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“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

What would be required? Two components.

The first are the banks that are the key in the credit expansion that would be necessary, combined with some parties wanting to borrow. Let’s look at the historical list.

*Commercial Real Estate and Property developers
*Residential Real Estate [the previous bubble]
*LBO’s
*Hedge Funds
*Consumer credit
*Foreign debt
*Business credit
*The Black Swan borrower [currently unknown]

Confidence is the second component required. We had the globilisation trend that drove, or was part of the dual stock market & real estate bubbles that developed since 1982, the end of the previous bear market. This provided the confidence within the creation of credit, that it was supporting wealth creating enterprise, and thus, the interest due would be provided for, and the principal safe.

Commodities will most likely benefit in any credit expansion, simply due to the fact that they [commodities] are the underlying ingredients to all products. Products [in greater or lesser] are still being demanded, thus there is a base that will hold. Most likely, that base has already been seen.

Second, commodities, as primary exchange goods, effect some of the value that is associated with money. When money devalues, commodities appreciate. Thus, even in the absence of a growth in demand, commodities adjust their nominal price, to reflect their real values in terms of exchangability.

Third, commodities need to be produced in of themselves. This production is not instantaneous, it requires lead times. Supply therefore can be constrained in the rapidly fluctuating demand for commodities. When demand falls quickly, there comes a relative oversupply, driving forces that then curtail the supply. This supply cannot simply be switched back on. Thus, if demand picks up from a black swan demander, supply will be severly constrained.

That any black swan demander for credit would be the first in line for said credit, they would profit hugely from the initial advantage of having expanded buying power in a world of reduced buying power [relative] and would stand to make outsize profits.

The smart money would catch this new sector quickly, and as others joined in creating potentially another bubble, would, potentially realize outsize profits. The confidence engendered by this nascent sector, would potentially stimulate the banks into credit creation into other sectors that benefitted from this unseen profitable sector.

Thus confidence and credit gain traction, lifting once again GDP. The problem of course is that the banks are nowhere near in reality sound currently, and cannot sustain the growth in credit that the government would like to see, and would therefore encourage. The likelihood therefore remains of a further deflationary contraction in credit should another bubble eventuate.

That another bubble is being sought by the government seems unequivocal. The difference however seems to be the belief that they can control the next one. That they will let it inflate only enough to lift GDP and most importantly employment, and then through judicious management, they will limit it’s size, presumably to allow the bubble to mature into a self-sustainable sector/industry.

Ignoring for the moment any visionaries who have already spotted the next big thing, or will, if and when it eventuates, the resultant lifting of economic activity will create demand for commodities. Thus, commodities, based on their three characteristics remain the best place to allocate investment funds currently.

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