THE UNFOLDING CRISIS

Doug Casey, chairman of Casey Research is a renowned investor, best-selling author and editor of the monthly newsletter International Speculator, now in its 27th year of providing independent-minded investors with unbiased recommendations on investments with the potential to double or better within a 12-month horizon. He has made it his life’s work to study financial crisis and how investors can protect themselves and profit, sharing his results in New York Times best-sellers such as Crisis Investing and Strategic Investing.

With global markets in turmoil, we turned to Doug to give us his interpretation of the big picture.
Q. You and the team at Casey Research have been vocal about expecting a major inflation. Yet, other than occasional surprises, inflation doesn’t seem to be much of a problem. What gives?

A. Things that you expect to happen usually take longer than you’d think. But once the process gets underway, they usually happen much more quickly. It’s like a boulder balanced on the edge of a cliff; nothing seems to happen until it happens all at once. Just adjust that analogy to the scale of a human lifespan.

The word “inflation” covers two different concepts, and it’s important to keep them separate. One concept is monetary inflation, which is an increase in the supply of money that outruns growth in the supply of goods and services. Papering over problems with yet more money is now the default solution for governments around the world. Case in point, when faced with the growing problems associated with the subprime mortgage sector, the European Central Bank announced that it would make “unlimited” funds available to the banking sector. The Fed will, predictably, react in the same way, running the printing presses overtime.

The other concept is price inflation, which is an increase in the overall level of prices for goods and services.

The relationship between the two is the relationship of cause and effect. Monetary inflation causes price inflation. But while almost everyone sees price inflation when it happens, few people notice the monetary inflation that is causing it. And so they tend to blame the producers of goods and services for higher prices—rather than the money-creating government that is the true culprit.

We’re now experiencing a lot of monetary inflation, which eventually will be reflected in price inflation. What’s really going to tip this over the edge, however, is the rest of the world deciding to get out of dollars. A lot of those $6 trillion abroad are going to come back to the U.S., and real goods are going to be packed up and shipped abroad. Inflation will explode.

It’s just a matter of time. But I think it’s going to happen this cycle.