A mid-summer rhapsody of hyperinflation

by Daisy Ku on Tuesday, August 24, 2010 at 5:35pm

The Fed, terrified of the US economy falling into a deflationary death-spiral, has bought up assets of all kinds to inject liquidity into the system. As a result, the Fed’s balance sheet surged from some $900 billion in 2008 to about $2.3 trillion today.

The Fed, the Treasury and the American Zombies are colluding in a triangular trade in T-bonds – the Treasury issues the debt to finance fiscal spending, the TBTFs buy them, with money provided to them by the Fed. The next episode of the money-printing saga: hyperinflation? The Fed is purchasing Treasuries both directly (the recently unveiled QE-lite) and indirectly (the Too Big To Fail banks), turning Treasuries into the new Toxic Asset.

Everyone knows that they are overvalued, everyone knows their yields are absurd, yet everyone tiptoes around that truth as delicately as if it were a bomb. One day, people would be so desperate in getting out of the currency that they will pay anything for a good which is not the currency!

A commodities burp would trigger an army of programmed high-frequency-trades to dump Treasuries into Bernanke’s waiting arms. The TBTFs, with boatloads of Treasuries on their balance sheets will add to the panic. Fund managers will be awaken by this massive buy and sell, seeing how precarious the US economy is, how over-indebted the government is and how US treasuries look a lot like Greek debt. Once Treasuries no longer remain the sure store of value, commodities will take its place. Not commodity ETFs or derivatives (counterparty risks), but for actual commodities. Once commodities start to balloon, ordinary citizens will get their first taste of hyperinflation. Main street people will rush to supermarkets as they freak out and begin panic-buying, uploading foodstuffs etc. Within the next few days, equities will plunge catastrophically and a $500,000 house will fall to 50 ounces of silver, which you can actually buy stuff you need.

The Federal government might seize control of major supermarkets and gas stations and hand out coupon for basic staples – yes food rationing. But the hyperinflation spell would finally clean out all the bad debts in the economy and reset asset prices to more realistic levels as opposed to a long drawn –out stagnation.

So here’s the investment strategy: invest in a diversified hard-metal basket, no equities, no ETFs, no derivatives. Take that hard-metal basket right in the teeth of the crisis and buy residential property.