Prepare in August for Hyperinflationary Holidays

By Dr. Jeffrey Lewis   Aug 19 2010 9:10AM

Ben Bernanke and the rest of the Federal Reserve are priming the pump for what could by a hyper-inflationary Christmas.  While the Fed continues to build a pile of kindling, the spark could very well be this holiday shopping season.

Imagine that you had a pile of wood put together to make a camp fire.  Your goal is to create the hottest fire imaginable, one that will last for quite some time.  You start with the smallest pieces, a few leaves, a couple of pine cones, and a few small sticks.  Next you throw on the larger timber.  A few logs and some old fence posts will do here.  Now, in the spirit of getting this camp fire going, you add a few gallons of pure gasoline.  That should be enough to do it, right?  Wait, what's that?  You forgot the matches?!

The above scenario is exactly what is occurring in the Federal Reserve.  They've done everything they can to create inflation.  They've laid the groundwork and poured on the gasoline in the form of M0 money creation, but now there isn't a single spark to be found that can ignite it. 

The Holiday Season

The gasoline they poured on the still unlit fire is slowly evaporating, and in a few month's time, it may be entirely dried up.  Ben Bernanke knows that his last hope at igniting the inflation candle will come in the fourth quarter of 2010. 

The gasoline is evaporating at a quicker than normal pace following a recession.  US exports continue to lag against our imports, and if too much cash is allowed to flow overseas, the inflationary recovery may never set foot.

Now or Never

This holiday season could prove to be vital for the Federal Reserve.  Their massive money creation scheme to prop up bank reserves has been 100% effective, but not a drop of the M0 money has yet to flow into the M2 money supply where it actually counts.  To go from M0 to M2, consumers have to borrow en masse, and then just like they do historically, fail to pay it off quickly.

The Back to School shopping season offered us a glimpse into real consumer confidence.  For those who are still employed, taking on personal lines of credit to make purchases is still second to cash, but at least someone is willing to borrow to some degree.  Holiday shopping usually accounts for far more than back to school shopping, so those who have enough cash reserves for back to school shopping will probably take out the credit card for a larger, more expensive, shopping season.

Get In While the Water is Warm

Silver and gold should perform well regardless of the outcome of the holiday shopping season.  If consumers go out on a limb and spend big, the groundwork will be laid for a massive expansion of the M2 in 2011.  If shoppers go to the store and spend conservatively, well, fear will return to the financial markets, and precious metals will boom again.  Buy now while both silver and gold are in their seasonal summer doldrums.

Dr. Jeff Lewis

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Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-R eview.com