THE STAGE IS BEING SET FOR A GLOBAL INFLATIONARY EVENT

By Dr. Richard S. Appel              March 17, 2005 www.financialinsights.org

The U.S. Federal Reserve has aggressively inflated our money supply during the past dozen years. It has performed this act in its effort to stimulate our economy and forestall a potentially damaging period of economic weakness. Prior to this time, and in ever increasing amounts as the years passed, dollar credits have hemorrhaged from our nation. This was largely the result of our unending and expanding balance of payments deficits that were primarily caused by three events: 1. the increased liquidity in our banking system that was generated by the issuance of inflationary purchasing media, 2. the wide-spread availability of enticing, cheap goods offered by our trading partners, and 3.the dollar has depreciated against other currencies which raised the dollar cost of their offered items.

The expatriated U.S. dollars resulting from this massive dollar outflow entered and swelled the central bank coffers of our trading partners. This circumstance has systematically forced foreign countries to increase their own monetary aggregates and threatens to spread inflation around the globe.

The transfer of dollars from the U.S. to other countries resulted in the temporary exportation of inflation from the U.S. to those lands receiving our dollars. If this did not occur and the dollars remained within our monetary system, the U.S. would have already seriously suffered from inflation. Remember, inflation is essentially caused by the over-issuance of purchasing media, in this case dollars. In effect, as the amount of circulating money increases while the quantity of available goods and services remains essentially constant, too many dollars are chasing the same goods, and nominal prices are bid up by supply and demand.

Through a series of banking system transactions, much of the foreign money acquired by a business or individual ultimately winds up in the vaults of their country's central bank. When a central bank receives another nation's money they generate a bookkeeping credit to the domestic depositor's account in the local currency. Further, the central bank normally uses the acquired dollars to purchase U.S. Treasury Paper. This allows them to at least earn interest on the foreign deposits. The newly created local monetary units then enter their banking system and increase the nation's money supply. The end result which may take time to work through the system, is the reduced purchasing power of those monetary units already in existence, and higher domestic prices.

A good example of the effect of the above process was recently highlighted in news emanating from China. As you know China is one of our nation's most important trading partners, and is likely destined to one day lead the list. Their generally low prices have attracted an enormous influx of U.S. dollars as American after American has sought the great bargains produced in their country. While the flood of dollars used to purchase their goods has helped their nation improve both their economy and the state of their citizenry, it has also had a deleterious effect. Quoting a recent New York Times article, "China's inflation rate rose to 2.9 percent in the first two months of the year...The cost of food, which accounts for about a third of the index, rose 8.8 percent in February after climbing 4 percent in January and 2.4 percent in December." Inflation is beginning to emerge there.

The January, $15.3 billion U.S. trade deficit with China was an individual country record. Most of these $15.3 billion dollars will find their way to their central bank which in turn will be compelled to issue new yuan credits to their depositors. Thus, their money supply will be further expanded. The final result will be the stimulation of future across the board price increases for their nation.

I have used China as an example. However, all of the trading partners with which we are in a balance of payments deficit are suffering a similar fate. Japan, South Korea, Malaysia, European Union countries and a host of other nations are also being similarly forced to increase their monetary aggregates, and are thereby threatened with an upset to their domestic pricing structures. This, in order for them to continue doing business with the U.S.

As the United States continues to inflate its money supply, many other countries have taken our lead. Japan, which has yet to extricate itself from its fifteen-year economic malaise, numerous European Community countries, as well as a number of additional states are pursuing a similar tact. Their goal is not only an attempt to similarly stimulate their economies via the printing press, but to also improve their competitive advantage in the world's markets by weakening their respective currencies.

The foreign accumulation of 2+ trillion U.S. dollars combined with the fostered money supply increases by many of our trading partners has damaging consequences. Not only have they been forced to increase their monetary aggregates with each dollar that they acquire, but many are also aggressively expanding their measures of money in order to cheapen their currencies, and thus halt the dollar's decline against their domestic monetary units.

We are beginning to see the first signs of rising global inflation unfold as depicted by China's current experience. Several commodities are already trading near or at all time highs. I believe that this trend is destined to continue and will produce far higher prices for all commodities, as they respond to the enormous issuance of fiat currencies by all of the world's major countries. At some point increasing prices will feed upon themselves. One nation after another will experience higher prices as both the cost of needed commodities and finished products, work their way through their economies.

The hardest hit nation will be the U.S. This will occur because foreign held dollar credits will finally return to our shores. These will swell our already enormous pool of domestic dollars. Foreigners are just beginning to sense that all is not right with the dollar. The first countries are beginning to limit their U.S. dollar holdings. Russia, Malaysia, China, Japan and South Korea have already announced their desire to achieve this goal. Later, a flight from the dollar will occur.

Foreign entities will sell their U.S. treasury securities and will exchange the received dollars for their own currencies. Our bond market will plummet as will the dollar, and inflation will become rampant. Gold and to a lesser extent silver will then act as life boats on a stormy sea. They will save those who recognize their importance, and gold will again return to the limelight as the only true and desirable form of money worth holding.

This series of events will not occur overnight. We likely have a few years or more to prepare. Our government will fight the demise of the dollar and the outbreak of inflation with all of the available methods at their disposal. They will call in all of the favors owed them by other nations, and will twist as many arms as is necessary to coerce the other countries to retain their dollar holdings. In the end they will lose. I for one hope that they will be successful for as many months or years as possible. It will not be a pleasant experience when our dollars finally come home to roost, but the stage is being set for an inflationary storm when they return.

I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential.

Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.

CAVEAT

I expect to have positions in many of the stocks that I discuss in these letters, and I will always disclose them to you. In essence, I will be putting my money where my mouth is! However, if this troubles you please avoid those that I own! I will attempt wherever possible, to offer stocks that I believe will allow my subscribers to participate without unduly affecting the stock price. It is my desire for my subscribers to purchase their stock as cheaply as possible. I would also suggest to beginning purchasers of these stocks, the following: always place limit orders when making purchases. If you don't, you run the risk of paying too much because you may inadvertently and unnecessarily raise the price. It may take a little patience, but in the long run you will save yourself a significant sum of money. In order to have a chance for success in this market, you must spread your risk among several companies. To that end, you should divide your available risk money into equal increments. These are all speculations! Never invest any money in these stocks that you could not afford to lose all of.

Please call the companies regularly. They are controlling your investments.



FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and is made available for informational purposes only. Dr. Appel pledges to disclose if he directly or indirectly has a position in any of the securities mentioned. He will make every effort to obtain information from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Dr. Appel encourages your letters and emails, but cannot respond personally. Be assured that all letters will be read and considered for response in future letters. It is in your best interest to contact any company in which you consider investing, regarding their financial statements and corporate information. Further, you should thoroughly research and consult with a professional investment advisor before making any equity investments. Use of any information contained herein is at the risk of the reader without responsibility on our part. Past performance does not guarantee future results. Dr. Appel does not purport to offer personalized investment advice and is not a registered investment advisor. The information herein may contain forward-looking information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties that may affect the company's actual results of operations. © 2005 by Dr. Richard S. Appel. All rights are reserved. Parts of the above may be reproduced in context, for inclusion in other publications if the publisher's name and address are also included for credit.