Economy off the bottom.

The FED had crashed the economy on Sep 15, 2008, when it changed the accounting system and declared some of the biggest financial institutions bankrupt. The move froze money circulation, pushed the economy off the cliff and not so coincidentally, elected Obama. The resultant deflation wrecked the housing industry, decreased industrial production and had increased underemployment to over 20%. The FED responded by pumping in unprecedented levels of fiat currency (we became familiar with the concept of trillions) and the Obama regime responded by increasing the federal budget from 1.7T to 2.5T and increased the deficit from 400B to 1.5T.

Two thousand nine saw the warring of the deflation initiated by the FED and the forces of inflation. While inflation did not show up in terms of prices (because of the deflation), the FED could not maintain a deflationary environment for too long (no matter how much it might desire such an environment) for fear of setting off a revolution. As companies pared down their work force, increased productivity and workers refrained from asking for higher wages, inflation was kept in check. Well, almost. We saw the slow creep in oil prices and crude oil prices add to the price of everything. As I write this, crude oil is battering the $85/bbl level and some analysts forecast the price of crude to rise to $100/bbl maybe within this year.

The signs of inflation, though, are beginning to show in actual prices, now that deflation is slowing. The first graph shows the increase in manufacturing and the price of raw materials and manufactured materials. We see that prices are increasing rapidly. The second graph shows the increase in rail traffic, which is an indicator of economic activity. Rail transport has increased for most commodities (for 18 out of 19); up 63% for metals, 37% for scrap, 36% for ores, 28% for equipment, 22% for grain, 15% for coal and 14% for chemicals. While, this increase in economic activity is welcome, it comes at the expense of increased prices and an unprecedented rise in National Debt. While, the Leftist economists of Obama believe that the National Debt does not matter (because we owe it to ourselves - an obvious fallacy because a large portion of the debt is owed by other nations), the debt reduces the value of the dollar and pushes up the cost of servicing the debt. A drop in the value of the dollar will push up prices as well.

So, we are continuing with conflicting forces on the economy. On the one hand, we see some effects of increased efficiency and stimulus, but jolts from the increase in taxes (via the expiration of the Bush tax cuts) and Obamacare. We see increased inflationary pressure from oil prices going up as well as the prices of commodities and the tremendous amount of increase in the money supply. On the other side, there is still the matter of commercial real estate defaults, low consumer confidence and high unemployment. All this points to the repeat of the Carter years: STAGFLATION.

Some analysts predict the end of paper currency. The amount of debt has become unsustainable not just in the United States, but in Europe as well and debt is continuing to rise. For the time being, the FED is buying Treasury Notes and tries to maintain the pretence that these are viable instruments. But, the charade is getting more obvious as time goes by. Experts predict gold prices to rise to between 1,500/oz to 1,900 this year and at least $2200 next year. Since, the US govt and the FED can print and waste money to hold gold prices down, it will mean that gold and silver prices will skyrocket all of a sudden when the govt can no longer hold them down.