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Inflation or Deflation?

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Inflation or Deflation? - Page 9 Empty Math that Gold is only antidote to perpetual serial deflation symbiotic with serial falling interest rates

Post  Shelby on Fri Jul 31, 2009 6:51 am

The math proves that there is no way to save the current fiat system, because once the marginal utility of debt has gone negative, there is only 1 thing that can retire the debt and grow the economy again-- GOLD (and/or silver). Until then, every increase in money supply, will decrease the GDP.

However, there is a problem with Fekete's math:

Shelby wrote:...A more elegant proof of the ADD#2 email above, is note that given the total future income of $1,735 for a $1000 30 year loan yielding 4% at $57.83 annual payment, then borrowing $735 on 30 year loan yielding 4/1.735% (to buy that former loan) requires a $34.21 annual payment. The annual yield on 4/1.735% of $1000 is $23.06, which is roughly the difference between $57.83 - $34.21 (within rounding errors for the loan calculator I used). Thus Fekete's liquidation value is correctly balanced, because one can simply borrow at the lower interest rate to buy the former higher interest rate loan at the theoretical liquidation value and still receive the same income as if the bond at lower interest rate was purchased...

The above only works up to the total value of the remaining payments on the loan.

For example, given the total future income of $1100 for a $1000 1 year loan yielding 10% at $1100 annual payment, then borrowing $9000 on 1 year loan yielding 10/10% or 1% (to buy that former loan) requires a $9900 annual payment. The annual yield on 1% of $1000 is $1010, which is not the difference between $1100 - $9900.

So the deflation or destruction of capital that can be caused by Fekete's Liquidation Value of Debt, appears to be limited to the total value of the remaining debt due, unless we assume that somehow debt is perpetual as in Fekete's derivation:

http://www.professorfekete.com/articles%5CAEFGrowthAndDebt.pdf (bottom of Page 2)

Fekete appears to argue that the perpetual assumption is applicable because the society is always replacing debt with more debt, i.e. that there is no sustainable business expansion that can be done as the trajectory of interest rates is downward, destroying any capital based business built from debt at each higher interest rate level:

http://www.professorfekete.com/articles%5CAEFIronLawOfTheBurdenOfDebt.pdf (Page 3)

Thus the society is always forced to reborrow at each lower interest rate level and repeat the deflation liquidation cycle. Apparently the only thing that can break society from this, is a fast move to live below one's means, so that interest rates and liquidation can stabilize. In fact, that is why only Gold as money can break this deflation cycle, because it forces this honesty on relative levels of consumption and savings (especially at the collective govt level, the govt is now borrowing to displace increased frugality in private sector). So this is why I say if people do not break from this deflation cycle, they enslave themselves with serial surmounting debt and rationing. The sooner the painful but quick recovery gold antidote is chosen, the less severe the overall pain will be.


> Shelby,
>
> There is an intrinsic value to any bond based on the face value and the
> yield it generates. No one would pay more than the entire amount of
> dollars involved in the remaining life in a bond to buy it. That sets an
> upper limit on the bond value. This is obvious, isn't it?

You were correct that the price of an INDIVIDUAL bond can not exceed the total value of it's remaining payments.

However, Fekete reasons convincingly that the debt is now perpetual until society can live below it's means, as I re-summarized above. The govt will simply borrow for us, if we refuse to. The only way the people can break free is with gold or silver.

The liquidation value of the individual bond with it's limited duration is not the limit, because in debt bubble pop deflation (where marginal utility of debt is so severe it is negative) then people always need to borrow more and more (and this new debt then pops, then over and over again snowballing the liquidation value of debt). Whereas, in a savings driven deflationary expansion, people always want to save more.


============
ADD: David Galland @ caseyresearch.com replied and I replied:

> Shelby,
> While I can appreciate you enthusiasm for your topic, I ran it by the
> senior
> members of the team and it didn't make the cut as something we would want
> to
> publish.
>
> Regards,
>
> David Galland

Thanks for the reply. I think I can change your mind in this reply, as my understanding/communication has refined.

My enthusiasm derives not from wanting to get published (I keep trying to quit writing), but from a realization of the profound dichotomy of the negative marginal utility of debt versus the popular notion that expanding the money supply (debt) creates inflation. AFAIK, there never is in history sustained inflation in that scenario, rather only hyperinflation at the end when population escapes to another currency (will be Gold/silver in this global case).

The reason is because it is impossible to raise interest rates in this political environment, because with such a large debt (and demographic retirement bubble, and high Gini coeficients), the population can not tolerate the life changing reset of the economy, so instead the reset has to take place first through a controlled (govt redistribution of wealth) deflation of serial falling interest rates, with the population not jumping ship to hyperinflation until everyone is pulled down into same boat.

I will carry on to refine, publish myself and make my arguments as to why deflation will continue until the world moves to gold (Math of Perpetual Deflation). And thus why betting interest rates will go up, is a short-term timing bet (waves of stimulus inflation reabsorbed into snowball of cascading defaults/deflation due to capital destruction of falling interest rates), as when they go up for good (mass movement to Gold) you won't be able to collect on the bet (can you say "capital controls").

I hope you already read my follow up email "CAVEAT:...", that explains the limitation of my alternative math proof and logic for Fekete's perpetual assumption in his derivation of the Liquidation Value of the Debt.

I am curious as to if or why you dismissed the theoretical foundation. Was it because you do not agree with the perpetual assumption theory? Did you need time to transistion your investments before making any such proclamation? Do the superiors work for PTB and are instructed to move a large investor base in for the kill? No need to answer, as time will reveal the reason.

The Chinese have way to curse someone without them knowing it "May you live in interesting times". Thus I end with, knowing Casey is an self-proclaimed atheist:

God Bless

(it is just a joke from a non-athiest...all the best...appreciated caseyresearch's recent publication on natural gas glut and 4th Turning)




==========
ADD#2: David Galland replies again and I replied one last time:

> I was trying to be polite, but as you are making no attempt in that
> direction yourself, e.g. your comment "move a
> large investor base in for the kill?", I will be more candid and say
> that the three very intelligent and well-informed individuals who read the
> material had pretty much the same comment - that there was nothing of any
> real intellectual value in the work.
> You may, in time, be proven right.
>
> But, please, don't keep me in the loop any further as you refine your
> arguments.
>
> David


Noted, thanks. Will not email you, even if you reply again.

The comment was not (intended) impolite, just a (remote) possibility and moreover a joke (didn't see I was joking at end of email). ("no attempt" is not accurate)

I am of course curious to know their logic. Specifically how can a "negative return on debt expansion" result in inflation (not hyperinflation mind you, which is a different flight activity, e.g. Argentina), which is essentially what your experts must be implying. By definition, it can not inflate the GDP. So the area of disagreement must be price inflation. If the GDP by definition is contracting, then private sector debt repayment load is increasing, sucking up any stimulus (liquidified new money supply). Supply (production) will decline due to (and demand offset by) contracting GDP, thus isn't a case for massive inflation. The only place I can see price inflation coming from is from waves of temporary speculation (e.g. equities and commodities) to try to capture the waves of stimulus as it is spent. But once it is spent, it falls into the black hole of by definition contracting GDP. The Japanese experience is exactly this. The main difference being Japanese debt problem was corporate only. So in theory, our debt blackhole should be much worse as it is corporate + individual + govt + central bank reserves. I am just trying to fathom what your 3 experts could possibly be thinking, because I know they are not stupid. I must be missing something...or they must be...hmmm...

When debt is paid off, but the GDP is shrinking, banks don't want to lend to private sector, they lend to the govt and if there is any arbitrage on the long end of curve, they take it. For Treasury interest rates to rise, govt borrowing has to outstrip money flowing into Treasuries, but if all the stimulus money feeds back into snowballing debt, then ends right back up in Treasuries again. Bottom line is as the private sector economy dies, the govt sector grows. Where else is money going to go? Gold, and that is the hyperinflation flight.

Thanks again and good luck,
Shelby


Last edited by Shelby on Fri Jul 31, 2009 3:46 pm; edited 4 times in total

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Inflation or Deflation? - Page 9 Empty Increasing money supply, causes DEflation! (not inflation)

Post  Shelby on Fri Jul 31, 2009 1:58 pm

Perpetual Deflation (of the GDP):

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-195.htm#1683
(with bouts of short-lived speculative inflations, either hyperinflation and/or Rationing/Fascist Hell at end)



Hommel vs. Fekete revisted; Score: 3-to-2 (Critical new insights!)

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-195.htm#1680
(added significantly to this since you may have read it before)



I significantly edited, added to, and completed the post where I was developing the ideas for the Perpetual Deflation. You may want to read it again:

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-195.htm#1678

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Inflation or Deflation? - Page 9 Empty Stimulating Hyper-Deflation

Post  Shelby on Fri Jul 31, 2009 6:05 pm

Stimulating Hyper-Deflation

Contrary to popular QTM illogic (i.e. counter-intuitively), since the marginal utility of debt went negative (as early as 2007 by some estimates), BY DEFINITION increases in the money supply (including bailouts, stimulus) has been and will continue to be DEflationary. Period. Read that again over and over.

In the fiat system, all new money is born as a debt, and a negative marginal utility of debt means that increases in debt, coincide with decreases in the GDP. Declining marginal utility of debt coincides with annual debt repayments greater than the annual increase in debt (2nd chart on page 2), thus over time all new money trickles through the economy into debt repayments. Once the line-of-demarcation is crossed into negative marginal utility of debt, then the Quantity Theory of Money (QTM) no longer applies (QTM normally predicts that inflation increases when money supply does), and instead a snowballing feedback loop deflationary bubble begins, i.e. Hyper-Deflation.

The only inflation will be volatile speculative waves not supported by fundamental value, e.g. current S&P500 P/E ratio of 723, as money parked in bonds and money market funds peeps out to temporarily chase spending up blips, running back into bonds in vicious fear as the stimulus money trickles into the blackhole of debt repayments. This can explain recent up ticks in narrow money supply metrics (e.g. M0, M1, TMS, etc). Central banks and governments can not push on a string and force inflation (bottom of page 10), just as a horse who is not thirsty can not be forced to drink. Sustainable (not servicing speculative waves) businesses will not expand if there is no viable profit to be made over the life of the amortization.

(read my next post for text that gets inserted here)

Detroit, the future of USA as a third world country:

Inflation or Deflation? - Page 9 Detroi10Inflation or Deflation? - Page 9 Detroi11

There are only four possible ends to a negative marginal utility of debt, Hyper-Deflation spiral. First, a Hyper-Deflationary blow off into complete institutional failure "Madmax" chaos with a mix of physical cash and barter. Second, pre-emptive hyper-inflationary flight to alternative stable money, at this time only gold/silver qualify because they are no one else's liability (globalization made all the globe's economies vulnerable). Third, fiat system restoration via higher interest rates (which was the 1980 quick cure), which are currently avoided, because a -20% GDP quick implosion of this extreme level of debt is not politically possible, especially considering the bubble in retirement of boomers starting now. Fourth, fiat system restoration via another WW2 to force the level of personal austerity (rationary, savings) necessary to pay down personal debt, which was the cure for the last Great Depression, after 10+ years of deflation (chart on page 4).

In Hyper-Deflation, preservation of capital is paramount, as most people will (suddenly realize they had) have none. Although interest rates ultimately must rise by orders-of-magnitude at the end, similar to the game of "musical chairs" the sudden apocalyptic mass revelation will incite chaos. So to the extent that the Treasury market still exists, the government will try maintain order and control the stampede of capital, and thus collecting on any bet to short Treasury bonds (other than for temporary speculative up blips) may not work out. I suspect there are many capital controls already buried in the many bailout bills and homeland security acts, e.g. such as this one that Wikipedia has since removed from their current page. In my opinion, it will be better to hold physical gold/silver (which are no one's liability), as they will play important roles and rise in purchasing power by the end of all possible scenarios. Refer to Exter's Inverted Pyramid for visual understanding. The masses already have no capital, as evidenced by crossing the demarcation line to negative marginal utility of debt-- they just do not realize it yet. The phenomenon is similar to owning the entire float of a stock (or anything), the quoted market price is meaningless, because you are selling to yourself.

The mathematical reality of negative marginal utility of debt, is that as it linearly goes more negative, the pace of deflation will increase exponentially (i.e. accelerate)! Serial declining interest rates create a feedback loop Hyper-Deflation debt bubble, where the bloating government displaces the withering private sector after inflationary debt bubbles (e.g. dot.com, real estate, China) are no longer possible due to negative marginal utility of debt. Declining interest rates finance redundant competitors who UNDERPRICE (price deflation!) those who financed businesses at higher interest rates, and thus lenders increasingly lend short to private sector (unsustainable speculation) or to the government Treasuries long for safe profits. Speculators are encouraged by any arbitrage in the yield curve to borrow on one end and lend to the other end of the Treasuries, knowing that the trend is the government must continue to increase borrowing in this deflationary debt bubble, thus driving Treasury interest rates lower across the yield curve and completing the serial feedback loop. Additionally, the increasing volatility of interest rates (higher frequency speculation superimposed on the serial decline wave), analogous to the friction of rubbing sand paper, also destroys business capital and adds deflation (page 4).

The "serial declining interest rates feedback loop Hyper-Deflation debt bubble" has been mathematically modeled as exponentially rising Liquidation Value of Debt (bottom page 2). To capture the fact that net total debt is always growing due to the aforementioned feedback loop, the model has both a logical and historic basis to assume a perpertual term bond (page 3). Although each individual bond (loan) has a finite term and thus finite maximum Liquidation Value, the net total or aggregate debt is behaving as a perpetual, because the economy is adding debt to make payments on existing debt, as evidenced by the negative marginal utility of debt. The concept of rising liquidation value can be justified with an example of comparing the income of lower rate bond, to borrowing at the lower rate to buy the higher rate bond, e.g. given the total future income of $2000 for a $1000 1 year loan yielding 100% at $2000 annual payment, then borrowing $1000 on 1 year loan yielding 100/2% or 50% (to buy that former loan) requires a $1500 annual payment. The annual yield on 50% of $1000 is $500, which is equivalent to difference between $2000 - $1500.

Emerging markets (e.g. China) can not pick up the slack, because the notional value of their economies are too small relative to the notional value of the debt bubble, and because they have their own institutionized low marginal utility of debt (perhaps internally negative without exports driven by western debt bubble). If the USA alone is 23% of the world economy, and it's imports have already dropped -50%, then China can not offset with it's 7% of the world economy and claimed +8% real GDP (7% x +8% = +0.6% versus 23% x -50% = -11.5%). Even if we assume China's nominal GDP growth can be sustained at 20% (which is unlikely with loss of 50% of exports), it does not offset (7% x +20% = +1.4%). And USA exports will continue to decline in Hyper-Deflation. Notional, or what people think is the, values are extremely of out-of-balance with reality. Rice fields in Asia are now at asking prices which do not reflect a reasonable ROI, because the debt bubble has assigned the value of potential residential or commercial development, exacberated by Asia's high population density. This is an example of the serial declining interest rate effect on business investment.

With more guns purchased in USA in one month, than in the entire China + Indian armies combined, seems the people realize the system is disintegrating. Even some amongst those who buy to protect their property, including those who are purchasing with intent to steal, may succumb to hunger and steal to survive. There is some evidence that the government is preparing to imprison many people (partially debunked) to squelch the eventual social chaos. Could the swine flu epidemic farce hysteria be used by the WHO to dictate global compliance to control travel as financial chaos envelopes? If concentration of mass media is not for enabling such control of mass thinking, then why did major media not report evidence of million deaths in Iraq or the proposed law to outlaw food self-sufficiency?

How did we get in this mess, and prevent re-occurrence in future? There was a debate about the inherent creep of fraud of all types when using financial promises (usury, loans, futures, gold certificates, Real Bills, etc) due to human nature.

Our current global crisis is evidence of the fraud which grows as fractional-reserve banks aggregate power over time. Repeated many times since ancient history, once the society moves from physical barter (i.e. commodity money) to trusting financial instruments containing "future promises", the initial free market of private sector full-reserve banks (e.g. full reserves for gold certificates, Real Bills) morphs to a free market of private sector fractional-reserve banks (e.g. cheating on reserves for gold certificates, Real Bills), then to a government monopoly on fractional-reserve banks (i.e. central banks) justified by the defaults (bank runs) in the private sector banks. Such creep can not be prevented with a legal system, as it is due to the natural forces of human nature, i.e. those private sector banks which cheat, gain leverage to force out their competition and eventually to own the government. The fiat money of central banks always fail. And the manipulation of the value of money (e.g. via manipulation of interest rates by central bank and manipulation of price of gold/silver in futures), causes geometric domino mis-allocation effects in the economy.

However, an "idealized" financial system that does not employ promises and credit, i.e. commodity money, is inefficient and retards economic growth and innovation, as is evident in the Dark Ages and Middle Ages, which was a reversion to such "idealism" after the fall of Rome. Economic growth benefits from the economy-of-scale impedance matching of usury (saving & borrowing with interest), at least up to the time where the fraud causes the marginal utility of debt to decline precipitously. Small savers must be aggregated for large (and multiplexed for small) borrowers, to maximize the utility of capital in the economy. Perhaps this impersonal exchange makes the parties biblical "foreigners" as allowed. The stock market can also aggregate (but not multiplex) via equity, and it is subject to similar fraud creep. Thus, no long-term moral advantage over usury, except that it does not manipulate value of money via interest rates and the future's price of gold/silver. Debt is probably more efficient in mobilizing capital in the early stages of an economy's financial sophistication (e.g. China now), when the marginal utility of debt should be at it's maximum. Lending at interest (opportunity cost) can be viewed analogously to equity and leases in terms of ROI, with all being forms of promises that can be broken. Fekete states that trading the futures market basis, instead of the price, is more informational and results in more efficient allocation of resources. This is conceptually similar to trading inflation adjusted price, or other metric of fundamental value, instead of nominal price.

So the mess is a natural result, and there is no way to prevent a re-occurrence, but transitioning from debt to equity investment as the marginal utility of debt drops, would be an improvement. However, there is no mechanism for such transition, due to the aforementioned vested power. Human nature can not be eliminated, just as insurance can not stop calamities. Society will try to bend the laws of nature in vain, overshoot, and revert to undershoot the mean, then repeat over and over. Exponential growth and decay of production, prosperity, fraud, youth, virility, etc.. are nature. Be happy in spite of it.


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Inflation or Deflation? - Page 9 Empty Bob Chapman Reports from an Undisclosed Source

Post  wescal on Sun Aug 02, 2009 1:20 am

I have read with much interest the deflation/inflation debate. One thing that concerns me is that Bob Chapman is saying that an anonymous source told him that embassies are being told to buy up a year's worth of local currencies. Also I had heard a news story where Geitner had told an audience at a Beijing university that investments in US treasuries were safe. He received gales of laughter. I have also seen the US dollar index trying to break through the 78 barrier. I do not know if these inflation stories are just of the moment or if they reflect a longer trend of US currency devaluation. There was another story relating that there would be bank holidays in the United States when the US dollar would be revalued downward in the Argentinian fashion. The last story is that China is going to take all those US dollars in its huge reserves and go on a spending spree to buy real assets such as mines and infrastructure. I do concede that deflation is story is also compelling, and I must admit that Laird is seldom wrong. I do see that the TARP funds have not hit main street. I do know that Wiegand has advised to go with the August trend of increasing values for small cap mining ventures with sell stops. This would fit with your idea that there will be fleeting moments of financial speculation. I do hold some optimism that mid sized gold mining cos.(producers) will be able to have good cash flows during this time of either inflation or deflation.


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Inflation or Deflation? - Page 9 Empty re: Bob Chapman Reports from an Undisclosed Source

Post  Shelby on Sun Aug 02, 2009 7:13 am

Note I edited the last 3 paragraphs of my prior post, to make it clear that equity investment has the advantage over debt/fixed interest, that the fraud creep afaics, can not manipulate the value of money via interest rates and futures markets for gold/silver. Also added the revelation about negative marginal utility of debt, that as it linearly goes more negative, the pace of deflation will increase exponentially (i.e. accelerate)! Also please insert following text in my prior post:

Negative marginal utility of debt means that the aggregate economy is bankrupt (even though some individuals may not be), and that only debt forgiveness (re-allocation of wealth) can break the cycle of deflation. The government is trying to steal from the middle class, so that the lenders don't have to take it on the chin! It is analogous to a person whose ability to borrow new money (value of collateral and income) is not sufficient to pay all of the payments of pre-existing debt, thus some defaults (deflation) are ongoing as the total level of debt is growing. Thus the bankruptcy is incremental, growing in speed as time goes on and the total debt payments grow.

wescal wrote:I have read with much interest the deflation/inflation debate. One thing that concerns me is that Bob Chapman is saying that an anonymous source told him that embassies are being told to buy up a year's worth of local currencies...

I heard that too, but it is not clear to me if Chapman's source is Shultz or vice versa? Or did they both verify independently? Shultz is in my opinion is less sensational, so I put more weight into his warning. Sensational warnings from those like Jim Willie, I ignore as several times they have not come true.

Here is report on Shultz's warning:

http://www.marketwatch.com/story/schultz-paints-bleak-picture-of-future


And Chapman:

http://www.rightsidenews.com/200908025787/editorial/bob-chapman-on-gold-silver-a-bank-holiday-and-the-monetary-elite.html

See also my comments here:

https://goldwetrust.forumotion.com/precious-metals-f6/silver-as-an-investment-t33-120.htm#1694

No single exporting country can ditch from the dollar, as per the simple math on relative GDP size in my prior post. If the developing nations as single bloc run from dollar, the math becomes more plausible, but the devil in the details (e.g. how can such be organized quickly and I don't know to what extent the USA imports of both products and OFWs/workers are causing domino trickle down into the internal GDP of developing world).

So we can say with near certainty that any SUSTAINED quick run from the dollar is a fairytale. A devalution of the dollar would just cause volatility, as inflation in USA and deflation abroad, followed by more deflation in USA and inflation abroad as other govts do competitive devaluations. Their relative size means they must sustain their exports by competitive devaluation. But this volatility could serve PTB a purpose for manipulating short-term capital flows (both in asset classes and in foreign exchange), i.e. to create sucker's bounces to bleed capital from the private sector to the elite (which is what the final stage of any empire is like, read the Rome history in link below).

So it is plausible for a big devaluation, and as a pretext possibly for instituting capital controls, but not as a permanent hyperinflation in USA. The sustained hyperinflation (as measured relative to fiat) can only come from a sustained move to gold/silver, especially by the developing world.

The 723 P/E ratio on the S&P500 and the fact that the new debt is going out into the economy (rising narrow money supply metrics) is scary, because we know the marginal utility of debt is negative and thus all that money is really flowing back into a blackhole of debt repayments. Thus we know we racing towards another implosion. Thus I would say it is much more likely that value of dollar will go up and Treasury will go up (rates down), which is the long-term trend predicted by Hyper-Deflation. But it would seem logical that PTB would first manipulate sentiment the other direction (via rumors, major media, etc), to suck in the most fools. So indeed, we will see more volatility and just could go as far as Shultz's warning. The situation with Hyper-Deflation may be so close to rolling over (geometric increase in bank failures), that it is time to go to such extreme volatility.

And we can't rule out spontaneous war and terrorist events.

Got gold yet? It is utter madness what we are heading into, so don't throw all your capital at speculations. Move some to safety of gold/silver in your possession, and ideally some in your plan B escape country.

Please realize that the end game is death of fiat, which by definition is infinite hyperinflation. However, if it comes by decree, it can feel more like rationing instead. Words have to be qualified by time scales, as the effects are quite starkly different depending on the speed at which the financial system will reset to gold/silver.


wescal wrote:...Also I had heard a news story where Geitner had told an audience at a Beijing university that investments in US treasuries were safe. He received gales of laughter. I have also seen the US dollar index trying to break through the 78 barrier. I do not know if these inflation stories are just of the moment or if they reflect a longer trend of US currency devaluation. There was another story relating that there would be bank holidays in the United States when the US dollar would be revalued downward in the Argentinian fashion. The last story is that China is going to take all those US dollars in its huge reserves and go on a spending spree to buy real assets such as mines and infrastructure. I do concede that deflation is story is also compelling, and I must admit that Laird is seldom wrong. I do see that the TARP funds have not hit main street. I do know that Wiegand has advised to go with the August trend of increasing values for small cap mining ventures with sell stops. This would fit with your idea that there will be fleeting moments of financial speculation. I do hold some optimism that mid sized gold mining cos.(producers) will be able to have good cash flows during this time of either inflation or deflation.

I can not see how the govts can create sustained inflation any more, given the negative marginal utility of debt. The string is like soft colored cotton knitting yarn now and can't be pushed any more.

Another revelation about negative marginal utility of debt, is that as it linearly goes more negative, the pace of deflation will increase exponentially (i.e. accelerate)!

So the only tool that govts have now is volatility and information manipulation-- they can not stop the long-term trend which is Hyper-Deflation until the move to gold/silver as money.

As I see it, the govts will be engines of death and destruction until some kind of unbearably painful bottom is reached that the people finally overthrow the govts. Capitalism has devolved into Socialism due to the power of the usury. We passed the peaked growth point when the marginal utiilty of debt turned negative, now we are the downside of the exponential S curve. The downfall of Rome parallels:

http://www.scribd.com/doc/17880556/How-ALL-Systems-Can-Collapse-Overnight-709

The only sure thing any one can do, is to drastically reduce expenses and become as self-sufficient as possible. The rest of the world is heading towards being as socialist as possible (mutually dependent), as they ride down exponential S curve. When we reach the bottom, it will be time to digg up our capital and invest again. Note some people may find ways to invest in things people will need as the deflation accelerates, e.g. they will need to downsize their living.


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Inflation or Deflation? - Page 9 Empty re: hyperdeflation

Post  dz20854 on Sun Aug 02, 2009 3:29 pm

Two observations:

(1) I agree that stimulus in the form of making debt more available is now deflationary. This is serving the interests of people who are benefiting greatly by deflation: anyone invested in money (gold) or what passes for money (cash and treasuries). Those people are seeing a huge increase in buying power relative to everyone else, and they are not even taxed on this increased relative wealth. Governments can quite easily create inflation by handing out money directly; just re-read the speech that gave our Fed Chairman his nickname. But they’re unwilling to stop the gravy-train for their constituencies (ie: those benefiting from deflation), or risk a fatal hyperinflationary run, until the suffering masses rebel.

(2) When interest rates get very low, halving them again has very little effect on inflation or deflation. At that point it is not the interest rate that is causing pain, it trying to pay back the principal that is so difficult. Look at the margin rates at Interactive Brokers— on $100,000 the interest rate was $3,200 last year. This year the interest is half of that. What is a huge percentage drop in interest rates is only a minuscule change relative to the principal. The actual dollar savings is not that great and if there is another bout of volatility it won’t save you from losing your collateral (eg- a margin call).

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Inflation or Deflation? - Page 9 Empty re: hyperdeflation

Post  Shelby on Sun Aug 02, 2009 6:18 pm

See the bottom of the following linked post, for what Robert Pretcher (Elliot Wave theory guru) wrote:

https://goldwetrust.forumotion.com/precious-metals-f6/silver-as-an-investment-t33-120.htm#1694


dz20854 wrote:Two observations:

(1) I agree that stimulus in the form of making debt more available is now deflationary. This is serving the interests of people who are benefiting greatly by deflation: anyone invested in money (gold) or what passes for money (cash and treasuries). Those people are seeing a huge increase in buying power relative to everyone else, and they are not even taxed on this increased relative wealth...

And that the bailouts are converting loans, and especially much more $$$ derivatives on loans, to money (Treasuries). So notional contracts (derivatives) are being converted to money by the govt. I suspect the crooks are converting their Treasuries to gold and other real assets such as factories and land, by selling derivative contracts on the Treasuries.

This is what I predicted in the Hommel forum back in 2007, when I told Hommel that $1 quadrillion in derivations should be included in the money supply when calculating the potential future price of gold. The Treasuries will be allowed to collapse at the end, only after the insiders have squeezed as much gold and silver as possible, as people are forced to dump it to survive in the deflation.


dz20854 wrote:...Governments can quite easily create inflation by handing out money directly; just re-read the speech that gave our Fed Chairman his nickname. But they’re unwilling to stop the gravy-train for their constituencies (ie: those benefiting from deflation), or risk a fatal hyperinflationary run, until the suffering masses rebel...

I used to think that also, but can they? They borrow every dollar they spend from the Fed, so the govt's debt payments will increase. The people will pay down debt, not go on a shopping spree. I think they are powerless to create hyperinflation using debt money. They could create hyperinflation, by telling everyone to go buy gold/silver. Printing large quantities of physical currency would accomplish that signal to buy PMs. In fact, you don't get hyperinflation until people are running from the currency. Hyperinflation is not a consumer driven event, rather it is a burgeoning flight from the currency (and govt).

So the only way the govt creates hyperinflation is by killing itself (when gold/silver is money this constricts govt spending and growth).

Govts are in the business of self-preservation, thus (OFF TOPIC) your proposed net worth tax would force people to gold and silver, unless the govt has complete control (i.e. 666).

Now here is a very novel thought I just had. I have been wondering if the BRICs can create inflation, or if their "marginal utility of debt" is also negative. Then I realized that China's infrastructure is a debt (in a balance of trade sense). Remember buildings and factories are liabilities, they rust and need maintenance. They obtained this infrastructure via a Yen peg theft (they undercut our manufacturing by enslaving their own people), so they can not escape the exports trap. Remove the exports, the infrastructure collapses, their people riot because they expect the progress they've worked hard for. Internally they can create inflation (because of high internal savings rate), and they must create inflation when they peg the Yen, but that inflation can not be felt externally (due to the Yen peg).


dz20854 wrote:...(2) When interest rates get very low, halving them again has very little effect on inflation or deflation. At that point it is not the interest rate that is causing pain,...

That occurred to me in wee hours of your Sunday in USA, and has been bothering my mind since.

But now after thinking it out, I realize that is incorrect logic.

  1. In terms of the wrecking ball on capital that halving interest rates enable competitors to undercut those who financed at higher interest rates, although the absolute value of differences is decreasing, note that the profit margins are also decreasing in absolute differences from costs. Also lower interest rates means competitors can even stay alive longer on negative profit margins.

  2. In terms of the "marginal utility of debt", the lower interest rate is only on the very small incremental portion added to the debt. For example, if the average interest rate on total debt is now say 5%, then each year we only add 1/20 of the total debt to service payments. So the absolute values scale, because after 20 years, the total has doubled by the time the total interest rate on the total debt has AT MOST halved (AT MOST, assuming the new loans can not be lower than 0% interest). And during that period, the "marginal utility of debt" is going more negative, because the absolute total debt is increasing while the production is decreasing due #1 above.



dz20854 wrote:...it trying to pay back the principal that is so difficult. Look at the margin rates at Interactive Brokers— on $100,000 the interest rate was $3,200 last year. This year the interest is half of that. What is a huge percentage drop in interest rates is only a minuscule change relative to the principal. The actual dollar savings is not that great and if there is another bout of volatility it won’t save you from losing your collateral (eg- a margin call).

See the logic and math above. And I do agree with you that the growing total debt is the driving factor and it is why the "marginal utility of debt" is going more negative, accelerating the deflation.


===============
From email:


> 1. well written and thought out.


Thank you very much.

>
> 2. you must consider the readability to the person who has not been
> involved in any prior discussions. Not dumb it down but write in as simple
> terms as necessary.


I do not think it is possible to take a newbie and bring them all the way to understanding why "marginal utility of debt" is the line in the sand that has no return.

I did add a paragraph since you read it, explaining how it is analogous to a bankrupt individual.

I realize I could attempt to move to much simpler explanation, but then the experts would not get it (they would doubt my understanding). And it is the other experts that I need to reach, then they will reach out and explain this 1000s of times over.


>
> 3. In addition if you keep it this technical, length could a challenge as
> far as keeping the reader engaged.


My goal is to get readers as far as the photos, then it is up them whether they are compelled to know more or not. I also can not force a horse to drink. But I want the complete analysis there in one place, so people can refer back to it.


>
> 4. If you do not offer up that there are many possible outcomes not all of
> which result in us reverting back 100 years in life style folks will
> ignore your postings. Now you may not care about this and that is fine.
> Consider again who are trying to inform/educate.


I have stated there are 4 possible outcomes, and the one that doesn't take us back 100 years is to let interest rates rise and let bankrupties happen as fast as possible. This is also equivalent to the hyperinflation scenario if everyone runs to gold/silver now and forces the fiat system to reset quickly. This will cause a quick and deep contraction, but will default the debt and derivatives quickly so that we can get the marginal utility of debt back into highly positive and grow again the economy on sustainable basis.

However, it does me almost no good to emphasize that option, because it isn't anything anyone can do individually, the govt is going to stop bankruptcies and protect the lender and enslaved, and suck the wealth from those who have it instead. I do not see enough people moving in masse to gold/silver to force it.

So in reality, there is no option that doesn't take us back 100 years, and that is why people are going to ignore what is coming. They will prefer the incremental slide into Hyper-Deflation, interim fascism, and eventual chaos.


>
> 5. perhaps you may wish to consider offering different solutions depending
> on the age of the reader.

Afaics, the solutions are all the same. Protect net worth in gold/silver long-term (maybe long on bonds, if you think you can get out before capital controls, but all short-term is gamble due to volatility and timing). Let me make it clear that I agree with Fekete that we will have serial halving of the interest rates long-term (until end), so shorting Treasuries is insane, except as a short-term volatility speculation.

Reduce expenses to level of income and/or become more self-sufficient, so that you can afford to not sell your gold. Try to increase income if you can see clear growth business from people downsizing, mentally/emotionally escaping their misery (e.g. cheap entertainment), etc.. In other words, there are ways to capture income from the direction of any epoch shift.

The only other choice is to become enslaved in the system and accept what you are given and told to do, and the system will worsen.

Certainly you want to stop servicing debt and walk away, if your income is lower than your debt payments. Do not cannabalize your savings. If necessary, totally change lifestyle and location/country.

Any ideas on how it can be different for different people? I want to hear all of you readers' thoughts.


Last edited by Shelby on Mon Aug 03, 2009 9:30 am; edited 1 time in total

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Inflation or Deflation? - Page 9 Empty Over my head; dollar is the final one world currency

Post  Guest on Mon Aug 03, 2009 12:35 am

Shelby, much of what you write is over my head and the only way I come to understand all this is in your conclusions. I must have learn't something because of the knowledge I have received has profited me greatly.
Some of what you write about I find is too far into the future. What I mean is that we do not have much time left before the Lord returns.
I do not see time for this world we live in to come to a one world currency for it has already happened with the US dollar. It's easy to see that the dollar will deflate and the cost of goods will increasing go sky high for the countries that are dependent on the dollar or who follow them (US) like they are god.
You have much knowledge in the world of finances and the evaluation there of but you lack biblical timing.

I just want to add that the unfolding of the fiat system is coming apart at an alarming rate and people should listen to Shelby...

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Inflation or Deflation? - Page 9 Empty URGENT: looks like the fireworks are starting again!

Post  Shelby on Mon Aug 03, 2009 9:18 pm

FDIC will be out-of-money:

http://market-ticker.denninger.net/archives/1284-Pump-Monkey-Orgasms.html
http://market-ticker.denninger.net/archives/1286-FLASH-FBI-RAID!-Colonial-Bank-Building,-Orlando.html
http://market-ticker.denninger.net/archives/1283-Is-The-FDIC-Broke-And-Covering-It-Up.html



RobRoy wrote:...Some of what you write about I find is too far into the future...

I think the Hyper-Deflation is happening now, and we will get another huge and worse crash within 9 months or less.

I also agree with all of the following article, except:

http://financialsense.com/fsu/editorials/sobolev/2009/0803.html

...A new wave of inflation in the coming years is inevitable...

Thus I think his and most all PMs analysts may be incorrect about the near-term for PMs prices. I think they may drop when the stock market does, at least silver:

https://goldwetrust.forumotion.com/precious-metals-f6/silver-as-an-investment-t33-120.htm#1694

The following doesn't make any sense to me:

http://www.bloomberg.com/apps/news?pid=20603037&sid=aH3YlITxECCE

...“Input costs have come down dramatically and it’s going to be one of the real engines that fuels this recovery,”...

Falling prices, means hard times for workers who are also the customers, which means business have to try to eat market share from competitors by lowering their prices. It is a downward spiral. There is no such thing as pricing power in a deflation. So many cheerleading news out there, we must be getting ready for a blowoff top for this re-flation hoax.

And SRSrocco says:

http://jasonhommelforum.com/forums/showthread.php?p=52132#post52132

...Looks like our SHELBY has become under the TRANCE of FEKETE's DEFLATIONARY SCENARIO. I would agree with DEFLATION on things we OWN, but not on things we USE. This is the main difference between ME, SHELBY and the other DEFLATIONARY HACKS...

Steve might want to note that things we own are a huge portion of our debt ATM machine, and thus they affect what we can spend. This means crashing demand:

http://globaleconomicanalysis.blogspot.com/2009/07/whats-real-cpi.html

China pumping up their economy for a big fall, driving commodity prices up temporarily:

http://globaleconomicanalysis.blogspot.com/2009/08/frugality-trumps-quantitative-easing.html

Steve will someday learn that Peak Energy due to natural limit is a fairly tale. The production of oil is peaking because the debt generation is peaking. Who wants to invest in oil when no one is going to be able to buy it? Nature has a way of balancing these things out. There are huge oil fields around the islands here in SE Asia. There is a huge field out near an island near Guam. No one wants to develop these now. It is wrong timing, we are heading into severe global deflation.

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Inflation or Deflation? - Page 9 Empty Hyper-Deflation, followed by Hyperinflation (run from dollar)

Post  Shelby on Tue Aug 04, 2009 3:17 pm

The inflation of small items (food) will be overshadowed by net worth deflation until perhaps 2011 or 2012, then all hell breaks loose:

https://goldwetrust.forumotion.com/economics-f4/peak-oil-nonsense-t102.htm#1705


Of course, quarterly speculation waves of volatility superimposed on that longer-wave trend prediction above.


Look at the correlation of 1930 stock market to current bounce:

http://www.gold-eagle.com/editorials_08/summers080309.html

Inflation or Deflation? - Page 9 Summers080309a

But remember the dollar was gold domestically until 1933, so the govt wasn't able to make the problem worse via money creation from 1930 to 1933. So this time, it could be a lot worse, as money creation is debt creation and the marginal utility of debt is negative now.


Here is another thread which explains a few more details about comparative value destruction:

https://goldwetrust.forumotion.com/economics-f4/value-destruction-t104.htm#1712


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Inflation or Deflation? - Page 9 Empty DROP DEAD FRED..........

Post  SRSrocco on Tue Aug 04, 2009 11:09 pm

Shelby wrote:
Falling prices, means hard times for workers who are also the customers, which means business have to try to eat market share from competitors by lowering their prices. It is a downward spiral. There is no such thing as pricing power in a deflation. So many cheerleading news out there, we must be getting ready for a blowoff top for this re-flation hoax.

And SRSrocco says:

http://jasonhommelforum.com/forums/showthread.php?p=52132#post52132

...Looks like our SHELBY has become under the TRANCE of FEKETE's DEFLATIONARY SCENARIO. I would agree with DEFLATION on things we OWN, but not on things we USE. This is the main difference between ME, SHELBY and the other DEFLATIONARY HACKS...

Steve might want to note that things we own are a huge portion of our debt ATM machine, and thus they affect what we can spend. This means crashing demand:

Steve will someday learn that Peak Energy due to natural limit is a fairly tale. The production of oil is peaking because the debt generation is peaking. Who wants to invest in oil when no one is going to be able to buy it? Nature has a way of balancing these things out. There are huge oil fields around the islands here in SE Asia. There is a huge field out near an island near Guam. No one wants to develop these now. It is wrong timing, we are heading into severe global deflation.

DEAR SHELBY,

DROP DEAD


HAAHHahAhAHAHHAHhaaa.....Only kidding Shelby. How in the HADES are ya by the FRICKEN WAY??? Long time no see.....or hear from ya. ALL of a sudden you come out of the BLUE and start sending me EMAILS from your BLOG. I am not complaining by the way....just nice to see you're still ALIVE and KICKING down there in the land of FILLIPINOS.

Shelby, I plan on writing an article that might help STRAIGHTEN YOU OUT a TAD or at least make you see it another way. Of course, I doubt it very seriously that you will. But HADES.....whats life without a little RIFF and RAFF.....AYE?

Shelby you are missing a VITAL ELEMENT in your DEFLATIONARY THEORY. And that is the PRINCIPLE of DIS-ECONOMIES of SCALE that take place in a DEFLATIONARY ENVIRONMENT. I will agree with the DESTRUCTION of CAPITAL per FEKETE (the gentlemen I quoted back in early 2008 to get a reply as a FLAKE by you) by the lowering of the INTEREST RATE by the MAGICIANS and CLOWNS at the FED.

As DEFLATION takes place in THINGS WE OWN......INFLATION takes place in things we USE....and I would focus these on FOOD, ENERGY and etc. As INVESTMENT CAPITAL DISINTEGRATES.....companies close down and DIS-ECONOMIES of SCALE kicks in. Thus we have RISING PRICES for GOODS in a DEFLATIONARY ENVIRONMENT the direct opposite in an INFLATIONARY ENVIRONMENT with ECONOMIES OF SCALE.

Anyhow.....I am putting the ARTICLE together. It's got some nice CHARTS and GRAPHS....and possibly a few CRAYONS for those who like it a little SIMPLER.

NICE to see you still got some VINEGAR in YA.

best regards,

steve

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Inflation or Deflation? - Page 9 Empty re: DROP DEAD FRED..........

Post  Shelby on Tue Aug 04, 2009 11:34 pm

Steve, same nice to hear from you and nice to open a debate, so that we can try to convince each other as to the likely future.

LOL on the "DROP DEAD".

The reason I called you out in my email Subject "SRSrocco rebuttal", was because yesterday you accused me of being a "Deflationary Hack" and accused me of saying "Fekete is a flake" in the Hommel forum, which you have repeated in my forum:

SRSrocco wrote:...I will agree with the DESTRUCTION of CAPITAL per FEKETE (the gentlemen I quoted back in early 2008 to get a reply as a FLAKE by you)...

I do not remember calling Fekete a flake. You must have confused me with someone else. "Flake" is a strong word, so please do not accuse me of that. I have been referencing and respecting his work since before you knew about Fekete, as evidenced by my published articles from as early as March, 2007 (where I link to his work and used it as a basis for my writings):

http://www.gold-eagle.com/research/moorendx.html
http://www.gold-eagle.com/editorials_05/moore030807.html (by Shelby Moore)

Shelby Moore wrote:...Dr. Fekete seems to have it all figured out. When Dr. Fekete writes "interest rate", I think he means generally "opportunity cost" of investment...

I think maybe you remember my comments about the debate between Hommel and Fekete in 2008:

http://jasonhommelforum.com/forums/showthread.php?t=2855&page=2

Perhaps you may have time to review my comments again, and you can see I was critical in 2008 of Fekete's claim that future's markets in gold and silver are not naked and are good for mankind. I still continue to disagree with Fekete on that aspect (even emailed him my thoughts on that), although I agree with Fekete that future's markets in other commodities are beneficial as long as the money system has not reached the terminal cancer stage. You can read my summary here:

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-195.htm#1680


SRSrocco wrote:...As DEFLATION takes place in THINGS WE OWN......INFLATION takes place in things we USE....and I would focus these on FOOD, ENERGY and etc. As INVESTMENT CAPITAL DISINTEGRATES.....companies close down and DIS-ECONOMIES of SCALE kicks in. Thus we have RISING PRICES for GOODS in a DEFLATIONARY ENVIRONMENT the direct opposite in an INFLATIONARY ENVIRONMENT with ECONOMIES OF SCALE...

I agree! But the disagreement is on the near-term relevance and timing of the relative effects.

What I mean is the rising prices of basic goods won't be the driving factor for our investments (except as it causes false rallies and volatility due to ignorance of marginal utility of debt), until the notional net worth of westerners has dropped so much that the these basic goods are unaffordable to them and they start to riot or run from the dollar system to precious metals. Instead deleveraging and deflation of investments will be the overriding theme for next year at least. And gold and silver will get caught in the overriding theme, before the finally launch to infinity fiat dollars at the very end, when the public walks away from holding up the debt, because they are all bankrupt and finding it hard to eat. For a while yet (probably until 2011 or so), the net worth crashing will be the larger valued theme that is affecting our investment decisions.

You didn't quote from the posts I wrote where I explained the above distinction:

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-195.htm#1706
https://goldwetrust.forumotion.com/economics-f4/peak-oil-nonsense-t102.htm#1705

It is not only dis-economies-of-scale, but also the reflation to a larger debt bubble, is driving speculation in real estate globally (as the other countries stimulus and competively devalue their currencies), thus making land uneconomic for farming. In Asia, land is being priced far from development, as if it will soon be developed. The rate of debt expansion is making people think the urban sprawl will just keep growing without end. You see PEAK ______ is all being caused by the misallocation of investment due to the debt. Even gold production has peaked, it is not pecular to oil (I know you think oil is causing all the other peaks, but I think debt is causing it and the correlaton to oil). Think of it like this. Imagine someone handed you an infinite credit line, then would you bother to work???? No we would all do stupid things with money instead. Scarce resources are precisely what is needed to remind people that money is not limitless. The debt bubble is the driver. Nature is just cooperating as it always does in exponential boom and bust. Even the plankton experience the exponential S curve.

I know one of your big recent themes is EROEI (something I have been aware since 2006), and this naturally declines as a soceity overstretches itself with debt. Think of it like this. If you had unlimited money (or thought you did), then you would take on growth projects that were less economic. Actually I have been aware of the efficiency equation since high school physics.

Also discretionary consumer items will lose pricing power in this coming deflationary depression. Only basic necessities will retain pricing power. And I don't think inflation will be that high, because the govt is clearly going to resort to FORCED rationing (see the proposed Health Care plan). But even Cap & Trade will be driving electricity rates through the roof. So indeed, the necessities will go up in price, and people will reduce purchases of non-necessities.

Nevertheless for the near-term, deleveraging is the main thing we need to be aware of as investors. Return/liquidity of capital is the most important priority right now near-term-- not inflation hedges. A few years out from now, real money will be the most important thing to own, as the financial & political system will disintegrate into fascism and splintering chaos. Instead of "green shoot", we will see many chaotic "offshoots". Not everyone is going to stay locked in the sinking ship of the dollar at the end. Near-term I expect the dollar & Tbonds to rally when the stock market crashes again. And I expect silver to fall hard, maybe gold as well-- both are supposed to be inflation hedges.

CAVEATS:

  1. PTB could power grab at any time, so having some gold/silver is necessary.
  2. Public mania can drive prices of investments assets higher in spite of deflation reality (e.g. S&P500 has P/E ratio of 723)
  3. We do not know when music stops playing on this dollar jail charade, it could end spontaneously at any time.
  4. Bank holidays and other side-effects of the hyper-deflation could drive gold up at any time



Steve, I have a minor in math. Understand that if debt bubble is causing malinvestment, thus causing peak oil, peak gold, etc. Then of course you will see a correlation between peaking oil and those other peaking things. It is mathematically erroneous to ASSUME that oil is causing the peak in gold-- there might be another root cause of both (i.e. peak debt). Mathematical correlation does not imply cause and effect. Real mathematicians know this. Ask one.

Steve I appreciate and admire your research on agricultural effects of the peaking _______. It has been helpful to my overall understanding. All the best to you.

==========
ADD:

Steve, I urge you to read this about China and metal prices:

http://www.frontlinethoughts.com/article.asp?id=mwo072409

And these about capacity utilization is declining in our deflation, meaning the supply destruction is being more than offset by demand destruction:

http://www.frontlinethoughts.com/article.asp?id=mwo073109
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/07/06/make-sure-you-get-this-one-right.aspx

The dis-economy-of-scale you are seeing may simply be the necessary amount be caused by the deflation.

The following deflation article has same negative marginal uitlity of debt logic as myself (& Fekete and Chris Laird):

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/07/13/debt-and-deflation.aspx


And in today's Casey Dispatch, we can see why David Galland and his 3 "experts" still don't get it:

...The Hoisington article traces through the mechanics of how increases in the monetary base and then increases in the money supply normally give a temporary stimulus to the economy and – and concludes that the normal chain of cause and effect isn’t working this time. The article cites the unwillingness of shell-shocked banks to lend and thereby turn the increase in the monetary base into an increase in the money supply, and also the reluctance of a nervous public to spend any new money that comes its way and turn the cash into demand for goods and services.

The Niels Jensen piece tells essentially the same story but in a less mathematical fashion.

The center of the deflationist argument is that while the government can create new money, it can’t force anyone to spend it. And once deflation sets in, no one will want to spend it. Motivated by fear and also by the thought that everything will be cheaper tomorrow, everyone will want to hoard cash.

The strength of that argument is also its weakness. The longer a deflation continues and the more tenacious it seems, the more government will print, which will make the eventual inflation that much more severe. Reluctance by banks to lend won’t prevent this. Even if every loan officer in the country posts a big “No” sign on his door, the newly created money will still reach businesses and consumers via government deficits financed by Federal Reserve purchases of debt. The resulting portfolio imbalance that most businesses and households will see (so much cash, comparatively so little of other things) will at some point lead people to spend, which will switch the system from deflation to its opposite...

They miss the point of that linked article above:

..."Thus Barro and Perotti are saying that each $1 increase in government spending reduces private spending by about $1, with no net benefit to GDP. All that is left is a higher level of government debt creating slower economic growth."...

That is the same as saying the marginal utility of debt is NEGATIVE. And it is what I wrote, that govt is crowding out the withering private sector.

========
ADD#2: From the Casey Dispatch for today, this blows my mind!

...Off Balance Sheet, Out of Mind
By Chris Wood

The U.S Treasury's Financial Management Service recently released its monthly Statement of Receipts and Outlays for the United States Government.

For the first time ever, the Treasury reported a deficit above $1 trillion -- $1.086 trillion, and that’s with three big-spending months left to go in the current fiscal year.

To put things in perspective, the reported federal deficit for all of 2008 was $455 billion. At the time, that was a record. But it is less than 42% of the borrow-and-spend total at this year's nine-month mark.

As shocking as that seems, it’s not even the real deficit story. Most of the real deficit is hidden by the Treasury's accounting methods.

For one thing, the annual budget deficit supposedly refers to the difference between government receipts and outlays. But sly politicians sometimes remove a spending item from the regular budget and then bring it back as a supplemental appropriation. Supplementals are real costs that add to government debt, but they don't get counted in the reported deficit. For example, during fiscal 2008, the federal government’s net operating cost (the government’s “bottom line” – the difference between revenue and cost) was $1,009.1 billion, but the budget deficit was reported as “only” $454.8 billion.

But it gets much worse.

To quote John Williams’ Shadow Government Statistics: “Those [2008] numbers, however, did not account for the annual change in the net present value of unfunded Social Security and Medicare liabilities, except in discussions and footnotes. Counting those changes, as a corporation would for its pension and healthcare liabilities for retirees, the 2008 annual deficit was $5.1 trillion [compared to the reported figure of $454.8 billion], versus $1.2 trillion in 2007 [compared to the reported figure of $162.8 billion]...


============
ADD#3: Anecdote that US firms may be accelerating offshoring to reduce costs to stay ahead of the deflation:

http://technology.inquirer.net/infotech/infotech/view/20090804-218774/US-firms-hike-offshoring-says-report

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Inflation or Deflation? - Page 9 Empty re: "Deflationary Hack"

Post  Shelby on Wed Aug 05, 2009 7:23 am

Shelby wrote:...The reason I called you out in my email Subject "SRSrocco rebuttal", was because yesterday you accused me of being a "Deflationary Hack" and accused me of saying "Fekete is a flake" in the Hommel forum, which you have repeated in my forum:

SRSrocco wrote:...I will agree with the DESTRUCTION of CAPITAL per FEKETE (the gentlemen I quoted back in early 2008 to get a reply as a FLAKE by you)...

I do not remember calling Fekete a flake. You must have confused me with someone else. "Flake" is a strong word, so please do not accuse me of that. I have been referencing and respecting his work since before you knew about Fekete, as evidenced by my published articles from as early as March, 2007...

Furthermore, Steve how can you say I am a "hack" and that I just got around to the deflationary thesis, when I was writing and predicting it back in March, 2006 when I wrote my main and first thesis paper which I have linked to innumerable times since then:

http://www.coolpage.com/commentary/economic/shelby/Inflating%20Deflation.html

Shelby Moore wrote:...

First world economies face an unavoidable dilemma, regardless whether globalization is switched on or off, either sacrifice now with decades of retirement demographic deflation (globalization off), or sacrifice later by inflating the deflation of globalization for temporary illusionary "wealth", which will end in a hyper-catastrophic global collapse Greater depression.

World politics have chosen "sacrific later", and on the order of 30 - 50% of the capital in developing markets derived from globalization, as well as the matching consumption debt in first world, is "unproductive" and due to be wiped out.

Contrarian investors can drastically increase their wealth betting on hyper-inflation of commodoties and precious metals...


=======
ADD: the reason "basic needs" costs are not yet the driving factor is the relative size of net worth:

http://www.infowars.com/this-depression-is-just-beginning/

...The fact is the Net Wealth of US Households has “declined from a peak of $22 trillion to just under $12 trillion in early March.”...

Let's say inflation of basic goods increases the family expenses by $400 per month, thus $5000 per year, with $100 million families in USA, that is only $500 billion. The $12 trillion net worth is the bigger financial factor, until the stock market drops another 80 - 90%. And that $12 trillion has probably grown since the stock market bounce.

As for political factor, with an increasing Gini coeficient, the inflation of basic needs costs is a big factor already, because there are many marginalized families already in USA.

BTW, I see net worth is up to $15 trillion now and is highly correlated to stock market:

http://www.zerohedge.com/article/money-sidelines-fallacy

Inflation or Deflation? - Page 9 Net20w10


Last edited by Shelby on Wed Aug 05, 2009 1:23 pm; edited 3 times in total

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Inflation or Deflation? - Page 9 Empty CaseyResearch misunderstood the Niels Jensen deflation argument

Post  Shelby on Wed Aug 05, 2009 12:07 pm

First, some recent interesting deflation data/logic from Mish Shedlock:

http://www.scribd.com/doc/17702821/The-End-of-the-End-of-the-Recession
http://globaleconomicanalysis.blogspot.com/2009/08/global-gdp-rebound-is-underway-but-whos.html
http://globaleconomicanalysis.blogspot.com/2009/08/office-volume-down-50-to-91-industrial.html
http://globaleconomicanalysis.blogspot.com/2009/08/federal-tax-revenues-suffer-biggest.html
http://globaleconomicanalysis.blogspot.com/2009/08/european-prices-fall-06-most-in-13.html
http://globaleconomicanalysis.blogspot.com/2009/07/ewave-count-on-us-dollar-suggests-move.html

Also the trailing P/E Ratio of S&P500 is expected to go to INFINITY (negative earnings) in next quarter reporting (Oct), and I expect the forward P/E will look bad also by that time (using consistent Reported Earnings, not the erroneous Operating Earnings):

http://runningofthebulls.typepad.com/toros_running_of_the_bull/2009/08/sp-500-earnings-per-share-1.html

Inflation or Deflation? - Page 9 Sc39


Here is my follow-up email to Casey Dispatch:

---------------------------- Original Message ----------------------------
Subject: You misunderstood the Niels Jensen deflation argument
From: "Shelby Moore"
Date: Wed, August 5, 2009 7:31 am
To: david@CaseyResearch.com
Cc: "Antal Fekete"
"David Galland"
--------------------------------------------------------------------------

Casey Dispatch wrote:

> The article cites the unwillingness of shell-shocked banks to lend and
> thereby turn the increase in the monetary base into an increase in the
> money supply, and also the reluctance of a nervous public to spend any
> new money that comes its way and turn the cash into demand for goods
> and services...

> ...The center of the deflationist argument is that while the government
> can create new money, it can’t force anyone to spend it. And once
> deflation sets in, no one will want to spend it. Motivated by fear and
> also by the thought that everything will be cheaper tomorrow, everyone
> will want to hoard cash...

That is NOT Niels Jensen's argument:

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/07/13/debt-and-deflation.aspx

"Thus Barro and Perotti are saying that each $1 increase in government spending reduces private spending by about $1, with no net benefit to GDP. All that is left is a higher level of government debt creating slower economic growth."

The above quote is clearly the same as saying the marginal utility of debt has gone negative. It has nothing to do with what people will do. Once that has gone negative, it is impossible to create sustained inflation ever again (until the debt is forgiven and system reset). The reason is that any new money creation creates negative GDP, no matter if it sits in Fed reserves or not (and it is not sitting in reserves now, the banks are creating money by buying long Tbonds now, to soon take profits on your subscribers who have shorted bonds, when the S&P crashes and long bond run to safety again).

This is precisely what I was explaining to Galland late last week, and he replied that your 3 "experts" said there was no intellectual content in my point.

I have now created a publish quality essay to explain the math (which I will probably publish to gold-eagle.com, financialsense.com, and kitco.com this month):

https://goldwetrust.forumotion.com/economics-f4/inflation-or-deflation-t9-195.htm#1685

You can read my numerous posts in the above thread, where I discuss the mechanics in more detail. Suffice it to say, there is no money being created, only wealth transfer to insider banks via more govt debt.

Galland did request that I not email him further on this matter, but you have emailed me your Casey Dispatch and solicited my feedback. So there you have it. You asked for it. If you don't want my feedback, then please take me off of your Casey Dispatch mailing list-- I never did subscribed to it.

BTW, I have respected and admired your efforts. I bother to email you because I care. If you want to mis-percieve as being impolite, or not respecting your enormous "expertise", that is your problem.

When it finally hit me that the overriding factor is the pre-existing net worth of Americans ($12+ trillion), not counting their $13 trillion debts, then the marginal utility of debt is the overriding factor in the direction of our investments (not counting interim volatility).

God bless,
Shelby Moore III

=========
ADD:

BTW, I see net worth is up to $15 trillion now and is highly correlated to stock market:

http://www.zerohedge.com/article/money-sidelines-fallacy

Inflation or Deflation? - Page 9 Net20w10

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Inflation or Deflation? - Page 9 Empty China, TBonds, Dollar, Deflation

Post  Shelby on Wed Aug 05, 2009 3:40 pm

http://www.gold-eagle.com/editorials_08/saville080409.html

Also I told you the insider banks are buying the bonds:

http://financialsense.com/fsu/editorials/kirby/2009/0804.html

...Bonds required to hedge the growth in Morgan’s Swap book are 1.4 billion more in one day than what is mathematically available to the entire domestic bond market for a whole quarter?

This interest rate swap book is not hedged. J.P. Morgan is the FED...

...J.P. Morgan’s Swap Book was a “black hole” of stealth artificial demand...

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Inflation or Deflation? - Page 9 Empty Chris Laird I think this is nonsense what you wrote

Post  Shelby on Thu Aug 06, 2009 4:00 pm

Chris,

You know I admire your writings, and agree with mostly all that you write. So it blew my mind to see you write this:

http://financialsense.com/fsu/editorials/laird/2009/0806.html

"...But, in this case we were talking the complete bankruptcy (insolvency actually) of the entire world, with for sure worldwide anarchy that might have taken 3 decades to get under control, if it ever was got control of. I am not exaggerating..."


Absolutely false. Do you know how much capital is being held back in USA and in Asia because of the corrupt bailouts? The private sector stands willing to do great things, but they simply can not, because it is too risky and costly for them to do it in this environment of bailouts.

In fact, you got it exactly backwards. The bailouts are going to cause it to drag out 2 or 3 decades and be several times worse in depth.

This is a fact of economics. It is a fact of the current negative marginal utility of debt (govt crowding our private sector).

I thought you have a math background?

"...But from what we know, there would have been a total world financial collapse on two occasions, actually more than two, but I specifically remember two in 07 and 08. And, if you wonder what would have happened if every financial institution had a run on it, and basically went insolvent, imagine food stores running out in less than 3 days, with more or less permanent shortages and riots, and no gasoline either, etcetera, you get the idea..."

That is a profit making opportunity for the private sector! You are socialist! You do not trust the privator sector to move into action.

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Inflation or Deflation? - Page 9 Empty re: Chris Laird I think this is nonsense what you wrote

Post  Shelby on Thu Aug 06, 2009 10:18 pm

Chris replied that he is contrarian and that is not socialist. Thus I replied again:

======================
I do not want to discourage you from me contrarian. And your point about the masses being locked into socialism because they fear collapse, thus no imminent dollar crash, is spot on contrarian and correct. I have been saying the same, in other words.

However, this view you have taken that the fear of collapse is correct, is thus not contrarian, except relative to small audience of gold bugs, austrian economists, and tin foil hats.

From memory the deep recession in before 1920s, was an example of what happens when the President said "no bailouts". The pain was deep and short, and that is exactly what would have happened if we let the fiat system implode. Agree it would have been much deeper, but not 3 decades of pain. Yes 3 decades (or more!) perhaps before getting back to a new top-down coordinated paper financial system, but that would be good thing. A reversion to gold/silver would generate a boom in private investment that would be magnificient.

Right now the govt is crowding out the private sector. At the increasing margins, productive activities is crowded out. This is why all resource production is peaking (Oil, Gold, etc).

I have been living in Philippines (on and off) since 1991, I am here now, and I can tell you that there is a huge amount of private capital (both gold and human) that is either sitting on the sidelines or malinvested in redundant "high value" retail, because it simply can not find suitable risk-adjusted ROI in productive investments. This is why so much capital is being wasted in speculation. Heck even I have been reduced to speculating. The only businesses I can think of doing that are sure to be profitable now are mostly very small scale things that avoid the economic bubbles and increasing tax/regulation/redundancy in the cities. The only way to productive infrastructure type investment is in cohoots with a govt mandated monopoly now.

One of the things the Bible says is that those who do not have faith, will live in delusion and fear.

If the fiat failed tomorrow, and all the productive systems based on debt broke down, this would provide an extreme profit opportunity for those with non-debt, capital. There will be a very deep spike down, followed by a spike back up and then onwards higher and higher. The free market is capable of exponential (compounding) increases in production and prosperity. It is the fiat debt system that parasites this. The parasitic component has now gotten so large that the marginal utility on debt (fiat money creation) is now negative. The fiat system is eating itself. And you think pouring more debt (money) on the fire is a good thing?

Don't you realize the crash has to come eventually, we have averted nothing, just making it much deeper by the end.

====
ADD: Quick deep economic retrenchment means productive assets don't go idle for long-time and rust, they get bought out by real capital on pennies on the dollar, then put back into service. There is no way free market can stay down for 3 decades, as even very 3% rate of re-capitalization, would mean 242% growth in 30 years. And of course the rate of re-capitalization at pennies on dollar will much higher than that, e.g. at 20% for 10 years is 620% re-growth.

Also Chris, please do not feel any animosity from me. I appreciate you from our conversations in past, you were the one who planted seeds in my mind about not being too overbullish on transistion to hyper-inflation (end of fiat). And thus I put extra effort into making this point to you. I think it is a critical error, in your otherwise excellent logic.

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Inflation or Deflation? - Page 9 Empty Bernanke admits the GDP is overstated by 2.5%

Post  Shelby on Thu Aug 06, 2009 11:40 pm

http://globaleconomicanalysis.blogspot.com/2009/08/dismal-unemployment-situation-in-chart.html

Mish Shedlock wrote:...In his Town Hall Meetings Bernanke said:

"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."

Inquiring minds might be asking: Why does it take 2.5% growth to keep the jobless rate constant? The answer is the first 2.5%+- of GDP is based on hedonics and imputations. In plain English, the first 2.5%+- of GDP (if not much more) is fictional...

Mathematically I can think of ways that the GDP could grow and employment fall (e.g. offshoring), so the above is not an exact proof. But it is proof that the GDP overstates economic reality that matters in USA.

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Inflation or Deflation? - Page 9 Empty Japan's debt wall could send them back to fascism

Post  Shelby on Fri Aug 07, 2009 6:01 pm

Watch the video:

http://finance.yahoo.com/tech-ticker/article/297420/Japan%27s-Future-%22It%27s-Going-to-Be-Scary

Note Mauldin mentions the world debt increase this year to crowd out the private sector. That means a negative marginal utility of debt (govt grows while private withers).

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Inflation or Deflation? - Page 9 Empty Scenario: "The Royal Scam"

Post  Guest on Sat Aug 08, 2009 2:13 am

Hi Shelby,

The scenario outlined in the piece found at the link below seems to fit elegantly with your math and logic. It also draws in the criminal nature of the lead actors in this process using Argentina as the example. I strongly suggest you read it and Janzen's (iTulip) latest update to his Ka-Poom theory that is referenced in this scenario.

http://www.oftwominds.com/blogaug09/KaPoom2CHS.htm

I greatly appreciate your efforts and intellectual rigour. Like you I read many of the analysts that you refer to and everything that Professor Fekete writes. I have to confess that I feel that some of these good people underestimate the utter ruthlessness of the PTB and their sociopathic contempt for the rest of us.

In closing I think that we should also take note of the experiment that was performed in Japan over the last few decades. If the greatest profit for the PTB lies in a fast crash and (relatively) rapid reset I believe that is what will be attempted.

All the best!

Guest
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Inflation or Deflation? - Page 9 Empty re: Scenario: "The Royal Scam"

Post  Shelby on Sat Aug 08, 2009 6:07 am

angophera wrote:Hi Shelby,

The scenario outlined in the piece found at the link below seems to fit elegantly with your math and logic. It also draws in the criminal nature of the lead actors in this process using Argentina as the example. I strongly suggest you read it and Janzen's (iTulip) latest update to his Ka-Poom theory that is referenced in this scenario.

http://www.oftwominds.com/blogaug09/KaPoom2CHS.htm

...

Excellent link! Thanks.

That seems to be where we are headed, but IMO it will be much more extreme and dragged out than Argentina, because of the relative size and that move from the dollar can not be to any other fiat, but to gold, thus the world will have to be run to an extreme first in order to finally capitulate to the "run from all fiats" hyperinflation. First, they have to reduce the net worth of Americans from $12 trillion by 1/10 or more, in the Hyper-Deflation (caused by the prior overshoot of debt to the point of now negative marginal utility of new debt/fiat). So we we will see the DJIA below 1000, so that Americans sell off all their hard assets to stay afloat, then the subsequent hyperinflation will further reduce this by another order of magnitude.

This is why I expect hard assets to first fall with the deflation, because it is necessary to get Americans to liquidate hard assets in order to complete the plan of impoverishment, in order to have maximum leverage against the savings boom in Asia. The savings boom in Asia can actually be viewed as transfer of hard assets (ancestral land) for fiat in the banks. The capital is being pulled away from the people. It is not a positive form of savings. I have also shown how this savings is being siphoned off to the "right people" (ruling class) via the state run monopolies which get 70% of that capital and are 1/3 as efficient as the private sector.

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Inflation or Deflation? - Page 9 Empty Catherine Austin Fitts (former Asst US Secretary) agrees we are in controlled deflation

Post  Shelby on Sun Aug 09, 2009 11:16 pm

Her point is PTB need to manage the risk, by stealing from some to prop up others:

http://www.modavox.com/voiceamerica/vepisode.aspx?aid=38361 (listen from 16 min forward, especially at about 32 min point)

...in slow burn, where achieve sufficient capital and legal control, so you systemically implode, drain, destroy, eat alive certain populations, but keep the system intact, so you subsidize financial assets by liquidating assets of certain groups, e.g. middle class...

And eventually near end to kill off the 5.5 billion underbelly of the population (leaving 500 million alive):

http://solari.com/blog/?p=3532 (Swine Flu vaccine)

...Do you have any idea how impossibly frustrating it is to manage a highly centralized system in which the vast majority of people lack any responsibility to ensure that the whole thing works? Everyone wants their free lunch and there are no real markets or democracy to force accountability or a shared intelligence. Force works. Force has increasingly become the way to achieve most everything. Using force is a lot easier that living with rising risk and the costs of subsidizing an aging population...

At her website:

http://solari.com/

Catherine Austin Fitts makes the point the we (nationwide) earn on average 1.7% on time deposits but pay 13.x% on our credit cards. For example, imagine two neighbors one loaning his money to the bank at 1% and the other borrowing it from the bank at 13%. This is example of how all the local capital is parasited to the centralized banking system.

=============
ADD: more examples of probable bank parasites:

http://market-ticker.denninger.net/archives/1315-Bribed-Regulators-Another-Example.html

...70% of the overdrafts happen at a POS terminal or ATM, not by writing a check...The bank knows before they approve the transaction that the money isn't there in the account...

...$1,000 in your account.

You write checks for $20, $50, $100, $1,000 and all are presented on the same business day.

How many checks will hit you with an overdraft fee?

THREE - every time. The bank will re-order the transactions so that the $1,000 check is processed first...

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Inflation or Deflation? - Page 9 Empty Are the PTB using force?

Post  Shelby on Mon Aug 10, 2009 8:56 pm

Shelby wrote:...And eventually near end to kill off the 5.5 billion underbelly of the population (leaving 500 million alive):

http://solari.com/blog/?p=3532 (Swine Flu vaccine)

...Do you have any idea how impossibly frustrating it is to manage a highly centralized system in which the vast majority of people lack any responsibility to ensure that the whole thing works? Everyone wants their free lunch and there are no real markets or democracy to force accountability or a shared intelligence. Force works. Force has increasingly become the way to achieve most everything. Using force is a lot easier that living with rising risk and the costs of subsidizing an aging population...
...

Interestingly the "force" is self-imposed, because Westerners ate the bait (low interest rates). So it really isn't force, it is just simple animal manipulation, as tying a meat on a stick in front of face of a crab so it will exhaust itself to death trying to chase the meat that always moves forward.

We have Peak animal Stupidity:

https://goldwetrust.forumotion.com/economics-f4/peak-oil-nonsense-t102.htm#1749

Shelby wrote:
angophera wrote:Hi Shelby,

The scenario outlined in the piece found at the link below seems to fit elegantly with your math and logic. It also draws in the criminal nature of the lead actors in this process using Argentina as the example. I strongly suggest you read it and Janzen's (iTulip) latest update to his Ka-Poom theory that is referenced in this scenario.

http://www.oftwominds.com/blogaug09/KaPoom2CHS.htm

...

Excellent link! Thanks.

That seems to be where we are headed, but IMO it will be much more extreme and dragged out than Argentina, because of the relative size and that move from the dollar can not be to any other fiat, but to gold, thus the world will have to be run to an extreme (deflation) first...

The synopsis is to bring the real wages of USA down to lower than China, so that China is busted. This will drag the whole world into the elite control. I can see we are in perpetual deflation now, because the marginal utility of debt (to GDP) went negative in 2007 or 2008. So now all new money/stimulus (debt in a fiat system) is driving the GDP more negative.

The mechanism is the debt load, which then enables all the other thefts (e.g. the TARP, low interest paid on deposits, high interest charged on non-govt debt, etc).

Even if the PTB wanted to stop it, they can't, because the players in the system are self-interested (as they should be).

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Inflation or Deflation? - Page 9 Empty re: Scenario: "The Royal Scam"

Post  dz20854 on Tue Aug 11, 2009 5:17 am

Thanks, that's a very informative read. This sums it up [my emphasis in red]: http://www.oftwominds.com/blogaug09/KaPoom2CHS.htm
It's not so much a “collapse” as a redistribution, from the middle class and the working to the capital class...
The capital class will never allow a wealth tax on their capital. They have convinced the middle class and the working [class] that property rights need to be defended, all the while squeezing and bankrupting them to add to the capital class' wealth. Almost no one can figure out how economics works, so the process evolves effortlessly. There isn't necessarily any conspiracy. I look at it as an unconscious symbiotic arrangement.

Has anyone noticed how deflation is taxed differently from inflation? Under inflation, appreciated property is subject to capital gains taxes. But under deflation, the increased buying power (often substantial) of cash is 100% available for spending and goes completely untaxed.

Another point: Many jobs in the small business category are gone forever. Remember the pride many in the middle and working classes had in going into business for themselves, providing for their families, and being able to give back to the community? I remember Shelby asking someone on a software developers board when was the last time that person had worked on a new software application that had commercial prospects. Remember when one could run off a whole bunch of disks, ship them from one's home, and make a million dollars. And it's not due to "the Royal Scam" or to peak oil. Technology is making things too efficient, reducing meaningful work opportunities. So that now there is less mobility between the classes.

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Inflation or Deflation? - Page 9 Empty (Almost) Everyone Is Wrong

Post  Shelby on Thu Aug 13, 2009 5:30 am

please see next post, as I wanted to place it at top of next page of this thread.

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Inflation or Deflation? - Page 9 Empty Re: Inflation or Deflation?

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