Morgan Stanley Now Warns of Hyperinflation

I have only just begun my deflation-inflation comparison and read in Alphaville this morning that:

Morgan Stanley’s Jocahcim Fels and Spyros Andreopoulos... [are saying] While such an outcome is clearly not our main case, the risk of hyperinflation cannot be dismissed very easily any longer, in our view.

I should say that I've increased the percentage of my portfolio in gold and silver to over 60% and thinking seriously about going for more, in spite of the recent spike which may be sustained and not return to old levels ever if we are going to see hyperinflation. Just the MS statement is probably responsible for a good part of today's rise.

Inflation or deflation?

I am going to begin commenting on the post titled Inflation v. Deflation and Part II on the Cassandra Does Tokyo blog via Infectious Greed.

The issues on both sides are relatively easy to understand but what is crucial is the timing so I will try to lay out the arguments as clearly as possible but I will keep those that affect the timing as a separate list. I happen to think that the amount of US debt that China acquires going forward is an important bellwether both for US inflation and for stability in Asia which is why I used that link for the title of this post.

I find this to be the most important of all topics and will be working on this for the next week or so. I also just received my copy of The Next 100 Years: A Forecast for the 21st Century by George Friedman and will be commenting on the provocative topics covered in this book

Inflation during the recession?

If TIPS (Treasury Inflation Protected Securities) are a sufficiently large proportion of M3 they are a dangerous feedback loop as are COLA and tinkering with the CPI is the only remedy short of paying down the debt with real money. The US has already spent itself into a quicksand bog and additional spending, especially if too little too late, will only make the situation worse.

Gold would be not such a great hedge against inflation if it were not for its "safe haven" attribute. Inflation worries plus crisis equal a gold spike. I am not suggesting armageddon, I don't expect to see in my lifetime. But a global crisis or the perception of one seems a possibility to me, at least enough to increase the amount of physical gold in my portfolio.

I suspect there are others like myself which would in itself increase the demand for gold over its market in normal times. There will be less demand for industrial and decorative gold but with the huge creation of stimulus and bailout in the news every day the safe haven market will grow.

Governments are trying to offset the collapse of velocity by injecting more liquidity but their increasing the money supply will be seen for what it is and will not instill the confidence needed for a true recovery. They will not dare decrease the money supply if the recovery appears fragile and so we may well see inflation as all these facors work themselves through the economy, and public consciousness is a huge component of "the economy."

Whipsaw, Recovery and Panic

Many are reporting that the current bailout total stands near 8.5 trillion, that is three quarters of GDP or more than 100% of M2. What is keeping runaway inflation at bay besides fear and a reluctance to lend on the part of those bailed out? Why are so many buying treasury bonds while Warren Buffet and others are buying equities? Is the value of the dollar balanced on a knife's edge here? It seems so...