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Inflation or Deflation?

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Inflation or Deflation? - Page 2 Empty Inflation Deflation Red-flation Blue-flation

Post  silberruecken on Wed Nov 12, 2008 10:39 pm


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Inflation or Deflation? - Page 2 Empty re: Inflation Deflation Red-flation Blue-flation

Post  Shelby on Thu Nov 13, 2008 2:10 pm

Thanks for posting this...

silberruecken wrote:http://mises.org/story/3040

...an increase in the money supply.[1] Accordingly, I will adopt that simple definition. Deflation will be defined conversely as a decrease in the money supply...

That is wrong, because it only looks at the supply side. One must also consider the demand for money, e.g. when the population (and thus production) increases by the same rate the money supply, then there is no inflation.

...What Is Money?...Complications arise in applying this definition, however, due to practices such as fractional-reserve banking...

Go back and read my posts in this thread again. Credit != capital. Money is only as meaningful as the foolish demand for false idols and usurious parasitic interest rates (which are only possible when money is intangible promises, not capital), because money is no longer fixed to real capital.

What we have now is the majority of the world lost at sea, being flung around by 10,000 foot waves, because they all worship imaginary money called credit. Therefor it will be almost impossible to make sense of anything in the markets, and especially not make any sense to talk about what is money. At this time, (what the world uses for) money is meaningless and the world is in the process of going crazy as a result. We won't have meaningful money, until people get back in touch with "money=capital down, before panties down", see the following explanation of that intentionally repulsive statement:

https://goldwetrust.forumotion.com/goldwetrustcom-f1/bulliondirectcom-bd-vs-goldwetrustcom-gwt-vs-seekbullioncom-sb-vs-goldandsilvernowcom-gsn-vs-apmexcom-vs-nwtmintcom-nwt-t21-15.htm#342

The fiat money supply is definitely being inflated, but I am not sure that total credit (derivatives writedowns, etc) is not being deflated. Since fiat money is just another form of credit, the effects boil down to what kinds of credit money people demand. Derivates don't put food on people's table, but greenbacks and credit cards still do.

The bottom line is that the Bretton Woods fiat system is broken and is in the rape & pillage & chaotic stage of death.

So the more important question is what does the world demand next?

In my view, the world (including China & Russia) will resist a hard money standard for as long as possible, as it is not in any one's interest. And thus there will be a dearth of hard assets (resources), by the time the world finally goes kicking and screaming to hard capital money.

So the relevant question is not inflation or deflation, as these are relative terms that can never have precise meanings when on a rubberband credit system.

The relevant question is, how far will the world go in malinvestment before it returns to hard money?

The longer the delay, the more astronomical the value of hard assets will be in the end. And thus the more dangerous it will be to hold/own them.

It ain't a pretty future. Indeed we might be entering the Tribulations. I am not sure yet.


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Inflation or Deflation? - Page 2 Empty Re: Inflation or Deflation?

Post  silberruecken on Thu Nov 13, 2008 6:40 pm

"The relevant question is, how far will the world go in malinvestment before it returns to hard money?

The longer the delay, the more astronomical the value of hard assets will be in the end. And thus the more dangerous it will be to hold/own them.
"

Exactly! And because the FED is bankrupt (they increased their balance in the last weeks > 120%)http://news.goldseek.com/GoldSeek/1223400153.php we will see very soon (9-18 months) inflation rates > 25%. An that will be the time for hard assets - in particular for silver.

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Inflation or Deflation? - Page 2 Empty The deflation-inflation two-step: Too complex for deflationsts to grasp?

Post  silberruecken on Thu Nov 13, 2008 6:42 pm


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Inflation or Deflation? - Page 2 Empty What Is Money?

Post  Shelby on Sun Nov 16, 2008 8:28 am


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Inflation or Deflation? - Page 2 Empty FED assets jumped by $1 trillion

Post  silberruecken on Mon Nov 17, 2008 10:36 am

from Casey Research:

Under Bernanke’s direction, the Federal Reserve has completely rewritten its mission. Many articles in the International Speculator and The Casey Report have reported the strange growth in the loans they have made and explained that Bernanke has, for a long time, espoused unconventional actions to avert deflation and to expand the economy. So the charts below tell that story, and it is truly amazing.

The Federal Reserve was never envisioned to be lender of last resort to a whole slew of investment banks, money market mutual funds and commercial paper issuers.

The situation is not easy to sort out, for the simple reason that the extent of their actions is not presented by the Fed via clear and concise data. Instead, the data is complex and hard to analyze, partly because of the piecemeal way the actions were taken, but also probably due to a desire by the Fed to avoid public scrutiny and criticism.

Digging into the details of the Fed’s balance sheet reveals, however, the complete change of composition and direction of the Fed. The most obvious change is that they have doubled the size of their assets and liabilities. A year ago, the Fed’s assets consisted almost entirely of government Treasuries and a little gold. That is a clean, safe balance sheet. The only important liability was the currency they issued (our paper dollars). They also had a small reserve of deposits from all the banks. When Greenspan wanted to give the economy a boost by lowering short-term interest rates, he would create some money and buy Treasuries. He could also do the reverse.

Bernanke has turned this upside down. Initially he made focused loans to big banks. But then the loans became bigger than the reserve deposits, leaving the banks in total as net borrowers. The concept of a fractional reserve no longer applies when the reserve is net negative.

To fund yet more loans, Bernanke then sold off half of the Fed’s Treasuries. And he traded Treasuries for toxic waste of poor-quality mortgage-backed securities. And he encumbered half of the remaining Treasuries with “off balance sheet” swaps of about $220 billion. (Does this sound like Enron accounting?) The balance sheet started with $800 billion of mostly reliable assets and now has about $250 billion of unencumbered Treasuries.

The biggest source of funding is from the Treasury. Banks are leaving deposits in the Fed now that the Fed is paying interest.

The important conclusion is that the paper dollars are now issued by a far less soundly structured Fed, an organization that is more interested in bailing out the financial community than defending the dollar.

This chart below compares last year’s assets, which were mostly Treasuries, to this year’s twice-as-large and far more questionable mix:

Inflation or Deflation? - Page 2 CR-fed-balance_2008-10

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Inflation or Deflation? - Page 2 Empty Re: Inflation or Deflation?

Post  explore on Thu Nov 20, 2008 1:03 am

Inflation or deflation?

* by Martin Hutchinson
* November 17, 2008

There is a considerable argument between commentators at present as to whether, apart from a pretty painful recession, we are in for a bout of inflation or deflation. Both sides have apparently cogent arguments, and maintain their positions with considerable vigor. Robert Samuelson, having recently published a book “The Great Inflation” that suggested another burst of inflation was inevitable, has now produced an op-ed in the Washington Post warning of the rapidly approaching dangers of deflation – such are the dangers of publishing schedules! Having in the past suggested that inflation was inevitable, I thought it worth looking at the deflationist case.

Money supply data, first, do not suggest that deflation is imminent, although to some extent they contradict each other. M2, the broadest money supply measure now published by the Federal Reserve, was up 7.4% in the 12 months to November 3 (suggesting a potential inflation rate of 6-7% since Gross Domestic Product growth was around 1% in real terms.) The St. Louis Fed’s Money of Zero Maturity, the closest we can now get to the old M3, discontinued by the Fed in 2006, is up 10.0% in the last 12 months, suggesting a somewhat faster rate of inflation, perhaps 8-9%. More recently however the two measures have diverged; in the eight weeks to November 4 M2 was up at a 19.9% annual rate while MZM rose at a 0.7% annual rate – a huge disparity that has yet to be explained.

Nevertheless, the “gold bugs” who would normally expect to profit substantially from an upsurge in inflation have had a terrible year, indicating that their thesis has in some respects gone horribly wrong. According to Mark Hulbert on CBS Marketwatch, Harry Schultz, Howard Ruff and Jim Dines, the three leading gold-bugs and prognosticators of economic doom, have each lost between 64% and 70% on their investment newsletters during 2008. Since this was the year in which their prognostications of doom finally appear to have come true, one can reasonably ask what went wrong!

Equally the majority view, that the principal danger facing the United States is a Japanese-style stagnation lasting a decade or more with prices declining slightly making real interest rates too high, also seems misguided. Japan was close to deflation even in the early 1990s, and then followed a poisonous mix of policies that failed to recognize the loan losses in its banks while attempting to spend its way out of trouble through the public sector.

The United States is doing the latter but not the former, which it is prevented from doing by “mark-to-market” accounting. While mark to market accounting has major defects in prolonging a bubble, since it allows bankers to enter into foolish deals in the hope of short-term profits and bonuses, it is highly salutary in a downturn, preventing any semblance of wishful thinking in assessing value-impaired assets such as mortgage bonds. That’s why the entire US banking system has been forced to turn to Uncle Sam for succor; it is also why that system is now entirely unable to carry on as if nothing had gone wrong as the Japanese banking system did in 1991-98. Thus with a banking system forced into realism and interest rates that are sharply negative in real terms, deflation seems an unlikely possibility, in spite of Treasury Secretary Hank Paulson’s determination to invest every spare nickel in the economy into its most unproductive and valueless assets.

The difference between the United States and 1990s Japan is further indicated by the credit crunch: Japan didn’t really have one, in the sense of a sudden constipation in normal lending that caused the economy to seize up. That suggests again that the US trajectory going forward is unlikely to resemble 1990s Japan (for good or evil – Japan avoided a really deep recession, though it suffered an appallingly long albeit shallow one.)

The recent spate of truly terrible economic numbers, such as the 2.8% retail sales decline in October (4.5% down on the previous year) and the 32% decline in automobile sales, suggests that wherever the bottom of the recession is located, we will get there quickly. The US savings rate and the balance of payments both need to be improved by about 5% of Gross Domestic Product, so a top-to-bottom decline in GDP of at least 5% is likely,. However there is little reason for GDP to decline more than 5% top-to-bottom, or maybe 7% to allow for a little overshoot. Once GDP gets to its new equilibrium level powerful factors stabilize it and produce renewed growth – after all, at that new level of GDP the United States is once again internationally competitive, selling goods and services to customers worldwide in a way that has been impossible for a decade.

We are thus not looking at Great Depression II, in which GDP would decline 25%. To reach such an unpleasant re-run we would need a major outbreak of global protectionism, a final withdrawal of confidence by depositors in the US banking system and a swingeing increase in taxes, more than doubling the top marginal rate. President-elect Obama isn’t going to do that. Is he? If he doesn’t, and we avoid a Smoot-Hawley-style attack on world trade, then we will also avoid Great Depression – the Sequel. After all, the Depression was a primarily US phenomenon, caused and prolonged by egregious US policy errors –it was nothing like so bad in Britain, where economic policy under Chancellor of the Exchequer Neville Chamberlain was highly competent and basically the opposite of US failures.

However, if the recession is to be limited to a drop of 5-7% in GDP (itself somewhat worse than the 1974 and 1979-82 recessions, both around 3.5% of GDP) then at the present rate of decline we will reach bottom pretty quickly, in no more than 9-12 months. That tallies also with the housing price decline; house prices have already declined more than 20% nationwide, and from valuation considerations probably have no more than 10% or at most 15% to go. The banking system has already been bailed out by the Feds and probably won’t have to be bailed out again, but will see a gradual containment of losses in the next few quarters (with one or more huge incompetents finally slithering into bankruptcy.) The stock market has nearly reached its equilibrium of around 7,800 on the Dow (based on its early 1995 level of 4,000, inflated by nominal GDP growth since then). Although the market will doubtless overshoot on the downside, the dollar loss from a further decline to say Dow 5,000 is less than we have already experienced in the decline from 14,165 to below 9.000.

While US GDP is still declining sharply inflation will remain quiescent. Oil, minerals and agricultural prices will be on a generally downward trend, as the rest of the world, in particular the high-population growth centers of China and India, find their growth restricted by declining US demand. However, China has already indicated that it will not allow a US recession to stall its own growth; instead it has announced a 2-year stimulus program of $580 billion, about 15% of GDP. Thus commodity prices will remain supported by the continuous surge in Chinese and to a lesser extent Indian demand. US inflation will slow somewhat from its summer peak of close to 6%, but will not go into reverse, even while output continues its sharp decline. A renewed decline in the dollar, inevitable once US savings rates begin to recover and the tsunami of foreign capital into US bonds lessens, will cause the recent decline in import price inflation to reverse. Meanwhile cost increases already present in the system will work their way through to prices, causing continued modest upward momentum.

Even if inflation is declining gradually as output declines, it will not have time to become deflation in the 9-12 months before output reaches bottom – if we were about to experience Great Depression II the decline would be more prolonged, but we’re not. Once output has bottomed out, the inflationary picture changes radically. Budget deficits in the United States, the EU, China, India and Japan will be enormous, causing sharp rises in interest rates as government bonds “crowd out” the private sector. Money supply, which will have been increasing because of the very low nominal interest rates, will now be grossly excessive for the shrunken GDP.

Costs, which were held down by the wave of bankruptcies in the contraction, will once again increase as supply comes once again to balance demand. For one thing, higher interest rates and capital costs (through lower equity prices) will themselves produce a sharp upward ratchet effect on corporate break-evens, both in the US and more especially in emerging markets where capital will be scarce. Lower production volumes against which fixed costs can be amortized will also increase unit costs. The overall effect will be sharp upward pressure on prices -- those continuing to sell at a loss to keep the factory at its most efficient output level and workers employed will be rapidly driven out of business.

Inflation will thus resurge, both domestically and internationally, and will quickly reach the double-digit level at which central bank action to restrain it becomes unavoidable (amusingly, unexpectedly awful inflation figures are likely to appear before the January 2010 end of Fed Chairman Ben Bernanke’s term, forcing him to admit while still in office that his “deflation” warnings were hogwash.) Interest rates will gradually be forced upwards to inflation-plus-4% levels in the last months of 2009 and throughout 2010, producing a second “dip” of recession in 2011 and a non-inflationary recovery in 2012-13. The turn from economic decline (but not truly deflation) to inflation will be well indicated by the gold market, which can expect to surge as the economic bottom is approached.

As often happens, the “gold bugs” will turn out to be right in the end, even if their performance during 2008 has been dreadful – for those that survive, 2009 is likely to be a banner year. Deflationists will proclaim each slowing inflation figure in the early months of 2009 to be evidence for their case, though in reality those months will see not true deflation but simply slowing inflation accompanied by sharp descent into recession. However in the long run, monetarists will prove to have been right – and the decade of excessive money supply expansion from 1995-2008 will impose its final penalties on the unfortunate US and global public. Monetarists will also have the satisfaction of knowing that higher real interest rates will have become inescapable, and that overexpansion of money supply will never happen again – until some future generation of idiots has forgotten the economic history of these decades.



(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
http://prudentbear.com/index.php/commentary/bearslair?art_id=10152

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Inflation or Deflation? - Page 2 Empty Hyperinflation is Guaranteed

Post  Shelby on Mon Nov 24, 2008 1:08 am

Hyperinflation is Guaranteed, when the money supply is not constricted to a precious metal standard.

Go back in history, and study every currency which was not backed 100% by precious metal, and try to find one of them that did not end in hyperinflation. Examples from of all the non-precious metal currencies I am aware of (and all of them ended with hyperinflation), and also in all cases the paper-backed money was used as hidden tax to force the cost of war on to the society:

http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation (<-- click for many more examples)

1775USA Continental Dollarfinanced the Revolutionary War
1789France Assignats and Mandatsfinanced debt from colonial wars
1861USA Confederate Dollarfinanced the Civil War
1920German Weimer Markfinanced debt from WW1, i.e. reparations
1944Japan Yenfinanced debt from WWII

Coming soon:

1971USA dollarfinanced Cold War and War on Terrorism


Deflation of prices is only possible when the money of circulation is, or is a bill exchangeable for, precious metal (gold and/or silver standard). Deflation of prices occurs when the money supply can not be increased faster (than the mines can produce) than the supply of goods. Deflation encourages saving, which is in the long-run is good for sustaineable capital investment.

http://finance.yahoo.com/banking-budgeting/article/106198/A-Depression-Coming;_ylt=Ag.bdMdfgIVVi8IK.RyCKNtO7sMF?-Not-Likely

...Deflation last occurred in the early 1930s, because (SHELBY REMOVED THE WRONG REASONING)...it was aggravated by the Federal Reserve's foolish contraction of the money supply. In the three years after the market crash of 1929, the Fed apparently shrank the money supply by nearly one-third -- precisely the wrong medicine for a fearful and credit-starved economy...

In 1930, the government was powerless to increase the money supply, because the USA was on a gold standard. FDR's New Deal was not possible until he had removed the constriction of the gold standard (domestically) with the 1933 confiscation.

In 1930, the "non-gold backed" credit was imploding, because of malinvestment that accrues with usurious interest rates, which (deflation of credit and credit induced price inflation) was a good thing. The govt was powerless to apply a hidden fiat tax on the population, until FDR removed the gold standard (domestically) in 1933.

Since 1971, the USA dollar is not backed by gold internationally as well as domestically. This has enabled a massive hidden tax on the society in order to finance american dominance globally. The tax was paid as poverty in developing world, and as accumulated fiat debt in west.

It appears that the world since beginning of time, has been continuously moving towards increasing debasement of circulating money away from intrinsic value (e.g. precious metals) towards symbolic money. This is known as Gresham's Law. I say continuously, because each hyperinflation (runaway debasement death of a currency) over history, has lead to society turning towards the least debased circulating currency, but other than the Dark Ages, the world economy has grown only when the circulating money has increasingly become debased. This is because humans refuse to invest, then consume-- they prefer to consume at usurious interest rates, and are thus only able to have jobs during the boom phase (up leg) of the usurious business cycle. I have defined usurious interest rates precisely (click the link).

Isaac Newton appears to have been aware of this fact, and by overvaluing gold, was trying to disincentivize the coining (for export to China) of silverware plates into money, which would have accelerated the debasement forces in Europe (Europe was usuriously over-consuming products from China):

http://www.pierre-marteau.com/editions/1701-25-mint-reports/report-1717-09-25.html

Isaac Newton wrote:...In China and Japan one pound weight of fine gold is worth but nine or ten pounds weight of fine silver, & in East India it may be worth twelve. And this low price of gold in proportion to silver carries away the silver from all Europe.

So then by the course of trade & exchange between nation & nation in all Europe, fine gold is to fine silver as 14 4/5 or 15 to on...

...It may be said that there are great quantities of silver in Plate, & if the Plate were coyned there would be no want of Silver money. But I reccon that silver is safer from exportation in the form of plate then in the form of money, because of the greater value of the Silver & fashion together. And therefore I am not for coyning the Plate till the temptation to export the silver money (wch has a profit of 2d. or 3d. an ounce) be diminished. For as often as men are necessitated to send away money for answering debts abroad, there will be a temptation to send away Silver rather then Gold...


The Central Banks of the world are trying to hide, in a veil of imploding credit, their money supply inflation:

http://nowandfutures.com/key_stats.html#all
Inflation or Deflation? - Page 2 Fed_al10

http://www.shadowstats.com/
...Flash Update Subscruption required November 23rd, 2008
• Monetary Base Annual Growth Now at 75.5% • Systemic Solvency Crisis Intensifies Anew...

This is because they have no choice but to hyperflate, due to Gresham's Law, all fiat currencies end with hyperinflation. It is as guaranteed as is the sun rising each day. The big question is how long does it take to occur.

The hyperinflation will manifest as soon as the world's bond holders become aware that they are being debased at double-digit negative real interest rates (see the money base inflation chart above, note M3 inflation is still in double digits as well). It seems that bond holders are currently focused on the imploding credit, not on the money supply. It is going to be whiplash in the bond markets sometime in 2009 or 2010. Then all hell will break lose.

In order to keep the developing nations in the world financial system, without moving to a 100% gold/silver standard (which is impossible due to Gresham's Law and usurious interest rates), some sort of layered financial system will have to be put in place like the 1933 Bretton Woods on a global scale, wherein domestically (or regionally) countries will be on fiats (with usurious interest rates), but international exchange rates will be set in gold. Who ever controls these exchange rates, will control where capital is incentivized to flight or haven.

This regional reformation of Bretton Woods (i.e. Amero for NAU, Asian Union, EU) will be last step to prepare for the world to eventually move to a single world fiat currency (aka "666"). www.isaac-newton.org/update.html+2060" target="_blank" rel="nofollow">Isaac Newton used the Bible to calculate the date of the END of the world currency as no earlier than 2060. So the world currency can begin some years before that.

http://esr.ibiblio.org/?p=455#more-455

...Raising taxes can delay this, but not prevent it. And might, actually, trigger it sooner; the historical evidence suggests that current tax rates may already be at above the minimum level where, by suppressing and unhealthily redirecting economic activity, they actually reduce total revenue. (One reason to believe this is that the much-derided “Bush tax cuts” actually increased revenues despite the effects of the dot.com bust.) But even if this isn’t true yet, diminishing returns will set in at some point as rates go up.

The only alternative to raising taxes (or deliberately inflating the currency, which in this context has similar effects) is to buy debt and pay entitlements out of that, pushing the unsustainability problem into the future.

The fundamental problem is that income-transfer programs (and the interest service on the debt purchased to keep them running) are spending wealth in higher volumes than the economy can actually generate, and demand for that spending is rising faster than the economy is growing. Thus, raising tax rates is no longer a way out, if it ever was.

At some point, the U.S. government is going to lose both the ability to increase revenues and the ability to sell bonds. At that point the entitlements system will crash. Transfer checks will either stop issuing or become meaningless because the government has, like some banana republic, hyperinflated the currency in order to get out from under its debt obligations.

Unlike the oncoming European demographic crash, the entitlements crash will be survivable in that there will still be people around to make things and trade things with. But it’s going to be ugly. probably rioting-in-the-streets ugly. People dependent on income transfers will starve or die of preventable diseases in large numbers, unless they can find work or private charity. Since many of those people will be old, work will be unlikely unless they are exceptionally capable at something. Families will have to re-assume the burden of caring for their elderly; retirees without children will be in especially severe jeopardy.

Violent revolutions have been fought over less wrenching economic changes than this one promises to be.

The next questions to ask are (a) when will it happen?, and (b) how can the pain be minimized?

There are good reasons to believe the crash could happen as early as 2012, with the trigger being the mass retirement of the Baby-Boom demographic bulge. That is, it will happen that soon if we are lucky.

If we are unlucky, the Federal government will concoct some sort of accounting flimflam (like Al Gore’s infamous lockbox full of IOUs from one part of the government to another) that will push back the day of reckoning out past 2020 — making the numbers and demographic profile of the stranded dependents worse every year it’s delayed. I think this is the most likely scenario, though I’d love to be wrong.

In the rest of this essay I am going to make, against my best judgment, the optimistic choice of a near-term crash; bear in mind that if I’m actually correct in my pessimism the devastation will be worse…


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Inflation or Deflation? - Page 2 Empty The Fed Is Out of Ammunition

Post  silberruecken on Tue Nov 25, 2008 8:59 am


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Inflation or Deflation? - Page 2 Empty Just another trillion

Post  silberruecken on Tue Nov 25, 2008 9:02 am


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Inflation or Deflation? - Page 2 Empty Worldwide bailouts in excess of $3.75 trillion...and counting...

Post  Shelby on Fri Nov 28, 2008 7:26 pm

http://www.kitco.com/ind/Barisheff/nov282008.html
Inflation or Deflation? - Page 2 Nov28211

And here is the inflation logic in a nutshell:

http://www.kitco.com/ind/katz/nov242008.html

UPDATE: Fedis being sued by Bloomberg News under the Freedom of Information Act, for refusing to identify the recipients of almost $2 TRILLION dollars of emergency loans...refusing to identify the nature of the “troubled assets” they are accepting as collateral.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aatlky_cH.tY&refer=home


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Inflation or Deflation? - Page 2 Empty Max Keiser on the "deflation hoax"

Post  Shelby on Sat Nov 29, 2008 3:59 am


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Inflation or Deflation? - Page 2 Empty How to destroy a currency

Post  silberruecken on Tue Dec 02, 2008 6:39 pm

From the Midas 01.12. - Bill H.:

How to destroy a currency

To all; so much has happened in the last 90 days that it is mind boggling. Since Sept. 1st we have watched Fannie and Freddie fail, AIG, WAMU, Lehman, Wachovia, Merrill Lynch, and Citigroup [all household names] have all either failed, been merged or bailed out. During this period the government has announced the bulk of its' $8.5 trillion in bailouts, buyouts, and sellouts. Just last week alone the Fed and Treasury came out with $1.1 trillion of candy for the banks and credit markets. The media reported it "matter of factly" and everyone just yawned. Back in late Sept. when the Treasury announced the $700 billion TARP, the public was seething and Congress was told if they didn't pass it, martial law would commence. Today it is nothing but yawns from the frogs about to get boiled.

So much has occurred over the last 90 days that "numb" is how I would describe investors. The information overload of bad news, bankruptcies, failures, bailouts, Fed and Treasury giveaways have come so fast and in such quantity that the average investor can't even process 2+2 anymore. What we have witnessed has been the complete and total looting of the Treasury. The ingredients for this cake took over thirty years in the making, we watched for the last 15 months as the ingredients were mixed together while only during the last 90 days did we protest mildly as it was being placed in the oven.

I firmly believe that the bulk of the Treasury Gold has been leased and sold over the last 10 years at least. Based on the reports of "coin melt" Gold that has surfaced around the world recently, I also believe we are very close to "THE END". I am sure that the people "pulling the strings" are not stupid by any stretch of the imagination, what I can't get my mind around is why? How could they let this happen, or did they make this happen? The end result is so obvious and the government responses so stupid that I just don't get it. Any thinking person knew/knows where this goes, maybe it's the only way to get the sheep scared enough to run toward the New World Order?

Back in 1996 the logical direction for the Dollar at the time was down. Instead, the Dollar turned up and Gold mysteriously started down, this was the beginning of the end. What originally started out as "buying some time" by Treasury sec. Rubin has turned into outright fraud. I think that the U.S. Gold hoard that once was by far the largest on the planet has been systematically dispersed almost completely. What started out as a reluctance to take some painful medicine that would have resulted in the loss of U.S. supremacy has morphed into the destruction of the global monetary system. Don't get me wrong, this had to happen anyway since the currencies were untethered from Gold back in 1971, however it would have happened sooner and been much less destructive had the decision not been made to "cover up" the Achilles heel.

Now, here we are after the biggest debt orgy, the greatest Treasury bilking, the greatest deflation, and the biggest con job in history. Where to now? For well over a year now, I've been harping on the deflationary forces in play. They have hit with a vengeance and will continue with more and more force as the credit system unwinds. BUT, now we can expect the second act to rear it's ugly head at any moment. Hyperinflation. Hyperinflation will take out the conservative ones that feel "lucky" because they didn't get hit by the deflation wave. This piece is very similar to what I wrote just 2-3 days ago but it is very important to understand that hyperinflation is a very different animal than deflation.

While deflation is like a 5,000 lb elephant that moves very slowly and sits on you while squeezing the air, life, and money out of you, hyperinflations can happen very fast. In fact, a hyperinflation is the result of "over issuance" of money and credit [does $8.5 trillion qualify?] and the resulting loss of confidence in the money results in a panic out of and a devaluation of that money. Those who have saved their entire lifetimes and never borrowed nor invested in stocks probably feel vindicated that those "risky" investors have finally gotten their comeuppance. They are missing the point. The point is that this was a flawed system that mathematically ALWAYS will result in failure. It must result in failure because a fiat system MUST inflate or die, that is the mathematical law.

If you thought the last 90 days was difficult, a currency crises resulting in the collapse of monies will be more horrific and almost surely much faster in its' movement. I think that once the dam breaks, the devaluations we will witness will be breathtaking. This 30+ year cake we have been baking will explode in hyperinflation taking even the most prudent out to the woodshed. Please review the attached chart of "100 years of monetary expansion". This, in a nut shell is HOW TO DESTROY A CURRENCY!
Regards, Bill H

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Inflation or Deflation? - Page 2 Empty Why Gold & Silver will go *UP* in value in this deflation / credit collapse

Post  Shelby on Wed Dec 03, 2008 6:39 am

Why Gold & Silver will go *UP* in value in this deflation / credit collapse

silberruecken, your prior post inspired me to write some thoughts...

Credit Deflation = More Credit Inflation = Hyperinflation Depression

Shelby wrote:Magicians can steal from your pocket unnoticed, by creating an illusion.

Gold & silver will go UP in value in this deflationary credit collapse, inflationary credit reflation, because collapsing the credit of the broad population, debasing them by giving credit to other fewer elite bankers, forces the broad population to defend themselves.

Experts are predicting mixtures (oscillating bouts) of deflation and inflation, ending with a big deflation and world wide implosion of the financial system...

Marc Faber (Boom, Gloom & Doom report guy), at 5:50 min point forward:

https://www.youtube.com/watch?v=Th4yIW521M8&feature=related

HSDent.com (who in 2006 was predicting Dow 20,000 - 40,000...I bought his book in 2005, Next Great Bubble Boom):

https://www.youtube.com/watch?v=r9A_bIEfM1g&feature=related (<-- says stay in cash to buy firesale assets in deflation)
https://www.youtube.com/watch?v=8sMdpuYbjBY&feature=related (<-- says commodities will crash after a 2009 rebound)


Apparently HS Dent does not seem to realize, that when credit dies, then gold becomes more valuable. They misunderstand that inflation and deflation are the same thing when credit is the circulating money (due to Gresham's Law). Credit economy dies (deflation) while money debasement increases to bail it out (inflation). Gold (real capital) wins when credit dies. Read on...

Marc Faber seems to understand:

http://arabianmoney.net/2008/12/01/marc-faber-bloomberg-interview-on-gold-and-stocks/

HSDent says to "be in cash", but cash will be debased (losing value) as the govt+Central Banks (out of thin air) have in the last 3 months have created new credit (and some claim $8.5 trillion) of $1000 for every living human on earth, or $50,000 per working person in USA (in just 3 months!). Annualized that and then account for the snowball effect, and you can see that working Americans are be diluted by hundreds of $1000s each per year, meaning the dollar is worthless now. Remember the mathematical implications I explained before that fiat money is just credit, never is it capital. So as this worthlessness of fiat propogates out into the financial system, then what can people do with their worthless dollars as they all race to not be the last to dump them?? Of course, people have no choice but to buy real things they need, i.e. food and gas or to store excess in gold. Although Marc Faber may be correct that for industrial metals (as contrasted with food & gas & precious metals) capital spending could continue to decline (although I think the future's markets for industrial metals may have already priced this in).

As people are forced to flee the fiat due to massive debasement/dilution, then as commodities prices and shortages become unbearable, then the production of the world economy slows down. This forces the govt+Central Banks to print even more money to bailout failure, which thus forces people to flee even more the fiats, but when there are no more commodities to buy, or the price of them just doesn't make sense (e.g. $10 for gas, loaf of bread, gallon of milk), then what will people buy in order to dump their fiat?? Of course, precious metals.

Please read what I wrote before:

Shelby wrote:...Deflation of prices is only possible when the money of circulation is, or is a bill exchangeable for, precious metal (gold and/or silver standard). Deflation of prices occurs when the money supply can not be increased faster (than the mines can produce) than the supply of goods. Deflation encourages saving, which is in the long-run is good for sustaineable capital investment...

...In 1930, the government was powerless to increase the money supply, because the USA was on a gold standard. FDR's New Deal was not possible until he had removed the constriction of the gold standard (domestically) with the 1933 confiscation...

...This has enabled a massive hidden tax on the society in order to finance american dominance globally. The tax was paid as poverty in developing world, and as accumulated fiat debt in west...

...The hyperinflation will manifest as soon as the world's bond holders become aware that they are being debased at double-digit negative real interest rates... ...bond holders are currently focused on the imploding credit, not on the money supply. It is going to be whiplash in the bond markets sometime in 2009 or 2010. Then all hell will break lose.

In order to keep the developing nations in the world financial system, without moving to a 100% gold/silver standard (which is impossible due to Gresham's Law and usurious interest rates), some sort of layered financial system will have to be put in place like the 1933 Bretton Woods on a global scale, wherein domestically (or regionally) countries will be on fiats (with usurious interest rates), but international exchange rates will be set in gold. Who ever controls these exchange rates, will control where capital is incentivized to flight or haven...

But there are other additional factors, which will drive precious metals even higher than commodities in general.

The govt+Central Banks will be forced into a difficult situation, because as the prices of commodities are going ballastic, this causes social angst, so the Central Banks will either be forced to raise interest rates and/or the govt will be forced to socialist, totalitarian fascism, so they can regulate the movement of capital (so people will not be allowed to stockpile commodities). If interest rates are raised, then world financial system will implode with defaults, thus it just pours more fuel on the fire, because the Central Bank will create more money/credit (out of thin air) and more debasement. Thus I am nearly certain the govt will resort to fascist capital controls, and this is incredibly bullish for gold. If the higher interest rates is chosen, then this will prime the system for even more defaults, debasement, and be even more bullish for gold (on a lag).

The developing world will see it's value rise as commodoties rise, although this will only improve the wealth of the saver in the developing world, as a the person who spends a large % of income on the basic necessities of life, wlll be squeezed by rising commodity prices. But this can be coupled with rising job opportunities, as most commodities are produced in the developing world. This depends to what degree the developing world is free market and not fascist, socialist, and totalitarian. It seems to me that China will manage the production of the developing world to a large extent, and will thus sacrific the maximum prosperity, for the socialist well being of all (meaning a centrally managed, non-optimal prosperity). And there is danger of social disintegration, that would require heavy handed treatment by govts in developing countries, or anarchy.

All of those implications in developing world, favor precious metals over general commodities.

Silver is both a commodity and a precious metal, which makes it exponentially more bullish than gold. Silver is up to 5x more rare than gold, in terms of above ground supply that can come to market. Silver is at near all time lows in price ratio to gold (80 versus natural production ratio of about 7; and historically about 10 - 15, when silver was circulating money). So when people flee fiat, and they see silver is 50 or 80x cheaper than gold, with gold into the $2000 - $5000 range, then they have no choice but to buy silver. Then with silver more rare than gold, the price rise will be much steeper than for gold, thus people being trend followers, will pile on silver, sending it to perhaps even parity to the gold price. Unlike in 1980 (when there was massive oversupply of 90% coin from the 1965 worldwide de-monetization of silver coin), silver won't be in a bubble and won't come rapidly back down in price, because it simply is that rare and the mines are shutting down. It will take many years to ramp up silver production. Also the 1980 bubble was caused because the Hunts went long on silver using paper future's, not entirely physical metal purchases. This time around, the lopsided future's position is short, and the longs are digging in the heels buying physical!

The silver spot price has been able to be pushed down by the alleged large USA bank's manipulation of the future's market price. But please realize that the open interest in the future's market is dying, and thus it is suspected that in 2009 that large bank will lose this manipulative power and the reality of the silver shortage will take control of the market price. You can track the demise of the Comex for gold & silver.

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Inflation or Deflation? - Page 2 Empty Re: Inflation or Deflation?

Post  silberruecken on Wed Dec 03, 2008 10:44 am

Very, very good post, shelby!!! Thanks. I absolutely agree with you.

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Inflation or Deflation? - Page 2 Empty Credit Deflation = More Credit Inflation = Hyperinflation+Depression

Post  Shelby on Wed Dec 03, 2008 8:58 pm

Thank you. The post was improved and published as an article today:

http://financialsense.com/fsu/editorials/2008/1203.html

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Inflation or Deflation? - Page 2 Empty Credit Deflation = More Credit Inflation = Hyperinflation+Depression

Post  Shelby on Thu Dec 04, 2008 5:56 am

Gold-Eagle.com also published it (but deleted one of the links at the bottom):

http://www.gold-eagle.com/editorials_08/moore120308.html

I have given some additional thought to the distribution of the $8.5 trillion (so far) credit re-inflation, and it seems the govt programs may be designed to forgive (writeoff) homeowner/credit-card debt, rather than provide funds for paying debt. This would be a way of minimizing the price inflationary effects, stealing from developing world, and funneling the benefits of the inflation directly to the banks. In other words, there appears to be strategic effort to make sure the re-inflation does not end up too much in the broad population, in order to minimize broad price hyperinflation. However, this encourages decreasing production, which will lead to shortages and price inflation any way.

In general, the are only two ways to channel a credit re-flation of this magnitude:


  1. Price inflation, which leads ultimately to shortages as people hoard
  2. Shortages caused by channeling reduction in production, which ultimately leads to price inflation and/or capital controls


As I alluded to in my article, I think the govt+Central Banks are going to combine some shortages and controls, with some price inflation. The price inflation will mostly come from the devaluation of the dollar in 2009, as the developing world is more productive and will be valued upwards with rising commodity prices in 2009. Western countries will see much higher prices for food & gas by late 2009, but asset prices (e.g. stocks and real estate) will be held roughly flat (or maybe a 20% up or down from current levels in stocks), by deploying increasing levels of socialization and capital controls.

So I think the runaway price hyperinflation scenario in assets is unlikely in west; whereas, in food and gas, shortages and controls will be used to combat the price hyperinflation.

These controls will enable interest rates to be held low (quantitative easing) for a while, but eventually will fall apart with an epic bond bubble unwinding, both the former and the latter are also incredibly bullish for precious metals.

In short, the west will move to a "you get your fair share" society. Crisises will be dealt with by "to each according to his/her need, from each according to his/her ability to pay".

Eventually that will lead to massive capital flight (even internal to countries by burying gold & silver).

So what happens to all that credit re-flation created? Well since the westerners are not producing any thing, then it means the capital is wasted on sustaining unproductive activity, which is of course stealing capital from the productive developing world. The large banks (& Warren Buffet) will be able to cherry pick the best assets/businesses in the world. Although the prices won't be too much lower (maybe -20% from current, on avg, some assets/locations will do worse), the $8.5 trillion (surely to double or 4x) is a lot of money. So the "firesale" prices will not be so much a further reduction in price (on avg, exceptions caveat), as an dilution of value, which is why holding straight fiat cash is not wise. But will the developing world do nothing about this robbery by the old-world bankers? As I said in my article, it depends to what extent the developing world is already top-down controlled (by members of the bankopoly-oligarghy). We see the riots in the Thailand airport this past week.

Thus the coming hyperinflation won't be a clear Weimer Germany or Zimbabwe type. It will be more muddled, with landmines of controls, shortages, and chaos. But eventually the interest rates have to move higher, and the bond bubble unwinding will rip to shreds the current attempts at "status quo peace", probably towards 2010-11. The controllers may be able to hold together a "muddle through" strategy until then.

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Inflation or Deflation? - Page 2 Empty DANGER: food & energy sunami coming in 2009?

Post  Shelby on Fri Dec 05, 2008 8:06 am


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Inflation or Deflation? - Page 2 Empty Deflation (& backwardation) will spiral into dollar death, if the controllers do not let Gold & Silver rise in price

Post  Shelby on Sat Dec 06, 2008 7:31 am

Here is why China (and Middle East and all countries) can not de-hitch from dollar willingly

http://financialsense.com/fsu/editorials/laird/2008/1204.html

The GWC (govt without compass) must let gold & silver price float free without manipulation, else their zero-interest rate policy will lead to more deflation:

http://financialsense.com/fsu/editorials/brawn/2008/1205.html

...Economic models predict that zero interest rates will pump up home prices, pump up equity prices, and lower interest rates. These are potent populist political fodder. The assumption, however, is that this action does not cause savings/capital creation to fade. Without capital creation to raise wages and cover losses, the scheme creates its own deflationary forces...

...For those interested in the inflation/deflation/gold revaluation questions, a graph in the (Koenig and Dolmas – Dallas FED 2003) paper explains clear that the FED must embark on a mission to create inflation. The graph shows the authors view of how Roosevelt used gold revaluation to create the inflation needed to end the Great Depression...

If the FED action is to buy long Treasuries (and not let gold & silver rise), it will lead to an even greater bond bubble, and then finally insolvency of the FED (death of the dollar system):

http://www.dallasfed.org/research/indepth/2003/id0304.pdf

page 9 wrote:...This leads us to a third point: the Fed is almost guaranteed to take a capital loss on its
portfolio. If the strategy works, the economy picks up, interest rates go up, bond prices go
down, and the value of the Fed’s holdings of longer-term Treasuries falls...

In short, no way out of our deflation if they don't let gold & silver rise. Which is what the backwardation of gold is signaling (first time in history of the dollar):

https://goldwetrust.forumotion.com/precious-metals-f6/silver-as-an-investment-t33.htm#518

The bailed out banks are indeed buying Treasuries, while it is already widely reported that they are also manipulating down the price of silver and gold in the corrupt future's markets.

The world wants to continue towards serfdom, instead of take the losses and let the free market move on:

http://financialsense.com/stormwatch/geo/pastanalysis/2008/1205.html

...The only way the economy can heal is through the market. However painful the healing process, only the market can bring about full recovery...if you do not trust the market, then you no longer believe in freedom or capitalism. In that event you are a socialist on the road to serfdom.

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Inflation or Deflation? - Page 2 Empty Deflation Caused By Low Gold Price

Post  Shelby on Sat Dec 06, 2008 9:22 am

I re-wrote the prior post for publishing to fiancialsense.com and gold-eagle.com:

Side walks don't cause falling rain drops to hit them, analogously deflation does not cause low gold prices. Rather vice versa.

No country can de-hitch from the dollar willingly:

...China is very afraid of one thing and one thing only, and that is if millions of migrant workers in the big cities...will riot...

...If China allows the Yuan to rise then their manufacturers are really punished...because they have razor thin profit margins...

If the widely reported downward manipulation of the gold & silver prices continues, then the FED's zero-interest rate policy will lead to spiraling, falling dominos deflation:

...Economic models predict that zero interest rates will pump up home prices, pump up equity prices, and lower interest rates...The assumption, however, is that this action does not cause savings/capital creation to fade. Without capital creation to raise wages and cover losses, the scheme creates its own deflationary forces...

...a graph in the (Koenig and Dolmas – Dallas FED 2003) paper explains clear that the FED must embark on a mission to create inflation...how Roosevelt used gold (upward) revaluation to create the inflation needed to end the Great Depression...

If the FED action is to buy long Tbonds as suggested above, while gold & silver prices are fixed too low by manipulated futures market, an even greater bond bubble will result, then finally insolvency of the FED (i.e. death of the dollar system):

page 9:
...This leads us to a third point: the Fed is almost guaranteed to take a capital loss on its portfolio. If the strategy works, the economy picks up, interest rates go up, bond prices go down, and the value of the Fed’s holdings of longer-term Treasuries falls...

In short, deflation can not end until gold & silver are allowed to rise in price, because even the FED has no model with which to start capital formation without a rising gold price. The backwardation of gold is signaling, for the first time in history of the dollar, that the dollar FED is trapped.

Backwardion means the spot price is higher than the future months' prices. People no longer trust future delivery, and are willing to pay more for delivery now than to use margin to make paper profits in futures arbitrage. This can also be because it is increasingly obvious the casino is rigged.

If backwardation is not reversed, world trade could grind to a halt, as more people do not trust to deliver their side of transaction first, a domino spread effect, then nothing can be traded. Backwardation means disintegration of the value of promises to pay. Remember the dollar (and every currency in world) is merely a promise to pay. The paper or electronic digits, have no intrinsic value.

Perhaps the only way backwardation can be reversed, is to let the gold & silver price rise enough and fast enough, to nip the growing disintegration of trust before it becomes too pervasive and engrained. I tend to agree with Fekete, that it is too late, because by this point it is clear the emperor is wearing no clothes and a rising gold & silver price will only mean even more ferocious demand for immediate delivery.

The bailed out banks are indeed buying Tbonds, while it is widely reported that they are also manipulating down the price of silver and gold in the alleged corrupt future's markets. So it appears the FED and it's member banks are indeed trapped and are in a rapacious "eat my own" deflationary death spiral, which will send gold & silver to the moon at the end of the bond bubble. But by that time, the world will be so broken/unsafe/socialistic/fascist/totalitarian that those who hold gold, will be afraid to invest it and restart the wheels of capitalism and world trade. The Dark Ages after Rome were caused by people being so afraid, they buried their gold. Contemplate the following. Gresham's Law is really just a mathematical statement of mankind's nsatiable inability to resist interest rates which are higher than the growth rate of production.

Disclaimer: The above are my personal opinions. I seek safe harbor. I am not a professional advisor. I am not responsible for anything anyone does after reading this. Seek your own counsel on all matters.

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Inflation or Deflation? - Page 2 Empty Simplest example of simultaneous Inflation and Deflation

Post  Shelby on Sat Dec 06, 2008 4:25 pm

See also the prior post I made today above.

Let's say you have 3 people total in an entire economy:


  1. Loaded with cash guy, who works for Supplier
  2. Manufacturer
  3. Supplier


So normally #1 spends at #2, #2 spends at #3, then #3 pays #1.

Now suppose that #3 wises up and says he will no longer take cash, only gold. This creates a huge demand for gold, so the price of gold goes up. So #2 has to raise his prices to buy gold to pay #3, so #1 has to spend more, so #1 then asks for higher pay from #3. That is inflation. But if the cash money supply is not increased at the same rate as #3's impact on demand and price of gold, then there is no way for #3 and #1 to spend enough cash, which means some business is lost. This is deflation.

So there you have it. As the demand and price for gold increases, if the cash money supply is increased, but not enough, then the result can be both inflation and deflation at same time.

Now what happens if the demand for gold increases, but the price of gold is not allowed to rise. This means rationing of gold, which thus leads to rationing of spending (because #2 can not get enough gold to pay #3), no matter how much cash money supply increases. This is deflation, because some business is lost. This is (part of) the current situation in our economy, which I covered in detail in my prior post.

Our current economy also has the dynamic of increase in demand for credit, while the Fed is increasing the supply of credit for Tbonds, but not supply of credit in general. So this is a bit like the situation with the gold price being up 300% since 2001, but the cash/credit supply is not increasing fast enough to keep up with the gold demand rise. So we have mix of two phenomena. But just imagine when all that credit stored in Tbonds peaks, and is withdrawn. Then where does it go? It is likely that is when we see HYPERINFLATION, unless the govt can create martial law and capital controls to keep that money trapped and unable to be spent freely.

I will refine this and publish it to financialsense.com and gold-eagle.com, after the prior post article is published.

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Inflation or Deflation? - Page 2 Empty The Crack Up Boom, Part XIII

Post  silberruecken on Sun Dec 07, 2008 4:22 pm

To put this amount of spending into perspective, let’s examine a recent missive from James Bianco at Bianco Research in Chicago:
“Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures – combined:

* Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
* Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
* Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
* S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
* Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
* The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
* Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
* Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
* NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion (data courtesy of Bianco Research)

That is $686 billion less than the cost of the credit crisis thus far.

The only single American event in history that even comes close to matching the cost of the credit crisis is World War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion
The $4.6165 trillion dollars committed so far is about a trillion dollars ($979 billion dollars) greater than the entire cost of World War II borne by the United States: $3.6 trillion, adjusted for inflation (original cost was $288 billion).” http://www.financialsense.com/fsu/editorials/andros/2008/1203.html

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Inflation or Deflation? - Page 2 Empty re: Backwardation

Post  dz20854 on Mon Dec 08, 2008 4:41 am

Backwardion means the spot price is higher than the future months' prices. People no longer trust future delivery, and are willing to pay more for delivery now than to use margin to make paper profits in futures arbitrage. This can also be because it is increasingly obvious the casino is rigged.
Backwardation can arise when people fear deflation could lower prices for further out contracts. For example, the S&P 500 ES futures contract is in backwardation, even though the Fed. is trying mightily to support stock prices. Prices at Friday's close: Dec. 2008-- 872.5; Mar. 2009-- 871.5; Jun. 2009-- 871.0; Sep. 2009-- 869.0; Dec. 2009-- 869.0; Mar. 2010-- 864.75. http://futuresource.quote.com/quotes/quotes.jsp?s=es

In contrast, comparing the contract months for gold shows no backwardation: http://futuresource.quote.com/quotes/quotes.jsp?s=gc
Also, no backwardation in silver: http://futuresource.quote.com/quotes/quotes.jsp?s=si

So if there is/ was any backwardation between the spot prices for gold and silver, and their near term futures prices, it may simply reflect near term fear of further deflation. Going out further, the futures clearly expect higher prices for gold and silver.


Last edited by Shelby on Mon Dec 08, 2008 8:47 am; edited 1 time in total (Reason for editing : provided the missing Subject, did not edit your post content at all)

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Inflation or Deflation? - Page 2 Empty Monetary Backwardation is different than Industrial Commodity Backwardation

Post  Shelby on Mon Dec 08, 2008 7:37 am

dz20854 wrote:
Backwardion means the spot price is higher than the future months' prices. People no longer trust future delivery, and are willing to pay more for delivery now than to use margin to make paper profits in futures arbitrage. This can also be because it is increasingly obvious the casino is rigged.
Backwardation can arise when people fear deflation could lower prices for further out contracts. For example, the S&P 500 ES futures contract is in backwardation, even though the Fed. is trying mightily to support stock prices. Prices at Friday's close: Dec. 2008-- 872.5; Mar. 2009-- 871.5; Jun. 2009-- 871.0; Sep. 2009-- 869.0; Dec. 2009-- 869.0; Mar. 2010-- 864.75. http://futuresource.quote.com/quotes/quotes.jsp?s=es

In contrast, comparing the contract months for gold shows no backwardation: http://futuresource.quote.com/quotes/quotes.jsp?s=gc
Also, no backwardation in silver: http://futuresource.quote.com/quotes/quotes.jsp?s=si

So if there is/ was any backwardation between the spot prices for gold and silver, and their near term futures prices, it may simply reflect near term fear of further deflation. Going out further, the futures clearly expect higher prices for gold and silver.

Gold and silver do not behave as industrial commodities, as they are primarily monetary in nature. Thus, they would not go into backwardation when predicting future industrial deflation. In that case, there will be no rush own gold now, as gold is not consumed interim time. They go into backwardation because the predict that the future's market will not deliver in future. We would need to see the backwardation become permanent in order to say the fear being expressed by the current backwardation, is going to be an accurate prediction.

And you can't compare contract months, because again the open interest is declining in all contract months, because the monetary market is predicting a Comex default in gold and silver. The contracts are losing relevance, as less and less people are willing to participate. You must factor open interest into your analysis.

See also this reply I made in other thread:

https://goldwetrust.forumotion.com/precious-metals-f6/silver-as-an-investment-t33.htm#534


Last edited by Shelby on Mon Dec 08, 2008 9:09 am; edited 6 times in total

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