02/04/2011 01:50 pm ET Updated May 25, 2011

Inflation Is Here to Stay

The U.S. weights food and beverages as 16.4% of the CPI calculation. The Chinese have a different weighting. They figure the basic necessities of life for their population should be weighted at 33% of the overall calculation. The fact is that the rate of inflation varies across a broad spectrum, not only between countries but from individual to individual. But no matter where or how you calculate it; inflation is set to soar on a global scale--and I mean significantly.

To begin with there is the likelihood of a $100 trillion increase in the amount of global credit and debt. That is what is being proposed at the World Economic Forum (WEF) in Davos Switzerland. The headline over in Europe is that continued global growth will need to be supported by $100 trillion in new debt during the course of the next decade.

Those geniuses at the WEF actually contend that the doubling of existing credit and debt levels could be achieved without increasing the risk of a major crisis. Unbelievably, the report from Davos also acknowledged that the massive increase in credit caused the global financial crisis of 2008. However, they ignorantly conclude more debt is still the answer when writing; "Yet, credit is the lifeblood of the economy, and much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential."

The global credit stock has already doubled in recent years, from $57 trillion to $109 trillion between 2000 and 2009. And yet incredibly, they desire to repeat the very same mistake in the next decade. The WEF report wouldn't be so alarming if it wasn't emanating from a gathering of global central bankers, business leaders and politicians. These are, unfortunately, the folks with all the power.

Keeping pace with the madness over in Davos, President Obama vowed to slash government debt by just $400 billion in 10 years in his State of the Union speech last week. However, the CBO upped the annual deficit for 2011 to $1.48 trillion, which is over a $400 billion increase from the formerly projected 1.07 trillion--effectively wiping out all of Obama's proposed deficit cuts at once. Trillion dollar deficits as far as the eye can see will mean the end of the U.S. dollar as the world's reserve currency.

Another reason why inflation is set to skyrocket is because our elected leaders either fail to understand basic economics or are committed to prevaricating to the people. Senator Harry Reid recently had this to say on NBC's Meet the Press; "One of the things that always troubles me is, when we start talking about the debt, the first thing people do is run to Social Security.

Social Security is a program that works, it's fully funded for the next 40 years. Stop picking on
Social Security." But we all should know by now that Social Security is a pay as you go system and there is no trust fund in existence. The program requires all payments that are not serviced by tax revenue to be funded by sales of Treasury debt. If we aren't going to be honest about the insolvent condition of Social Security and Medicare, how can they possibly be fixed? The unfortunate truth here, once again, leads to the conclusion that financing our nation's entitlement programs will be done courtesy of the Federal Reserve.

So while our leaders are choosing to put their heads in the sand on the issue of nation's solvency, the Congressional Budget Office stated last week that Social Security will run deficits beginning this year, which is 5 years sooner than expected. The CBO also said that the government will run up an additional $12 trillion in debt over the next decade if current taxing and spending policies remain in effect. Their report contained this foreboding comment; ..."a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government's ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates." By the way, this warning isn't a ridiculous supposition. It's exactly what occurred over in Greece.

For me, there is no escaping the conclusion that inflation rates are set to skyrocket. Inflation is, after all, the increase in money supply. And there appears to be no escaping that phenomenon on a massive scale. A significant dilution in the outstanding supply of dollars always results in a loss of confidence in the future purchasing power of the currency, sending aggregate prices much higher. But here is a point that gets lost by most economists and market strategists. That loss of purchasing power can result not only from a direct and immediate increase in the money supply but also from the mere perception on the part of global investors that the U.S. has no choice but to eventually monetize a great proportion of its debt.

To conclude; the WEF wants to increase global debt by $100 trillion, the U.S. refuses to acknowledge that we can't afford to pay our $112 trillion in unfunded liabilities and our publicly traded debt is set to more than double in the next decade. Since our supply of savings is grossly inadequate to fulfill all these obligations, I'm unfortunately forced to conclude that the supply of U.S. dollars will surge along with the rate of inflation.

This makes owning gold mandatory. It also virtually assures, thankfully, that the global experiment in fiat money will be deemed a failure in just a few years time.

Michael Pento is the Senior Economist for Euro Pacific Capital