Why Commodities are the New Safe Haven
Wednesday, September 7, 2011
Executive Summary
- Prices have already risen dramatically with the money supply.
- An increase in money velocity will ratchet up the trajectory in prices dramatically.
- Are we likely to see more or less moneyprinting from the Fed?
- Why commodities, beyond the precious metals, are becoming the next safe haven.
Part I – Commodities Seem Set to Rocket Higher
If you have not yet read Part I, available free to all readers, please click here to read it first.
Part II – Why Commodities are the New Safe Haven
Condition #3: Preference To Hold Money Persists
What does one do with Money of Zero Maturity (MZM)? Well, you can save it in a money market fund, keep it at your bank, or you can spend it. The rate at which it is being spent, relative to the economy, is measured in terms of its velocity.
The faster people are spending the same money chasing a relatively fixed amount of goods and services, the higher the rate of inflation goes. The mental image you should have here is someone in Germany in the 1920’s being paid with a wheelbarrow full of cash that they push as quickly as they can to the nearest store (literal veloicty of money, as it were).
Right now, the velocity of MZM is near its historic lows (only recently set in 2009), keeping inflationary pressures relatively low — for the time being.
When either the economy heats back up or people/corporations lose their faith in money and increase their spending to avoid inflation, there’s nothing but a whole lot of upside to the velocity of MZM, according to the above chart. Velocity could more than double from here and still not reach its former peak.
If it did, it’s pretty safe to conclude that inflation would come roaring out of the gate and we’d be experiencing double-digit inflation, the same as in the 1970’s. Or perhaps even more. But even with low velocity, the extraordinary amounts of MZM recently created have had a noticeable impact on inflation.
For example, we’re experiencing very strong inflation in the raw and intermediate components of the producer price index:
(Source)
Yes, those are very high, double-digit readings.
by sjdavis 
