I have owned gold and gold-related investments aggressively since 2001 for one main reason: the mismanagement at the U.S. Federal Reserve, with its unplanned and unarticulated determination to debase our currency and promote inflation.

Though we have had long periods of apparent stability, since 1971 stability has really been the case only when Paul Volcker was Fed chairman and immediately after his tenure.

The money-printing at the root of our problems essentially intensified exponentially under Alan Greenspan, and now Ben Bernanke, fueled particularly over the past four or five years by worldwide fears of deflation. The irony, of course, is that the fear of deflation guarantees inflation as central banks are willing to use the printing press with reckless abandon.

I think it is highly probable that the fears of a deflationary accident have passed, so folks might be more receptive to signs of inflation, which would certainly change the landscape in many markets.

No substitute for common sense

In Canada, where the Consumer Price Index is perhaps slightly less sanitized than in the U.S., inflation was reported on March 23 to have accelerated again in February due to higher costs for gasoline, electricity and meat. I thought it was interesting that a Bloomberg story blamed those items, because here in inflation-denying America, we discuss inflation only ex food and energy. In fact, one could argue that the Fed and those who worship it like to look at inflation only after stripping it ("ex" stands for excluding) of anything that has gone higher in price.

Image: Bill Fleckenstein

Bill Fleckenstein

Of course, many companies have been affected by higher inflation already, not the least of which is ConAgra (CAG). I liked The New York Times' rendition of the company's recently lowered outlook: "Like all food companies, ConAgra, the maker of Banquet frozen meals, Chef Boyardee pasta, and Hebrew National hot dogs, has been hurt by soaring costs for grain, meat, and fuel."

The Fed: Giving credit where credit is due

As everyone knows, the cost of almost everything you need has been rising for some time, while certain assets, such as real estate, have declined. (The prices of electronic consumer products have also declined, because that is what technology does: get cheaper). In any case, it should surprise no one when I say that the problem facing us prospectively will be inflation, not deflation.

The Fed is going to be very slow in accepting any responsibility for that, as it has a long history of denying its role in past disasters. Just witness Greenspan's denial of his sins, not to mention Bernanke's remarks during his so-called University Lecture on March 22: ". . . the evidence I have seen suggests that monetary policy did not play an important role in raising house prices during the upswing."

Someone who can reach that conclusion is going to be rather disinclined to take any blame for a rise in consumer prices. Of course, given the way the U.S. CPI is constructed, it is very difficult to get it to register higher prices in the first place. Thus, inflation will be raging wildly long before any attempt is made to stop it.

Naturally, that will affect the bond market, which will eventually take the printing press away from the Fed, and hopefully bring a happy ending to this horror story.

Required reading

As for protecting yourself against the evils of inflation and currency debasement, this week I received a compelling email from a longtime friend and extremely successful professional investor. As a very smart guy with more than 40 years of experience in the investment world, his frank (even blunt) opinions are uncommonly valuable.