Author: Richard Reinhard
Posted: January 25, 2012
Editor’s comments: The multi-decade build-up of debt worldwide promises to be the most epic financial bubble the world has ever seen. Certainly the unwinding process has been very dislocating for many Americans, Greeks, Spanish, Portuguese, Irish … probably most of the developed world that had cheap access to credit. But it’s the Americans in particular that have been able to live on “borrowed time” if you’ll pardon the pun. America can and is able to spend beyond its means in perpetuity – or at least that is what the government and many Americans seem to believe.
The Ludwig von Moses Institute prepared the following chart which plots the money supply change from the prior year, in billions of dollars:
The money supply has exploded by more than $2 trillion since late 2007, with an annualized growth in true money supply in the range of $700-800 billion per year. This growth rate will at best remain steady or even accelerate as long as the U.S. government maintains its current spending habits and the Fed doesn’t tighten policy.
So the bottom line for us is that governments and central banks around the world will try to address the debt burden with as many doses of inflation as possible while avoiding as much as possible the appreciation of their currency. The safety valve available that will inevitably come into play is a rally in commodity and precious metals prices. And such a rally could easily dwarf the 2010-11 march that came to an end last April, which should pay us some serious dividends for having waded in to the market over tax-loss selling season. Once the sentiment pendulum swings to the other extreme and prices are increasing at an unsustainable rate, don’t forget to start raising some cash. On a triple we usually sell a third and take our initial capital out. More conservative investors may sell half at a double and use a trailing stop loss with the help of Bollinger Bands or a simple percentage drop.
