-- Posted 20 January, 2011 | | Discuss This Article - Comments:

Silver investors who have been stockpiling physical silver on massive global changes in monetary policy have been a bit ahead of themselves.  While the fear of inflation exists in very broad detail, the realizations of inflation have yet to show themselves.

Most understand by now that it is the segmentation of money that keeps the massive expansion in inflation rates from happening overnight.  While the amount of money in bank reserves is growing exponentially with each new step of the quantitative easing program, very little of this money is circulating where you or I could see it.

Two Types of Inflation

Some are claiming that inflation is already pricing itself into goods of all types.  This, however, is not true.  While prices are rising at the pump and in the grocery store, this increase in price is due solely to the decrease in borrowing costs.  Investors can essentially borrow unlimited amounts of money, store this cash in hard assets, and wait for inevitable appreciation, or at least stabilization.  Since the rate of change in price level is greater than the cost to borrow, this is an extremely profitable trade.

However, the truth is that none of this financial sector lending does anything to the money supply or the current capital structure.  Instead, brokers are lending their money with effectively zero-risk (margin calls prohibit declines below zero) and are more than happy to provide a service to their clients and generate positive, risk-free income.  Their clients are even happier to leverage up, borrowing at near-zero to profit on a positive, but still low, inflation rate, and creating excess demand for food, energy, etc.

These higher prices—the prices we can see—happen as a result of lower prices for borrowing money, not lower prices for money itself.  However, that is all changing.

A New Dynamic

Lower prices for money (currency values) are right around the corner.  As mentioned in an earlier write-up, the fall shopping seasons—back-to-school and holiday shopping—would be the eventual catalyst for a rising money supply and falling currency values.  According to recent earnings calls by the largest banks, this is proving true: average Joes are willing to spend, and to spend, they are willing to borrow.

This may not be evident to the headline surfer.  In fact, most articles focus only on falling revolving debt balances (credit cards.)  Deep in the data, however, we see that it is only revolving debt that is falling, while personal and automotive loans have seen growth for two consecutive months.

The major catalysts of the monetary metals are coming to fruition.  Higher borrowing means a growing money supply in M1 and M2, the two areas where it really counts.  Greater spending also means improved demand-side economics for industrial silver demand, which of course only helps those of us with positions in the investment segment of the market.

This year, 2011, should prove to be a stellar year on top of 2010's excellent boom.  While it is too soon to forecast mid-term changes in the capital structure, greater levels of borrowing do help the bullish case.  By summer, we should know how strong this new urge to borrow really is.

Dr. Jeffrey Lewis

www.silver-coin-investor.com