Inflation Nation

Here’s what we know:

• The national debt surpassed $13 trillion this month
• The International Monetary Fund (IMF) has predicted that the national debt will surpass the U.S GDP by 2012.
• The IMF also projects that the U.S. economy will expand, in the short term, at a slower pace than the average of the past 50 years.
• The current U.S. administration is pursuing a policy of expanding the money supply by issuing debt which is purchased by the U.S. Treasury
• The U.S. Treasury is the biggest borrower of funds

Recently, Canada became the first G-7 country to raise interest rates since the global financial crisis.  It has also been reported that the U.S. Federal Reserve is pondering raising interest rates in the near term.

The general risks, which result from these situations, include:

• High inflation
• Bond value reduction
• Monetary deflation
• Negative economic growth

More specific risks are as follows:

• Inability to reduce the money supply while raising interest rates
• Continued high unemployment rates
• High misery index –  the sum of the unemployment and inflation rates
• Stagflation – resulting from the combination of high money supply and high unemployment

Many investors are choosing to invest in gold, silver, and other “hard” currencies.  Should this become a wide-spread trend, a situation where too many dollars are chasing too few goods occurs, which creates a ripe environment for hyperinflation.

The Fed has backed itself into a corner where there is no means to adjust the interest rates to control inflation.  This week, they have instructed banks that have received TARP funds to further tighten credit, so lending is limited and business loans are particularly hard to get.  The Fed desires, also, to pull more than a trillion and a half dollars out of the system, which would have a severe detrimental effect on the economy.  The alternative is to face the distinct possibility of hyperinflation and it seems that Fed tends to lean in the direction of the latter.

Inflation –> Stagflation –> Hyperinflation –> Good Times – NOT