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It is extremely difficult for our contemporaries to conceive of the conditions of free banking because they take government interference with banking for granted and as necessary.

July 8th, 2011

The Return to 1970’s Stagflation
….a Term Very Few Truly Understand


What happens when tough love does not take the first time around? Apparently, for America’s leadership, it means another humbling trek to the woodshed. As tempting as it may be to gain example and similarity between the Carter and Obama administrations, let us avoid the insipid and silly and opt for the high road.


1970’s stagflation; are we heading there again? Despite the barrage of Keynesian economic experimentation, the forced feeding of vast amounts of paper money into a morally bankrupt financial system has clearly failed. Even with artificially low interest rates, along with colossal and breathtaking sums of deficit spending, America’s economy remains mired in inertia.

A summer sell-off in the juniors is not even a forecast; it is tradition. Come this fall, currency metal plays and energy stocks should enjoy a brilliant rally. The even now, stale-dated prediction of a dollar rally will realize (at best) a few irregular twitches and the occasional spasm; the ongoing saga of sovereign debt crisis in Europe will continue to escalate, resulting in the U.S. dollar partaking in fiat cannibalism. America’s wholly artificially contrived debt-ceiling crisis will come and go, with the winner reaping the political benefits in 2012. A political victory perhaps leading to a Pandora’s Box of problems. 

Albeit armed with knowledge and conviction, my stance during the dark days of 2008 and 2009 turned both unpopular and unpalatable to many – allow weak and troubled industries along with insolvent financial institutions to fail. Obviously this did not happen; nor did I really expect it to happen. While a nervous America chanted along with a charlatan ‘change we can believe in’, I continued to immerse myself in the pages of economic lesson and history; patiently allowing current events to run their unavoidable course. 

As I underlined quotes from “When Money Dies: The Nightmare of the Weimar Hyper-Inflation”, and marked pages from “A History of Money and Banking in the United States”, America’s languid and seemingly indifferent Keynesian leadership chose economic suicide by opting for inflation as an (economic) panacea. Three years later, their hackneyed cure-all has failed miserably and the lead country on the planet now finds itself staring into an economic abyss. Staring back at the confused and terrified faces in Washington, stagflation.

Stagflation: A condition of slow economic growth and prolonged high unemployment – a time of stagnation – accompanied by a rise in prices, or inflation. Economically, the worst of all worlds and without strong leadership, almost impossible to cure. Worth noting: Within the many pages of the Keynesian Theory...there is not a single mention of stagflation!

Assembling the Stagflation Construct

Obviously to build the two-headed construct known as stagflation, we need a narrow and timorous government acting in flagrant disregard of historic example. This of course, being in concert with a stubborn or perhaps arrogant disregard for current fiscal reality as evidenced by muddled and incoherent economic policies.

Thus far, Washington has instructed the Fed to flood the system with trillions of faith-backed dollars, using this money to purchase the dubious assets clogging up the balance sheets of technically insolvent banks. Result: At a cursory glance, the banks appeared healthy. But wait! By dropping short-term interest rates well below the ‘official’ level of inflation, the banks received interest on their Fed held deposits; so not only do the once-troubled banks appear solvent, by any fiat based definition, they are solvent! Wall Street is happy... and the people of America are on the road to becoming beggared?

By pumping the banks full of money, the Fed (playing the cat’s paw to Washington) sought to ‘nudge’ consumer demand, thereby kick starting the economy. Instead, what emerged was the (double) sleight of hand as the banks, acutely aware of their naked exposure to the tottering tower of derivatives, denied consumer lending. Factor in Washington’s odious and oppressive attitude toward business, along with their perilous and unflinching fiscal focus on entitlement programs, the culture of growing uncertainty drove the majority of investment funding to the sidelines.

Justified economic uncertainty has traveled full circle to bite the government right on their collective backsides. Car sales are slowing (traditionally a consumer’s second most important purchase). More importantly, real estate prices continue to seek their natural bottom; which in turn shines the spotlight right back on the banks and their exposure to real estate related derivatives. And what do banks do when they feel threatened? They tighten credit even more, thus impacting the force and depth of the recession. I would think even the most deluded in America will now admit there is not even the hint of a recovery.

Ignoring the persistent and reiterated signs of danger ahead, Washington stubbornly clings to the now totally debased Keynesian formula, continuing to allocate and spend vast gobs of paper money.  The Fed continues to print money; money that is rapidly losing both value and allure to the rest of the world. Evidence: the U.S. dollar has reached record lows against most of the major currencies in the world. As to trusting any of the few remaining healthy currencies (Swiss franc, Norwegian krone) that may also prove to be a fool's game. Reason: with the rest of the paper currencies suffering decline and debasement, all it would take would be the stroke of a government pen to weaken a (temporary) strong currency. If you take a look at the system of fiat currency, remember an old truism; bad money chases out good. In other words, keep your eyes on the Swiss franc!  

Yet, in spite of all the potent and prevailing evidence there are still Washington regime-friendly economists, applauding the weakened U.S. dollar. Like carnival barkers, they continue to claim the nation’s exports will rise and thereby create jobs. Never mind that almost every other country in the western world has initiated the same doomed tactic, thus negating any lasting benefit to America. And not to be ignored, the plethora of historical evidence clearly showing wilful currency devaluation damages domestic markets and leads to runaway inflation. As we speak, the American consumer is already face-to-face with higher costs for imported goods, along with accelerated food and energy prices.

If logic played any part in this macabre economic scenario, one would think that government would come to grips with the profile and outline of the problem and freeze spending! However, since when is Washington logical?  A spending freeze would also logically negate their penchant to regulate business, both large and small. Instead, it is glaringly obvious the Fed will be instructed to go into stealth mode and continue to somehow pump more paper dollars into an already fractured system. After all, we are approaching an election year! The last thing the administration wants is to be held accountable for double-digit unemployment, collapsing markets and the threat of disenchanted armies of civilians marching on Washington.

If history remains our teacher, prepare to witness the continuation of an almost Weimaresque bunker mentality superseding the need for reality-based fiscal responsibility. As it stands, the Keynesian inspired programs of phase-one inflation have failed (miserably) and we are now on the threshold of experiencing the next phase of the economic cycle…stagflation; a word we will soon all come to understand.

Survive and Prosper During Stagflation?

It has been said that ‘savers’ are the hardest hit when stagflation rears its very ugly head. I would suppose that would all depend on what you are saving! If you have been measuring the worth of your nest egg in dollars or dollar-denominated assets, then you are guaranteed to experience catastrophic losses. But can we survive both cycles of stagflation and hyperinflation?

Even the mainstream box-thinkers like to use the catch-phrase, ‘new reality investing’ after the collapse of 2008. Unfortunately, very few even understand what that means. It is your task as a ‘saver’ to identify opportunities that will preserve and grow your savings. If you allowed any scope and significance to our narrative over the last two years, you are already staying away from paper currency and leveraged assets. Rural real estate, copper, physical gold, physical silver, oil and gas; the basic commodities will carry you through the ravages of stagflation. Repeat: There will soon be little value attached to the physical dollars in your wallet and zero value attached to the trillions of synthetic dollars being pumped by the Fed into a doomed economy.

"There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence." - Charles De Gaulle

It has always been my contention that we take full advantage of the (relatively) free and unencumbered junior gold and energy markets to maximize our paper dollar gains; followed by (quickly) translating a large portion of the paper profits into ownership of physical gold and silver. I have survived past taunts and jibes of the box-thinkers, as they sneered at out reality-based investment stratagem as unsophisticated and crude. The global stampede to owning physical gold and silver now allows me a moment of bright bask!

Stagflation and The Markets

During the early days of the Weimar collapse there were incredible opportunities to prosper in the markets.  I believe we are in front of that mirror again and should at least consider taking full advantage of the opportunities presented in our junior markets. Investors that are weak of heart, or unwilling to take individual responsibility when it comes to a disciplined due diligence process need not participate.


Understanding the Land of Fretful Discontent

Currencies

Sadly, nothing has changed to alter my stance on the future of fiat currencies. Be it the European Central Bank announcing their intention to double the size of their emergency bailout fund or an intractable America refusing to stop spending, the state sanctioned madness of paper money printing will continue. Predictably, inflation is already upon us, no matter how numbers are massaged. Inflation will only increase, and will in itself continue to add pressure on all paper currencies. Regardless of the temporary twitches and spasms, and its current moment of summer madness, the U.S. dollar will inevitably decline against all major currencies.

Energy Opportunities

Energy stocks are hot and will provide allure for the foreseeable future. Many investment analysts feel that putting money into energy is a no-brainer. I tend to agree as there are opportunities in the alternative energy plays, but last I looked oil, natural gas and coal are not even close to falling out of investor favour. Investing in oil remains a given. No one can argue that investing in natural gas has increased and will continue to enjoy even brighter days ahead. As to coal; maligned by the mainstream media, let us look at some hard and compelling facts, examining what to many… is a truly inconvenient truth: coal remains the world’s most abundant fossil fuel, more plentiful than both oil and natural gas combined. Coal use is not only keeping pace, the use of coal is increasing. Coal will be with us for many decades to come, so get used to that fact, and be smart enough to invest in the “black gold”. When it comes to nuclear energy, keep thorium in the back of your mind, as it is only a matter of time for this back page story making it to the front page as well. China has a robust plan to bring thorium nuclear generators on line and the rest of the world will follow. The bottom line is that both traditional and alternative energy plays will continue to bring us good investment opportunities.


Precious Metals, Focus on Gold


Both gold and silver are currency metals. As both cannot be printed, it is only logical that both will continue to appreciate in price against all forms of paper currencies. Surviving the next (stagflation) economic cycle, owning physical gold as part of your end game is crucial. The one-two punch of escalating inflation and the printing of money will be a shot in the arm for gold and silver, along with the companies that explore and produce currency metals.  Much has been written lately about the crisis situation in worldwide gold production. And although I do not disagree in the main with this argument, there is some breathing room in the system that (imo) has not been addressed. Before we even look at current and near-future production issues, there is a more urgent note worth reviewing; something I touched upon in my May report: There are approximately $200 trillion in total global financial assets that are even now, in the process of turning their attention toward the $1.5 trillion in market-available gold. If even a fraction of this attention is manifested, the price of gold will go parabolic. Do the math!

Getting back to the argument that gold production is in deep trouble, one has to concede there is a degree of (temporary) slack in the whole demand/supply system.

Or am I nit picking when I raise the point that there are still many past producing mines that were shuttered due to low gold prices? With the price of gold now at record highs, I am sure many of these mines will experience a renaissance as they prepare to go back into production. As well, I am sure there are many promising properties that were abandoned due to reserves - both proven and indicated, that were not considered profitable at $800 gold. Is it safe to assume that many of these once promising properties are being revisited, with an eye to near-future production?

Perhaps I am too optimistic that old mines and already existing properties of proven merit can be a factor in satisfying the ever-increasing demand for gold. There is the very real possibility that we are but one or two black swan events away from the gold price absolutely roofing. Thus, investing in physical gold and reaping the rewards of investing in gold and silver junior exploration companies may become almost mandatory for the serious investor!

If I may draw one more note from history; during the period of stagflation in the Weimar Republic between 1919 and 1923 gold went from 100 marks per ounce to 100 trillion marks. At the end when hyperinflation was the order of the day, gold dealers would not accept any amount of German marks for even a single grain of gold.


Larry Myles
Larry Myles Reports
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Larry Myles is neither a geologist nor a financial analyst. I do not purport to offer personal investment advice nor recommendations. While all statements of fact are derived from reliable sources, and are believed to be accurate, I make no warrant that they are so. You must do your own research and check statements of fact for yourself. My opinions are precisely that, my opinions. I do not accept any responsibility for any gains or losses you may experience resulting from actions taken based on my opinions. If not otherwise qualified, you should consult with your own personal financial advisor before engaging in any investment activities. Larry Myles Reports does not provide individual investment advice, act as an investment advisor, or individually advocate the purchase or sale of any security or investment. Larry Myles may actively trade in the investments discussed in this publication. Larry Myles may have a substantial position in the securities recommended and may increase or decrease such positions without notice. I do not know your personal financial circumstances. I am not your personal financial advisor. You must do your own due diligence. By entering this web site, or reading LMR reports, you acknowledge and accept the foregoing.