Commodities, Inflation And The Exponential Curve Of U.S. Debt

by: Sheldon Sutherland

[Originally published on 01/16/2013.]

In periods of economic upheaval, in periods of economic crises, wealth is not destroyed, it is merely transferred.

- Larry Bates

Why does everything cost so much? Why isn't my paycheck going as far as it used to? If you've asked yourself these questions, then chances are you are being affected by inflation. Although the Federal Reserve assures the public that inflation is under control, I have a feeling their grasp is starting to weaken. According to the Consumer Price Index, inflation is now between 2% and 3% but does not include food or energy; so if you don't eat, drive or use electricity then inflation shouldn't be a big issue for you. As for the rest of us Americans, we are feeling our wealth slowly diminish.

I remember the days when I would go shopping at the grocery store with my parents and they could pretty much fill the entire cart up for just twenty-dollars and then head to the gas station and fill their gas tank for twelve-dollars. Now as an adult, I do my own grocery shopping but twenty-dollars doesn't get me nearly as many groceries as it did my parents in the late '90s and I'll be lucky to fill the gas tank in my four-cylinder car for less than forty-five dollars.

Why are the prices of goods getting so high? Has the demand for bread and milk gone up so much that farmers must mark up the price substantially in order to balance supply? The truth is Americans aren't consuming more and more food, clothing, housing, automobiles and fuel. So then why are these products steadily climbing in price? The answer is Inflation.

Currency Debasement

Inflation is defined as "A general increase in prices and fall in purchasing value of money", and that is exactly what we are experiencing right now. In December 2008, after the crisis concluded with the collapse of investment banks Lehman Brothers, Merrill Lynch and Bear Stearns; central banks acted aggressively to falsely prop up an economy that was clearly in need of a huge correction by stimulating the economy with $600 billion freshly new printed dollars, also known as Quantitative Easing.

The plan was then extended in March 2009 for an additional year until March 2010, after the initial stimulus package failed to produce enough economic activity. The new currency was used to purchase $1.25 trillion worth of MBS (mortgage-backed securities) and agency debt, with an additional $300 billion in treasury securities. This was a poor choice that the government made in my opinion. The free market decided that real estate prices were too high, stocks were over-valued and interest rates were too low and the result was an economic downfall that really shook the markets.

The government did bail-out the banks and motor vehicle manufacturers immediately to reduce further losses. At this time Ford Motor Company (NYSE:F) and General Motors (NYSE:GM) also took huge hits. Ford's stock price dropped sharply 85% with General Motors leading the way with a 99% loss.

This is a 10 year chart of General Motors:

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It would have been more constructive, to let these companies fail and slowly build their wealth back the natural way, by saving up capital and paying down debt. Whatever is left could be used to grow and expand. After all isn't that what capitalism is all about, saving up capital and creating growth through surplus?

Bailing out a failing market is not free-market capitalism. Free-markets decide the price of a product; when the government steps in and forces a price on a product through stimulus, then it must continue to stimulate forever. The moment the stimulus ends the markets will suffer and we've seen this happen over and over every time the market expects QE to expire.

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Since the 2008 - 2009 economic crises, many more stimulus packages have been introduced since QE1; such as:

  • QE2 - November 2010 - June 2011

The central bank purchases $600 billion in longer dated treasuries.

  • Operation Twist - September 2011 - June 2012

Trade short-term bonds for long-term bonds and push interest rates down.

  • QE3 - September 2012 - Current

Asset purchases are open ended $40 billion a month in MBS.

  • Operation Twist - Extended through 2012

$45 billion purchases in 10 - 30 year treasuries a month.

Today our debt is 60% higher than it was in 2008; jobs are fewer and prices have risen. If we would have let the economy correct and reconstruct itself prices would be lower and put less of a squeeze on the middle and lower class. There would have been a lot of jobs lost but the purchasing power of the dollar would go quite a bit further due to deflationary symptoms.

Instead the Federal Reserve has decided to continue being a third leg to this broken stool by running the printing presses and pumping the economy up with cheap money. This is no solution to long-term job growth. Stimulus adds jobs through pork barrel spending. For example, building a bridge to nowhere. Once the bridge is finished so is the job. Government run economies have been proven to fail numerous times throughout history.


Take Weimer, Germany for example. In 1919 it took 12 German marks to buy 1 U.S. dollar. Sadly in 1923 it took 4 trillion German marks to buy 1 U.S. dollar.

If this were the answer to economic growth then Germany would have had robust growth in that time span, instead jobs were getting fewer as time went on. Sound familiar? In 1928 650,000 people in Weimer were unemployed. By the year 1933 the number of unemployed grew to 6,100,000. Staggering amounts of currency being printed and jobs becoming fewer, kind of sounds like what's happening in the U.S.

Ben Bernanke will tell you after an FOMC meeting that job growth is right on track and employment is getting better but what many people don't understand is under-employment is extremely high right now. Those that used to work white collar jobs are now working blue collar jobs. Yes, government jobs are being created through stimulus but when the stimulus ends unemployment will be on the rise again; that's why Bernanke created an open ended bond buying plan because unemployment keeps rising every time our stimulus injection runs its course. It's like giving alcohol to a drunk. We're only making the hangover that much worse when it comes time to really deal with our problem. We are digging ourselves deeper into debt with every stimulus injection. Socialism can eventually turn into communism very easily if a country becomes too reliant on government spending.

In a communist country such as Germany was, you are told what to buy, where to live, what profession you're going to be in, what food to purchase. In Germany, citizens were given ration cards for food. They were working to feed themselves. This is not an appealing way to live life. America was built on capitalism and that is what has made this country so free and desirable. Now I'm not saying that America will end up like Weimer, but if we don't stop the currency creation at some point, we will end up exactly like Weimer, maybe worse.

My solution to this problem is simply to stop the currency expansion today. Yes our economy will be in very bad shape for a very long time; that you can count on, but we will also restore faith in the financial system and the dollar. We will regain capitalism which is one of the most important factors in keeping a country free.

Unfortunately I don't believe America wants this party to end just yet. America has promised so many elderly citizens a dream retirement and by all means these people deserve it. After all, baby boomers have been putting their hard earned dollars in social security since they were old enough to work. The government doesn't want to tell the public that they aren't going to pay these individuals what they were promised, so they are going to follow through with their end of the deal and cut social security checks every month. The trouble is that in order to fund these checks America will have to monetize the debt that they owe to these citizens, so they will continue to print money. Yes the retirees will get their check, but will they be able to buy anything with it? How diluted will the currency be by the time you retire?

I believe another economic downfall is among us simply because the economy seems to contract every time stimulus packages end their course. The collapse that is coming is going to make the crisis of 2008 look like a small correction because we are in much worse shape now then we were in '08. Our debt has to be more than double when President Obama leaves office than it was when he took office. If we try to save and pay down our debt, it will collapse the money supply. Eventually investors are going to realize how much the dollar is depreciating and pull out of it. In the '70s, inflation was getting so bad that countries all around the world were dumping the dollar and exchanging it for gold; which is the reason why Nixon took us off the Gold standard in the first place.

Our debt has been on an exponential curve ever since the gold window was closed for the dollar. The dollar is now a debt based 'Ponzi Scheme' that requires that America go further into debt in order to keep the economy going. Here is how the exponential curve of the U.S. debt looks today. As you can see America must go into more debt than the year before or else the whole economy falls apart. We can never pay off our debt without first reforming our debt-based banking system.

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The prosperity that we are enjoying right now at this moment is owed back in the future plus interest.

- Michael Maloney

Just in case you didn't know what 16 trillion dollars look like. . .

Hedge Inflation with Commodities

During times of inflation commodities are just as likely to rise as the value of your dollar is likely to fall. We saw this in the 1970s when the dollar became a free floating currency backed by nothing. At that time inflation was rising unusually fast and the price of most all commodities were making impressive gains.

Here are a few charts of commodities that did very well in that time period.


Silver was the biggest performer in the 1970s rising from ~$1.60 in 1970 to ~$50 in 1980. Silver is one of the biggest oppurtunities I've ever seen. With the price of silver still roughly 40% below it's all time high, and gold almost double it's all time high, I believe silver is extremely undervalued and has enormous upside potential. If you're looking for exposure in the silver market I would highly suggest the iShares Silver Trust ETF (NYSEARCA:SLV) or Sprott Physical Silver Trust (NYSEARCA:PSLV) because they are tied directly to the metal itself; although as of right now I believe the silver miners such as Silvercorp Metals Inc. (SVM), Velocity Shares 3X Long Silver ETN (NASDAQ:USLV), Silver Wheaton Corp. (NYSE:SLW), Silvercrest Mines, Inc.(NYSEMKT:SVLC), are far more undervalued and will have more explosive gains than stocks fixed to the metal.

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Gold was the second highest performer in the '70s bull market, rising from ~$35 to ~$850. I recommend SPDR Gold Trust ETF (NYSEARCA:GLD) for exposure in the gold market, due to the fact that it is closely tied to the bullion, representing 10% of an ounce of gold. If you prefer a little more upside potential I would recommend Direxion Daily Gold Miners Bull 3x Shares ETF (NYSEARCA:NUGT), Goldcorp Inc. (NYSE:GG), Market Vectors Gold Miners ETF(NYSEARCA:GDX),Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ), Eldorado Gold Corporation (NYSE:EGO), Yumana Gold Inc.(NYSE:AUY), Barrick Gold Corportation (NYSE:ABX) and Newmont Mining Corporation (NYSE:NEM). These stocks represent gold and gold miners, for those looking to make some massive gains; this sector is also undervalued in my opinion. I must warn though, these stocks are on a downward pattern and may continue for a while longer. Anyone who wishes to enter precious metals mining stocks should take caution but I believe the recent sell-off of these stocks are a huge buying opportunity.

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Oil came in third with the price rising from ~$4 a barrel to ~$40 a barrel. Oil is the most consumed commodity in the world and will be for years to come. In times of economic uncertainty and inflation, oil will always rise significantly. I'm excited to see what's going to happen to the price of oil in the coming years. Those wanting to gain exposure to the oil market should think about United States Oil ETF, LP (NYSEARCA:USO). For those looking for more upside potential, I would recommend ProShares Ultra DJ-AIG Crude Oil ETF (NYSEARCA:UCO) and FactorShares 2X Oil Bull/S&P 500 Bear ETF.

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What are central banks doing?

For 20 years central banks have been net sellers of gold until 2010 when central banks purchased 77 tonnes. In 2011 that number jumped to a staggering 456 tonnes, with a projection of 499 tonnes in 2012. That means that countries all around the world are starting to distrust the dollar and return to a true store of wealth.

Central Bank Gold Holdings 2012


Gold Holdings in Tonnes

Percent of Foreign Reserves in Gold




























United States



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Remember these assets in my opinion will do exceptional over long-term. Do not concentrate on the day to day or even month to month moves of these commodities and ETFs, yet concentrate more on the over-all picture of growing your wealth over years. The stock market is still making back what it lost in 2008 while gold has more than doubled. As long as the government continues to be reckless with our monetary policy you can rest assured that more inflation is just around the corner. The Fed is now pumping $85 billion dollars into circulation every month, with $40 billion in mortgage backed securities and $45 billion in 10 - 30 year U.S. treasuries. The Fed's balance sheet will increase from 2.8 trillion to 4 trillion by the end of 2013. Almost half the deficit will be monetized.

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If you want to make sure you are protected from devaluation of your savings then you need to be in real assets. The Federal Reserve, which is not Federal (it is a private organization that has share-holders) and has doubtful reserves, has effectively created a system to slowly transfer wealth from Main Street to Wall Street through stimulus and currency creation. If you are making the same salary as you were prior to the crises of 2008 and your holding your savings in dollars, then your true wealth has been shrinking dramatically through inflation. Real assets become more expensive in times of inflation, like the price you pay for gas at the pump. If you want to hedge yourself from inflation then you need to hold your savings in investment vehicles that are growing in value not depreciating. If history has taught us anything, it's that history repeats itself and I believe commodities will be the investment of this decade.

Disclosure: The author is long GLD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.