The most frequently asked question I seem to get, no matter the time period, is “Larry, don’t you see hyperinflation for the U.S. in the years ahead?”

So let me clarify my position, here and now. There was a time when I expected the U.S. economy would eventually experience hyperinflation.

But 21 months ago, when the price of gold failed to react to the Fed’s QE III announcement of virtually unlimited money-printing and the yellow metal entered an interim bear market, I knew something had radically changed.

So I further researched the known periods of hyperinflation in the world. And I found something that completely changed my view: There has never been a major core economy that has died at the hands of hyperinflation.

There was the Weimar Republic, of course, but it was not a core economy for the world. There are the hyperinflations of Zimbabwe, Brazil, Argentina and countless other small economies that were never at the core of the global economy.

And upon further study, I found that even the Roman Empire, certainly a core economy during its reign, didn’t even die of hyperinflation.

It died largely because of abuse of power by politicians, which drove citizens away from the Empire; by rapidly rising taxation, which had the same effect; and by a corrupt Treasury and justice system that tracked down and confiscated citizens’ wealth, largely to fund increased military campaigns, which were hoped to revive the Roman economy. Sound familiar?

Was there high inflation in Rome before it fell? Yes, but nothing of the sort of hyperinflation like we subsequently saw in Weimar Germany or any of the countries I mention above.

So, then, what does the U.S. economy face? Further disinflation, eventual reflation or something else?

My view, and I am not hedging my answer or talking out of both sides of my mouth: We face a combination of further disinflation in the short-term, followed by a rather large jump in inflation a few months from now and heading into the future for at least three years.

How high will inflation eventually go? Hard to say, but I wouldn’t be surprised if, say, three years from now, we see 20% or even 25% inflation.

But I highly doubt we will ever see inflation in the thousands or even millions of percent. It’s just not possible in a core economy. For many different reasons.

Whether we have deflation or inflation is also the wrong way to think about the U.S. economy these days. The reason? Ever since we abandoned the gold standard, inflation and deflation have become two sides of the same coin.

In other words, they are both present in the economy at the same time. You can have certain goods and services and even asset classes deflating, while others are inflating. It’s as simple as that.

For instance, the price of LED TVs has crashed in the past year or so, as have the prices of laptop computers and many other goods. Not to mention real estate prices since their peak in 2007.

Meanwhile, other items have experienced inflation. Food prices, legal and health-care services, and more.

So it’s not a matter of one or the other, it’s a matter of what sector is inflating and why, versus which sectors are deflating and why.

Nevertheless, there’s another important underlying force that you need to understand, another one that resulted from the abolishment of the gold standard.

A certain level of general, system-wide inflation is always baked into the cake. It’s due, again, to the fact that we no longer have a gold standard, but it’s also due to many other forces, such as population growth, limited availability of natural resources, the constant desire for people to improve their lives and more.

And it’s also why investing in gold ? just after it experiences a short-term disinflationary trend ? is an ideal strategy to jump on.This is important to understand, because it’s the chief reason prices will be higher a year from now, five years from now and even 10 years from now … no matter what the U.S. or global economy does.

For instance, $5,000 in cash squirreled away in a bank in 1913, when the Federal Reserve was created, is now worth only 4.37 cents. That’s right: 4.37 cents.

Put another way, it would take $114,396.56 of today’s money to buy what $5,000 would have bought in 1913.

Want more recent examples? Consider the following …

It now takes $6,210.11 to buy what $5,000 bought just 10 years ago … $29,161.44 to buy what $5,000 bought in 1970 … $47,047.46 to buy what $5,000 bought in 1950.

Even a McDonald’s Big Mac, which cost a mere 57 cents in 1959, now costs about $4.37, an increase of 665%, for an average annual increase of just over 12% per year.

Now let’s look at gold. Even though we had a general level of price inflation from 1980 on, as we always do, the price of gold plunged from a high of $850 in 1980 to a low of $255 in 2000.

In other words, it deflated as the stock market inflated wildly during that time.

And, now, gold has some catching up to do. Just to regain its 1980 high, it needs to shoot to $2,331.75. And it most assuredly will.

Keep in mind the above figures are based on the government’s conservative, politically manipulated Consumer Price Index. As we all know, it vastly understates inflation.

The bottom line: There are several.

First, yes, we have, and pretty much always will have, a base level of inflation in our economy. It’s the natural state of things.

Second, inflation will at some point in the future move even higher. But don’t expect hyperinflation.

Third, and perhaps most importantly, gold does not need any further inflation to move higher. It’s undervalued right now. And it will probably fall even a bit further.

That’s how markets work. They go from overbought and overvalued, to underbought and undervalued.

Thing is, the more undervalued an asset becomes, the greater the profit potential. That’s precisely why I am more interested in gold now than I’ve been since my initial “buy” signal way back in 2000. The profit potential is simply enormous.

Best wishes,

Larry

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.

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Good morning. Here's what you need to know.

- Markets in Asia were higher in overnight trading. The Japanese Nikkei 225 rose 2.7% and the Hong Kong Hang Seng advanced 1.2%. European markets are higher across the board, led by France, up 1.7%. In the United States, futures point to a positive open.

- The big story for markets this week will be the Federal Reserve's FOMC monetary policy meeting, which concludes Wednesday and is followed by an afternoon press conference with Chairman Ben Bernanke. Many expect the FOMC to strike a dovish tone after bonds have sold off aggressively due to fears over tapering back of monetary stimulus.

.......read 2-10 HERE

Up, down. Down, up.

Yesterday, the Dow reversed recent declines. It rose 180 points. Gold, too, seems undecided as to what direction to take. It fell $14 an ounce.

We'll carry on... trying to figure out what is really going on.

The typical post-war boomer has lived with just one complete interest rate cycle. Rates hit a low after the war... as the US faced the biggest fiscal cliff in its history.

The biggest stimulus program of all time – World War II – had come to an end. Millions of soldiers and defense industry employees were out on the streets looking for a job. Most economists and investors thought they'd never find one. They thought the war had pulled the economy out of the Great Depression. Now that the war was over, they expected it would fall back into its depressed state.

And they believed that interest rates – which had been falling for nearly a quarter of a century – were a forward indicator. Instead, they turned out to be nothing of the sort. The low interest rates of 1946-50 reflected the past, not the future.

The GIs went to work. They took out their wartime savings and started businesses... and families. Soon, the economy was booming.

And interest rates rose...

My Life in Bonds

In fact, interest rates in the US rose for the next quarter century... until the early 1980s.

And once again, investors who looked at interest rates for a hint of what lay ahead were misled. The high rates – the Fed funds rate was at 21% at one point – reflected the rising inflation rates of the 1960s and 1970s... not the lower inflation that lay ahead.

And here we are. Another quarter century has gone by – and more! Once again, interest rates are at record lows. In fact, they are now close to where they were when we were born.

That's a complete roundtrip!

And once again, they tell us more about the past than the future. They are rising. From theNew York Times:

It has been a reliable fact of life for investors, corporations and ordinary borrowers: interest rates, for the most part, keep heading lower.

But all of that may be about to change. For prospective homeowners, the cost of mortgages has been going up in recent weeks. Governments are also facing the prospect of higher borrowing costs down the road, and they are projecting increases to their debt burdens. Savers with money in bank accounts, on the other hand, have the prospect of finally earning more than a pittance on their deposits. [...] 

Over the last few months [...] investors and banks have been demanding higher payments for their loans, pushing up interest rates and bond yields.

"I think you all should be ready, because rates are going to go up,” Jamie Dimon, the chief executive of JPMorgan Chase, told a financial industry conference at the Waldorf-Astoria Hotel in Manhattan on Tuesday.

As investors brace themselves for a new era of higher interest rates, global markets in bonds, currencies and stocks have experienced spasms of turmoil. On Tuesday, the catalyst for the market's volatility was disappointment over the Bank of Japan's decision not to take new steps to address rising bond yields. That heightened worries that other central banks – the Federal Reserve in particular – will soon pull back on pumping money into the financial system.

We have been witnessing a fight between Mr. Bernanke and Mr. Market. We know who will win it. Mr. Market always wins in the long run. But we have no idea when... or how... he will win.

The latest news from the bond market suggests he is hitting Mr. Bernanke right where it hurts. Bond yields will go up. Mr. Bernanke will go down.

But watch out. Mr. Market is a wily and cunning fighter. He never likes to win his battles in a straightforward way. Instead, he dodges. He feints.

He fools us all...

Regards,

About Bill Bonner

Bill Bonner founded Agora Inc. in 1978. It has grown into one of the largest independent newsletter publishing companies in the world. In 1999, along with Addison Wiggin, Bill foundedThe Daily Reckoning. Today, this daily e-letter reaches over 500,000 readers around the globe.

Bill has also co-written two New York Times bestselling books, Financial Reckoning Day and Empire of Debt. He has written or co-written other widely read books as well, and has penned a daily column at The Daily Reckoning for over 12 years. Recently, Bill decided to “retire” from his role at The Daily Reckoning and begin writing his Diary of a Rogue Economist.

Bill Bonner’s Diary of a Rogue Economist is your gateway to Bill’s decades of accrued knowledge about history, politics, society, finance and economics. Sometimes funny, sometimes frightening – but always entertaining and packed with useful insight, Diary of a Rogue Economist can help you make sense of the complex world we live in today.