By Robert Fitzwilson of The Portola Group

October 27 (King World News) - “US Collapse To Make Weimar Germany Look Like Child’s Play”

One of the big unknowns is when and whether we will experience an exponential rise in prices, which is traditionally associated with excessive printing of money, as was seen in Germany at the end of World War I.  History does provides clues, but it is possible that we are already living it, just not in the headline manner experienced during the Weimar period....

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The official (government) inflation rate in the U.S. is in the 1-2% range.  That calculation relies on the exclusion of the things most people care about, food and energy, as well as several other statistical tricks.  The real inflation rate as calculated by John Williams of Shadowstats is many multiples of that range.  We also see the effects of inflation in shrinking packaging and portion sizes.  Inflation rates in India, Japan and China are also very high.

Thinking back to the 1970s about the dramatic rise in home prices, it was not a situation where prices rose in a vacuum.  Home prices rose because there were 70 million Baby Boomers forming new households, and there were not enough homes to go around.  Lumber and other construction materials followed suit, as did the cost of construction labor.  The point is that prices rose dramatically for something in great demand and short supply.  There was plenty of dry tinder in the system through excessive monetary expansion, but a lot of that was channeled into housing.  Higher prices spread to the rest of the economy, but it was triggered by the emergence of a huge new segment of the population demanding certain products.

Our guess is that the items in short supply in post-WW I Germany were food and fuel.  As the population became desperate for those basics, prices took off on an exponential rise.  The pictures and stories we have seen about wheelbarrows full of currency were probably ordinary people scrambling for staples while experiencing the dramatic rise of the volume and weight of the medium of exchange of the day, cash, or reichsmarks.

Our world is different in many ways.  In developed countries, the supply of food and fuel is readily available.  The prices have risen a lot, but supplies have generally been sufficient.  There are no wheelbarrows required as money is now mostly electronic.  You see a zero changed here and there with the accompanying grumbles, but not mobs in the street.

We have seen dramatic increases in prices for those items demanded by the wealthy.  Prices for jewels, antique cars, high-end real estate and art have reached stratospheric levels.  Education and medical costs are skyrocketing as increasing demands for those services in excess of capacity as well as subsidies from government drive prices relentlessly higher.

The point of this is that the hyperinflation we read about was focused at least initially on specific goods and services, not the economy as a whole.  Rising prices first show up in things we want, not a cosmic process where everything rises in unison.  Germany was a closed system at the time.  We now have a world economy where we can have major price increases for things in short supply, but price declines for things in over-supply or where technology and productivity intervene. 

The dry tinder of excessive printing lurks in the background, but the price increases are focused on specific goods, services or asset classes.  Throw in bad data and officially sanctioned market manipulation, and the match to light the dry tinder of the latent excess printing leading to a general hyperinflation could be further into the future or not at all.

To see a repeat of the Weimar experience, we need both a severe shortage of what people want combined with a loss of confidence in the medium of exchange.  Right now we see competition for resources are fierce, but relatively controlled, bidding for trophy assets.  Education has seen a dramatic rise in the cost, but the cost was masked by subsidies and the widespread availability of student loans.  The usual suspects to spark panic buying are shortages of food, energy, water, medicines and personal security.  Which of those will be evident at the flashpoint is impossible to predict.  It could be all of them.  Nobody knows.

There is no doubt that the currency wars are in full swing.  So far, it has manifested itself as flows back and forth.  The recent rise in the Euro is an example of that as capital flows out of the dollar into that fiat currency.  The spark that will set all of this on fire will be the repudiation of all fiat currencies in favor of gold, silver, resources and other real assets. 

The mountain of fiat currencies and derivatives dwarfs the amount of real assets. As that mountain crumbles, we will see the sparks and the tinder come together in a monetary conflagration as wealth holders panic into anything that will hold value.  The Weimar experience will seem like child’s play as the entire financial system for our global economy is deconstructed.

When that will occur is unknown, but the smell of monetary smoke is in the air.  Traditional real assets, such as those mentioned above, will become the safe havens.  Those who dallied, despite all of the historical warning signs, will see what remains of their wealth evaporate in a very short period of time.

The situation does not call for despair and inaction.  It calls for thoughtful allocation of assets using common sense and history as our guide.  We have suggested that opportunities for growth that will transition the monetary reordering should also be a part of the allocation.  Look for global brands consolidating market share and companies that are rapidly growing earnings such as we see in technology and energy.  It is imperative that investors be extremely well-positioned and nimble in this ‘Brave New World.’

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Eric King

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