Here's a scary story. This is how hyperinflation (defined here as >20% per year or the doubling of prices in 4 years, as measured by the gold price) has crept up on Canadians over the past 2 years.

It was the summer of 2007. Gold was below $700 US. The Canadian dollar was reaching parity with the US dollar. Thus gold was around $700 Canadian.

Gold shot up through the fall of 2007 until November, when it reached $800 Canadian. The Canadian dollar was stronger than the US dollar!

Through March of 2008, gold was on the rise. Price in March? $1000 Canadian. The Canadian dollar was still close to parity.

Through the summer of 2008, not much change. Still $1000. Then came the great devaluation. The crash of August, 2008.

Gold fell precipitously. But the Canadian dollar was now far below the US dollar. So, in Canadian dollars, gold was still around $900. (At the worst of the Great Collapse in Everything that was the fall of 2008)

Then, gold quickly shot up through $1000. By January 2009, it was $1100.

Today, it's just over $1200.

So the Canadian dollar inflated 71% in 18 months! That's 43% inflation per year!

Still waiting for a correction to buy gold?

What's more is that central banks still haven't raised interest rates!! They're all expecting deflation! What a bunch of fools! Now is the time to take advantage of the greatest contrarian trade in the history of the world. Short currencies and buy gold.

To put a final nail in the coffin of the "fiat currency deflation" argument:

Japan's so-called deflation - the only example of a fiat deflation - lasted 3 years and had a maximum annual decline in the CPI of just 1%.

If we define inflation as the rise in CPI, within a margin of error of 1%, then Japan had absolutely NO deflation.

Of course, there have been short-term periods of deflation in just about every fiat currency. For instance, the year 1970 in the US was a major deflationary year. However, I'm talking here about periods longer than 2 years (length of your average recession). I'm talking about 4 years or more of deflation. There's never been such a case. Not even in Japan.

So again, one only needs to adjust the definition of inflation slightly to mean "net inflation over a period of 4 or more years" to state confidently that all fiat currencies have always inflated.

And what exactly is inflation? The way I define inflation is "a rise in consumer prices without a corresponding change in supply & demand."

Deflation would be the opposite: "a fall in consumer prices without a corresponding change in supply & demand."

The latter part is critical, because prices rise & fall all the time due to supply & demand imbalances. However, when you have the same supply and the same demand and prices are rising, it can only be because there are more dollars with which to denominate the price.

So knowing all this, what would you rather prepare for? Inflation, or deflation? If you say deflation then you're probably also preparing for the second coming of Jesus Christ and you probably already have a bunker set up in preparation for the 2012 arrival of Planet X.

I've been reading Mike Shedlock's financial blog for a while now, mainly to have a contrarian view to the inflationary perspective that the US dollar will collapse.

He posts great news and analysis and always very timely. His deflation thesis always seemed rather bizarre to me. I mean, here you have the US dollar - a fiat currency - and yet his thesis is that because of debt destruction, we're going to see deflation in the US and a rise of the US dollar. Also strange because no fiat currency has ever deflated for more than a few months. Look it up. Prove me wrong.

Anyway, for a long time I gave him the benefit of the doubt, mainly because his arguments all seemed so compelling. But here's what he posted in an article yesterday:

"Hyperinflation?

No, this madness is nowhere close to causing hyperinflation. You do not get hyperinflation with this much consumer and corporate debt when unemployment is soaring globally, overcapacity is rampant, and wages are falling. Please see Fiat World Mathematical Model for more details."

Well, he's finally lost it. There is NO way I'm going to agree with that argument. That sounds more like something Jim Cramer might say on CNBC. Here's why...

In the history of the world, there have been MANY recorded incidents of hyperinflation occurring precisely at moments when there was "overcapacity" in the economy, huge indebtedness, soaring unemployment, and falling wages.

Look at Zimbabwe. How many people have jobs there? How many people can actually spend money on anything but the most basic necessities of life? Yet there's hyperinflation.

Mish, you have totally lost your credibility with this one argument. Maybe it was an honest mistake. Maybe a moment of total absent-minded foolishness. But if your entire thesis of deflation relies on this argument, then you are just plain wrong.

The bottom line is, the value of a currency has little to do with economic fundamentals. If the US dollar went down 50% tomorrow (i.e. prices doubled), you'd say consumers went on an insane over-the-top shopping spree. Maybe Obama finally gave the PEOPLE a stimulus package. But you'd be wrong. The dollar could depreciate 50% without ANY FUNDAMENTAL CHANGE in the economy! This is very important to understand.

For example, you might have salaries $27,000 one day and $32,000 the next. Gas would also go from $2.70 a gallon one day to $3.70 the next. If you were Mish, you would argue, "consumers just got a raise and so they're spending more!" Or, "there's a glut of savings!" In reality, what happened is consumers got a PAY CUT! REAL wages went down. Savings didn't change. The dollar just depreciated nearly 40%. That's what happened.

This depreciation of the dollar thing is very hard to understand intuitively, because it's a complex mass-psychology phenomenon, and because it has never happened in the United States. But it will happen. It's not a matter "if" but "when". All fiat currencies in the history of the world have eventually become worthless. The question is, are you prepared for this eventuality? What good is the FDIC if you have $100,000 in the bank and the minimum wage is $50,000 an hour?

I consider the possibility of hyperinflation in a fiat regime to be far more likely (by a factor of 100) than the possibility of a sustained multi-year deflation. I'm much more in agreement now with Peter Schiff than Mike Shedlock.

It seems that these days every company out there is losing earnings. However, there are some companies that are still making money and will make even more money in the future. These are companies that have restricted themselves to local markets, produce real stuff, and as a result are mainly unaffected by global financial collapse.

In the next 10 years, the following sectors will do well:
- Rail (most cargo will be moved by rail rather than by plane or truck, due to fuel shortages)
- Energy (anything needed for the production or distribution of electricity)
- Minerals (gold, copper, silver, zinc, uranium)
- Agriculture (soil, fertilizer, seeds, and anything else needed for growing food)
- Information (innovative processing & distribution of information; keyword "innovative")

Also, for a company to prosper in the coming decade, they will need to be highly local due to the fact that a lot of political upheaval is coming. Companies that have expanded globally will see their market share shrink dramatically. Companies that have assets in unstable countries will lose revenue.

So with that, I present to you 5 companies I have selected based on the above criteria:

CNR - Canadian National Railway
ECA - EnCana Corp.
G - Goldcorp Inc.
POT - Potash Corp.
T - TELUS

One for each sector. I would argue that these are the best companies in each of the 5 sectors I described earlier.

The stock prices of these companies may not go up tomorrow, or next year, but perhaps over the next 10 years these companies will provide a very good return on your investment. They should greatly outperform the market.

WARNING: Do not blindly buy the stocks I mentioned above. Do your own research.

Check it out: