“Inflate or Die”

Here are some thoughts to ponder from Eric Roseman, one of the few stock market analysts I bother to listen to.

The federal government is now on course to engineer the greatest expansion of credit in the history of modern financial markets. The long-term consequences will ultimately be disastrous for American financial assets, particularly the dollar and Treasury debt.

Global markets are skyrocketing over the last 24 hours on news the United States will create a bail-out fund to cluster all toxic mortgage-backed paper and finally lift the dark clouds hovering over global finance since August 2007.

Markets have been crashing until Thursday’s announcement as the credit crisis reaches epic proportions — ranked as the worst crash in inter-bank lending confidence since the Great Depression.

Thus far in September the Fed has expanded its balance-sheet by some $425 billion dollars. In just 19 days, the Fed has rescued Fannie and Freddie, AIG, spent tens of billions of dollars in overnight liquidity funding operations with other central banks and has extended a $75 billion dollar lifeline guarantee to money-market fund investors.

Clearly, the credit crisis requires desperate measures and only governments can help to alleviate or even quash systemic failure through the unprecedented expansion of credit. Confidence must be restored to the financial system right away. Like I’ve said all along, it’s Inflate or Die for Western capitalism.

Markets are wrong to think we can all enjoy a sustained v-shaped recovery; this won’t happen.

The primary trend in the markets since July has been a lightning switch from inflation to deflation as credit markets are frozen, bankruptcies accelerate and markets crash. These are all highly deflationary trends that will remain with us for the next several months until the financial system stabilizes and credit starts flowing again.

But over the next 18-36 months, inflation is going to make a formidable comeback as the chickens come home to roost in the United States and Europe.

The cost to resuscitate the financial system is primarily an American problem and will result in a massive expansion of credit; inflation is all but inevitable.

Eric Roseman is the lead investment advisor for The Sovereign Society, of which I am a member.

◊◊◊◊ Now: Gold @ $858.90, Silver @ $12.39, USDX @ 77.96◊◊◊◊
◊◊◊◊ Now: DJIA 11,422.64

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