The Art of Inflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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If ever there was an apt metaphor for our times, it was the sale of Andy Warhol's "200 One Dollar Bills" at Sotheby's on Nov 11th. The silkscreen, which is a black and white image of 200 U.S. $1 bills went for $43.7 million (including commissions). It had previously been purchased for $385,000 in 1986, so this sale represented an approximately 100 times increase in value in 23 years. High-end art is a place where inflation shows up first. Only when the big price increases start filtering down to lesser works though is it an indication that inflation is getting really out of control. In hyperinflations, even tertiary works experience big price increases. Art, collectibles, and antiques were favorite investment areas in the U.S. during the high-inflation 1970s.

At the rate the U.S. government is printing money and pumping liquidity into the financial system, it might take $43 million one day to buy what $200 did when Warhol created his artwork. While the Obama administration is making noises about trying to control the U.S. budget deficit by freezing expenditures or even cutting them by 5%, this is simply an empty symbolic gesture meant to placate America's creditors, Spending on the new health plan, likely to be much greater than estimates, will probably more than wipe out possible savings elsewhere and social security outlays will be rising rapidly and continually in the next decade. While budget cuts may be minimal (defense and Veteran's Affairs are excluded from cuts and these account for a big slice of total federal budget), increases in taxes may not be. The most likely outcome is a budget deficit that keeps growing and a damaged economy from higher taxes.

The Chinese have been complaining loudly recently about excessive U.S. spending and its impact on the dollar (they are estimated to hold about $1 trillion in dollar denominated assets in their reserves). Reluctance on their part to continue buying U.S. debt would cause treasury interest rates to rise significantly. Selling even a small part of their dollar hoard would damage the U.S. currency, which is already sinking fast. The trade-weighted dollar fell below 75.00 again this morning and it looks like it's only a matter of time before it test its all time low around 71.50. A falling currency is the very definition of inflation (contrary to what most economists claim).

Gold, our everyday inflation indicator, hit another all time high in early New York trading this morning. Spot gold rose to $1131.10 after having reached the $1133 level overnight. The 5:15PM New York close last Friday was $1119.50. Gold got stuck at it $1120 resistance level for only two days and then cut right through it Sunday night. Spot silver has traded as high as $17.90 so far today and still needs to trade and close above key resistance around $18. Just like high art prices and a falling dollar, gold and silver are making a very clear case that inflation is a problem.

Disclosure: Long gold and silver, short treasuries, don't own any Warhol's, but do own some actual $1 bills

NEXT: Silver Breaks Out of Trading Range

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.