Friday, December 24, 2010


Nothing comes from nothing. But what comes from something?

Did you see what happened? The Fed's holdings topped $2 trillion for
the first time ever. It took 95 years to get the Fed's holdings to $600
billion. In the space of 3 years, it has added $1.4 trillion more.

That's something.

Extraordinary, no? Amazing, n'est-ce pas? Incredible, huh?

And yet, the feds expect this explosion of Fed assets to produce an
ordinary firecracker of a recovery. They expect - or hope - that this
fantastic increase in the base money supply of the US banking system
will result in a rather run-of-the-mill rebound in the US economy.

The inflation rate (CPI) is only 1%...they think it will go to 2%. Long
bond yields are expected to go up a little too - but not too much.
Investor experts are predicting a 10% increase in stock prices in 2011.
Almost every economist is talking about a "gradually strengthening
recovery." Unemployment is supposed to go down a little. House prices
are expected to stabilize...and even rise.

In other words, an out-of-control monster of monetary inflation is
expected to sire a pipsqueak of a recovery.

We've talked in the past about how nothing comes from nothing...and how
you can't produce real wealth with ersatz money. But what about this?
Here we have the Fed doing something really big. Three times as big as
anything they did in all the years since 1913.

And yet, economists expect nothing much to happen.

How likely is that? The feds don't know what they are doing. They are
juggling nuclear bombs...and testing runaway viruses on an unsuspecting

What might happen?

Here are some guesses:

1) It will create more speculative bubbles. We wouldn't be at all
surprised to see oil go to $100 and above, for example. The Fed's money
is, so far, not making it into the real economy. But it is available to
And speculators are betting that they can make more money
in commodities than in US T-bills. So, keep an eye open. Most likely,
you'll see some bubbles in 2011.

2) Emerging market stocks could soar. Imagine that you're 'trading' for
Goldman Sachs. You can borrow dollars for nothing. What do you do with
them? Invest them in the world's fastest growing economies! If you're
lucky, you'll get 10%...maybe 20% return - on someone else's money. And
if you're unlucky? Who cares? It's not your money. And you won't go
broke. The Fed will give you more money.

3) Gold to $1,500. Why not? The IMF just completed selling. China,
India and other emerging economies are adding to their stash.

Speculators are getting in on the biggest and most reliable bull market
in the financial world. Heck, even individual investors are catching

Passing through the airport in Miami last week, we noticed a gold
vending machine! We had heard they were around. But this was the first
time we saw one. How surprising would it be if more and more ordinary
people started imitating the rich, who've been buying gold for years?
Suppose people realize that their central bank is now working against
them...and that they have to maintain their own real money reserves? We
could easily see gold over $1,500 in 2011.

4) US bond yields rise; the bond market begins to break down. It looked
like it was beginning a week or two ago. Bonds were going down just as
Ben Bernanke was trying to push them up. Sooner or later, it's bound to
happen. Investors must eventually realize that buying US debt is a
dangerous proposition
; the Fed is actively trying to reduce its value.
And if there is one thing the Fed ought to be able to do it's to
undermine the value of US debt. After all, the feds control the
currency it's calibrated in.

5) In contrast to this bubbly and bodacious outlook is a not-
insignificant risk that the whole shebang will blow up.
US stocks could
crash. Bubbles can explode. Unemployment, housing, sales, consumer
price inflation - all could get worse. Then what? Then, the US dollar
and US debt will go up!

Well, which is it, you're probably wondering. Inflation or deflation?
Boom or bust?

Our answer? Yes!

It's all coming. If not in 2011, then...later.

Bill Bonner
for The Daily Reckoning

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