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Inflation or Deflation?

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Inflation or Deflation? - Page 16 Empty No deflation until the back the fiats with gold

Post  Shelby on Wed May 12, 2010 11:23 am

Shelby wrote:I don't have anything to say about the short-term, gold could go up or it could consolidate, but I am sure we don't have deflation and we won't have (sustained) deflation until they back the fiats with gold. Until Derek understands this, he won't be able to get the long-term trend correct.

You must understand that a shrinking private sector, supplanted by a growing public sector, is always inflationary. Decreasing private production yields less supply and thus higher prices. Decreases in private share of total pie of money/credit/debt outstanding, means higher prices for the private sector. Deflation means lower prices, and positive real interest rates (i.e. falling gold price). Inflation means higher prices and negative real interest rates (i.e. rising gold price). Those who can't understand this, will not be able to understand the trends.

If you need more detail on this (read all the way to the bottom of the page for detailed understanding):

Derek, regarding your link:

"Furthermore, those disasters were intentional; the oil spill was, quite obviously, an accident."

That is false. The Valdez spill was intentional. Do some research on the captain and the circumstances of the incident. My father was the West Coast Division head attorney for Exxon during that time. Do some research.

Why was it intentional (to rally the environmentalists at the cheapest possible cost)? Well that is for you to speculate, but note that the USA is now dependent of foreign oil, which will help insure the coming hyper-inflation. :wink:

Also the oil price drop may have been a margin call by the those bet against the outcome of the Greece bailout:

"That mattered because a couple of major hedge funds are said to have borrowed heavily to load up on high-yield Greek debt over the weekend in anticipation of the EU deal. The attack on that debt on Tuesday was so successful that the unfortunate hedge funds received margin calls, which forced them to raise cash quickly. They had to sell both their new debt positions at big losses and to dump a wide variety of other holdings, such as oil, gold and stocks. This explains why oil crashed $4, seemingly out of the blue, at a time when supplies were actually constricted due to the Gulf of Mexico drilling rig disaster."


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Inflation or Deflation? - Page 16 Empty Only a fool shorts during massive inflation

Post  Shelby on Thu May 13, 2010 12:27 am

Shelby wrote:You can't make real (adjusted for inflation) money, by shorting anything, when inflation is running at 33+% per year (read from that link to end of page for full justification of the 33+% assertion):

You fools! Gold and silver just jumped +18% and +33% off their February lows! And your shorts are losing money. By the time the market consolidates, you will be another year of inflation behind us.

Shelby wrote:Even shorting things that will do poorly in inflation (e.g. bonds that have negative real interest rates) won't work out, because the inflation is precisely being sustained by the public's (market's) ignorance about those poor investments. And when the public's perception turns, then there won't be a solvent counter-party to pay your bet.


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Inflation or Deflation? - Page 16 Empty It ends with an unsustainable strict global gold standard

Post  Shelby on Thu May 13, 2010 3:33 pm

Shelby wrote:I agree with Ray ("R N") and the prices won't move in a straight line, but I can assure you we won't have deflation until the currencies are fixed to something that can not be created out-of-thin air.

I expect the fiats to be fixed to a very strict gold standard at the end of this chaos, because strict gold standards don't work long-term, and so this will play into the plans of the elite. A strict gold standard will be extremely deflationary and will also be the only way to restore order after the chaos coming. It will destroy the nation-states and be implemented by world authority (e.g. IMF, world bank, BIS, or their successor).

Shelby wrote:Note we may see more liquidity crisis, and it is possible the Fed may play chicken with the Congress again, and let the thing slide into what looks like deflation for a few months, but there won't be any sustained deflation for as long as the banksters haven't completed the hyper-inflationary step which is required for them to maximize their theft:

Then they will reset everything to strict gold standard, so that they can be paid interest in gold and mop up the remaining physical gold in world.

After they have all the gold, they control every human being with a chip implant. You will not be able to buy, sell, or eat without their computer's permission. I am not sure if that comes in my lifetime, but I think so, perhaps about 20 - 30 years from now (because time is accelerating due to exponential function, e.g. Moore's Law the power of computers doubles every 18 months, i.e. the curve of computer power looks like a parabola).

What can you do about this? Remember what was written in 1 Samuel 8. Never have a govt, or eventually you will be enslaved. So the only way to be free, is to want nothing on this earth (especially no govt and central organization). To be free, you have to live free and decentralized (disorganized). Try to spread it by your actions.

The worst think you can do is once the gold suppression has ended, is to continue to hoard gold. Set it free. Don't be greedy. Get the capital into as many hands as you can, so that we can have more diversity and less centralization going forward.

You don't realize how one person can make an exponential difference. If you influence 10 people, and they each influence 10 people, etc.. Then after 7 ripples outward, you influenced 10 million people. A truthful message/action will grow stronger as it ripples out and not be diluted.

Shelby wrote:Ray,

Please re-read the math I presented, to understand why a rigid gold standard will not tie the hands of the elite and in fact will serve to funnel all the remaining physical gold to them.

It will be a mopping up period.

You keep writing in a condescending tone, yet seems you can't read or can't understand a simple exponential mathematical concept. If the mining rate for gold as compared to the above ground supply is say 2%, and if the interest rates go to double-digits, then if the money being paid as interest is rigidly fixed to gold, then those who are loaning money, will be gaining more gold as a % of above ground supply every year. And given the elite retain the power to crash the economy and cause the other banks to fail, so they can acquire them (and other means of aggregating all the loans being made).

Also you seem to not grok that the lowest entropy systems are the most unstable and weakest (i.e. the world order that elite are striving for will only last 7 years). I would rather educate someone in the 210 IQ range on the subject:

Last edited by Shelby on Sun May 16, 2010 3:19 am; edited 2 times in total


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Inflation or Deflation? - Page 16 Empty Summary of this thread

Post  Shelby on Thu May 13, 2010 11:44 pm

Shelby wrote:I was expecting gold to consolidate briefly at the break out to new high, so IMO here the chance to load up before the parabola run coming. But no one can be sure of the short-term direction of the price. Long-term I am sure.

Kiley, it doesn't matter if the Fed chooses to facilitate the creation of more dollars or not. Because if we stop funding the USA federal govt's deficits at treasury auctions (and soon state govt deficits too), then USA federal govt would default. This would cause a massive stampede from the dollar, which is the same as saying hyper-inflation in everything priced in dollars. It would have the same ripple effect on every fiat in the world, and thus it would be the endgame of hyper-inflation, with everyone stampeding to the safety of hard assets and away from bonds. Even 100% tax can't solve this:
(read entire page and entire subsequent page also)

Whereas, if the central banks continue to feed the govt deficits then we will also see increasing inflation, eventually resulting in hyper-inflation because there is no possible solution that stops deficits increasing parabolically. This is because the annual deficits and interest payments on the accumulated public debts are such a large % of GDP (production/private sector), that we now have what is called "negative marginal utility of debt". This means that the increases in debts (deficits), cause the private sector to shrink (GDP to decline), which thus increases the deficits even more. This then accelerates the negative marginal utility of debt (shrink in GDP due to increasing debt) even more. In other words, the acceleration of the implosion of the private sector. This can not be stopped, because it the result of decades of mis-allocation of capital by interest rates which were too low, because the elite were suppressing the gold & silver prices (by making silver coin not money in 1964 all over the world, by selling central bank gold, by selling short 100 times more paper gold & silver than they have, etc):

Also explained in my comments at end of this:

In short, hyper-inflation is already guaranteed, it is only a question of when. By doing QE, the central banks are delaying it, but they are making it much worse, by increasing the size of the public sector (debt, i.e. mis-allocation) and depleting the capital of the private sector. The deflation that follows the hyper-inflation will go much lower. The entire world will nearly depleted of capital. You gold & silver owners will be so incredibly wealthy, that you will be targetted by the masses. It is in your interest to convince as many people as possible to start buying metals with 2 fists.

Shelby wrote:Another way to wrap your mind around "negative marginal utility of debt" is to look around you and see that most people are in useless jobs. We don't really need what they produce. This is what mis-allocation of capital has done. It has created an economy where westerners produce nothing (except in the high tech sector), and China produces too much junk (at near 0 profit margins) that fills storage units across boomer land. Thus the truth is coming (either slowly by central banks fight it) or quickly (if central banks stop buying govt bonds). And that truth will result in everyone realizing the society and thus the govt is bankrupt, and thus running from the govt's bonds. That is hyper-inflation because then no one will trust the currencies of those govts. So really the only thing delaying the hyper-inflation, is the coming stampede to the truth.

After that hyper-inflation, then you everyone is in hard assets or destitute (if they have none), and that is then deflation, because interest rates will be skyhigh and private sector will start to grow again, but from a very, very, very low level.

People get confused. They think a shrinking private sector means deflation. Wrong! Shrinking private sector is inflation! Why? Because production is declining, meaning less supply meaning higher prices. Duh!

Shelby wrote:For as long as the currencies are not convertible to a fixed quantity of gold and/or silver, they will continue to decline in value relative to these metals. They can go all the way to 0, because of what I wrote in the prior 2 posts. At some point (after they have squeezed all the blood they can, i.e. destitute everyone who doesn't have hard assets), it will be in the elite's interest to arrest the hyper-inflation and so that the private sector can start growing again. At that point, they will introduce regional or global currencies that are fixed to gold. The SDRs of the IMF already are. Ray is correct, the broad population will not convert these to physical gold (anyway, they will only have enough cash to get a speck of gold dust). What the population will want is credit. They will begging for loans and the right to pay back those loans with interest in a fixed quantity of gold (as the currency will be fixed to gold).

This will cause all the gold to be aggregated by the elite. Because if the interest rates are greater than the annual increase in gold supply from mining (about 2%), then it means on aggregate the banks are sucking up all the physical gold.

So the 2nd gold standard will be final one, that removes the gold we have now from the population. After that is complete, we move to the 666 described in Revelation in Bible. Humans will be completed controlled by the elite like cattle.

Shelby wrote:Ray it is important that you understand the fixing the new fiats to gold will be in the interests of the elite. The masses will be bankrupt so there is no danger that they will be wanting to accumulate gold. The interest rates will be skyhigh. The private sector will have shrunk drastically. Thus the people will be eager to borrow money because there will be so many profit opportunities in the private sector (especially outside the western world), and thus no one will be interested in gold, they will prefer to earn high rates of interest at the banks. In this sense, it will be 1980s all over again, but with a global private sector.

This will suck the remaining gold and silver out of the private sector, just as the period from 1980 to 2000 did, but this time it will be much more complete.

So yes there will be a gold standard, but it will be international and the common people will not be accumulating gold.

Someone emailed me this:


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Inflation or Deflation? - Page 16 Empty Refuting Fekete's deflation

Post  Shelby on Sat May 15, 2010 10:42 am

Dr. Fekete,

Hadn't emailed you for a few months. You deflation theme is wrong because:

(1) A rising gold price means real interest rates are negative. This means there is inflation greater than the interest rates. Also interest rates are rising around the world (China, Greece, all of EU will see their interest rates rise now, USA is next but perhaps after a 2nd round of mortgage defaults).

(2) Negative interest rates are ballooning the size of the public sector and cannabalizing the private sector, i.e. negative marginal utility of debt. Less production and less investment by the private sector means less supply and thus higher prices.

(3) Food and energy are poor examples because they are highly subsidized. Rather look at wages and property values in the developing world. They have not stopped climbing at double-digit rates. Just ask your average westerner if there is inflation, as their real wages are declining (that is inflation).

Any way, please decide what type of inflation and deflation are you defining. Of the gold price? Of commodities? Of 10x over-priced, credit saturated western real estate? Of cash-only developing world real estate? Of developing world wages in a predominately cash (no credit) economy?

(4) When the westerners wake up to the $100+ trillion insolvency, we will have hyper-inflation. And the banksters want hyper-inflation, after they have finished transfering the bad debts (derivatives) to the public sector and leeching out the desired secured assets (for pennies on the dollar) via the magic of derivatives:


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Inflation or Deflation? - Page 16 Empty Pricing

Post  Shelby on Thu May 20, 2010 9:45 am

Shelby wrote:Ray, that is true, except for the statement "Therefore it can do anything that those 'behind the scenes' with the real information want it to do.".

There are actually physical limits, because some are taking physical delivery. The manipulators have to work within those limits.

What they will do is move the price around to extract the most profit possible, or other macro or inter-dependent objectives they have, but they do have to factor in the counter-effects of moving the price (too much or not enough or too fast or too slow) in either direction. Pricing controls all effects in markets, so they have monitor all the effects they are interested in. All this mis-pricing (deviation from what the free market price would have been, i.e. interference with normal feedback loop of pricing) is what is causing massive mis-allocation in the world, which will lead to shortages and inflation, and then when confidence in financial system implodes-- hyper-inflation. Mis-allocation also causes over-supply in other things, thus causes somethings to be too cheap. So shortages in some things, over-supply in other things.

Shelby wrote:Another thing to keep in mind Ray is how unstable a system is that has 20,000 tonnes perched on the head of needle.

99.9% of gold and silver investors are atop that needle head, ready to fall into the abyss, because they don't hold title to real metal. Once a few start to stampede, it will unravel. Then there will be no controlling the physical price.


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Inflation or Deflation? - Page 16 Empty Summary of my conclusions about inflation

Post  Shelby on Fri May 21, 2010 10:49 am

Please email this to everyone you know. Email it to every analyst. This is a summary of my macro-economic research over the past few years.

Here is the chart you need to be looking at now, which is screaming "BUY GOLD NOW!!":

Inflation or Deflation? - Page 16 Tacinv10 <--- Click chart for full article

And for a wider view:

Inflation or Deflation? - Page 16 Kibar110

Inflation or Deflation? - Page 16 Gdp-re10 <--- Click chart for full article

In the above chart:

  1. green line is reported annual real (inflation adjusted) GDP growth (nominal and real are reported as same now, as CPI is reported so low)
  2. blue line is govt's annual budget deficit (spending - borrowing)
  3. red line is green line minus the blue line, i.e. the actual GDP growth generated (above & beyond debt taken on)

As if the above wasn't already catastrophic, the truth is actually much worse. The blue line is cash accounting, not accrual accounting:

With accrual accounting, I estimate based on data from link above, that the actual GDP growth is about -60% per year!! In other words, if entitlements are marked-to-market, we will be at 6% of our original private sector within 3 years (0.40 x 0.40 x 0.40)!!

Even worse, the green line is a reported lie, because the inflation is under-reported. Actual real GDP growth is -2%:

And even worse, the chart above does not include state govts and private sector debt, which are probably both increasing.

So actually the private sector GDP (the actual GDP after subtracting debt taken on by the govt) is some where in the realm of -80% per year (maybe in the -90s%), so by 2012 and when the stampede occurs that marks-to-market everything (and when the bankster elite have transferred all the debt to the public sector and are ready for the hyper-inflation,, then the private sector will have shrunk to something like 0.20 x 0.20 x 0.20 = 1%!!!!!!!!!!!

The reason you can't see this implosion yet in USA is for the same reason silver is not yet at $100+ (given 99% silver investors have an empty promise, not silver):

It is because nothing has been marked-to-market yet. The public still believes the lies, as evidenced by TIPS reporting that is inflation is low.

Denninger has most of the facts correct, but he makes the wrong conclusion, expecting deflation, because he only looks at the demand destruction. He forgets that all of this is mis-allocation of capital and so supply will also be destroyed. Actually supply of somethings (houses and a slow form of euthanasia "health care") will be too much and other things that depend on credit, energy and their long-term investment, will go into shortages, i.e. food:

Shelby in email to Denninger wrote:Demand destruction yes, but what about supply destruction?
And what about the need to flee the mis-allocation of fiat to survive?

You are wrong about monetary deflation (it is also why you are wrong about gold), except as priced in gold. Gold is the regulator of interest rates. You must pay attention to what gold is telling you. And you must learn that mis-allocation of capital does not only affect demand.

(also read this entire page above) (read to end of page, including debate with Mish Shedlock) (How Deflation is Inflation) (about China, read to the end of page)

The point of the above, is that the private sector (people) will be forced to flee the fiat system in order to survive, at least until the elite back a new reserve system with gold (SDRs with Amero, Euro, and Yuan at parity). A flight from broken fiat system is hyper-inflation. In terms of gold, there will be deflation.

However, I caution you to not try to become entirely self-sufficient (as it is very inefficient), as Hommel so well stated (instead try to be a in place where you can trade for what you need and focus on producing and doing what you do best):

Again I want to re-iterate that we are heading into a tempest of horrific proportions. Expect at some point for silver to skyrocket, but remember to take profits, because for this chaos to end, the elite will have to lock a reserve currency to gold to defeat the barter chaos that will drive silver bananas (the elite can mop up gold with usury but can not mop up silver, also

Also in some jurisdictions one may need to flee and too many kilos of silver could be a hindrance (unless you have secret long-term storage already planned out, that relies on no entity that the elite know about).

ADD: I want to take a stab at refuting this claim that the Euro situation is not that big of deal:

Gerbino is making several assumptions which seem wrong to me:

  1. Austerity will reduce GDP, reduce tax payments, and thus snowball the amount of debt assistance needed ($4.2 trillion will grow exponentially as the GDP implodes on itself, due to austerity which will thus drive need for more austerity). The $4.2 trillion is a static figure that does not reflect what % of these economies is non-competitive in the world without the govt debt spending subsidy.
  2. Buildings and factories backing debt, does not mean 70% of the debt is payable. An over supply of building and factories for non-competitive, redundant debt subsidized production, is worthless. Infrastructure can't be eaten, and it can't be used for production that is more expensive than China. I think Gerbino is failing to understand the level of mis-allocation that debt and too low interest rates creates. To look only at the tip of the iceberg ($4.2 trillion) is foolish.
  3. Restructuring of debt for longer-terms, means either that the bond holders are getting shafted by fiat decree, or much higher interest rates will be paid out as compensation, and in either case, either way the market is going to extract higher yields from Euro-wide bonds, thus forcing Europe's already extremely high debt load even higher due to higher interest on the debt. Gerbino's simplistic calculation assumes no market cost for this "restructuring", which I think is impossible for anyone who understands the way the free market works (routes around price fixing).
  4. Gerbino admits that he assumes the austerity programs must be followed. If they are followed, Europe will implode as the non-productive morass that it is, which will exacerbate the debt problem and the QE (inflation). Thus they won't be followed, and/or there is going to be so much strife and chaos, that business confidence is going to plummet. I just don't see how he sees this as a small matter. You don't do the wrong thing for decades, then it comes to a head and suddenly it is a minor thing that can be fixed with a little 10% haircut over 10 years.
  5. Increased tax collection (if successful and I doubt it, as people will stick their middle finger to the govt at times like this when they have nothing to lose) would further implode the economy (stealing from the private sector to give to the public sector always destroys the real GDP).
  6. The USA and UK are heading into a tempest and will drag down Europe with them. The whole world is interconnected/dependent now in terms of trade. Europe's decline will drag USA and UK down too.
  7. What is this guy thinking? We are heading into a hyper-inflationary death spiral of decades of western debt subsidies (hyper-deflationary if prices are measured in gold ounces).

Here is some more relevant commentary:

Hamilton chimes in with "it is inflation ahead as usual":

The difference between now and 2008 panic, is this panic does not involve fear about the world's reserve currency economy (yet)-- the US dollar. Thus this panic will be less severe in the short-term, especially relative to gold because the inverse relationship of the dollar to gold has been broken by the realization that the Euro is no more disciplined than the dollar (and the -20% drop in stocks is not having as a big of an effect on gold, now that DJIA/Gold ratio has broken trend in gold's favor heading for another plunge, see first 2 charts above). And long-term, all the fiats are in an unavoidable monetary inflation mode-- that is monetary as I have defined it in my linked discussion of inflation above (not a specific measure of supply of money, which is ambiguous). And by the time the panic does involve the US dollar again, it will be realization that fiat system is spinning out-of-control and there will be massive move down Exter's pyramid towards gold (and probably silver too with a vengeance). This is the ultimate "inflation expectations" that central banks keep their eyes so diligently on. Once public turns away from bonds worldwide towards gold, the parabolic move is on (hyper-inflation in fiat prices, or hyper-deflation relative to prices in ounces of gold).

But the final parabolic move will probably be drawn out or aborted at least once, before it finally blows out and up. Because we are talking about a huge inertia (humans don't like to change fast and will resist until overwhelmed by reality).

Yes, this month's flight from everything into cash (which still means US Dollars worldwide) has knocked the gold price 6% off its recent record high vs. the greenback. But compared with all other assets bar Treasuries, however, gold shows phenomenal strength so far. Oil is down 20%. Platinum is 15% off. Aussie Dollars have dropped 10%, despite paying 450 basis points above cash deposits at the US Fed.

Note silver only dropped about -10 so far. So appears silver is starting to assert its monetary role a bit, and silver has huge OTC derivatives (promises to pay) that can not be fulfilled. The other metals don't have this.

Last edited by Shelby on Sun Jun 20, 2010 5:19 pm; edited 2 times in total


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Inflation or Deflation? - Page 16 Empty USA has 1000% debt-to-GDP ratio! THOUSAND, not HUNDRED!

Post  Shelby on Tue May 25, 2010 11:43 am


Inflation or Deflation? - Page 16 Debt_t10 <--- click to read more

That should give you some idea that this is not a normal deflation nor inflation. This is death spiral for fiat debt system.

Clive Maund says this may be the best and last opportunity to sell dollars while they are strong:


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Inflation or Deflation? - Page 16 Empty Ben revs up the helicopters again

Post  Shelby on Fri May 28, 2010 5:10 pm

Bernanke restarted the QE only 1 month after he promised it was stopped:

ADD: someone emailed me that the following refutes that any swap lines have been used thus far and thus there may be another liquidity take down coming:

Federal Reserve Foreign Exchange Swap Agreements (USD bn) - Federal Reserve Bank of New York

Short-term is unpredictable, but the bailouts must come, else the fiat system disintegrates.


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Inflation or Deflation? - Page 16 Empty The gold story

Post  Shelby on Fri Jun 04, 2010 1:26 am

This article sums up most of my writings very well:


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Inflation or Deflation? - Page 16 Empty CaseyResearch echos my statement about imprecision of money supply & importance of "expectations"

Post  Shelby on Sat Jun 05, 2010 7:24 pm

Here was my original post about that in debate with Mish Shedlock on May 9 (which I had emailed to CaseyResearch):

Shelby wrote:=========Inserted on June 6, 2010============
I see that on May 29, Bud Conrad wrote a similar analysis about imprecision of the money supply and how "expectations" is most important: (see "M3 Falling")


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Inflation or Deflation? - Page 16 Empty More on why we don't have deflation

Post  Shelby on Tue Jun 08, 2010 12:49 am

I had to summarize my prior debate with Mish again in another forum:

Shelby wrote:Stop the nonsense please

There has never been deflation on fiat currency that wasn't convertible to a fix quantity of gold. Never. Go find one example? Even though Argentina real estate declined relative to gold and dollars, the cost-of-living in Argentina skyrocketing in pesos. There was no deflation relative to pesos.

The reason there can't be deflation, is because the fiat can and must be debased as a reaction to the liquidity crisis.

There of course will be deflation relative to gold.

As people scramble to get out of the increasingly worthless fiat, there will be hyper-inflation relative to fiat, and hyper-deflation relative to gold.

The definition of deflation is that my cost-of-living as priced in my real wages should be declining. This is not the case.

Yes liquidity crisises will cause some assets to decline in value (those which are having liquidity crisis), but this is not deflation unless it causes my cost-of-living to decline.

Your house loses value, but your real estate, insurance and financing costs are all increasing. By 2012, I expect your taxes to go ballastic and/or the debasement of the dollar to go ballastic. Any short-term liquidity crisis blip is not going to give you a sustained reduction in cost-of-living.

Where is the general deflation?

Some reading material, especially my comments at the end and the links in them to my further comments and debates:

What you really need to realize is this is not deflation or inflation period, it is a death of the fiat period, which is hyper-inflation (priced in fiat) and hyper-deflation (priced in gold) at the end game.

Shelby wrote:There will be hyper-deflation for those holding gold (prices relative to gold price), at the same time there will be hyper-inflation for those holding toilet paper (and imho that includes mining stock certificates because the situation is so bad that I think govt will be forced to steal everything).

So yes I have been and continue to argue that we will have hyper-deflation. And we will have hyper-inflation at same time. If you own gold and silver, you get the former, otherwise you get the latter.

Other than that, I have no quibble. Look forward to your coming articles. Thanks.

ADD: most people only look at the demand side, and they say liquidity crisis will cause a drop of demand and thus prices to fall. They don't look at the supply side. Liquidity affects production too. Worse yet, these liquidity crisises are transforming into a death march for the fiat credit system, which is being fought by debasing the fiat system via sovereign bond overissue. Eventually people have to jump ship from these negative real interest rates, lest they will be drained of all their savings. And jumping ship from negative real interest rate sovereign bonds, means hyper-inflation. And in hyper-inflation, it becomes very difficult to do production. Thus production will drop even more. Then of course the govt will be forced to step in and ration supplies, which will further disincentivize production, as producers will no longer be able to get the highest price for their risks.

Look at any dip in the price of silver as big gift. Hope you sold your mining stocks at the recent peak, and ready to munch on physical silver on every dip.

There is no way that silver consumption is going to decline significantly. The reason is the developing world has barely scratched the surface of modernization, and silver per capita consumption is not even 1/10 of the west. Silver consumption is going to skyrocket. If we do go into a mad-max implosion, then we will have war, and war will place great demands for silver and every other commodity. Remember during WW2, Americans couldn't even eat butter because everything was rationed for the war effort. That is not even getting into the skyrocketing monetary demand for silver especially in the USA. And this is only the tiniest tip of the iceberg of the coming monetary demand.

It will be very difficult to find a collection of mining stocks that on average outperform physical silver. And that doesn't even include the risk of the govt stealing some or all of your paper gains.

Silver is used to improve efficiency in electronics and mechanics and thermal flow. Any energy crisis will be a boom for silver, as people will need to find more efficient ways of living. It is a lot more efficient to commute work via the internet than to drive.

ADD: an email to Dr. Fekete:

Shelby wrote:Bravo!

Much better than your prior article.

There is no deflation is you define in terms of whether people have an increasing standard-of-living, which is what deflation means to me.

You must be referring to deflation of credit. That is much narrower definition of a different sort of "deflation". That definition of deflation looks like inflation to most people as their standard-of-living is reduced by lower real wages and/or price increases.


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Inflation or Deflation? - Page 16 Empty Ben actually did start the helicopters again (he is just hiding the action)

Post  Shelby on Wed Jun 09, 2010 12:03 pm

Shelby wrote:Bernanke restarted the QE only 1 month after he promised it was stopped:

ADD: someone emailed me that the following refutes that any swap lines have been used thus far and thus there may be another liquidity take down coming:

Federal Reserve Foreign Exchange Swap Agreements (USD bn) - Federal Reserve Bank of New York

Short-term is unpredictable, but the bailouts must come, else the fiat system disintegrates.

The QE is continuing, it is just being hidden via proxies, where the accounting won't appear at our Fed immediately (it is a form of credit, and off-book accounting):

Just more of the same accrual and off-book accounting games...


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Inflation or Deflation? - Page 16 Empty It will be hyper-inflation (probably circa 2012)

Post  Shelby on Thu Jun 10, 2010 6:50 am

Shelby wrote:Hyper-inflation will occur because the banksters have transferred all the creditor status (mortgage debt) to the govt:

Hyper-inflation will also occur because it is the only way to escape (as people dump fiat for gold & silver) the negative real interest rates of the debt default spiral and negative marginal utility of debt stage:

See my comments at these links:

Note that only gold & silver are monetary metals, because they only have high stocks to flows ratio: (see his track record!)

If you get this wrong, you will lose everything. Paper assets will not survive (and that includes mining stock certificates).

I have stated this several times now, and the reason is I think we are getting close (within 2 years or so at most, but the parabolic change could accelerate later this year).

Don't be left standing holding a paper bag when the music stops playing.


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Inflation or Deflation? - Page 16 Empty China Asset Bubble (bullish for silver?)

Post  Shelby on Thu Jun 17, 2010 4:43 pm

No one knows when it will crash, could go on for some years possibly:

1) Law of diminishing returns (I had figured this out in prior posts), given that China is spending > 33% of GDP on fixed assets (which doesn't account for depreciation and maintenance).

2) 12.5% of GDP stimulost, does not account for the multiplier effect of the massive increase in fractional reserve lending by the banks (which did not occur in USA stimulost).

3) The concept that China is a land of savers is false (for example saving as being an owner of a condo in an empty building, or more generally the point of #1, where savings is overconcentrating in fixed assets).


I found this debate very informed and fascinating! Looks like we may get a busting of the China real estate bubble, followed on by a 5 year plan to stimulate sales of household durables! Can any one say "BUY SILVER"!! Yeah! The central managers will just keep creating 5 year bubbles and popping them along the way, trying to "pretend and extend". Eventually (many years or decades) it will all end horribly.

Chinese workers forcing their salaries to be higher (a defacto rise in the Yuan exchange rate):

Last edited by Shelby on Fri Jun 18, 2010 2:34 am; edited 1 time in total


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Inflation or Deflation? - Page 16 Empty Denninger fails 10 points, wins 2

Post  Shelby on Thu Jun 17, 2010 7:06 pm

My comments added to bottom of above article

Shelby wrote:You may wish to review my comments at the bottom of the prior article by Gordon Gecko:

My thesis on the End Game for gold investors also has some relevance:

Points against Denninger's rebuttal:

1) LEAP Calls on stocks may not work out if those companies that go bankrupt in an hyper-inflationary environment. Also Denninger is wrong to say he only needs to stay ahead of the lose of purchasing power of the currency, he always has to stay ahead of rising taxes, to pay for the socialized welfare unemployed.

2) Denninger argues that the dollar is appreciating relative to "30 years income pulled forward by credit" over-inflated housing prices. Geez, I just built a 1000 sq.ft. home made of solid concrete and steel for $7000 in a developing country (no permits needed!). The prices of houses here are basically the cost of the raw materials. Denninger also does not understand that protectionism is a hidden tax (the free market routes around all costs, Coase's Theorem). Your net worth will decline in global purchasing power with his strategy. Dollar is declining relative to gold and silver since 2001.

3) I agree with Denninger that gold bugs hoping to break the tax laws will be destroyed:

4) Denninger implies that hyper-inflation won't happen again, because it didn't happen in 1980 when Volcker raised interest rates towards 20%. He forgets we are net debtor nation now, and the PUBLIC sector interest rates can not be raised that high without causing debt implosion, which is politically intractable:

Note private sector interest rates are already high:

5) Denninger fails to understand that gold is a hedge against negative REAL interest rates (which must remain negative until end game of hyper-inflation per #4), not inflation nor deflation:

6) Denninger is correct that gold is a damn good geopolitical hedge, and with lastest Matt Simmons revelation that the BP well in Gulf of Mexico is NEVER going to be capped (short of a nuclear bomb down the hole), and Iran/Israel situation to blow any time, this would be a good time to have some gold insurance in your portfolio.

7) The BIS and Jeff Christian in recent GATA debate, both say the gold isn't there. And apparently Larry Summers is on record proposing price suppression in a research paper and his actions:

Denninger argues that anything that has a value above the cost of its input (i.e. anything someone made a profit margin on) is CREDIT. Nonsense! Credit has nothing to do with profit margins. Credit is a promise to pay in future (and usually at some interest rate above 0%). There is no promise made when someone pays someone a profit for producing gold! The implication of this error is that Denninger is lacking fundamental understanding of economics. I suggest he read Adam Smith.

9) Denninger fails to understand that those who control the creation of the money supply and credit (owners of the central banks), thus control the government by buying the politicians.

10) Denninger does not understand that ability to trade dollars for gold, is what allows the dollar to have any value at all. If ever the Comex and LBMA fix, can not deliver physical metal for contract, then their pricing power will be lost and the dollar will hyper-inflate towards 0 purchasing power (infinity gold price). The way this will happen is when the masses are forced to jump from the dollar to gold and silver:

11) The founders of USA created a bi-metallic system of gold and silver. The metals must be allowed to compete with each other to regulate the manipulation of each. Denninger is correct that gold is more pure monetary and silver more industrial and (before) currency oriented. But he fails to understand that what makes these metals monetary is not some trust in nothing intrinsic, but in fact in their very high stocks-to-flows ratio. Meaning that the annual mining production is very small relative to above ground stocks. But silver is really in a special squeeze on above ground stocks:

And Denninger is correct that elite hate silver, because they can't control all of it, and they made the mistake of demonetizing it in 1965 globally, and this is going to bite them back hard now (see link above).

12) Denninger fails to understand that gold was money in 1800s and that meant you could earn compound savings in gold, and thus 1800s for 33,900% more return for savers than 1900s:


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Inflation or Deflation? - Page 16 Empty Negative REAL interest rates in spite of negative CPI

Post  Shelby on Sat Jun 19, 2010 12:33 pm

My comments added to bottom of above article:

Shelby wrote:Even if some prices are falling very slightly, we have inflation because REAL wages are declining (especially precipitously if you average wages of the employed with the zero wages of the accelerating ranks of unemployed):

Gold is rising because of the negative REAL interest rates in the PUBLIC (sovereign) bonds. CPI is a lagging indicator. They are negative REAL relative to PRIVATE sector (debt and bonds) interest rates which are skyrocketing (or soon to):

When the private sector implodes, there will be massive shortages and inflation, then next comes the stampede to gold+silver as the wheels fall off the fiat delusion, which is the currency event called hyper-inflation.


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Inflation or Deflation? - Page 16 Empty Denninger loses 17 more points

Post  Shelby on Sat Jun 19, 2010 7:07 pm

See my comments at bottom this article:

Shelby wrote:Denninger has attempted to rebut the above article:

But he did not rebut my comments above (nor my comments in the prior Gecko article). Readers might want to challenge him to debate me. I can handle Denninger easily.

Denninger fails on numerous points in his latest diatribe:

1) Denninger butchered his own credibility in his prior rebuttal, see #8 in the comments about Denninger's prior rebuttal:

He proved he doesn't even know what credit is, and does not understand the basics of economics.

2) Denninger argues that discussions that use the word "gold" have no relevance to the big picture, because he apparently doesn't understand that gold is the Ultimate Market Regulator:

Thus, since most of what Denninger writes about is fraud and lack of regulation, it is difficult to have an intelligently meaningful discussion in his forums without mentioning gold and getting banned. The Dewey Decimal system has nothing to do with it. Denninger invents straw-men arguments to defend censorship. As for the religious dogma, he could create a forum for that, and send all such posts there. Many of us want to discuss gold's critical role in regulating fraud and other economics, without adding religious dogma to every post we make. I for one, do also have an orthogonal Biblical view, but I am able to separate my gold arguments from my Biblical arguments, and do so at my forum,

3) Denninger clearly does not understand that hyper-inflation in an across the board rejection of fiat, where the masses toss fiat in exchange for any tangible asset they can get. It is characterized by DOUBLE-DIGIT percentage DAILY price rises, even Net 30 credit terms for receivables is not offered during hyper-inflation, and all such commerce ceases.

4) Denninger again flunks Economics 101, because he does not understand that if gold is unavailable for any fiat price, it does not mean that gold is unavailable in trade for some real goods. Thus gold at that point has a near infinite value relative to fiat, but a more stable value relative to real goods. This is a defacto return to a gold standard, which is in effect what hyper-inflation means. Serious economists understand that gold has tracked oil within a range since 1970s, because the Arabs demand to be paid in gold:
(note the mention of FOFOA at link above, I have refuted one aspect of FOFOA's free gold thesis here, )

5) Denninger again correctly argues that government (society) will attempt to steal (tax) gold:

However, that is no argument for LEAPS, because the government will steal those first, as they are easier to steal. The only way the government will stop a black-market from flourishing, is if they offer a new fiat redeemable for a fixed price in gold and are able to supply all redemptions (which will be few if interest rates paid are high enough). And in that case, yes we gold investors could lose some due to taxation if we want to participate in the high interest rate compounding (a theft from society of capital), but we will not lose as much as those who are wiped out in LEAPS and other paper investments. And for those who want to be clever, just buy silver instead. Silver should outpace gold appreciation by several times, and I don't see the government will be able to make a higher tax on silver capital gains, because they won't be backing the new fiat currency(ies) with it and thus such a differential tax on silver vs. gold would cause a flourishing black-market for silver.

6) The dollar has performed horribly in the past year relative to potatoes and other fresh produce where I am. Potatoes have nearly doubled in price in past year, and are 20% higher than they were at the peak in early 2008. Ditto for meat, fish, and nearly every fresh food product, except not for rice (because it is subsidized by the Philippine government).

7) Denninger again fails to understand that gold is a hedge against negative REAL interest rates (which must remain negative until end game of hyper-inflation per #4 in my comments to the prior rebuttal from Denninger), not inflation nor deflation:

Regarding crossing the border with gold, Denninger doesn't seem to realize that some have advocated moving your gold now to other locations where you might want to flee. Also there may be other ways to cross borders, e.g. small plane, boat, submarine, diving, tunnels, horse, hot air balloon painted same color as sky, etc.. And if your gold (preferably silver!) is already well hidden where you want to ride out the crisis, then no need to move it until the crisis is over and you are ready to pay the capital gains tax and join the repaired fiat system again.

9) Denninger does not understand that no shooting has to take place if 79% of people buy silver and just hide it well. The fraud fiat system would collapse over night (due to silver's tiny $10 billion annual global supply), and the government wouldn't even be able to back a new fiat system with gold, because the citizens would be holding and demanding silver to be money. This ideal won't likely happen (because we can't educate the masses fast enough and TPTB would shut down the availability of silver by war or other means if threatened), which is why there will be lots of shooting unfortunately. And those who lost everything in LEAPS will be lacking resources to protect and survive repeated waves of threats.

10) I disagree with Denninger that USA citizens will be more safe in USA than in every other country. There is going to be a lot shooting going on in the USA, until the system recapitalizes with a new fiat redeemable for a fixed gold price. I am glad that I am 10,000 miles away from what looks to be a 3 million barrels per month oil gusher that can NEVER be stopped, short of a dangerous nuclear device which could potentially fracture the seabed even worse. Valdez spill was 257,000 barrels, and Nigeria wasteland is 13 million barrels total over decades. BP gusher is 4 - 6 million already. How convenient an "accident" to be enable blaming the already coming implosion of the US economy on BP instead of on the central banks.

11) Denninger argues that investment in secular turns in markets is not profitable (calls it "curve fitting"). Does he even realize he wrote that? Amazing. Secular shift investing is not speculation.

12) Denninger is correct that Gecko had an incorrect statement about CPI being "flat to down". What Gecko should have said is that REAL interest rates have been "flat to negative":

13) Denninger argues against himself, where he agrees that there is no way to operate a viable business without being paid in the debt money fiat currency.

14) Denninger apparently is not aware that the Constitution granted only limited enumerated powers to the Federal govt, and thus the Feds have no right to print currency for use in the States, only in territories ceded by the States to the Feds:

15) Denninger is again correct TPTB want gold standard without silver, as I explained my comments to his prior rebuttal, that both gold and silver are legal tender in the Constitution in order to regulate the manipulation of either one (the free market trades the gold-silver ratio). Indeed the banksters want a gold standard because they can control gold more easily than silver, but they also were able to manipulate silver in the past too:

So that is why we need both. Hard for them to manipulate both simultaneously, as there is nothing else in the world (other than silver and gold) that have sufficient NATURAL stocks-to-flows ratio to be used as store-of-value.

16) Denninger is correct that wild swings in inflation and deflation result when the predominant money is gold and silver, as was case in 1800s. But what he fails to mention is this only affects those who are doing the borrowing ("debtor is slave to the lender" wisdom in Bible), as it manifests in bank runs on banks that created "gold promises" (i.e. loans) without 100% reserve. But those who hold gold and silver (both!) are immune from this effect. And those who saved in Treasuries under a gold standard, got 33,900% more REAL purchasing power than those who saved in fiat in the 1900s:

So we already have historical proof that Denninger's socialist mantra of "enforce the law" and "The Quantity Theory of Money" (MV=PQ) fails miserably. In fact, go back 1000s of years for more proof. Why do we bother to debate this idiot? He doesn't understand economics nor history. I could detail all the reasons that MV=PQ is a useless abstraction (for starters, ), but why bother when the historic proof exists.

17) Decling prices does not accompany wages that decline more than prices in deflation, only during inflation. Deflation is rising real wages, inflation is declining real wages:

This incorrect understanding about what is deflation is really screwing up most of the "anal-ysis" I see out there. I also debated Mish about this and I think he understood:
(read the several posts at link above)

Denninger has most of the facts correct, but he makes the wrong conclusion, expecting deflation, because he only looks at the demand destruction. He forgets that all of this is mis-allocation of capital and so supply will also be destroyed. Actually supply of some things (e.g. houses and a slow form of euthanasia "health care") will be too much and other things that depend on credit, energy and their long-term investment, will go into shortages, i.e. food:

18) Denninger is correct that gold does not regulate socialism evenly, but rather in rapid bursts called hyper-inflation. All his politicking won't protect him from being wiped out by the Ultimate Regulator (which will never fail, it just waits to act when the most people can be obliterated for their sin of debt and credit):

Good luck to all fools.


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Inflation or Deflation? - Page 16 Empty Gordon Gecko blog

Post  Shelby on Sun Jun 20, 2010 8:47 pm


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Inflation or Deflation? - Page 16 Empty No deflation in China

Post  Shelby on Mon Jun 28, 2010 12:29 am

...To begin, the People's Bank of China has just this week decided to permit a wider trading range between the yuan and the dollar. This is the first step toward ending the infernal yuan-dollar peg. While the impetus behind this abrupt change remains a mystery, I have a sneaking suspicion that, as my colleague Neeraj Chaudhary explained in his commentary last week, the nationwide labor strikes were a prime motivator.

In response to the 2008 credit crunch, the Fed printed so many dollars that the People's Bank of China was forced to drive Chinese inflation into double digits to maintain the peg. The pain has fallen on China's workers, who have seen their wages stagnate while prices for everything from milk to apartments have skyrocketed. This week's move indicates that, regardless of its own policy motives, the Communist Party can no longer afford to keep pace with the dollar's devaluation...


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Inflation or Deflation? - Page 16 Empty Sound Familiar?

Post  WuQiMing on Tue Jul 06, 2010 10:00 am

I would have added this to the appropriate thread but it's locked.

Mish is being called to answer his deflation theory in public by Nadeem Wayalat at Market Oracle:

Still deflation?

An exact duplicate of your argument Shelby.


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Inflation or Deflation? - Page 16 Empty re: Mish incorrect definition of deflation

Post  Shelby on Wed Jul 07, 2010 1:08 am

Yes I read that too. Thanks for taking the time to link to it. I think Nadeem may also be reading my work (he wrote publicly recently against debt in all forms, and noted he is not religious, I feel he might have been talking to me, as I have stated that I try to keep biblical understanding orthogonal to economic understanding, although finding correlations).

I also repeated a comment that I have made in past:

Shelby wrote:SURE inflation

I know of no time in world history (including our history since 1934) that a fiat not redeemable at fixed price to gold, ever experienced a period of sustained price deflation.

There will be inflation until the world fiat system is fixed to gold again. Period. 1 million percent sure.

Those who are fooled by deflation nonsense, will lose.

Shelby wrote:
Prechter wrote:They're going to try the same old stuff, more and more lending, more and more borrowing—which is the problem, not the solution—until everything collapses, and then they'll go, “Oh maybe we should try something else,” and by that time we'll already be at the deflationary nadir, and it'll be time to look for an inflationary outcome.

And what does more debt in a fiat system mean? It means more inflation of prices. Yes there is deflation in prices of assets that were overly inflated by debt (e.g. houses), but all of this debt creation to stop that from imploding, is feeding through to massive price inflation, especially in India and China where strikes are being reported now every day. Thus the prices of most things must and are rising, as the working class (third world) is demanding higher wages. I have watch wages increase here in Asia by 30+% in the past year or so, and potatos and other vegetables are 30 - 50% higher than they were at peak in 2008, and nearly 100% higher than their low price in 2009.

Anyone who is measuring their net worth relative to houses is going to get a nasty surprise when the world rebalances to a gold back currency(ies), because the I can build that same $200,000 house (say in Arizona) for $10,000 here in Asia (cost of materials, labor nearly free, no permits needed, land very cheap in rural areas). And the prices of those raw materials are rising 30+% per year.

Those who follow the deflationalists, will end up buying gold at $10,000, when it is already too late.

Shelby wrote:See my prior comment on this page.

Yesterday, in the downtown wharf area, I stumbled upon 13 kg sacks of white onions imported from China for P360 (US$7.83). This is about 40% of the price I was paying in the grocery store. But this just appears to be the fact of living in the islands, where locally produced vegetables are very expensive due to low economies of scale and high fuel and middle men costs.

I live within 2 blocks of where the fishing boats land, so recently was able to buy (still alive!) small fish for about $1 per kg, versus the dead frozen on ice $2 to $3 in the grocery store.

I think this illustrates the level of deflation that is possible if free trade is allowed and the govt gets out of the way. The ASEAN region is experiencing a boom in trade as tariffs are dropped. We are seeing pockets of deflation due to this.

Nevertheless raw materials, fuel, and wages continue to rise in price.

Also remember that relative to gold, we do have deflation. In that sense, Pretcher is correct, that the debt model is imploding.

Also the correct (non-liar) US inflation chart is here:

Thank you.


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Inflation or Deflation? - Page 16 Empty Denninger's mistake on deflation

Post  Shelby on Sun Jul 25, 2010 12:12 pm

Shelby wrote:Denninger's mistake on deflation

Denninger interview videos linked from my comment:

Denninger says we can't have inflation because there can not be created a bigger credit bubble than the housing bubble that is bursting (this was the same argument presented by Mish Shedlock). The "money supply" (an inherently ambiguous term as I have explained in past) can not be increased (pushing on the string of total credit). He correctly pointed out that govt debt is being increased to offset loss of private sector debt, and the total debt has decreased (but only very slightly, see chart):

I agree but inflation will result any way. What he apparently does not understand is that the govt will monetize entitlements from here forward (and this will not cause a collapse of the dollar relative to other equally bad fiats), and yes total credit may decline and housing and other credit based assets will continue to decline (that is deflation). But this acceleration of social welfare monetization (is mis-allocation of capital, i.e. theft) and will cause a devaluation of the dollar relative to assets that can not be diluted by corruption of central banks monetizing sovereign bonds. Thus will result in inflation in price of everything that is not bought on credit (i.e. energy, food, gold, silver, etc). The govt is printing money to pay entitlements. The totals may have peaked, but the composition is changing RADICALLY, which means an inflation in the price of things that can not be created out of thin air which are not in oversupply. I had written about this:

Essentially what is happening is that the westerners are being drained of their net worth and this is being done with a combination of deflation of credit based assets and inflation of commodities. There is an accelerating transfer of jobs and wealth to developing world so they the world's poor (those that can get a job) can absorb this inflation (because western companies are forced to lower labor costs due to the decline in private sector):

Thank you.


Shelby wrote:Capacity utilization does not affect commodities

Capacity utilization only affects the profit margin of the valued added, not the demand for the commodity inputs.

This is super-cycle rebalancing of west to developing world via a credit devaluation of the west, will continue to drive the prices of commodities, and especially silver and gold higher. See my comments at bottom of following linked article, especially the last comment:

Yes the western credit is deflating and being replaced by sovereign welfare money printing. This is creating inflation globally, as evident by strikes in China and India. I expect silver to skyrocket as this inflation becomes more recognized. The bankster nations will take us through another deflation scare in order to ramp up the monetization to the next higher level to offset the accelerating rate of credit implosion globally. You think silver from $9 to $19 was something, stay tuned for round two with $5 trillion in QE coming...


Shelby wrote:Hyper-inflation is due to confidence implosion

I agree with the thesis of this article above, as per what I had written in comments at bottom of the following articles:

Hyper-inflation in dollars will only come if there is a stampede of confidence where holders of dollars try to dump their dollars for tangible assets. It is not preceded by an exclusive correlation to inflation (many periods have inflation but hyper-inflation does not ensue), but to be more precise it is preceded by negative REAL interest rates sufficiently horrendous to cause loss of confidence in the ability of the currency to be store of value. This could be caused by a collapse in employment and tax income, where the govt had to radically raise spending and deficits.


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Inflation or Deflation? - Page 16 Empty Hyper-inflation is likely for the USA

Post  Shelby on Sun Jul 25, 2010 6:16 pm

page 8 wrote:Greece, which on its present course, would end up spending more than
20 percent of GDP on interest by 2040. But look at the right-hand chart and you’ll
see that powering ahead in the interest payment stakes are once again, the United
Kingdom and the United States.

This projection suggests that by 2040, unless there’s a radical change of course, the
United States will be spending over 20 percent of GDP on interest payments on the
federal debt. Guess what, that’s exactly the percentage of GDP that the CBO, the
Congressional Budget Office, estimates will be raised as tax revenue by the federal

page 9 wrote:...Only a few years ago, the United States was spending less than 7 percent of federal
revenues on interest payments on the federal debt. The debt wasn’t that huge and
interest rates were very low, but on present trajectories, we will quite quickly get to
the point when a fifth of federal revenues are going on interest payments. And as I’ve
said, if the BIS is right, within three decades, it will be 100 percent. Of course, it never
will get there because that’s just impossible. What a crisis like this does is to force
impossibly difficult political decisions about what is going to be sacrificed in order to
pay the debt or which debtors are going to be sacrificed to maintain other payments...

page 11 wrote:...Cut, print, or default. Ladies and gentlemen, history affords only one example of a
country that managed to get itself out from excessive debt-to-GDP burden without
either inflating or defaulting. The only case that I can find is Britain after 1815. For
a long century, Britain paid down its debt through growth and through running
primary budget surpluses. There was no default. There was no inflation. But this,
unfortunately, is the only case that history offers us. And remember Britain did have
some unusual advantages at that time. It was, of course, the first country to enjoy an
Industrial Revolution. It also had the world’s biggest empire to draw on, and it had
a nondemocratic franchise throughout the period, which meant the propertied were
represented and the propertyless essentially were not. That makes it much easier to
make tough fiscal decisions, believe me.

So that just leaves us with two options: printing, and that’s much easier for a
country with monetary sovereignty like the United States or the United Kingdom
(it’s impossible for Greece, unless Monsieur Trichet agrees to print for them); or
alternatively default, which I believe not only Greece but other eurozone economies
will ultimately do because no bailout can essentially achieve the drastic contraction
in fiscal policy that the Greeks have committed themselves to undertake. And I don’t
believe that that contraction is politically viable...

page 12 wrote:...What governments don’t do is slash expenditure entitlements, reduce
marginal tax rates on incoming corporate profits to stimulate growth, raise taxes and
consumption to try and balance the budget and encourage saving, and grow their way
out of the problem without defaulting or depreciating their currencies. As I’ve said,
there’s only one exception to the rule and that was Imperial Britain after 1815.
Let’s look at what governments usually do with world war–sized debt burdens. One,
they tend to oblige, subtly or not so subtly, central banks and commercial banks to
hold government debt. That of course, is already happening on both sides of the
Atlantic. Two, they sometimes restrict alternative investment opportunities for citizens
and firms—capital controls were a feature, of course, of the post–World War II era.
Three, they tend to default on their commitments to politically weak groups at home
and foreign creditors. And three, ultimately, if they can, they condemn bond investors
to negative real interest rates. But I just want to make a point that’s very important
here. There are fewer naïve investors in government bonds today than there were in
1945, and the term structure of government debt today is much shorter than it was in
1945. Many people assume we will inflate the debt away like we did after 1945...

page 13 wrote:...Within, I would say, the next six years,
interest payments on the federal debt will exceed the defense budget. I think one of
the clearest lessons of history is that that is a major turning point for any power—from
Spain in the 17th century, the Netherlands in the 18th century, through the Turks in
the 19th century, and the British in the 20th century. When you’re spending more on
your debt than on your army or your navy, it’s all over as a great power...

page 14 wrote:...Why did Americans stop saving and start to add leverage to their
balance sheets and devote more and more effort into speculating in real estate? I think
one answer to that is that they learned from the experience of the 1970s that thrift in
the traditional form didn’t pay and that those who were thrifty and saved in traditional
ways with their savings accounts or the purchase of government debt effectively got
hammered. And the winners of the 1970s, in particular were those people who’d
borrowed a lot, who’d bought real assets including their houses and then been able to
pay off the debt in depreciated dollars.
So although it’s cultural in its character, my inclination is to say that we can change
that culture by policy errors, and the huge inflationary crisis of the 1970s, which
was even bigger of course in the United Kingdom than it was in the United States,
taught people a lesson and they acted quite rationally...

page 15 wrote:...What do you take from your study of the history of all this in terms of what will trigger crisis?...

page 16 wrote:...So from our vantage point, the thing to worry about is when public finance becomes
the stuff of the front page and becomes the stuff of really nasty political fighting. I’m
afraid the British are probably about to find that out pretty soon when the happy
marriage of the conservative- liberal coalition is put through the stress test of going
through the books and discovering just how vast the deficit they’ve been left by
Gordon Brown really is...

page 18 can’t solve the problem of unsustainable debt in the private sector
by having unsustainable debt in the public sector. This merely postpones the day of
reckoning, and the act of postponement may make the day of reckoning worse.

...The more we kick this ball into next year...the more politically difficult.
I think in the Greek case, the bailout really doesn’t
change anything about the impossibility of the Greek debt burden. Even if everything
goes according to plan, it peaks out at 150 percent of GDP, and they’re supposed to
go from a 13.6 percent deficit to a 3 percent deficit in just a few years, a massive fiscal
squeeze, and their economy is contracting.

So it’s almost the opposite of the way in which Latin American debt crises were dealt
with in the 80s right through to 2004. We seem willfully to be trying to pile on these
incredible debts, these impossible debts, and essentially we’re just lining these countries
up for political crisis. We’re asking governments to do what is historically not possible,
and I think that’s an extremely risky thing to do. Because in the case of Europe, it
not only destabilizes a country like Greece or Spain or Portugal or Ireland and who
knows, maybe Italy, but it destabilizes the European Union. And it seems to me the
big casualty of this crisis may turn out to be the European institutions, including the
European Central Bank, which has in effect, been rolled over. The real story was not
actually this fantasy of balance sheet vehicle that was going to bail everybody out with
money from who knows where. The real story was that the ECB agreed to buy debt
directly, and that’s one step away from monetizing the debt...

page 20 wrote:...Right now, the productivity action in China is so astonishing that they don’t really
need—and this is a conversation Fred and I often have—they don’t really need to
manipulate their currency. Even if they allowed some appreciation of the renminbi, the
productivity gains that they’re making in manufacturing would still make them pretty
hard to beat in most global markets...

...Ah, has there ever been a crisis of the global economy before: Yes. What’s interesting
is, I’ll give a brief answer, we have been here before. Global markets were highly...

page 21 wrote:...integrated between say 1870 and 1914. Those charts I began with of the international
bond market were charts from a highly globalized world in which the London market
was tremendously liquid and traded assets of all kinds from all parts of the globe. For
me, the fascinating thing about Globalization 1.0, the first version, is how suddenly
it fell apart. It really fell apart in the summer of 1914 and never wholly recovered. So
a geopolitical crisis, and this really links the two parts of my arguments together, a
geopolitical crisis can be the way that a global finance system falls apart. That’s why
these issues that I raised at the end about relations between the debtor power and the
creditor power are so hugely important.
Really, up until now, since 1972, since the opening to China, we’ve taken for granted
that relations between China and America will be harmonious. And I’ve even written
about Chimerica as a kind of happy marriage between the spendthrift and the saver. But
the big concern is that that marriage is unraveling before our very eyes. What strikes me
when I come to Washington is complacency on this particular issue, that when I raise
the question, “Could the Chinese have a different strategy?,” the answer I always get is,
“Well, they need us as much as we need them,” and that’s an illusion because they don’t.
The lesson they’ve learned from the financial crisis is that they don’t depend on the US
consumer anymore, that they can sustain something close to double-digit GDP growth by
their own means and in trade with Asia. I think we’re in that sense at a big turning point
in relations between China and the United States, but only one partner seems to see that...


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