There is too much money being
printed. No rocket science is needed to reach that conclusion. The markets
are giving us a clear message.
For example, gold is trading at
a record high, while silver has reached a 30-year high. Those new high
prices are happening for a reason. The precious metals are sensitive to
changes in inflation, both actual as well as future expectations.
Rising precious metal prices
tell us that there is a lot of inflation in the pipeline, but they are not
alone in giving us this message. More generally, look at the trend in
commodity prices over the past few months in the following chart of the CRB
Continuing Commodity Index, which is based on the price of 19 different
On June 4th the CRB Index closed
at 450.24. Here we are just 3-1/2 months later, and the CRB Index
closed Friday at 530.24, up 17.7%. That is a HUGE jump in prices in
such a short period of time. To put this price rise into perspective,
it is a 61.8% annual rate of "appreciation" – though we
should call it by what it really is, namely, "price inflation".
Commodity prices are not rising
because of good economic activity, which remains in the doldrums with high
unemployment throughout most of the world. Commodity prices are rising
because too much money is being printed. But the Federal Reserve
reports that M1, a narrow measure of the total
quantity of dollars in circulation, rose only by a 9.1% annualized rate in
the three months from May 2010 to August 2010, and M2 rose by even less.
So why are commodity prices rising by an even faster rate than money
growth? There are two reasons.
1) Because too much money has been
printed for years, not just over the past three months, which can be
illustrated by comparing M3 to the total US population. In 2000 there
were $26,977 in circulation, as measured by M3, for every man, woman and
child in the United States. That amount has ballooned to $46,538, a
7.1% annual rate of growth, which is more than 7-times the 0.9% annual rate
of population growth during this period.
2) Demand for
money is usually ignored, but it is an important part of the equation.
Unfortunately, demand cannot be measured, so we again need to rely on
observations of market prices to determine the prevailing trend in the demand
for dollars at any moment.
So, for example, let’s
look at the US Dollar Index, which measures the dollar’s rate of
exchange against a basket of currencies. While commodities have been rising
since June 4th, the Dollar Index has been falling. It is down 7.9% over
this period, a 27.6% annualized rate of decline. Given that people are opting
to hold other currencies in preference to the dollar, as evidenced by the
dollar’s falling exchange rate, it is clear that the demand for the
dollar is falling.
Thus, the dollar is being hit by
both rising supply and falling demand. We know from Economics 101 that
this condition results in falling prices, which when applied to money means
declining purchasing power, or what today is usually called
"inflation". If monetary policy is not corrected and
inflation is not reversed, in time hyperinflation will be the inevitable
I have been warning about
hyperinflation since March 2, 2009 when I wrote that the dollar was on the cusp of hyperinflation. I noted that "the federal
government has embarked on a course of runaway spending, and it is runaway
government spending that causes runaway inflation", which if left
uncontrolled leads to hyperinflation. The trend has not changed for the
From February 28, 2009 to August
31, 2010, runaway federal government spending has resulted in a $2.57
trillion increase in the national debt. But over this period GDP increased by about $0.5 trillion, and
the increase in economic activity is even less after adjusting for inflation.
So clearly we need to ask ourselves, what have the bailouts and
stimulus programs really accomplished?
The answer is very little in
terms of economic activity, but there is an ominous consequence from this
foolish binge by policymakers of soaring debt and reckless money creation.
Given that these dollars are not being used to generate economic
activity, they are now sloshing around the globe looking for a safe home. Tangible
assets are one of the safest places to be to protect your wealth from a
currency whose purchasing power is eroding.
The result is that the commodity
markets are on fire. Prices are not rising because of a shortage of
commodities, but rather, there is a surfeit of dollars. Too much
currency has been created, relative to current economic activity.
Without an abrupt about-face to
end the wrongheaded policies being followed by policymakers, there can be
only one conclusion. The dollar is headed toward hyperinflation. The
new record highs in gold and silver, an across-the-board rise in commodity
prices and the renewed downtrend in the dollar’s rate of exchange are
the 'writing on the wall'.
Free Gold Money Report
Article originally published by the Free
Gold Money Report.
James Turk is the
founder of the Free Gold Money Report and of GoldMoney.com. He is also the
co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com).. Copyright © by James
Turk. All rights reserved.
Copyright © 2008. All rights reserved.
Edited by James Turk
This material is prepared for general circulation and may not have
regard to the particular circumstances or needs of any specific person who
reads it. The information contained in this report has been compiled from
sources believed to be reliable, but no representations or warranty, express
or implied, is made as to its accuracy, completeness or correctness. All
opinions and estimates contained in this report reflect the writer's
judgement as of the date of this report, are subject to change without notice
and are provided in good faith but without legal responsibility.