Exactly one week from today — on Monday, December 3 — we will give you our forecasts for next year, and I can tell you right now: 2013 is going to bring one of the wildest rides of our lifetime!
Whether the fiscal cliff crisis blows up right away — or blows over for now — we have come to an historic fork in the road; a unique place in time where two powerful forces have converged:
Powerful force #1 is government cutbacks and tax hikes.
If Republican leaders in the House get their way, it will have a heavier dose of entitlement cutbacks.
If Obama prevails, tax hikes for the rich will play a bigger role. But …
Either way, the government will be taking tremendous amounts of money OUT of the economy, and this means DEFLATION.
Powerful force #2 is the Fed’s massive money printing operations.
Some Fed decision makers want to continue at the current pace of their “QE-Infinity” program, printing about $40 billion in new dollars every month. Others are pressing to accelerate that huge the program.
Either way, they are injecting massive amounts of unbacked paper dollars into the banking system, and this implies INFLATION!
So which will prevail in 2013 — deflation or inflation?
Before you answer, make sure you fully understand precisely how CRITICAL this question is — and how massive the consequences of each can be:
• During the last major INFLATIONARY period in America, (culminating in 1980), short-term T-bill rates surged from 2.99% to 17.14%, gold jumped from $34.94 to $850.00, and silver catapulted from $1.27 to $49.45. Hundreds of S&Ls and banks collapsed. Major wars raged. In stark contrast …
• During the last major DEFLATIONARY period, just four years ago, virtually every investment under the sun collapsed — not just stocks, but also commodities … not just in the U.S., but also globally. The Dow fell 54%. Oil plunged 78%. Even gold lost 34% of its value.
Which is worse? For an answer, just consider the long-term consequences of each:
The True Consequences Inflation
Inflation may ease the pain of debtors temporarily, help provide the semblance of a recovery, and even give the illusion that “the crisis is over.”
But such benefits are almost invariably short-lived. They are limited to a privileged few. And they almost inevitably backfire in the form of new bubbles, new busts and, ultimately, an even deeper depression with more financial losses, more bankruptcies and more layoffs.
In a nutshell, unbridled inflation causes:
• Still more bad debts. Individuals and companies are once again encouraged to borrow, spend and speculate, adding a new layer of burdensome debts to an already-overburdened economy.
• The ultimate moral hazard. Speculators are rewarded with profits, while savers are punished with zero, or less-than-zero real yield on their money. And yet, it’s the speculators who are among the primary culprits of the boom and bust; while savers are the ones most needed to help finance the next recovery.
• The destruction of the dollar. Savings and retirement nest eggs are trashed. People have little incentive to work hard and every incentive to find alternative schemes for making money. The inflation corrupts society and sabotages efforts to bring about an economic recovery.
The True Consequences of Deflation
Deflation brings with deep financial losses, widespread corporate bankruptcies and higher unemployment.
But those consequences are largely unavoidable anyway. Moreover, there are major, long-term benefits that accrue:
• A much-needed reduction of burdensome debts. With deflation, debts are paid off or liquidated in bankruptcies. Bad debts are removed from the economic body, creating a cleaner slate for future growth.
• Just deserts. Speculators who took the most risk during the bubble suffer the biggest losses; while those who had the foresight and prudence to save their money benefit from the best real returns. Thus, deflation naturally punishes those who played a role in causing the crisis; while delivering the greatest rewards to those most capable of ending the crisis.
• A strong dollar. The U.S. dollar gains in purchasing power, giving every American a bedrock of value to strive for, to save and to invest prudently. This lays the foundation for shared sacrifice by families, local communities and the country as a whole.
Clearly, despite the near-term pain, deflation is the lesser of the evils.
But what SHOULD happen for the long-term good of the country and what actually WILL happen in 2013 could be two different things entirely.
So the next big questions are:
Which is more likely? Deflation, inflation, or some unique combination of both?
When and how will they strike?
Most important, what are the consequences for YOU?
And what will be the impact on
• The U.S. stock market …
• Bonds and interest rates …
• Gold, silver, and other precious metals, plus …
• Oil and other commodity prices?
We will give you our answers exactly one week from today.
So check your inbox next Monday, December 3, for the exact time and place!
Good luck and God bless!