downside IN the recent boom/bust cycle. Now that they are firmly in the same recessionary phases we are “enjoying” here in the States, they are being forced to relax their anti-inflationary stance and increase currency in circulation. This is resulting in a temporary illusion of a rising dollar.
Damming Up the River
Suddenly Wall Street and Washington are faced with a unique opportunity: They can continue to print like mad men. And so long as they don’t actually distribute any of the money, the value of each dollar Washington gives to its friends on the street will actually increase in value.
Thus we see Washington secretly giving away billions each day, and yet none of it seems to be entering the mainstream. Instead, the banks simply hoard this cash, while the economy teeters on the brink of collapse. Their self-fulfilling reason? It’s simply not prudent to lend it, as no one is a safe enough risk.
Force Majeure
This game will only work but so long, however. The politicians in charge of the mint have to please two constituencies: their friends (who fill their campaign chests all year), and the voters they buy with that money once every two to four years.
Shortly, I expect the deflationary phase of this shell game to end. Come January, the incoming administration will “force” Wall Street to begin dispensing its hoarded cash to “higher risk” borrowers, beginning with the ailing Detroit automakers. However, because this is a “forced action,” Washington will indemnify the banks, acting in essence as a cosigner on these loans.
The banks will, for a short period of time, be able to buy up massive pieces of American industry and real estate with their newly powerful dollars. However, once these dollars actually “trickle down” into the larger economy (more like a flood actually), inflation will resume and the value of these dollars will once again shrink.
Borrow Small, Spend Large, Repay Smaller
This is not a mere byproduct of this maneuver. Rather it is an essential aspect of the game. The banks wish to borrow weak dollars, spend strong dollars, but repay (these are, after all, loans) weaker ones.
With the idea that this deflationary cycle will be very short lived, perhaps maybe only another 30-90 days even, it behooves an investor to take advantage of the temporarily strong dollars while they can.
I am not a gold bug per se. But with so many Wall Street companies on the verge of bankruptcy, and lacking the inside information required to ride this out in the same fashion as the banks themselves, I do not see share accumulation as the best means of capitalizing on this temporary inversion.
Hedge Like a Billionaire, For a Fraction of the Cost
In this rare circumstance, I do see gold as a viable means of doing of this. Much as with the previous bubble cycle, Wall Street will be using gold as a hedge against most all of their share purchases.
Some investors might care to purchase actual gold to match Wall Street. However, I am a trader at heart and prefer to capture gold’s movement via shares of the S&P Gold Shares SPDR (GLD).
There is an additional opportunity to leverage gold’s gain. In WaveStrength Options Weekly, I have recommended that readers purchase mid-dated calls against GLD. A rotating series of these calls ought to enable a nimble trader to double the value of their holdings every three to six months.
