Silver Investing Outlook Bulish base Expectation

Silver investing outlook is bullish for the first decade of the 21stcentury. That bullish outlook is based primarily on the expectation of high inflation in the U.S. The high inflation is the result of the sharp increase in the number of U.S. dollars in circulation.

The U.S. money supply increased over 300% in three years, late 2008 to late 2010. This sharp increase was required to fund deficit spending by the federal government, and to keep the U.S. debt market from collapsing (QE2) so that the deficit spending can continue. If the federal government reigns in deficit spending and decreases the money supply, inflation can be tamed and catastrophe averted. With inflation in control, the outlook for silver investing turns bearish.

Although the government's Core CPI number under 2.5% in the summer of 2011, the real inflation rate in the U.S. in mid-2011 is around 10%. By real inflation, I am referring to the manner in which inflation was measured before 1970 when the government began manipulating the measurements.

The effect of the original sharp increase in the money supply in late 2008 is just now beginning to be felt. In order to reverse the trend of rising inflation, the money supply must be reduced. To reduce the money supply, the government must take in more dollars than it spends, so it can reduce the debt. In other words, it must operate on a surplus for a number of years, and it must use that surplus to reduce the money supply. How difficult will that be?

Consider the first attempt at the 2011 budget. Congress fretted for weeks over a $30 billion cut in a proposed budget deficit of $1.5 trillion. That's $30 billion dollars cut out of $1,500 billion of overspending. That is just 2% of the proposed deficit spending. Its only 0.833% of the total budget.

To put this in perspective, suppose a family makes $2,100 per month but is spending $3,600 per month. The family is borrowing $1,500 a month on credit cards to support its spending habits. The head of the family says, "We have reached our borrowing limit, we have to work together to significantly reduce our spending." After much negotiating and anguish, the family finds 0.833%, or $30 per month in spending cuts.

Instead of overspending by $1500 per month, the family will only overspend by $1,470 per month. Instead of adding to their debt at the rate of $50 a day, they've cut back to $49 a day in deficit spending. Big deal, right? That's all Congress accomplished in their first attempt. A full 98% of the proposed deficit spending remained in the budget.

If future budget negotiations yield spending cuts equal to 2/3s of the $1.5 trillion annual deficit. The U.S. still adds ? trillion a year to its $14.3 trillion debt. This means that the U.S. must increase the money supply by at least a ? trillion a year. Nobody in their wildest dreams believes congress will reduce deficit spending by 1/3.

To reverse inflation, Congress must reduce deficit spending by over 100%--AND reduce the money supply with the excess. The political will simply does not exist, and that is just one more Silver lining to the silver investment climate.