Prepare for Hyperinflationary Holidays


"Bernanke knows last hope of igniting inflation candle will be in Q4."

Bernanke and the Fed are priming the pump for what could by a hyperinflationary Christmas. While the Fed continues to build a pile of kindling, the spark could very well be this holiday shopping season.

Imagine you had a pile of wood to make a campfire. Your goal is to create the hottest fire imaginable—one that will last for quite some time. You start with the smallest pieces, leaves, some pinecones and a few small sticks. Next, you throw on the larger timber. Now, in the spirit of getting this campfire going, you add a few gallons of pure gasoline. That should be enough to do it, right? What's that? You forgot the matches?!

The above scenario is exactly what's occurring at the Fed. They've laid the groundwork and poured on gas in the form of M0 money creation, but now there isn't a single spark to ignite it.

Bernanke knows his last hope of igniting the inflation candle will come in Q410. U.S. exports continue to lag against; and, if too much cash flows overseas, the inflationary recovery may never begin.

This holiday season could prove vital for the Fed. Its massive money-creation scheme to prop up bank reserves has been 100% effective, but not a drop of the M0 money has flowed into the M2 money supply where it actually counts. To go from M0 to M2, consumers have to borrow en masse.

Silver and gold should perform well regardless of the holiday shopping-season outcome. If consumers spend big, the groundwork will be laid for massive expansion of M2 in 2011. If shoppers go to the store and spend conservatively, fear will return to financial markets and PMs will boom again. Buy now while both silver and gold are in their seasonal summer doldrums.

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