Austin Report-Inflation Edition

Gabe Elton | Austin Rare Coins & Bullion |

Hello to all and welcome to the beginning of fall, a quarter that historically has shown phenomenal gains in both Gold and Silver. In fact, during the month of September, going back more than 20 years, Gold has gone up 81% of the time – almost like clockwork. This goes without saying that now is the time to consider adding to your holdings.

Gold has managed its way back over the $1200/oz mark after easing off of its $1260oz. high, falling to $1160/oz in the heat of the summer doldrums – a time that is historically soft for Gold, Silver and other Precious Metals. We believe that once Gold tests the recent high of above $1260 and breaks through that number, it is likely to hit $1300 in short order.

Silver today stands above $19/oz. and is just knocking on the doorsteps of $20/oz. Analysts say that once Silver breaks through $20, that it could ramp up breaking through its previous all time high of $23. If you haven’t considered Silver, you should – the numbers and logic say that Silver is poised for even bigger gains than what some analysts are expecting from Gold.

It’s been more than a year now since we began putting out the Austin Report. Over that span of time you have heard us mention the possibility of severe inflation – even hyperinflation. In this special inflation report, we will share with you some very keen insight, written in a clear and concise manner, which spells out the likelihood of hyperinflation in America. We will share with you the events that could lead us in that direction and discuss what the likely outcome would be. Another important aspect that will be covered is the event that is likely to precede hyperinflation-an event that could wipe out what is falsely considered among the safest investments in the world – U.S. Treasury Bills.

Morgan Stanley Analyst Says Governments to Default
Business week broke a story recently bringing to light a report out of Morgan Stanley. The report, authored by Arnaud Mares an executive director from the firms London Office, warns of a possible default on Government Bonds. Mr. Mares words shouldn’t be taken lightly; he has a long history in finance, both public and private – Mares worked for the U.K.’s debt management office and was the Senior Vice President for the credit rating firm Moody’s. His report gave a stern warning to bondholders saying that investors face defaults on Government bonds due to aging populations and lessening tax revenue. In his report, Arnaud Mares warns that “Governments will impose a loss on some of their stakeholders.” And that, “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take….The sovereign-debt crisis is global and it is not over.”

Admittedly, Mr. Mares, does discount the possibility of a U.S. default saying, “Outright sovereign default in large advanced economies remains an extremely unlikely outcome, in our view, But current yields and break-even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take.”

Currently, the United States Government debt is “just” 53% of GDP, which, when compared to other developed nations, is among the lowest. However, debt as a % of revenue is a whopping 358% which is the highest of any developed nation in the world. For comparison – Italy, a country whose financial straits are not to be admired, has a debt to GDP ratio that is 116%, a figure about twice as high as ours. However, their debt to revenue ratio is “only” 118% a figure that comes in three times lower than ours. Numbers like these are extremely concerning to the major players that hold treasury bonds.

The report out of Morgan Stanley seems to confirm some of our worst suspicions – hard times are likely on the way and the event that could light the fire of severe inflation will likely come from the ticking time bombs also known as Treasury Bills.

Hyperinflation – Special Report
In past issues we have shared with you the opinions of many financial analysts who see a dollar destroying, savings wrecking, inflationary event on the horizon – John Williams of ShadowStats.com, Peter Schiff of Europac.net, Damon Vickers of Nine Points Capital, Tom Cammack of the Texas TRS, and others. However, in this issue, I would like to share with you a report that recently created quite a stir among the internet communities of growing and well networked financial blogs and websites. Unlike other reports, written by financial wizards who are hard to follow and understand, the report by Gonzalo Lira makes for easy reading – short the occasional expletive. Perhaps this is because Mr. Lira isn’t a trained financial expert – he is a filmmaker from Chile whose family was directly affected by the hyperinflation witnessed in there in the 1970’s. The following synopsis is one of the most clear and best written synopsis that we have come across regarding the subject and how it could happen here.

According to Mr. Lira, even though almost every economic indicator screams deflation – inflation is on the way. This coincides with other research from other analysts whose research shows that each hyperinflationary event in the history of the world was preceded by a period of both, Government Stimulus and Deflation. If these are two prerequisites that are clues to a hyperinflationary depression, having now gone through both Government Stimulus and Deflation, America is well on its way.

“Right now, we are in the middle of deflation. The Global Depression we are experiencing has squeezed both aggregate demand levels and aggregate asset prices as never before. Since the credit crunch of September 2008, the U.S. and world economies have been slowly circling the deflationary drain.

Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”.

Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?

Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.”

Hyperinflation – How it Can Happen Here
The so called “recovery” that the cheerleaders on CNBC and other talking heads are selling – Mr. Lira isn’t buying it:

“This recovery is not going to happen—that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip—we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been—and is headed—down.”

Gonzalos’ beliefs are similar to those of the Morgan Stanley Analyst in that both believe that the Treasury market is on very fickle footing to say the least. In fact, Mr. Lira makes a very strong case that it will be the collapse of the Treasury Market that will be the precursor of a hyperinflationary event like none other in the history of America:

“Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.”

He goes on to argue that the Federal Reserve will intervene – buying treasuries and monetizing debt – and that this will lead to a catastrophic event where the Too Big to Fails – the firms that were bailed out on our tax dollars, will see the Federal Reserve as a buyer of last resort and that the treasury market will snowball from there:

“So the TBTF (too big to fail) banks, on seeing this run on Treasuries, will add to the panic by acting in their own best interests: They will be among the first to step off Treasuries. They will be the bleeding edge of the wave.

Here the panic phase of the event begins: Asset managers—on seeing this massive Fed buy of Treasuries, and the American Zombies selling Treasuries, all of this happening within days of a largish Treasury auction—will dump their own Treasuries en masse. They will be aware how precarious the U.S. economy is, how over-indebted the government is, how U.S. Treasuries look a lot like Greek debt. They’re not stupid: Everyone is aware of the idea of a “Treasury bubble” making the rounds. A lot of people—myself included—think that the Fed, the Treasury and the American Zombies (bailed out banks) are colluding in a triangular trade in Treasury bonds, carrying out a de facto Stealth Monetization: The Treasury issues the debt to finance fiscal spending, the TBTF banks buy them, with money provided to them by the Fed.

Whether it’s true or not is actually beside the point—there is the widespread perception that that is what’s going on. In a panic, widespread perception is your trading strategy.

So when the Fed begins buying Treasuries full-blast to prop up their prices, these asset managers will all decide, time to get out of Dodge—now.”

Hyperinflation – How it Would Effect Commodities
At this point we bet you are wondering what to expect from Gold and Silver in an environment like this. One could only guess that economic events like those discussed above would send Gold and other precious metals skyrocketing, but how exactly does or can it happen? Mr. Lira gives us his insight:

“At the time of the panic, commodities will be perceived as the only sure store of value, if Treasuries are suddenly anathema to the market—just as Treasuries were perceived as the only sure store of value, once so many of the MBS’s and CMBS’s went sour in 2007 and 2008.

It won’t be commodity ETF’s, or derivatives—those will be dismissed (rightfully) as being even less safe than Treasuries. Unlike before the Fall of ’08, this go-around, people will pay attention to counterparty risk. So the run on commodities will be for actual, feel-it-’cause-it’s-there commodities. By the end of the day of this panic, commodities will have risen between 50% and 100%. By week’s end, we’re talking 150% to 250%. (My private guess is gold will be finessed, but silver will shoot up the most—to $100 an ounce within the week.)

Of course, once commodities start to balloon, that’s when ordinary citizens will get their first taste of hyperinflation. They’ll see it at the gas pumps.

If oil spikes from $74 to $150 in a day, and then to $300 in a matter of a week—perfectly possible, in the midst of a panic—the gallon of gasoline will go to, what: $10? $15? $20?

So what happens then? People—regular Main Street people—will be crazy to buy up commodities (heating oil, food, gasoline, whatever) and buy them now while they are still more-or-less affordable, rather than later, when that $15 gallon of gas shoots to $30 per gallon.

If everyone decides at roughly the same time to exchange one good—currency—for another good—commodities—what happens to the relative price of one and the relative value of the other? Easy: One soars, the other collapses.

When people freak out and begin panic-buying basic commodities, their ordinary financial assets—equities, bonds, etc.—will collapse: Everyone will be rushing to get cash, so as to turn around and buy commodities.

So immediately after the Treasury markets tank, equities will fall catastrophically, probably within the next few days following the Treasury panic. This collapse in equity prices will bring an equivalent burst in commodity prices—the second leg up, if you will.

This sell-off of assets in pursuit of commodities will be self-reinforcing: There won’t be anything to stop it. As it spills over into the everyday economy, regular people will panic and start unloading hard assets—durable goods, cars and trucks, houses—in order to get commodities, principally heating oil, gas and foodstuffs. In other words, real-world assets will not appreciate or even hold their value, when the hyperinflation comes.

This is something hyperinflationist-skeptics never quite seem to grasp: In hyperinflation, asset prices don’t skyrocket—they collapse, both nominally and in relation to consumable commodities. A $300,000 house falls to $60,000 or less, or better yet, 50 ounces of silver—because in a hyperinflationist episode, a house is worthless, whereas 50 bits of silver can actually buy you stuff you might need.

Let’s take the Fed: How could they stop a run on Treasuries? Answer: They can’t. See, the Fed has already been shoring up Treasuries—that was their strategy in 2008—’09: Buy up toxic assets from the TBTF banks, and have them turn around and buy Treasuries instead, all the while carefully monitoring Treasuries for signs of weakness. If Treasuries now turn toxic, what’s the Fed supposed to do? Bernanke long ago ran out of ammo: He’s just waving an empty gun around. If there’s a run on Treasuries, and he starts buying them to prop them up, it’ll only give incentive to other Treasury holders to get out now while the getting’s still good. If everyone decides to get out of Treasuries, then Bernanke and the Fed can do absolutely nothing effective. They’re at the mercy of events—in fact, they have been for quite a while already. They just haven’t realized it.”

Hyperinflation – What it Would Look Like
Of course these ideas aren’t considered “mainstream” and are rarely discussed in an educated and open forum, however, it is precisely for those reasons that Mr. Lira argues hyperinflation is even more likely. And for those of us who believe that it can’t happen here, or that, we are headed for decades of deflation like that witnessed in Japan, Mr. Lira has a retort:

“This is all bloody ridiculous,” I can practically hear the hyperinflation skeptics fume. “We’re just going through what the Japanese experienced: Just like the U.S., they went into massive government stimulus—hell, they invented quantitative easing—and look what’s happened to them: Stagnation, yes—hyperinflation, no.”

That’s right: The parallels with Japan are remarkably similar—except for one key difference. Japanese sovereign debt is infinitely more stable than America’s, because in Japan, the people are savers—they own the Japanese debt. In America, the people are broke, and the Nervous Nelly banks own the debt. That’s why Japanese sovereign debt is solid, whereas American Treasuries are soap-bubble-fragile.

That’s why I think there’ll be hyperinflation in America—that bubble’s soon to pop. I’m guessing if it doesn’t happen this fall, it’ll happen next fall, without question before the end of 2011.

Like Rothschild said, “Buy when there’s blood on the streets.” The thing to do to prepare for hyperinflation would be to invest in a diversified hard-metal basket before the event—no equities, no ETF’s, no derivatives. If and when hyperinflation happens, and things get bad (and I mean really bad), take that hard-metal basket and—right in the teeth of the crisis—buy residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials. The reason is, at the peak of hyperinflation, the most valuable assets will be dirt-cheap—especially equities—especially real estate.

I have no idea what will happen after we reach the point where $100 is no longer enough to buy a cup of coffee—but I do know that, after such a hyperinflationist period, there’ll be a “new dollar” or some such, with a few zeroes knocked off the old dollar, and things will slowly get back to a new normal. I have no idea the shape of that new normal. I wouldn’t be surprised if that new normal has a quasi or de facto dictatorship, and certainly some form of wage-and-price controls—I’d say it’s likely, but for now that’s not relevant.

What is relevant is, the current situation cannot long continue. The Global Depression we are in is being exacerbated by the very measures being used to fix it—stimulus is putting pressure on Treasuries, which are being shored up by the Fed. This obviously cannot have a happy ending. Therefore, the smart money prepares for what it believes is going to happen next.”

The Aftershocks, Afterthoughts, and the New Normal
After this event has passed, no one knows for sure what the new normal will be, but there is one thing we are quite certain of – the United States Dollar will no longer be the world’s reserve currency. Our view isn’t based on speculation but instead is based on the numerous financial publications that have called for an end to the dollars status as the reserve currency coupled with available reports that have been put out by: The International Monetary Fund, Treasury Secretary Tim Geithner and the United States Postal Service.

In April of this year the International Monetary Fund penned a report entitled Reserve Accumulation and International Monetary Stability that promoted a global regulatory authority whose bureaucracy would supercede sovereignty, coupled with a new Global Monetary Unit called an SDR that would replace the dollar as the worlds new reserve currency. SDR stands for Special Drawing Rights and is an idea first proposed by the economist John Maynard Keynes. The report issued by the IMF could spell the beginning of the end of the United States Dollars reign as the king of currencies. But wait, you might say, won’t our Government do something to stop this and stem the tide? If you haven’t realized it by now, let us break the news – the Government is NOT going to help. In fact, our very own Treasury Secretary, Tim Geithner said recently that he is very open to the idea of the SDR replacing the dollar. This very statement, which, coincidentally, came before the IMF’s report, created havoc in the foreign exchange market – the dollar fell 1.3% against the Euro within 10 minutes of his remarks.

Granted, the International Monetary Funds report proposing the Global Currency called an SDR and Tim Geithners slip of the tongue could both be considered circumstantial evidence, that is, if it weren’t verified in black and white by the United States Postal Services own website, among others. Yes, that’s right, the U.S. Postal Service recently confirmed some of our worst fears. On their website, you can currently find an SDR to U.S. Dollar Conversion tool. Through using it you will find that a devaluation of the dollar is in the works. A devaluation like that proposed by Gonzalo Lira but not quite. Initially, from the looks of it, there wont be several zeroes knocked off – at this point, according to the tables on the usps website, the devaluation will initially be about 30% – currently $100 United States Dollars is equal to $65.76 SDR’s. The United States Postal service is apparently adhering to regulations set forth by the Universal Postal Union, and international organization of postal services – for instance – the Czech Republic’s postal service website has an SDR converter as well as the Swedish Postal Services website.

Let’s hope that every bit of this report is just an interesting read and that we are entirely wrong with our synopsis. Unfortunately, based on the evidence, that doesn’t seem to be the case. Should Gonzalo Lira be right, precious metals will likely prove to be the investment of not just the decade but the investment of the century. We urge you to contact your representative to discuss your personal situation and strategies. They will be glad to tailor a package that fits your goals and objectives. Now is the time to act. Not tomorrow, not the next day, but today.

Gabe Elton | Gold & Silver Specialist
Direct: 1-800-552-4109| Office: 1-800-928-6468
Austin Rare Coins & Bullion
7200 N Mopac Ste 310 | Austin, TX 78731

Print PDF