Ben Bernanke has long been known by a friendly nickname, “Helicopter Ben”, due to a speech he gave in November 2002 before he became Fed Chairman on the Federal Reserve’s response to deflation.

He said, basically, that the U.S. government could print as much money as it wants:

“But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

He became known as “Helicopter Ben” because of the image of the government dropping money from the sky into the economy.

What is more interesting about his speech on that November day was his discussion of what would happen if the Fed had to drop its interest rate to zero to combat deflation:

“Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation.

The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.

The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.”

The rest of the speech is worth reading as well.

Deflation: Making sure “It” Doesn’t Happen Here, November 21, 2002, Before the National Economists Club, Washington, D.C.

Helicopter Ben is doing what he said the Fed could do in 2002. And without actually “intervening” to affect the exchange value of the dollar- the Fed’s actions are doing just that as the dollar has weakened considerably since the Fed’s last interest rate cut.

With all the free money again flooding the system, it will inevitably lead to distortions in the economy.

Many analysts believe the housing bubble will bloom again- as mortgage rates decline to their lowest in the last 40 years.

But that ship has sailed. Never before in history has a bubble that has burst (or is bursting) been halted and re-inflated. This time will be no different.

So where will the distortion show up?

We’re already slowly seeing the results of the events of the last year in the gold market. While gold is off its 2008 highs by about 17%, it is one of the few asset classes that is actually higher for the year. Through Sunday, Dec 21, it was up 5.13% for the year.

Maybe it won’t hold its recent gains going into the end of the year. Or maybe it will.

Gold is up 14% in the last 30 days. Not surprisingly- it rallied sharply after the Fed cut rates to zero.

Everyone is looking for the next bubble but it is already staring us in the face. The precious metals will rally hard as the free money moves through the system and pushes inflation higher in the second half of 2009.

Yes- I said “inflation”- not deflation.

Nearly 30 years after its last boom, gold is poised to again be a mania.

The best ways for an investor to catch the upside are:

1. Owning the metal itself either through gold coins or gold bars (but then where do you store it?)

2. Buy the iShares Gold ETF (GLD)- which actually holds gold in London and trades closely with the gold price.

3. For a more speculative play- buy gold stocks. You can buy a basket of them in the Gold Miner ETF (GDX). This ETF also holds a few silver stocks (which should move higher along with gold.)

GDX is a much more volatile play- as the gold stocks don’t always behave the same as the underlying metal. But in a gold bubble, gold stocks have the potential for the most upside.

As always, be diverse. In this kind of market environment, it pays to be invested in several asset classes (stocks, bonds, precious metals etc.).

You might not have heard this news.

About 500 miners at potash mines owned by Potash of Saskatchewan (the largest potash manufacturer in the world) went on strike a few weeks ago.

So? What’s the big deal?

Potash isn’t just used in fertilizers. The potash compounds are used for industrial uses in products like soaps and detergents.

The 500 miners have shutdown 3 facilities in Saskatoon. Just this week, Potash (POT) announced it was re-opening one of the mines by having management operate two shifts. It was unclear how much production the 2-shifts would even produce. It seemed more of a symbolism than anything.

The strike has greater implications for potash prices. Just three weeks into the strike, and already potash prices for industrial use are spiking.

Potash Becomes Scarce

Potash of Saskatchewan is putting its customers on allocation- which means that if you normally order 10 tanker trucks a week, you might get 3 under the allocation.

Try telling that to your customers who depend on the material.

It has set off a race to obtain the compound. Scarcity means prices will jump. And they are. IN some cases, prices are doubling.

Why should we care? It’s just 500 striking miners.

But there are a lot of industrial customers who are now going to be paying a lot more for potash.

That means you and I will be paying a lot more for that detergent and soap (among other things.)

Some analysts believe the strike could last for months.

All because of 500 miners in Canada. Stay tuned.

Last Friday was nirvana for those following financial news.

On the one hand, you had Warren Buffett, the greatest living investor in the world (maybe the greatest investor ever), on CNBC for three hours on Friday morning. He espoused on a variety of topics such as how many cherry cokes he would drink during the show to the slowing of the economy.

But his most interesting comments were on inflation.

Buffett Warns about Inflation

Berkshire Hathaway, as you know, controls quite a few companies. I’m ashamed to admit I don’t know how many (dozens?). They own everything from Pampered Chef to Geico to Dairy Queen. Berkshire’s companies are in a wide range of industries.

While Warren doesn’t himself run all of those companies, as Berkshire’s CEO, he gets monthly reports from his managers telling him what is going on with each business.

He said the July reports were interesting. He gave a specific example of one of their carpet businesses which he said the carpet was basically made out of oil (bet you didn’t know that carpeting is a petroleum-based product. But that’s a subject for another post.)

He said that company was getting price increases nearly every day from its suppliers and that of course it was pushing through price increases on its own products as its margins were shrinking. But even with the increases- the company couldn’t keep up with rising raw material costs.

Asked by CNBC’s Becky Quick if these price increases will be seen throughout the economy eventually- he answered “yes” and thought that the CPI would be reflecting them soon. He basically didn’t believe that the CPI was measuring the inflation in the economy.

His comments on inflation are exactly those that I’ve been hearing from many others in the business community. As I’ve said before- the inflation genie is out of bottle.

Bernanke said inflation will “moderate”

Ben Bernanke, the Fed Chairman, gave a speech in Jackson Hole, also on Friday, discussing the state of the economy. From the Financial Times:

Speaking at the start of the Federal Reserve’s annual retreat in Jackson Hole, Wyoming, Mr Bernanke said the shift in currency and oil prices, as well as weak growth, “should lead inflation to moderate this year and next”.

Such a scenario would mean that commodity prices would likely have to fall even further than they have in the last month.

There’s no doubt that inflationary pressures ease as growth slows. But companies continue to push through the price increases and it’s unlikely that they will suddenly stop and roll them back.

Are any of the airlines saying they’re getting rid of their baggage fees now that crude has fallen below $120 a barrel?

I haven’t heard of any.

Instead- all I’m hearing about is more price increases on goods and services.

Hershey’s just announced it was raising prices 11% after already raising prices last January. Mars also announced it too would raise prices- but didn’t say by how much. Mars also raised prices last January- following Hershey’s lead.

This all comes on the heels of the chemical companies announcing 20% increases.

Who Do You Believe?

The stock markets all rallied on Bernanke’s comments- virtually ignoring the Sage of Omaha. Moderating inflation sounds wonderful, doesn’t it?

Bernanke v. Buffett.

Academic v. CEO.

A wise investor would be smart to listen to Mr. Buffett.

Who’s going to put the inflation genie back in the bottle? Looks like it won’t be Fed- at least not under this Chairman.

Now that crude has fallen about 20% and is considered in a “bear” market- Wall Street is breathing a sigh of relief.

Because if crude falls, that means that inflation is no longer a worry, right?

Gasoline has fallen about 20 cents a gallon in recent weeks, enough so that it seems “cheap” at the pump.

Wall Street seems to think that means all the other crude-related items that were rising as crude prices went up will also come back down.

Not so fast.

Ask any chemical company what is going on and you’ll get the following answer:

Prices continue to rise.

I just talked to someone in the chemical industry (yes- it’s my brother again) who filled me on a few of the price hikes happening in just August alone.

Caustic Potash is going up 25% this month.

Caustic Soda is now at record levels. Usually it sells for about $250 a ton. Right now, it’s selling for $1200 a ton. Apparently, one of the distributors had software that wouldn’t let them input four numbers into the system (for $1000 a ton, for example) because it has never, ever been that high.

Chemical companies are seeing some relief on Mineral Spirits prices, mainly from Marathon which really hiked prices and is now pulling back on some of them.

These kind of price increases are simply insane.

Price Inflation Will Be Passed Along

Eventually, these price increases will be passed along to the consumers through higher prices. It is only a matter of time.

No industry could absorb these kinds of increases without raising prices themselves.

This is all inflationary in the system.

In order for chemical prices to decline, crude would have to decline more severely and stay low for months. And even then, it would take months for the chemical prices to start to go lower. Once the increases are priced into the system, they’re hard to erase.

How’s that for some uplifting Friday news?

The chemical sector should be watched. As I’ve said before- it’s the building block for most American products and industry.