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Inflation or Deflation?

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Inflation or Deflation? - Page 18 Empty Hyper-inflation will take longer & different form

Post  Shelby on Sat Aug 28, 2010 1:42 pm

I had provided some links that it explain why here:

It is important you read that 0% interest article.

What will happen is the REAL wages and average level of employment per capita, will decline until we reach the point that the economy implodes:

When the economy implodes, that is when the hyper-inflation will take place.

The hyper-inflation will not be due to putting ever increasing digits in peoples hands, rather due to a devaluation of the dollar relative to stronger developing countries. In other words, commodities will hyper-inflate. The hyper-inflation will be felt as an impoverishment of the people relative to real money. This will be the inverse of 1920 - 1940 when we left the national gold standard, but rather like the return to a NWO gold standard.

The value added over the raw materials cost for manufactured goods will likely not hyper-inflate (although will inflate) because the developing world has overcapacity and it is increasing.

Inflation or Deflation? - Page 18 Tybits-27-1 <--- CLICK for important article

World Affairs Brief, August 27, 2010 Commentary and Insights on a Troubled World.Copyright Joel Skousen. Partial quotations with attribution permitted. Cite source as Joel Skousen's World Affairs Brief ( )

Hyperinflation-What it Really Takes to Get There
Why Jobs Aren't Being Created Here
Israeli Attack on Iran Postponed
Backdoor Amnesty
Carter to North Korea--What's in this Deal?
Unfair To Ireland
Karzai in Trouble
Tea Party Primaries--Mixed Results


I'm not optimistic about where this country is heading, but to properly confront what's coming it's very important to understand the real risks facing us and not get misled by hype. I'm getting increasingly irritated by conservative pundits claiming that hyperinflation is imminent, and just around the corner. It is not, and here's why: simply put we don't have the automatic, direct injection structures in place for government to deliver those ever-increasing quantities of money directly into the hands of consumers, as they did in the Weimar Republic in Germany. That doesn't mean it can't still happen, but the process currently in place works more slowly. We need to understand the process in order to correctly foresee when this threat is really upon us. This week I will dig into this and other intricacies of hyperinflation.

First, let me set the stage by quoting one of the typical hyperinflation projections. Note that all the basic data is correct, only the leap to hyperinflation is unsupported. Here's Charles Scaliger of the New American magazine [my comments in brackets]:

"Think you're scared enough about the economy, the ballooning deficit, and the prospect of ruinous tax rates and runaway inflation to pay for astronomical government debts? If you haven't read Boston University economist Laurence Kotlikoff's August 10 article for Bloomberg, 'U.S. Is Bankrupt and We Don't Even Know It,' you probably aren't.

"Dismissing official federal debt figures out of hand as misleading 'fiscal labeling,' Kotlikoff estimates that our true fiscal gap is a staggering $202 trillion -- about 15 times the 'official' debt level pronounced by government statisticians. The reason for this vast discrepancy is the scurrilous practice -- used by the federal government to conceal real levels of indebtedness -- of declaring certain liabilities, like Social Security and Medicare payouts, as 'off budget.' It's as though these are not enormous sums of money that the federal government has committed to pay out over the next couple of decades as waves of Baby Boomers and Generation X-ers retire.

"The federal government has behaved like an imprudent householder who, having taken out a mortgage, a car loan, and a student loan, proceeds to run up an enormous credit card debt -- then declares the last 'off budget' and ignores it. Just as laws, credit ratings, and debt collectors will eventually catch up with such behavior in the private sector, so too the pitiless laws of economics will eventually bring our federal government to heel.

"And the day of reckoning won't be pleasant. Kotlikoff minces no words in describing an outcome comparable to what Weimar Germany endured in the great hyperinflation of the 1920s: 'Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: 'Something that can't go on, will stop.' True enough. Uncle Sam's Ponzi scheme will stop. But it will stop too late.'

"And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement [won't happen--politicians have to pander to the voters to get reelected]. The second is astronomical tax increases that leave the young with little incentive to work and save [that too is political suicide, unless you only "tax the rich"]. And the third is the government simply printing vast quantities of money to cover its bills [and they don't actually have to print money to create more--electronic creation is the modern way]... And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece [actually bonds are probably the first to realize when the government starts to inflate it's way out of debt--it destroys their market, which dwarfs stocks].

"Simply put, the lies our government continues to tell itself and us about the debts run up over the past few decades will soon be laid bare. What Kotlikoff has labeled 'Enron accounting' has enabled the federal government to perpetuate the deception whereby older generations are subsidized by younger generations. Few Americans are even aware that the so-called 'Social Security trust fund' consists only of IOUs [same with the FDIC guarantee of bank deposits]-- the federal government spends Social Security 'contributions' before they are even paid, just as it spends every last cent of money extracted from the collective taxpayers' hide. Government neither saves nor invests; it consumes.

"One unpleasant point that Kotlikoff avoids is that there is a difference between tax rates and tax revenues. Simply put, Americans will be neither able nor willing to pay significantly higher taxes [true]. Demands to pay higher income taxes will most likely be met with non-payment or outright revolt, which will leave the federal government only the option of printing its way out of debt. Once the rest of the world figures out that game, though, the feds will find no takers for their bonds, and the end of America as we know it will come about in a tsunami of hyperinflation."

For that to be true, it requires a detailed analysis of how hyperinflation happened in Germany, 1923-24. Here are a few interesting historical highlights, an excerpt from "Paper Money" by George J.W. Goodman. "Why did the German government not act to halt the inflation? It was a shaky, fragile government, especially after the assassination [Walter Rathenau, the SPD foreign minister was killed in 1922], ... In January 1923, Germany failed to make a payment, and France invaded the Ruhr. The vengeful French sent their army into the Ruhr to enforce their demands for reparations, and the Germans were powerless to resist. More than inflation, the Germans feared unemployment. In 1919 Communists had tried to take over, and severe unemployment might give the Communists another chance. The great German industrial combines -- Krupp, Thyssen, Farben, Stinnes -- condoned the inflation and survived it well. A cheaper Mark, they reasoned, would make German goods cheap and easy to export, and they needed the export earnings to buy raw materials abroad.

"Inflation kept everyone working as the pace of the economy [and velocity of monetary circulation] kept accelerating. The cost of living index was 41 in June 1922 and 685 in December, an increase of more than 16 times. The occupation of the industrial region of Germany in the Ruhr valley took place to ensure that the reparations were paid in goods, such as coal and steel. The Mark was viewed as practically worthless. [Now here is one key:] Inflation was exacerbated when workers in the Ruhr went on strike, and the German government printed more money in order to continue paying them for 'passively resisting.'[That was the first structural step that allowed the German government to start injecting currency directly into the hands of citizens--which allows for a rapid expansion of the money supply, in ever-increasing quantities]

"So the printing presses ran, and once they began to run, they were hard to stop. The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. 'If you want to save money,' he was told, 'and you want two cups of coffee, you should order them both at the same time.' ...By late 1923, the German government required 1,783 printing presses, running around the clock, to print money."

The payment of "resistance money" to the workers in the Ruhr was not sufficient in itself to cause hyperinflation. Germany was also forced to pay for war victim pensions and compensation for their families. This broadened the flow to a majority of all Germans. So, with over half the citizens having access to an ever-increasing flow of income, the rest of the country began to respond in kind and demand increased wages. Businessmen started raising prices regularly to pay for their increasing labor and material costs, and the process started to gallop away.

A History of the Modern World pointed out that the only ones destroyed initially were those on fixed income: "Annuities, pensions, proceeds of insurance policies, savings accounts in the banks, income from bonds and mortgages - every form of revenue which had been arranged for at some time in the past, and which often represented the economy, foresight, and personal planning of many years - now turned to nothing. The middle class was pauperized and demoralized." Eventually, almost everyone was hurt.

Tax revenue was quickly devalued by the government's own rapid inflation, which further induced the government to rely almost solely on inflation to pay for government expenditures. Tax rates couldn't be changed except once a year, so that source of revenue quickly became irrelevant. Notice that had the government not been able to directly pay so much money into the hands of a majority of citizens, the inflation spiral would have been limited. Price inflation can't continue unless a large percentage of people have automatically increasing amounts of cash to pay for the rising prices. If the majority does not, buying (for them) slows down dramatically with rising prices and that forces prices to fall in order to attract more buyers.

This has a bearing today. Except for Congressionally mandated stimulus money, which takes time to debate and pass, there is no automatic way for the government to create money and hand it out to consumers. Ben Bernanke's famous suggestion that he might hire helicopters to fly around and distribute cash from the air earned him the moniker of "helicopter Ben," but otherwise was only a figure of speech. With exception of one stimulus check, all the bailout money went to the big bankers and insiders. Even if the government started boosting SS payments and pension and welfare payments, it would only cause a slow rise in inflation, but would also damage those on fixed incomes which would complain--forcing Congress to slow down or stop the increases.

There was another factor--the relative size of the monetary base before the inflation. Germany was a moderate sized nation, and had a large economy compared to most other European countries. Nevertheless, the German Mark was not used around the world as an international currency--the British Pound was the major world currency at that time. So, it was not particularly difficult to double the money supply in Germany in one year, and then quadruple it the next. In a 4 year period, the German Mark went from 14 Marks to the dollar to a Trillion to 1. You can't do that with the dollar today. The dollar has spread out so much around the world as an international currency that there are at least $200 Trillion printed dollars outstanding, and probably $800 trillion in contracts that have never been monetized. That's a staggering amount.

As I have pointed out before, a $3 trillion bailout of the banks was less than 1.5% inflation of the money supply. I don't approve of bailouts like this (and there is a lot more money suspected of being created off the books) but one has to understand how this huge base of dollars allows the US to keep inflating without it showing up dramatically as inflation--let alone hyper-inflation. It was inflationary, but only within the speculative economy that the big banks control: the paper stock, bonds, mutual funds, FOREX, and derivative markets. Most of this money just stays in these speculative bets through roll-overs and only about 25% gets invested in the real economy (and most of that is in the industrial military complex. That's the reason we haven't had a lot of price inflation. But stocks and bonds are inflated--because they are on the receiving end of government money creation.

Now the last point I want to make about the claims of imminent hyperinflation has to do with misunderstanding the terminology. In short, some misinformed people are saying hyperinflation is synonymous with a loss of confidence in the currency or a flight from currency. This is a factor but it is distinct from hyperinflation. Here's a typical example from a self-styled economic commentator, Gonzalo Lira, who is actually an expat American novelist living in Chile.

"Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about... [Other more] amiable souls diligently point out that in a deflationary environment--where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking--inflation is impossible. Therefore, hyperinflation is even more impossible.

"This outlook seems sensible; if we fall for the trap of thinking that hyperinflation is an extension of inflation [It is but he's going to try and disprove that reality]. If we think that hyperinflation is simply inflation on steroids--inflation-plus--then it would seem that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous. But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same--because in both cases, the currency loses its purchasing power--but they are not the same.

"Inflation is when the economy overheats: It's when an economy's consumables (labor and commodities) are so in-demand because of economic growth [always fueled by government pumping too much new money into the hands of consumers by inducing banks to loan at rates too low], coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomenon. Hyperinflation is the loss of faith in the currency."

His definition of hyperinflation is totally insufficient and improper. It is definitions like this that allow Lira and other to claim that hyperinflation is imminent. But, there are many degrees of loss of faith that precede true hyperinflation. We have it right now, to some degree, but are not experiencing hyperinflation. Even with moderate inflation there is a loss of faith in currency. But it is even more true of hyperinflation.

With moderate inflation of around 10% investors and people start trading dollars for other currencies or gold--anything which appears to hold its value better than the dollar. Nations with bigger hoards of dollars can't unload them all at once on the FOREX lest the dollar's declining value collapse halfway through the transaction. So they start buying companies in America or commodities for future stockpiles which they intend to use. China is currently on a dollar spending spree buying up industrial metals and oil.

For it to qualify as hyperinflation the rate of inflation needs to rise above the level where panic buying starting to happen --usually in the 20-50% inflation rate per year. Once it goes about 100% per year (doubling the inflation each year) it starts going exponentially upward until government stops the money creation process. Only at that level do we see the total collapse of confidence where people feel that if they wait any amount of time, the money will be worthless.

But this can't and won't happen in the US until government gets Congress to allow it to hand out regular stimulus checks to all Americans. Nothing less than that would allow for unrestrained spending. As I have long predicted, I think the financial PTB will continue to gradually increase inflation sufficient to keep people pacified, but not so much as to create panic buying.

Michael Pento explains where the current inflation is going and why it isn't showing up as significant price inflation: "Wall Street analysts seem to believe that the Fed's doubling of the monetary base after the credit crunch has not had an inflationary impact on our economy. Their logic can be summed up like so: 'The money the Fed created and dropped from helicopters has all been caught in the trees.' In other words, the Fed is creating money, but it is just being held as excess reserves by the banking system instead of being loaned to the public. Therefore, the money supply hasn't truly increased, there is no money multiplier effect, and aggregate price levels are behaving themselves. But this is only a half-truth.

"Yes, most of the money created by the Fed has been kept by commercial banks as excess reserves. However, the Fed doesn't conjure reserves by magic. It first creates an electronic credit by fiat, then purchases an asset held by a financial institution. Those primary dealers then deposit that Federal Reserve check into their reserves. The act of creating money from nothing and buying an asset -- be it a Treasury bond or Mortgage Backed Security (MBS) -- drives up the price of that asset in the open market. Those price distortions send erroneous signals to private buyers and sellers, eventually creating gross economic imbalances. Therefore, the inflation created by the Fed first gets concentrated in whatever asset it has chosen to purchase -- before spreading throughout the economy." In reality, it doesn't get spread throughout the economy. Too many of the big boys are keeping their funds in the speculative markets and not spending normally.


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Inflation or Deflation? - Page 18 Empty Fekete revisited, Casey Research (Doug Galland et all) proven wrong by interest since

Post  Shelby on Mon Aug 30, 2010 3:20 am

> Oh no, not that again. Was it his inane assertion that as yields approach
> zero, older bonds will go to infinite value in the market? I assert the
> absolute
> limit that can be assigned to a bond is its face value plus the sum of the
> coupons over its lifetime. That is a finite number. Anything beyond that
> is a ponzi scheme.

Yes now you finally understand. The fiat system is a ponzi scheme. That is why that Fekete equation works.

Let me translate. The debt never decreases, because the bad debts are transferred to govt, the Fed banks then borrow more at lower interest rates to buy all the companies that fail in the private sector. It is the fact that money can be printed out of thin air that makes his equation work. Otherwise you would be correct.

> The only way it can possibly make sense is if the treasuries become money
> when dollar bills cease. Meaning the treasuries themselves become more
> scarce than dollars. But Fekete isn't speaking of that. His assertion is
> that
> even when the value of the dollar does not go to zero, the value of older
> treasuries goes to infinity as the yield goes to zero, due to market
> demand.
> This is ridiculous.

No that is not what he is saying.

He is saying that the debt (not treasuries) can be paid off with new debt at lower interest rates, thus sustaining debtors.

It is exactly quantitative easing.

It is like those home loans where people never had to pay any principle, they just borrowed more and more to pay the interest payments, but that can only work if interest rates fall. Which can only work by printing money.


You were proven incorrect by what happened since:

Look at the math again. You failed to understand the leverage involved in
the economy with derivatives of bonds.

Fekete is correct:

We are headed lower on interest rates. The hell will be with us much
longer than people expect.

> The liquidation value of the individual bond with it's limited duration is
> not the limit, because in debt bubble pop deflation 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.
> > Shelby,
> >
> > I confess I didn't read your quoted article below.
> >
> > A $100 bond yielding 3% maturing in 30 years is never, ever, ever worth
> > more
> > than $190. And any twisted situation where that bond gets sold for more
> > than
> > $190 is a ponzi scheme. End of story. End of discussion. I'll go to my
> > grave
> > with this belief.
> >
> > On 7/31/09, Shelby Moore wrote:
> >>
> >> as you can see below, you are correct that the price of an
> >> bond can not exceed the total value of it's remaining payments.
> >>
> >> However, Fekete reasons convincingly that the debt is now perpetual
> >> until
> >> soceity can live below it's means, as I re-summarized below. The govt
> >> will simply borrow for us, if we refuse to. The only way the people can
> >> break free is with gold or silver.
> >>
> >> ---------------------------- Original Message
> >> ----------------------------
> >> Subject: CAVEAT: Math that Gold is only antidote to perpetual serial
> >> deflation symbiotic with serial falling interest rates
> >> From: "Shelby Moore"
> >> Date: Fri, July 31, 2009 4:31 am
> >> To: "David_Galland"
> >> Cc: "Antal Fekete" <>
> >>
> --------------------------------------------------------------------------
> >>
> >> 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:...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 $1100, 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:
> >>
> >> (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 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:
> >>
> >>
> >> (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.


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


David Galland

On Thu, Jul 30, 2009 at 5:16 PM, Shelby Moore wrote:

> Hi David Galland @,
> Nice to speak to you on phone briefly. I somewhat haphazardly cut &
> pasted several emails together below...
> I hope to hear back from you, so I can determine if I need to go public
> with this (I am published on and and
> syndicates), or maybe you simply credit me (and Fekete) and take the math
> public? I would rather live vicariously through your enhanced reach and I
> am not claiming any copyright nor am I asking for anything (but I won't
> refuse a gold coin :D).
> The following is relevant to your #1 investment to short US Treasuries,
> which I think the following math will prove is against trend. The basic
> mal-assumption is that increasing money supply results in inflation.
> The math of Dr. Antal Fekete proves that increasing money supply now
> results in increasing deflation, because the marginal utility of (growth
> of GDP from) debt has (probably) turned negative (in 2007). As you know,
> in a fiat system all new money is loaned into existance.
> Fekete has explained the mechanism for capital destruction (misallocation)
> due liquidation value of the total PRE-existing debt. I think Fekete has
> been widely misunderstood and thus ignored. I will attempt to correct
> that here.
> Fekete derived a mathematical proof that serial halving of the interest
> rate, results in serial doubling of the liquidation value (cost) of the
> total PRE-existing debt:
> However the typical reaction of readers was apparently that it was
> impossible for the value of a bond to rise higher than the total remaining
> income (payments) to the lender. I even had similar doubts until I
> revisited it recently.
> My contribution is a more undeniable proof by noting 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.
> Note the Fed mathematically forces the long-end of the interest rate curve
> by monetizing Treasuries at the short end:
> It is counter-intuitive, but once the marginal productivity of debt has
> gone negative, then the faster the money supply rises, the faster the GDP
> shrinks.
> The marginal productivity of debt goes negative, because a falling
> interest rate structure causes faster business capital destruction as
> rates near 0:
> Fekete means that if you borrow at 5% to build your business, then your
> competitor borrows at 3%, then your competitor will undercut your pricing,
> because competitor has a lower debt payments on the same level of borrowed
> capital investment. So perpetually declining interest rates creates a
> snowball of failing businesses, and thus further declining interest rates.
> As interest rates near 0, then each decline in the interest rate is
> proportionally much larger. For example, if the interest falls from 0.25%
> to 0.125%, this is equivalent to a fall from 2% to 1%, and doubles the
> liquidation value of the PRE-existing debt.
> Thus to short Tbonds now is suicide, because the recent expansion of the
> money supply will lead to another bout of contracting GDP and the
> additional money that was speculating on commodities, equities, and condos
> in China, will come rushing back into safety of Tbonds again soon.
> From Fekete's math, I was able to deduce a very important rule for
> investing during this crisis for cash flow. To remain competitive in this
> death of fiat system, you need to choose a cash flow business, where your
> competitors won't have access to borrow money at lower interest rates.
> The alternatives are to be in a non-capital intensive business (e.g. your
> new Technology newsletter service), connected to govt contracts (Goldman
> Sachs) or to be able to continually refinance at lower rates (Buffet
> buying into banking).
> This implication of this rule is confirmed by what I see happening in
> China, and in Philippines where I currently live. In China, we see that
> $1.8 trillion of govt stimulus has ended up in speculation on unoccupied
> condo Towers priced orders-of-magnitude out of the budget of the masses
> (factory workers making few $ per day). This is because the negative
> marginal productivity of debt has China by the throat and their Gina coef
> is 0.5 (unlike other asian tigers which never went north of 0.25). There
> is no (or very few) capital intensive business that any one wants to
> invest in China, so it ends up mostly in speculation. Similarly in
> Philippines, although rural land is still cheap if converted to
> residencial use, it is now way overpriced to get suitable rate of return
> for rice farming. This is the effect of too low of interest rates and
> over speculation in the rural land sector with oversupply of debt.
> Thus there is no way any country can willingly and successfully detach
> from the US dollar, unless they move to gold. Which of course will be
> massively disruptive and although theoretically propel them to the front
> economically, would certainly get them attacked by the USA military. As
> Chris Laird points out, we are instead moving to a one world currency
> after massive (probably decades long) death throes (war, riots, etc) of
> the current fiat system, and actually think Gold may be only black market
> currency for a while after chaos rules with rabid govts (supported by poor
> enslaved masses) resisting the gold antidote to bittermost end:
> So I agree that we can get gyrations of speculative inflation (e.g.
> commodities run up by the China stimulus demand and the speculators in
> pricing markets overshooting that), we will be on a deflationary trend
> until the masses (or their elite masters) move to gold (& silver) to force
> a hyperinflationary death of fiat system entirely. So gold is rising in
> value as the deflation continues to unform, thus gold is performing it's
> function of retiring the debt, even in spite of the gold price fixing
> markets.
> Let me make it clear that only gold can retire the current negative
> marginal utility of debt, and thus deflation will rule (and rationing to
> support it) until the world makes a significant move to use gold (and/or
> silver) for business capital and trade (i.e. the paper silver and gold
> markets fail). The break to gold can cause hyperinflation in any fiats
> that resist, but realistically no one will break away from the dollar, so
> it will be an all or nothing proposition, which is why it will run so far
> to the deflation side before all hell break loose.
> This is why you see many people buying guns. They sense that they have no
> way to avoid the above trap. They can't maintain a cash flow higher than
> expenses and debt servicing load, and they know they can't hold out long
> enough to stay vested in precious metals.
> On top of this, holding precious metals does not guarantee you will be
> able to redeem them for anything or hang on to them. The rabid govts will
> have the poor masses behind them as they come after those who any
> remaining net worth. And they will come after cash flow businesses also
> with new taxes and regulations.
> I highly recommend Hugo Salinas Price's bio of Fekete for a brief insight
> into what makes his work unique:
> And Wikipedia:
> Some other relevant links:
> (70% of China savings to state run companies)
> (NPLs in Russia 30%)
> (increase in part-time & "hooker" jobs in Philippines)
> Interestingly I had posted else where (with link for proof) that in China
> 70% of the private savings ends up in Communist Party public companies,
> which are 1/3 as efficient in creating new production per capital, than
> the public sector. I had also noted how Philippines was doing massive govt
> stimulus, ripping out functional roads to replace them unnecessary brand
> new concrete and bridges to no where, etc.. Obviously Obama is doing the
> same thing, on a huge scale with new socialized programs.
> So it seems possible that we are headed for a Great Depression worldwide,
> not an inflationary one. We will get bouts of deflation and inflation,
> with the constant result of a redistribution of wealth from production to
> waste. This will drive most private wealth bankrupt and into the hands of
> the elite.
> Sincerely,
> Shelby Moore III
> P.S. You and David Galland may remember me as the controversial and
> spirited poster (and former subscriber) that apparently rocked the boat so
> much, you to shut down your discussion forum in 2006. I send this email
> with my sincerest concern for the well being of your company. I do not
> want to see you with a major blunder (a la Peter Schiff in emerging
> markets in 2007-2008), as I think your promotion of gold is correct. I do
> not want to see "the baby get thrown out with the bath water", as you
> apparently have a significant market (or at least marketing) presence.
> Also who knows I may bump into you one day.
> Here are some more comments from me about
> Fekete's Theory of Liquidation Value of Debt:
> Subject: In deflation, future money is worth more than current money, thus
> bonds are worth more than their residual future income
> cc: Fekete, maybe he can explain this better, or at least he should be
> aware of the interpretations of his theories.
> > 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?
> >
> I also thought that. Perhaps Fekete could explain that better as follows.
> Yes from the perspective of the lender, there is an upper bound on the
> residual income stream of a bond that has already been issued, but the
> potential lower bound on the residual income stream of a of the new bond
> is 0, if the lower interest rate is 0. Any number divided by 0 is
> infinity. Thus the relative liquidation value (opportunity cost) of the
> former bond increases as the interest rates falls with no limit.
> But how does that relative opportunity cost translate into a buyer paying
> more for the bond than the future total of the residual income stream?
> The key is that in deflation, future money is worth more than current
> money, thus present (current) value will be higher than the future total.
> Also from the perspective of the borrower, who is now paying a much higher
> relative rate of interest to his opporunity cost. In that respect, the
> potential relative cost (opportunity cost) is infinite. And in the
> example I provided, where competition can borrow capital at that lower
> interest rate, undercut pricing, and then put the higher interest borrower
> out-of-business. So the opportunity cost is real, not just theoretical.
> When considering the rising income stream value value of the lender's loan
> as interest rates fall, I think Fekete considered a hypothetical infinite
> duration ("perpetual") loan period, meaning there is no potential upper
> bound on difference in dollars paid out to the lender in infinite time (in
> falling interest rate scenarios). The infinite time model is applicable
> to reality, because lenders are reloaning the debt payments (or otherwise
> finding a superior opportunity cost). So if the interest rate is halved,
> the perpetual bond can be sold for twice it's original face value, because
> at the lower rate it would take two bonds to generate the same income
> stream. Remember in deflation, the future money is worth more than
> current money, so the present value is a non-linear function of the
> interest rate (as shown by Fekete's derivation in link below). It is also
> non-intuitive for people to park money in Tbills paying negative interest
> rates, which happened in 2008. In deflation, future money is worth more
> than current money. So the bond is worth more in current time than it's
> remaining future (residual) income stream, because there is premium for
> income stream paid later not sooner. Bonds have sold for more than their
> residual income streem in reality. Fekete provided an example for British
> consols up to 1914 (when the Sterling pound reserve currency died).
> Relevant links:
> Note volatility of interest rates is also a wrecking ball on capital, not
> just falling interest rates:


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


On Fri, Jul 31, 2009 at 8:08 AM, Shelby Moore <> wrote:

> David,
> 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, 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:


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Inflation or Deflation? - Page 18 Empty Hyper-inflation in what form?

Post  Shelby on Mon Aug 30, 2010 6:23 pm

..HYPERINFLATION is coming...

I expect not soon:

See prior 3 posts in this thread:

Unfortunately I have become more convinced with those two recent posts above, that this is going to be a long grind.

But then again, it is also likely that when it finally comes, it will come "like a thief in the night".

My best guess right now is late 2012. But even 2016 is not so incredibly unlikely in my current thinking.

And I also doubt that it will be recognizable hyper-inflation. I think it will be more of exhaustion and submission. I don't think most people will resist their slavery.

I am thinking metals will go very high in price, but price controls+rationing will be used instead of hyper-inflation in the normal sense.

Perhaps people will move to large camps provided by the govt, where they will be fed. And perhaps eventually exterminated. They will do this willingly in order to eat and get govt health care (medications, these camps will be infested with raving mad drug addicts).

Dome of Rock, 2023 Jesus returns:
(I am not using that biblical link as my theoretical support, rather I am using the 0% math in my prior comment)

What I think I am saying is that we may be in the end times (it depends if people wake up immediately or not, because accumulated misallocation will make it unmanageable soon). Don't hold on to metal too long, it won't save you. You've got to invest it now in heaven.

Here the panic phase of the event begins: Asset managers—on seeing this massive Fed buy of Treasuries, and the American Zombies selling Treasuries, all of this happening within days of a largish Treasury auction—will dump their own Treasuries en masse...

So when the Fed begins buying Treasuries full-blast to prop up their prices, these asset managers will all decide, “Time to get out of Dodge—now.”

.....By the end of that terrible day, commodites of all stripes—precious and industrial metals, oil, foodstuffs—will shoot the moon. But it will not be because ordinary citizens have lost faith in the dollar (that will happen in the days and weeks ahead)—it will happen because once Treasuries are not the sure store of value, where are all those money managers supposed to stick all these dollars? In a big old vault? Under the mattress? In euros?

Do you think the govt is going to let anybody sell their paper assets?

Of course not. When the time comes, they will lock everything down and move to rationing and price controls. Besides as long as rate continue to decline you can always make more money in bonds than other things.

It will be a different style of (hyper-?)inflation and it will go on and on, with interest rates declining and declining:

etc... forever...

As Fekete's math showed, the interest due on the outstanding debt, can always be serviced, for as long as the interest rates to borrow new money is halved (5% of $20T = 2.5% of $40T). You can halve forever and never reach 0% asymptote.

You will need a lot of endurance for this one, you better dig in for the long haul.

Only the favored people can borrow at these lower interest rates, the rest of us become debt slaves forever.

As Fekete explained, the businesses that borrowed at the higher rate and are not allowed to refinance at lower rate, are bankrupted and bought out by those who can borrow at the lower rate.

Welcome to NWO.


Two reasons there can't be hyper-inflation:

1) Masses have no where to run to
2) Bankers don't need it, they will own everything with their exclusive access to declining interest rates*

If the masses try to run to another fiat, it won't help them. If they try to fit into metals, the problem is the elite own most of the metals, so the masses are just fighting over scraps (only a few will get enough to survive). He who owns the gold makes the rules. It is too late, the elite were mopping up all the gold at $250. Now I understand why Denninger is against the gold standard!!!!!

There is only one weapon the masses have, they own most of the silver in silverware and jewelry forms (15 - 18 billion oz).

They have to drop the fiat system and switch to physical silver, but the problem is that would implode their lives. They simply are not willing to go back to subsistence lifestyle on a farm. They will choose the slow cooking instead.

* this is why Buffet went to bed with them, he sees writing on wall, you are either with them or bankrupted.


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Inflation or Deflation? - Page 18 Empty Fekete is correct

Post  Shelby on Sat Sep 04, 2010 10:50 am

Commercial lenders' cost of capital is marked up to cover overhead and profit. This markup, as a percentage of principal, does not change when the cost of capital changes. For example, if his cost of capital is 1%, and he adds 2% for his markup, he loans out money at 3%. If the lender's cost of capital is reduced to 0.5%, he would then loan out money at 2.5%.

In this case a 50% drop in the lender's cost of capital results in only a 17% drop in the rate the lender charges. And as the lender's cost of capital further approaches zero, the rate charged by the lender will hardly drop at all; in any case not dropping below 2%.

Furthermore, when interest rates are low, what is a huge percentage drop in interest rates is only a minuscule change relative to the principal. The actual dollar difference is not that great. We discussed this last year on your forum, here.

The markup is nothing (tiny below significance) for the fat cats who are borrowing $billions at a time.

The point is the fat cat borrowers can re-finance at the lower rate and retire their principle at the higher rate. Thus they can destroy (out-compete due to their lower cost of capital) those in private sector who are not given the opportunity to re-finance. This destroys the private sector and either shuts industry down and/or transfers ownership to the fat cats.

As I explained to Fekete, this is not monetary deflation. It is a different sort of phenomenon, which needs a new name. I have suggested "self-strangulation".

Contrary to Fekete's call for the govt to open the mint (which will never happen because the fat cats control all mass movements by infiltrating them, see this "interview" with Rupert Murdoch, ), the only solution for "the people" is to use the decentralization method of the Apache indians as explained on page 21 of The Starfish and the Spider:

I think it is important to note that the increased use of silver as currency was technological:

As Fekete has explained, silver is not as monetary as gold, due to scarity of stocks in pure bullion form, and thus is more of a currency.

However, the problem is that the digital world can not be accomodated by a physical coin standard any more at the currency level:

This is why most of my effort currently revolves around decentralizing the communication network:


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Inflation or Deflation? - Page 18 Empty Fekete's latest position paper on gold is excellent

Post  Shelby on Sun Sep 05, 2010 12:22 am

I emailed him:

I agree with everything you wrote here:

I only want to suggest you distance yourself from the ambiguous words "inflation" and "deflation".

Too many people wrote you off because they thought you were a deflationalist in the same camp as Robert Pretcher.

And I now agree that the price of gold does not matter. These are not investments, they are money. How can you invest in money!


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Inflation or Deflation? - Page 18 Empty David Galland (CaseyResearch) continue to ignore Fekete's math

Post  Shelby on Sun Sep 05, 2010 6:43 am

as interest rates are forced higher, much higher, to attract buyers, particularly foreign buyers. When this happens, the total return on bond funds will be smashed


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Inflation or Deflation? - Page 18 Empty People don't understand Fekete's math

Post  Shelby on Sun Sep 05, 2010 10:52 pm

anonymous wrote:I sure don't see this USD love affair last several more years.

The Chinese are easing their holdings now. Others are slowly following suit.

This about the fiat system as a whole, not just the USD.

You are looking at the wrong metric. Look at total global debt, public and private, including derivatives. It can't keep growing if interest rates don't keep decreasing. And an implosion of global debt, means an implosion of the world economy. Nobody wants that, including China.

Only gold can retire the debt, and the global economy can not fit into gold, because the global economy is at least 50% mis-allocation (and percent is growing).

No one in the world is willing to lose 50% of the global economy, instead they would rather slowly cannibalize the other 50% of the private sector with increasing debt and mis-allocation.

When the situation reaches the point that the private sector (is say 10-30% of the global economy) can no longer hold up the dead weight, then we fall over the cliff into the abyss of hell.

Shelby wrote:Your long frustration awaits...

Tell me the psychology you are thinking of, and I will explain how the math shows that people will choose to stay in bonds for another 3 - 5 years.

What you are failing to understand is that to exit dollar system, is to implode. People simply won't choose that, it will happen to them as they slowly boil in the pot.

The cliff of implosion is still some years off...there are many halving of the interest rates that can occur before the westerners find themselves eating their own feces and drinking their own urine to survive...

The problem is you, me, and all the readers here use fiat to transact. And for as long as that is true, Fekete's math is insures that no one will want to leave bonds, other than a few to move into speculations like stocks (actually most are pulling out of stocks to 'safety' of fixed interest) and precious metals.

And that is why this is going to be a complete wipeout. Because no one can get off this train, unless they move to farm and highly increase their complexity.

This a math problem. There is no way out.

There is one glimmer of hope and that is a radical burst in technological innovation that dramatically lowers complexity, increases possibilities, and renders the current fiat order irrelevant.

EROEI is only problem because a highly ordered system (high complexity) needs energy input to grow more ordered and not disperse (i.e. implode in an exploded way). But if we get the technological innovation to reduce complexity and increase diversity, then EROEI is not an issue any more. And that is an irrefutable mathematical truth.

Here is psychology for you:

Delusional voters have produced our delusional democracy which strongly favors corporate, wealthy and elitist interests over ordinary Americans. This explains frightening economic inequality and the demise of the middle class. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income (less than 5 million people). Two-thirds of the nation’s total income gains from 2002 to 2007 flowed to this sliver of households, which saw a rise of 62 percent, compared to 4 percent for the bottom 90 percent of households. Today, the median male worker earns less, adjusted for inflation, than he did 30 years ago.


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Inflation or Deflation? - Page 18 Empty points on interest rates and complexity

Post  Shelby on Tue Sep 07, 2010 4:32 am

1) Notice while interest rates drop for govt and fat cats, they go up for the masses on credit cards. Supports my (Fekete's) theory that we are in a perpetual debt trap of declining interest rates for the fat cats:

2) Another point about complexity. While it may seem like more possibilities is more complex, notice that real complexity is when it takes you n-squared more time to do something, e.g. you are in the middle of an urgent project and you need a certain tool and that tool has to be shipped from China. In algorithms this is know as O(n*n) meaning it takes exponential n-squared time complexity to complete as the project size n increases, versus O(n) in which completion time scales linearly. Just to give you an idea, 10 * 10 = 100 is 10 times greater than 10. The reason that more possibilities conquers exponential trends (such as this exponential debt trap), is because communication (greater knowledge and interaction) between n independent actors, is n! (actually (n! - k!) / k! for all k), and 10! = 3628800. I hope you appreciate the jaw dropping truth of that!


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Inflation or Deflation? - Page 18 Empty Fekete is correct, but incorrect on one point

Post  Shelby on Wed Sep 08, 2010 8:56 pm

...When bidders win at a treasury auction, they will be paying cash in order to get "cash"...

They are bidding for an income stream, because there is no other way for the private sector to get income now, due to the destruction of the private sector by the declining interest rates (unless your business can borrow short-term, but what capital business can function reliably with only a short-term planning).

So 1% of $1 million gives them an annual income of $10,000, and 0.1% of $100 million also gives same annual income of $10,000.

Let's say you hold a one year bond, so it will pay $1.01 million, but at new 0.1% interest rate, one has to buy 100 x $1 million bonds to get paid $100.01 million.

Fekete has the opinion that bidders will be willing to pay $100 million for the $1 million bond, because they want the income stream. I think I now disagree with him, and will email him that. He thinks that we are in deflation, and future money is worth more than current money. But even if that was true (which I don't think it is), it wouldn't make any sense to pay more money for something than it can pay you back, unless it is all a greater fool game where you expect the next guy to buy your bond before maturity expecting to be able to sell it to someone else. That doesn't make much sense, especially on the shorter maturities.

So I agree with Fekete that the liquidation value of the debt is increasing, but it is not because the bond values are increasing, it is because for each halving of the interest rate, the amount of total debt that can be issued can double, without increasing the amount of debt service that has to be paid annually.

It is nothing more than a way of printing money and handing it out to people, but instead of it going to the masses and cause runaway hyper-inflation, it is being distributed to the banksters. A large portion of the money is distributed to the masses via entitlements and as these grow, they displace the private sector, so on net it is not hyper-inflationary (at least not until the private sector implodes and the system can't feed any one).

This above system is deflationary in a sense that there are not many alternatives for fixed investment. So the retirement plans stay invested in the bonds while their income shrivels. The only altenatives are speculation or technology investment. Technology investment is really hard and only a few people can do it consistently well. Speculation is speculation.

The world is stuck in this debt trap. No one has a way to get off of it. Those of us who move to gold and silver, are also stuck in it, because the system is going to be horrifically broken and the govt will end up as 70 - 90% of the economy, so the govt+masses are going to be in a massive fascist theft mode.


The developing world is a different story, and has a positive marginal utility of debt. Here an increase in debt does increase the GDP. The problem is that profit margins are so slim, because there is so much excess capital (both human and low interest rate capital exported from the west). So leverage here is gained politically. So the Gini coefficients are getting worse here also, although you do have the poor coming up, the super rich are rising much faster. This is a way of measuring that there is massive mis-allocation of capital. Mis-allocation always ends with implosion of the mis-allocated economic sectors. And expect that implosion to be rescued with even more lower interest debt, i.e. more of the same New Deal crap, which of course is inflationary and steals from the masses.

We are in trap globally.


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Inflation or Deflation? - Page 18 Empty Demographics correlation for 1970s and 2010s decades

Post  Shelby on Sat Sep 11, 2010 2:36 am

Click for article:

Inflation or Deflation? - Page 18 Us-economy-9-11
Inflation or Deflation? - Page 18 Us-economy-9-10


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Inflation or Deflation? - Page 18 Empty Depression is not deflation

Post  Shelby on Sat Sep 11, 2010 12:35 pm

Shelby wrote:Stathis wrote, "The second rule of thumb is to avoid any rhetoric from those who have agendas, such as that found from those who sell securities or gold."

Stathis again bashes gold, even though he got it wrong in 2009:

Stathis's basic misunderstanding is he doesn't understand the concept of real interest rates. He should search and read my article, "How Deflation Is Inflation".

Depression is not monetary deflation. Monetary deflation means the value of the currency is rising. From 1929 to 1933, there was deflation, because Americans who still had a job were eating more butter, more chicken, etc, because everything went down in price. Thus 1929 to 1933 was not a depression, contrary to what you have read from others. Yes 1/5 of the population lost their jobs, but the other 4/5 were buying more with their wages.

The reason that the value of money rose from 1929 to 1933 was because the dollar was gold. But in 1934, FDR confiscated the gold and made it illegal for Americans to get gold for dollars, and thus the Great Depression began in 1934. After 1934, prices rose and people could buy less, even though FDR created many jobs with New Deal govt work programs. Hey why use shovels, when by using spoons you can create more jobs! But you don't create more production, and thus prices go up! By WW2, Americans could not even eat butter nor chicken. Everything was rationed (prices were skyhigh in the black market).

Stathis apparently does not understand that while the prices of houses has fallen, the cost of living continues to rise (check for the truth on that).

The cost of living is rising faster than the interest rates that can be earned on bonds.

Thus there is no incentive to hold bonds over gold, because gold pays no interest, but interest rates are lower than inflation. Thus gold goes up in price. And this will continue until the world's fiat system is good as gold again.

We are in the death march for the fiat system. I explained how the interest rates can keep falling forever and never hit 0%:

While Nadeem explained why inflation won't stop:


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Inflation or Deflation? - Page 18 Empty China's personal savings doesn't really exist!?!

Post  Shelby on Mon Sep 13, 2010 7:59 pm

I expected this, but this is some bombshell evidence!

My instincts says this is correct, because I see similar here in Philippines, the difference being that the filipinos only do it for small personal needs, there isn't the big speculation here by everyone as in China.

And of course we know much of China's net exports reserves are loaned to bankrupt westerners and/or heavily invested in commodities which depend on the continued boom in their economy.


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Inflation or Deflation? - Page 18 Empty Typical hyperinflation unlikely, rather a slow boiled descent into rationing

Post  Shelby on Tue Sep 14, 2010 12:53 pm

Shelby wrote:There is nothing short of war that can stop the perpetually declining interest rates, because each halving of interest rate (which will never reach the asymptote of 0%) allows deficits to double without increasing debt service costs:

We have +10% SGS CPI now, coupled with asset price deflation, so we already have a form of hyper-inflation:

Shelby Moore wrote:As I wrote in prior comment, the world is locked into perpetual halving of the interest rates. This is both inflationary and deflationary. It causes the public sector to cannibalize the private sector (insiders borrow at ever lower interest rates and thus can force the private sector out-of-business on a return on capital basis, see also my other reasons in my writings). It can't actually lead to hyper-inflation in the traditional sense, because the private sector will be selling assets to pay for basic necessities which are rising in price.

I have covered this extensively in my writings. I have even debated both Mish and Denninger and most of the major writers.

Read my writings before you go any further.


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Inflation or Deflation? - Page 18 Empty Mish is correct on some points, but misses the most important conclusions

Post  Shelby on Tue Sep 14, 2010 3:19 pm

Shelby Moore wrote:Starting about 14 minutes into the interview, I strongly agree with Erik and Mish that the typical hyper-inflation that Lira experienced in Chile, is not possible, because we are in period where retiring westerners will need to sell assets, as the jobs have all been outsourced and they are retiring any way. Yet we have simultaneously price inflation in basic necessities which will exacerbate because of the perpetual declining interest rates of deficits in the west. There won't be some moment where westerners suddenly abandon the dollar and rush into commodities, because they don't have any cash. They are just trying to stay above water, by selling off things step-by-step to keep up with all the inflation (or drop in real wages which is the same thing).

What Mish fails to grasp is this duality of deflation and inflation and what is causing it.

I have written extensively about this, especially focusing the issues well in the past few weeks of my writings.

1) Public debt is increasing offsetting the drop in private debt. The public sector and insiders are cannibalizing the private sector. Thus we will get increasing inflation as the private sector supply craters. Low capacity utilization is a symptom of this, as the private sector simply can't get sufficient return on capital. Mish misinterprets this as meaning we have an oversupply. SGS price inflation metrics (and similars ones in UK, etc) prove this is not the case. We have oversupply in unnecessary things such as housing, manufactured goods, but not in basic necessities such as food, energy, commodities.

2) As interest rates half, deficits can double, and debt service doesn't increase (and fails as a % of total debt!). This means that westerners can continue to write themselves a blank check indefinitely at the federal level to fund the promises. Of course, this is highly inflationary for basic necessities and deflationary for business.

3) I could go on and on, but just go read my writings. We are in a death debt trap spiral for western civilization. There is no way to get off the hamster wheel. It will end in massive rationing, fascism, death, war, etc.

4) I urge you to read Peter Thiel's article (founder of Paypal), which is linked on my site. It has amazing insight into the battle over good globalization versus the NWO top-down scenario that we seem to be headed.

Folks this is real bad. Much worse than Mish and Erik realize.

This is not deflation and it is not hyper-inflation.

I also made 2 comments on the Lira interview which explain much more about my logic:


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Inflation or Deflation? - Page 18 Empty Specifically why hyper-inflation is not coming soon

Post  Shelby on Tue Sep 14, 2010 5:27 pm

SRSrocco wrote:Shelby and Fekete have stated that the US TREASURY rate can keep halving forever before it hits zero. This is like telling a person to take a step toward a line, but only doing so by cutting each step half the distance to the line. Theoretically, you can keep halving your step and never hit the line. But who on earth would keep halving their step forever. Your typical Joe-Bag-of-doughnuts will do it for about 5 minutes, then say, "THE HELL WITH IT", cross the line and say, "HEY...LET's GO GET A BEER."...

Hahaha, you really made me laugh.

Seriously, you missed the point. Joe-Bag-of-doughnuts doesn't have anything to do with the setting of the interest rates other than his continued demand for the govt to take care of him. The point is that a halving of the interest rate is all that is necessary to satisfy all the parties in this current global game:

1) 100s of millions of politically powerful and entitlement-promised westerners (i.e. govt & private sector retirees, long-term unemployed, welfare recipients, etc) get to keep their fiat benefits indefinitely, because govt deficits can double, but interest payments stay constant and actually decline as a % of deficits.

2) Banks get to continue to make money for doing nothing but check kiting to purchase govt bonds with money they created out-of-thin air.

3) Investors continue to make a doubling of their networth for every halving of the interest rates. I find this Dr. Fekete claim controversial and perhaps incorrect, but apparently it is what has happened (I think the mechanism is via derivative leverage, a form of creating value of thin air). I think swaps are what allows leverage on the declining interest rates, so every halving of interest rates can result in same nominal boost in value by increasing leverage.

4) China gets to continue its bubble, which would be burst horrifically if they walked away from the dollar and western bonds.

None of the above can happen if there is a run away from govt bonds.

If there was a run from bonds, it would be an instant implosion for all the vested interests above. The only winners would be those who own all the gold. We do know that eventually those elite cabal who own most of the world's gold will eventually eat their own, and go for that final crackup hyper-inflation, but it will be on their terms and when they have already maximized the damage it will do. We are no where near maximized yet. They can take it much further.

The limiting factor is when the entitlements in #1 are not able to buy anything. Meaning the private sector has imploded from the socialism and wealth transfer effect of declining interest rates, and there is massive rationing or cutbacks in basic attainable needs by the broad population. At this point, the masses will be ready to act and the elite cabal will be ready to use the masses to destroy all the vested parties above, so that everything goes to them in a NWO chaos.

SRSrocco wrote:John Williams Sees The Onset Of Hyperinflation In As Little As 6 To 9 Months As Fed "Tap Dances On A Land Mine"

John Williams has been following the markets for decades. His shadowstats website is the only one that reports REAL ECONOMIC STATS that the US GOVT puts out. He has been correct on many forecasts. Again....2 years ago he stated that HYPERINFLATION would hit within the decade. Last year he moved it up to within 2-3 years. Now he says 6-9 months. You can read the post at ZERO HEDGE HERE:

This goes right inline with what GONZALO LIRA states about hyperinflation from a crack in the US TREASURY MARKET. Looking at Shelby and Fekete's assessment on the TREASURY MARKET, I find it works in a mathematical mind, but not in a public who lives by psychology.

Shelby enjoys filling his posts with detailed mathematics to prove his points. I believe math has a certain use in the world, but it fails to forecast the psychological mind.

John Williams wrote:Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability. Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt.

This is wrong. When the USA has its next liquidity crisis, everything BUT bonds (and possibly gold, but I think it will selloff some too) is going to be sold. We already went through this in 2008. Nothing has changed. The vested parties above still have no incentive to jump ship, because they cut their own throat if they do.

There is nothing to run to. Do you really live in the fantasy world that thinks the Chinese communist party crooks who rape their own country, are going to suddenly destroy their own power and implode their bubble Yuan peg economy thus causing massive riots and overthrow of their govt, by making the Yuan as good as gold?

Whose psychology are you expecting to ignite this massive move to commodities causing hyper-inflation? And where are they going to get the cash to do so? Could you walk into the mall today and point to a few of them for me? Come on Steve, get a grip on reality. You been on the farm too long. Go back to the mall and observe the McFat population please.

Sure gold and silver will go up because there isn't much of it and we only need like 0.1% of the people in the world to buy some to make it go up. But that is not the same as a massive run on commodities in general by the general population. Get real.


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Inflation or Deflation? - Page 18 Empty Re: Inflation or Deflation?

Post  Shelby on Wed Sep 15, 2010 4:17 am

shelby wrote:It is about the interest rates. The lower rates is what is causing the interest expense to level off or decline.

...but this is not stopping the parabolic ascent in the deficit, which ultimately is what causes the crack-up and/ or implosion.

Precisely. And this is allowing the fiscal situation to get worse for a long-time (slow-cooking the sheeple) before it finally cracks-up or implodes. It is the mechanism by which we get to the level of socialism and failure required for a NWO chaos. Without the lowering interest rate phenomenon, then this fraud would stop too soon:

shelby wrote:Do you mean that bond investors are not profiting significantly off of lower rates?

Unleveraged bond owners profit little on the halving of rates when rates are so low. When the rate on our checking account dropped in half, from .1% to .05%, as a joke I felt like telling my wife "You've got to spend less; our interest income was just cut in half!" But if my wife checked she would have seen that the actual interest was only a few dollars a month anyway, and in fact we changed to an interest free account just to simplify things.

Leveraged players are profiting, but not without risk. There have been big whipsaws. I suppose if these players and are in on the rigging and can print money to cover margin calls, like we saw with silver, the risk is less.

While I agree that it's not in anyone's interest to cause a flight out of Treasuries or US dollars, the the nature of parabolas is that they are very unstable and sudden changes can occur at any time, as they relentlessly approach the inevitable.

There is no risk as long as there is no mark-to-market and the insiders control the game any way. They can use this leverage and their control over the timing of whipsaws to shake out any competition.

You see this paradigm is one where the fat cats eat the private sector by a 1000 paper cuts.

Thanks you have confirmed my understanding.


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Inflation or Deflation? - Page 18 Empty Hussman ignored relative REAL rates

Post  Shelby on Wed Sep 15, 2010 10:47 am

Shelby wrote:It is getting extremely exhausting to correct all the analysts who have real interest rate myopia. I think I am going to give up.

Mish you quote Hussman, and at the link your provided, Hussman's thesis is that the dollar will have quick devaluation in order to offset the lower relative rate of interest paid on dollar versus foreign bonds. However, Hussman seems to forget that in China (and other developing countries) where higher interest rates are paid, the inflation rate is also much higher, thus the real interest rates may in many cases not be that much higher than for the dollar. And his analysis seems to ignore the Yuan peg, which requires dollars to find their way back to dollar bonds.

Mish I appreciated you recent revelations about China and I also agree with you that hyper-inflation is not possible in traditional sense, however I continue to not agree that we have a simple deflationary macro-economics:

Also Nadeem if you are not going to allow me to respond to nonsense and slander, then let's just make this my final contribution to your site:

You know very well that gold is NOT my favored pet investment:

Please allow this last statement. Thank you for everything and good luck.


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Inflation or Deflation? - Page 18 Empty I predicted it all in 2007

Post  Shelby on Wed Sep 15, 2010 2:31 pm


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Inflation or Deflation? - Page 18 Empty Exactly what you wrote SRSrocco, and agrees with my thesis too

Post  Shelby on Mon Sep 20, 2010 8:07 pm

Inflation or Deflation? - Page 18 Deflat10

But there will be no rapid hyperinflation, except in commodities but these bursts of commodity prices will deflate from time-to-time, because they send the world crashing into renewed bouts of implosion. Wash, rinse, repeat.


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Inflation or Deflation? - Page 18 Empty As I said, "Til Debt Do Us Bust"

Post  Shelby on Tue Sep 21, 2010 4:31 pm

The big financial myth-buster of the week is that the alleged deleveraging of the US consumer has in fact been a giant myth. According to the Wall Street Journal, if you account for defaults, US consumers have only pared down their debts by an annual rate of 0.8% since mid-2008.

The Journal writes (emphasis added):

Over the two years ending June 2010, the total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion… Our own analysis of data from the Fed and the Federal Deposit Insurance Corp. suggests that over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.

That means consumers managed to shave off only $22 billion in debt... In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.

Whether this is because Americans are stuck on a “buy ‘til you’re bust” mania, or if it’s simply because the cost of living in the US today is so high relative to incomes and other expenses that most folks can’t get by without using credit is up for debate.

Personally I think it’s a bit of both, with some folks obsessively buying the new iPad while skipping on mortgage payments while others are simply using credit cards to try and get by after being unemployed or underemployed.

Note I disagree with Summers' conclusions in the rest of the article. There is no imminent default/restructure/hyper-inflation. What is imminent is more QE and more gyrations of the implode, wash, rinse, repeat "until debt do us bust" some heartbroken years from now.


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Inflation or Deflation? - Page 18 Empty 20 years of 0% interest in Japan

Post  Shelby on Wed Sep 22, 2010 4:04 pm

Martin D. Weiss is very intelligient and well respected:

There is not going to be any hyper-inflation, only a continued (but volatile) increase in price of things we use and gold+silver.

Westerners will be caught in a squeeze of declining real wages, while prices of things they use go up. They won't have cash to go chase goods and cause hyper-inflation, they will simply stop using (become poor).

"hyperinflationary situation there is a shortage of money"

Haha, thanks for putting it that way! Helps me to explain it to others.

"deflation, ...velocity of money is ultra-slow and falling...mistake ...that deflation is the same as...collapse of the money supply...there is a superabundance of money due to...central bank and the government to pump up the price level. In spite of this, prices may keep falling..."

Excellent explanation!

Distinguish between prices in gold units and prices in fiat units. In fiat units, it is possible to have a situation as we have today, where the production of "things we use" is not declining faster (or peaking and not growing further) than the use is declining or increasing. In other words, as the companies try to fight deflation, they move their operations to the developing world, where 10 workers cost the price of 1 western worker. Thus the demand for food increases by 10, so the price of food is going up while we have deflation in other things.

Reality is that prices of things we use are going up in fiat, not down.

Thus I am saying, warning double-dip will come eventually.

Probably 2012, or maybe 2011:

Time Line?

Between now and anytime in 2011.

At the latest, 2012.

ADD: Note those with cash in excess of expenses will chase gold+silver (more so gold, but silver bullion market is so tiny it will rise more in price than gold).

ADD#2: Steve the USTreasuries market will never crack, they will go lower and lower nearer to 0%. When world devolves into 10-20 years of depression, we go into war probably. It is a mathematical treadmill. The hamsters can not get off. When it is time to leave Treasuries behind, there will be a world banking solution ready.

Steve this is much more dire than you realize. You are not pessimistic enough! You think this will end quickly.

John Williams is smart in a bean-counter way. He doesn't see big picture. You should also read Martin Armstrong, who agrees with Fekete and Weiss and myself. The 4 of us are 10 times smarter than John Williams.

Steve, hyperinflation requires that the govt continuously hand out money directly to the public. Do you see that happening? A one time stampeded to goods is not hyperinflation, it reverses and implodes when there are no more buyers. Think about it!


Inflation or Deflation? - Page 18 Otb09210


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Inflation or Deflation? - Page 18 Empty Is Buffet an idiot?

Post  Shelby on Fri Sep 24, 2010 2:37 am

First, here is another person pointing out that Tbonds blowup isn't coming anytime soon:


Warren Buffett wrote:"It doesn't depend on calling it the stimulus bill to be stimulating. I mean, if the government is spending $3 for every $2 it takes in, that is, that is fiscal stimulus," Buffett said.

Doesn't he know the marginal-utility-of-debt has gone negative, meaning that each additional dollar of debt is subtracting from GDP, not adding to it!

Inflation or Deflation? - Page 18 Muod10
Inflation or Deflation? - Page 18 Rgdp10Inflation or Deflation? - Page 18 Tdebt10

More Berkshire nonsense:


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Inflation or Deflation? - Page 18 Empty End game

Post  Shelby on Fri Sep 24, 2010 11:18 am

Shelby aka Jocelyn wrote:> recruit the work force of countries with a “surplus” of workers.
> How to get the people who work for us in 30 years to accept our currency?

Gold has the highest stocks-to-flows ratio, thus has highest marginal utility of any commodity on earth. Next is silver. Platinum, Pd, Cu, etc have very low stocks-to-flows ratio and are not suitable for store-of-value function.

Problem is the nation-state doesn’t like capital flight, and is “cooperating” with G20 to shut out tax havens. In USA at least, gold is taxed on capital gains, yet gold’s function is only to remain level with the per-capita production, i.e. purchasing power. Thus gold can lose purchasing power parity value after taxes.

Flows means periodic mining production and industrial draw-down. Stocks means readily available above ground supply. For example, silver's above ground supply is very high (≈20 billion troy oz), but it is mostly in jewelry, silverware, electronics, etc where the recovery cost is higher than (or significant portion of) the value of the metal.

The best strategy is to invest in productive assets that have pricing power in inflation and deflation. Buffett wrote about this criteria.

The best investment is in knowledge. It is portable, doesn’t suffer from inflation, and can not be taxed.

Also knowledge can not be stolen. Most often a thief wouldn't even know what to do with it.

> the only possible outcomes, long-term, are hyperinflation and sovereign default

Hyperinflation requires the fiat issuer to continually supply more fiat to the masses, i.e. any stampede to commodities is inherently limited and will reverse when there are no more buyers. Hyperinflation destroys the creditors, so it won't happen if ever, until the power broker banks who own the political class, have dumped their ownership of loans on the public.

The more likely outcome is that budget deficits will increase for years to come, because each halving of the interest rate (e.g. 1%, 0.5%, 0.25%, 0.125%, etc) halves the cost of the debt service. This destroys the private sector while increasing the size of the public sector, i.e. the marginal utility-of-debt went negative in USA in 2008. Companies hire up to 10 developing world workers for the price of 1 westerner, to fight against this deflation squeeze, which then increases the demand for basic commodities by up to 10 times, causing simultaneous inflation in "things we use" driving real wages of westerners lower, exacerbating deficits in a feedback spiral.

There doesn't have to be any default until the people who suffer from it, run away from such a broken system, but what can they run to? Gold? There is no mathematical way to make the net-worth of even 10% of the people whole in gold-- moving to gold would bankrupt the massive dead-weight in the global economy.

Unfortunately, inexorable creep towards world war is all I can see at the end game. Please tell me it isn't so?


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Inflation or Deflation? - Page 18 Empty re: $10 Oil; gold & silver to rocket up?

Post  Shelby on Sat Sep 25, 2010 6:33 pm

Good basic video on money creation and the problems that it has created today. He believes in deflation and that OIL will be at 10 bucks a barrel.
25 minutes

Thanks for posting that!

He sees silver on an imminent H&S breakout going to $32!

He sees stock markets and commodities essentially heading to near 0.

His reasons are:

1. M3 declining slightly.
2. Stock overvalued by historic measures
3. H&S and dead-cat bounce chart patterns.

My reactions are:

1. Does this matter?
2. Does this matter?
3. I see a double-top in stocks, but it aborted into what appears to be sideways rollercoaster which may end up a H&S by 2014/5.

I do agree that the current falling interest rates is a death spiral for jobs. I think there is an offset of jobs to developing world, and I thought this would focus more spending on basic "things we use". I agree this all craters one day.

I hope he is correct, it means our metal will gain much more purchasing power.

This is why I am warning against illiquid stocks. This is a dangerous time.


Well Maloney really got me thinking.

A. One of his points are bearish H&S patterns he sees in various commodities, some more well defined than others. However, if am I not mistaken that all of these so called H&S patterns project a price less than zero?!? That seems to invalidate them. Afaik, there can't be a valid pattern that projects an impossible price. Can anyone comment on this?

B. Bearish commodities assumes one of the following:

i) that the developing world goes back to the farm and back to eating "roots and grass" (filipinos say this when times get tough), or

ii) oil (input cost for other commodities) becomes much cheaper, but what would make oil cheaper other than #i above (reduced demand)? Note that global population is increasing.

iii) a massive increase in commodity production, which would increase price of oil, unless we get a massive increase in supply of oil.

iv) massive depopulation event (Georgia Guidestones 500 million target)

C. Let us understand the nature of this deflation. What is happening is that the indebted western countries are creating govt debt to sustain the lifestyle of the unproductive sectors of the economy. This is of course strangling the western private sector, so the private sector is transferring as much possible capital (and jobs) to the developing world. However, China is capturing a large chunk of this capital by central control of the exchange rate which keeps its labor priced lower internationally than is the actual purchasing power parity internally. Thus instead of Chinese businesses investing in other developing countries, they to a large extent are forced to invest domestically and so there is an oversupply of factories and it driving profit margins to 0 or even negative. It is not that China doesn't need more investment to create employment for the recent huge workforce bulge in their demographics, but rather that the investment is being forced into exports focus (and speculation in real estate and stock market) rather than being focused on imports by investing in other developing countries that actually have a lower purchasing power parity cost structure. This is why China is approaching the point where they can not grow any more without massive inflation, because they are not allowing the global free market to anneal.

Thus I conclude that Maloney is correct about the threat. The process of exporting the USA capital can not continue until China's peg is broken. Thus China will break into a depression, which will drag the rest of the world down. The western nations QE is just a mechanism for exporting the capital of the west in a politically palatable way.

The question is when does the Yuan peg paradigm reach exhaustion? And the fiat controllers could still decide to go to hyper-inflation as the end game instead.

I just looked at $WTIC:$GOLD chart on stockcharts, and it shows a huge bearish H&S pattern in oil as priced in gold, with the left shoulder starting in 1994, the right shoulder just started!! Wholly molley!! It projects to a ratio of 0.01 on the logarithmic chart which means at $10 oil if gold is $10,000!!

I always had the suspicion that Peak Oil was a planted psycho ops just like Global Warming and I suspected that we sent our military to the middle east to make sure the truth would not come out about how much oil there really is there. Or the above chart pattern could simply be warning of a massive implosion of the global economy for the reasons of capital mis-allocation as I described above.


Okay here is an inverted chart which I supplemented with latest data:

Inflation or Deflation? - Page 18 Goldoi11

The red line scenario says oil will keep rising in price, outpacing gold.

Thompson wrote:There are many many parameters that need to be considered before drawing a chart, before announcing you have a major market “all figured out”. To give power to a bull continuation head and shoulders, rule number one is that it must be continuing a major trend.

Thus I tend to think gold/oil will not deviate significantly from historical ratios, because the oil countries demand to be paid in gold. Thus I side more with the red line scenario. But any way, here follows the analysis of the green H&S scenario...

The green H&S scenarios, indicates that Maloney's timing is too soon! Just as I expected! The oil price will peak around 1/15 of the gold price about 2011.5 (when the real-estate resets peak) and decline slow to shoulder base until about 2014, then the entire global economy will implode and oil will drop to 1/45 (on the non-logarithmic chart above or 1/100 if the correct (proportional change) logarithmic chart is used) of the gold price! Wholly molley!!!! :eek: That is exactly the sort of confirmation I have been looking for my thesis about inflation vs. deflation.

Thus I redraw Maloney's projection with a pink line showing a double-top at $125 for oil in 2011.5, then decline to $85 by 2014, then everything falls off a cliff and the global economy implodes:

Inflation or Deflation? - Page 18 Oil10

That makes a lot more sense than Maloney's immediate implosion, as the west is certainly going to try to QE in reaction to the deflation threat. And we don't finish the real estate resets until 2012. And then I think things will get more aggressive, also politically because we have another presidential election. I think this also agrees with the net macro cycles that Martin Armstrong had published? (any one remember what year his final peak before the cliff, wasn't it 2012.2?).

Armstrong does see 2011.5 (June 2011) as a pivotal date! (see page 16, the last page)

Armstrong writes on page 4 (numbered 2) that land value falls to its non-leveraged value, on page 6 (numbered 4) he again re-iterates the market will bounce up until June 2011!

Again on page 9 (numbered 6) Armstrong mentions the 2011.45 date a key pivot, also see page 10 (numbered 7), we have since closed about the 2007 breakline for the first time since the liquidity crisis started (this indicates we are going higher until May 2011, but we will dip under 10,000 briefly in January along the way)!

However it appears that Armstrong was formerly arguing for a low in 2011.45, not a high:

Also think why was Maloney allowed to come speak to these Russian bankers about oil imploding? Maybe it was because the person in charge knew he would give a premature forecast, which would then cause those bankers to totally ignore the truth in what he was saying after oil increase from now until middle of next year.

If the above green line H&S pattern is correct, then it will take roughly 67% to 85% taxes to cause us to break even on gold in purchasing power at the end game (higher taxes would cause us to lose). If the red line pattern is correct, then any tax on gold is going to cause us to lose purchasing power.

So how does silver fit into this type of scenario?

Inflation or Deflation? - Page 18 Silver10

Silver is ready to make a big move NOW.

Assuming the green line H&S pattern for the gold/oil chart is valid (and not the red line scenario), so the question is what happens to silver after it fails to break $50 in 2011 and the global economy implodes again and oil starts its decline? Does silver follow suit because of industrial demand decline while the base metal mines overload the supply as they did in 2009? I say yes! I say this is why the elite were never worried about silver. So these means silver will peak at 30 ratio to gold in 2011. I don't think silver will fall from as much as oil relative to gold, I see silver dropping back to 50-60 ratio to gold by 2012, so roughly $20 - 30. Then as gold picks up steam as the crisis worsens towards 2014, I see base mines shutting down and silver keeping pace with gold but at 50-60 ratio just as it did from 2008 to 2010. Then after 2014, I see silver gathering steam again to rise back up to 15 - 30 ratio to gold at its final peaks some where in the low 3 digit range.


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Inflation or Deflation? - Page 18 Empty China's capital controls causing real-estate mania

Post  Shelby on Tue Sep 28, 2010 8:12 pm

Read whole article and the linked comment:

I had mentioned this already:

Shelby wrote:...C. Let us understand the nature of this deflation. What is happening is that the indebted western countries are creating govt debt to sustain the lifestyle of the unproductive sectors of the economy. This is of course strangling the western private sector, so the private sector is transferring as much possible capital (and jobs) to the developing world. However, China is capturing a large chunk of this capital by central control of the exchange rate which keeps its labor priced lower internationally than is the actual purchasing power parity internally. Thus instead of Chinese businesses investing in other developing countries, they to a large extent are forced to invest domestically and so there is an oversupply of factories and it driving profit margins to 0 or even negative. It is not that China doesn't need more investment to create employment for the recent huge workforce bulge in their demographics, but rather that the investment is being forced into exports focus (and speculation in real estate and stock market) rather than being focused on imports by investing in other developing countries that actually have a lower purchasing power parity cost structure. This is why China is approaching the point where they can not grow any more without massive inflation, because they are not allowing the global free market to anneal.

Thus I conclude that Maloney is correct about the threat. The process of exporting the USA capital can not continue until China's peg is broken. Thus China will break into a depression, which will drag the rest of the world down. The western nations QE is just a mechanism for exporting the capital of the west in a politically palatable way.

The question is when does the Yuan peg paradigm reach exhaustion? And the fiat controllers could still decide to go to hyper-inflation as the end game instead...

Shelby wrote:I am trying to understand the mechanisms that keep capital within China from escaping to greener pastures, thus causing bubbles in real estate and for-export factories.

1. China's central bank controls all foreign exchange of Yuan.
2. While citizens are free to travel abroad, most countries where they would find undervalued investment opportunities, will either not give visas to non-wealthy Chinese (e.g. USA and Europe), or do not allow foreign business and land ownership (e.g. Philippines, Thailand, India, etc). Vancouver and Hong Kong have so many Chinese immigrants and real estate bubbles because they encouraged Chinese immigration.
3. Although Chinese can buy gold domestically, the price over spot is excessive and there are probably restrictions or taxes to be paid if it is exported.

So when the western countries say they want the Yuan peg to end, they are lying because if they really wanted it, they could just encourage Chinese visitor visas for tourism and investment purposes (no need to give politically sensitive immigrant visas).

However, this presents an enormous business opportunity to those market makers who want to provide a way for Chinese exporters to get paid in local Yuan that wants to get exported. The foreign importers then provide the exported foreign exchange. This could be run on the internet. However, you could expect the world's govts to shutdown any such thing.

Shelby wrote:
James Quin wrote:"The Federal Reserve does not want a 20 year recession like Japan. They will not get it. They’ll get a hyperinflationary collapse instead. Japan entered their 20 years of stagnation with a population that saved 18% of their income and huge trade surpluses. The Japanese government could count on the Japanese population to buy every bond they issued to pay for worthless stimulus projects. The US has entered this Depression with a population that saved 2% of their income and a trade deficit of $500 billion."

The world saves in US dollars (and Euros), e.g via the Yuan peg, so there is no danger of a run away from bonds any time soon, rather I have described the likely path forward and the end game (too much to repeat here, refer to follow links):

Doug Casey wrote:DC: I think it is. The Chinese know that one of the reasons Mao took over is because the government of Chiang Kai-shek destroyed the national currency. The Chinese can see the problems with the U.S. dollar. That it could blow up in their hands. They also see the problems they're creating for themselves by creating trillions of new renminbi. So I think that they're encouraging the average guy in the street to do some saving with gold so that if things go sideways with these paper currencies, the average guy isn't left too destitute and too angry. At least he'll have some gold coins. I think they're being quite intelligent about encouraging their people to buy gold.

Private gold ownership is of no threat to the Yuan peg and resultant mercantalism, so it provides a release value for inflation. China is very wise to promote gold ownership, as it allows them to continue their Yuan peg longer. And at the end game, they can confiscate this gold, just as USA did in 1934.

Last edited by Shelby on Wed Sep 29, 2010 1:13 am; edited 4 times in total


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