The Inflation of Art and the Art of Inflation If ever there was an apt metaphor for our times, it was the sale of Andy Warhol's "200 One Dollar Bills" at Sotheby's on Nov 11th. The silkscreen, which is a black and white image of 200 U.S. one dollar bills, went for $43.7 million (including commissions). It had previously been purchased for $385,000 in 1986, so this sale represented an about a 100 times increase in price in only 23 years. High-end art is a place where inflation shows up first. Only when the big price increases start filtering down to lesser works though is it an indication that inflation is getting really out of control. In hyperinflations, even tertiary works experience big price increases. Art, collectibles, and antiques were favorite investment areas in the U.S. during the high-inflation 1970s. At the rate the U.S. government is printing money and pumping liquidity into the financial system, it might take $43 million one day to buy what $200 did when Warhol created his artwork. While the Obama administration is making noises about trying to control the U.S. budget deficit by freezing expenditures or even cutting them by 5%, this is simply an empty symbolic gesture meant to placate America's creditors. Spending on the new health plan, likely to be much greater than estimates, will probably more than wipe out possible savings elsewhere and social security outlays will be rising rapidly and continually in the next decade. While budget cuts may be minimal (defense and Veteran's Affairs are excluded from cuts and these account for a big slice of total federal budget), increases in taxes may not be. The most likely outcome is a budget deficit that keeps growing and a damaged U.S. economy from higher taxes. The Chinese have been complaining loudly recently about excessive U.S. spending and its impact on the dollar (they are estimated to hold about $1 trillion in dollar denominated assets in their reserves). Reluctance on their part to continue buying U.S. debt would cause treasury interest rates to rise significantly. Rates on 10-year and 30-year treasuries were already going up at the end of 2009. Selling even a small part of their dollar hoard would damage the U.S. currency, which is already in strong downward long-term trend. A falling currency is the very definition of inflation (contrary to what most economists claim). While government statistics are subject to manipulation, markets ultimately speak the truth. The price of gold, the ultimate measure of inflation, hit all-time highs above $1200 in early December. Just like sky-high art prices and a falling dollar, gold is making a very clear case that inflation is coming. And based on their price action, it’s going to be a lot of inflation. Disclosure: Do not own any Warhol art works, but I do own a small amount of $1 bills; long gold   Daryl Montgomery, Organizer, New York Investing Meetup http://investing.meetup.com/21