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I have tabulated the results for the first five weeks of 2011.

What conclusions can we draw from these numbers?  So far this year, inflation (via QE2) has elevated the Dow, platinum and palladium.  The dollar has lost ground to the euro.  Gold, silver and the mining shares are the big losers and have been forced lower to “mute the canary in the mineshaft.”  The mining shares, which are leveraged to the price of gold and silver, suffered the largest drop (but they have reversed course and are on the way back up in the last three days).

Bernanke and my vacation

Susan and I flew back to Minneapolis from Miami, two days ago. It was 80 degrees when we left and this week the high temperature in Minneapolis will be 5 degrees.  At least there aren’t any mosquitoes this time of the year.  That’s part of the charm of living in Minnesota!  You have to be hardy to survive.

Minneapolis is 1,726 miles from Miami and it was a 3.5 hour flight.

“Cactus Jack” and his stunning wife Judy were with us in Boca Grande and Miami.  On Saturday morning, Jack and I were having breakfast next to the pool at the South Beach Ritz Carlton hotel and he was giddy over the Dow topping 12,000. Jack was certain the economy was strong and the recession was over. I’m not certain.  I told Jack that the Dow was not rising because of a strong economy.  It was rising because of all of the newly created money (QE2) the Fed was pouring into the economy.  QE2 was inflating the stock market, food prices, energy prices and all of the commodities, including gold and silver.  It is clear to see when you check out the commodity index, which just hit a new all-time high! Jack was confusing inflation with growth.

Ben Bernanke is living up to his promise of “dropping hundred dollar bills out of helicopters” to keep the economy from sinking into another Great Depression. (On November 21, 2002 Ben Bernanke gave his infamous speech in which he stated that he wasn’t concerned about deflation because the Fed could always drop hundred dollar bills out of a helicopter to jump start the economy.)

What does this “helicopter drop” look like?  Try to visualize what is happening. One million dollars in hundred dollar bills, stacked one on top of another, would reach   a height of 6.66 feet – or about the height of an “average” professional basketball player.  How high do you think a $1.5 trillion stack of hundred dollar bills is?  Its 1,894 miles! That’s 168 miles more than the distance between Miami and Minneapolis!  When you look at QE2 from this perspective, it is clear that the dollar is doomed as a store of value.  You just can’t water down the currency in this fashion without causing massive inflation.  It is already showing up in an increase in the M-2 Money Supply, which catapulted $46.6 billion to a record $8.862 trillion. Over the past year narrow money grew 4.5%.

QE2 is Bernanke’s version of the helicopter’s hundred dollar bill drop.

The scary thing is that it won’t work.  It will be followed up by QE3, QE4 and, as Jim Sinclair states, QE to Infinity, because the minute that the Fed stops inflating, our economy will start to plunge into Great Depression 2.

The riots that are taking place in Egypt and Tunisia, over rising food prices, will visit us by 2015.  Today, one in seven Americans are already on food stamp assistance.  Rising food and energy prices will push many of them over the edge.  By 2012 unemployment benefits will run out for over 14,000,000 Americans and the unemployment checks are their only means of support.  Then the riots will start.

Even if the unemployment checks keep on coming, tens of millions of Americans will not be able to get by, due to the rising cost of food and energy.  The monthly check will not be sufficient to keep up with the rising food and energy prices. Gerald Celente has issued warnings about this.  We are in the early stages ofhyperinflation and depression.  It will be global and it is playing out now in the Middle East.  It will be felt here as well.  The rising stock market and rising price of gold and silver are the early warning signs that inflation IS here now, and it will intensify.

As Celente points out, the current smoldering unrest could easily end up in WWIII.  We are in a very precarious position now.  Keep your eye on the rising cost of food, energy, inflation and the Middle East.

Copper, wheat and rice are up 3.9%, 4.4% and 8% respectively this week alone and so far in 2011, they are up 2.3%, 8% and 13.3%.

The instability in Egypt and the Middle East is contributing to higher oil priceswith NYMEX crude up 1.8% and Brent crude up 2.54% this week.

The National Inflation Association reported overnight that wheat prices are up 100% since June and warned that food and energy price inflation could lead to food riots spreading from Egypt across the world and even to the US by 2015. They believe that this is a further sign that massive inflation and potentially hyperinflation is coming in the coming months and years.


David Schectman

Miles Franklin