As average U.S. gas prices (NYSEArca:UNG - News) head toward $4.00 a gallon, billionaire hedge fund operator John Paulson recently told a standing room only crowd at New Yorks University Club that double-digit inflation is about to rear its ugly head. Paulson assumes that the Fed will continue to engage in its inflation-creating behavior.
John Paulson is famous for making a killing on shorting subprime bonds before their collapse. Most of Wall Street was bullish at the time and Fed Chair Ben Bernanke famously declared that he didn't see subprime mortgages causing any problem. The market completely fell apart weeks after Bernanke spoke.
The Paulson Bernanke dynamic is now back in play with predictions of inflation (NYSEArca:TIP - News). Bernanke doesn't see it now and doesn't anticipate it. In an interview with ABC News done around the same time that Paulson gave his talk, Bernanke stated 'We haven't quite yet got to the point where we can be completely confident that we're on a track to full recovery,' and he continued that the central bank would take no options off the table to further stimulate the economy. The interviewer didn't ask Bernanke the obvious question of whether or not the need for further Fed stimulus after four years indicates that the previous efforts have been a failure.
Paulson's presumption that the Fed will continue to feed inflation forces is completely supported by Bernanke's actions and statements. The Fed Chair further blamed rising oil and U.S. gasoline prices on geopolitical tensions. Prior to the mid-2000s though, geopolitical tensions only raised the price of oil (NYSEArca:USO - News) to $40 a barrel. This time it's well over $100 a barrel. Money printing accounts for the price difference, but you'll never hear that from the Fed's money-printer-in-chief. And this is to expected. No government in inflation's 2000 year history has ever taken full responsibility for causing it.
Governments also have a history of finagling with the inflation numbers as well. This seems to be a universal practice once some form of indexation takes place (adjusting prices for inflation). The U.S. introduced indexation for social security and tax brackets in the 1970s. Starting it the 1980s, a number of statistical 'improvements' were introduced in how the inflation rate was calculated. Interestingly, all of these 'improvements' lowered the reported rate.
When it comes to inflation predictions, investors have a choice between John Paulson, who has made billions from his knowledge of how markets works, and Ben Bernanke, who has repeatedly shown he is oblivious to their dangers (remember how he let Lehman Brothers go under and this almost led to the complete collapse of the global financial system?). If you are betting on Bernanke, you are betting against history repeating itself. Money-printing has always led to massive inflation in the past. Apparently, John Paulson knows this.
Daryl Montgomery is Author: 'Inflation Investing - A Guide for the 2010s' and Organizer, New York Investing meetup.
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