Inflation or Deflation?

Shelby wrote:Agreed Nadeem, and I will add some thoughts of mine:

1. If the China doesn't abandon the peg, they get skyrocketing inflation and thus a renewed global collapse/liquidity crisis, which will thus cause the dollar to appreciate again and continue the dollar bond bubble. Whereas, if China does abandon the peg, the collapse also will occur, because the global system is capitalized to handle the current trade flows, not the new paradigm (West and developing world rebalanced) that will come. Thus no matter what China does, the result will be a continuation of the bond bubble. There is simply no way to escape. The only escape is gold retiring all the debt of the world in NWO system that is being prepared at the BIS.

2. The bottom line is that the entire world is built on a house of cards of debt and this has created supply and demand in the wrong areas. This will all have to be laid to waste, but every single country has a demographic age debt that can't tolerate such a reset. Thus the path to the NWO is guaranteed. The banksters are quite smug now.

3. Bernanke is also doing QE because if he doesn't, interest rates rise and the current financial system will be toasted. No matter what any one does, the current financial system is on its death march towards its intrinsic value of 0.

In short, the world is FUBAR and clusterfucked. Just look at Bernanke's oped in NY Times on past Wednesday. He said QE is working. That was basically the middle finger of the banksters to the world, "you can't stop us".

Sorry to be so frank and downbeat, but I like to call a Spade a Spade. Helps to be realistic when planning.

Should I talk about the positives going forward?

Shelby wrote:Prices and economic activity are decreasing (or stagnant) in areas where credit was overused (e.g. housing). And prices and economic activity are increasing in areas where credit is increasing (e.g. China and developing world).

During the interview Pelley said that Mr. Bernanke's new $600 billion QE-2 stimulus plan is spending “the Fed's own reserves. It's not tax money. It does not add to the federal deficit.”

During the interview Mr. Bernanke said: “We're not printing money,” said Mr. Bernanke during the interview. “The amount of currency in circulation is not changing. The money supply is not changing in any significant way.”

PELLEY Is that tax money that the Fed is spending?

BERNANKE It's not tax money. the banks have-- accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. so it's much more akin to printing money than it is to borrowing.

PELLEY You've been printing money?

BERNANKE Well, effectively. And we need to do that, because our economy is very weak and inflation is very low. when the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.

The Fed has been buying bonds since early 2009. When a private investor buys bonds, the investor uses cash or sells some existing asset to raise cash and uses that money to buy bonds. The investor might also borrow money from a bank and use the borrowed funds to buy securities on margin. The Fed can do something else. It has the power to electronically credit money to the bank accounts of sellers who in turn sell government securities or mortgage backed securities to the Fed. The banks get the money and the Fed gets the securities. The Fed isn’t literally printing $100 dollar bills when it does this. But it is creating money, electronically, that wasn’t in the financial system before. In that sense, it is printing money.

But as Mr. Bernanke has been trying to emphasize lately — perhaps clumsily — most of the money that the Fed has created isn’t circulating much through the financial system. It’s mostly sitting idly, often in deposits — also known as reserves — that banks keep with the Fed itself. Broader measures of the money supply haven’t grown that much because the money isn’t being lent on. Since January 2008, the amount of Federal Reserve notes, i.e. currency, in circulation has increased 18%, to $980 billion. During the same stretch, the reserves banks keep with the Fed has increased more than 30-fold to $995 billion from $33 billion.

Meantime, in the 12 months between November 2009 and November 2010, M2 money supply, a broad measure of money including bank deposits, retail money market fund deposits and other measures of short-term money, are up just 3.3%.

The Fed chairman seems to be trying to emphasize two points: 1) The Fed isn’t literally printing money; and 2) The money that it is creating isn’t flooding through the financial system in a way that would be inflationary.

Shelby, Feb. 2006 wrote:First world economies face an unavoidable dilemma, regardless whether globalization is switched on or off, either sacrifice now with decades of retirement demographic deflation (globalization off), or sacrifice later by inflating the deflation of globalization for temporary illusionary "wealth", which will end in a hyper-catastrophic global collapse Greater depression.

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

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

Fiat currencies have value based on the ability of government to meet its obligations. As we and others have picked up on, the USA’s interest expense is now over $400 Billion and currently 17% of tax revenue. This is with interest rates at historical lows and a national debt of $14 Trillion. That doesn’t include agency debt of $3 Trillion and an estimated $2.8 Trillion from the states.

The situation is going to get worse. The states will likely need support in 2011 and perhaps a bailout by 2013. The continuation of the Bush tax cuts adds another $700 Billion to the deficit over the next two years. The most important variable of all, interest rates is now moving in the wrong direction.

Two years from now, the US government would be dealing with over $17 Trillion in debt and at the least, a 50% rise in interest payments. Even if interest rates hold around 4%, you are still looking at an interest expense equivalent to 25% of tax revenue. And that accounts for growth in tax revenue.

This speaks to why the Fed is monetizing the debt under the guise of economic stimulus and quantitative easing. They have to, and they are just getting started. In the coming months and years, the Fed will have to monetize more as the debt burden grows larger. Moreover, the Fed will periodically have to buy bonds to try and keep rates down.

Here is the place to go for the exact interest on the national debt:

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

I don't know how he comes up with a 3.1% interest rate but what I do know is that U.S. is more in short term instruments now, well more than 50% in short term. Just divide the debt into the interest I suppose.

But the real problem is as more and more debt is racked up in short term instruments then when those rates fly higher then game is over as interest approaches 25% of receipts and well beyond.

Kid Dynamite wrote:darkmath - because my interest in silver is not to use for currency in the future, or to hold forever and give to my grandkids, or to rub on my naked chest, or to bury in my backyard (that's my absolute favorite thing, by the way - people who say to buy precious metals, seal them in PVC pipe, and bury them in the yard. unreal)...

My goal is to profit (in fiat terms! shock!) from a rise in the price of silver/gold. SLV/GLD, in my opinion, clearly accomplish this goal more efficiently (easier, faster, cheaper) than buying (and don't forget, eventually SELLING ) physical metals myself.

As for fiat: the purchasing power of the US Dollar will continue to decrease over the next 100 years, just like it did for the last 100 years - that's very different from saying that the dollar is dead/doomed/on it's way out. (side note: every time you hear someone say "the dollar has lost 98% of its value over the last 80 years," or whatever the number is, it's important to notice how silly a statement that is. I'm not advocating taking piles of fiat currency and burying them under my mattress, in my barn, or in my yard - you invest your (Fiat) money, and it has delivered a very positive real return).

Congrats on your NASDAQ top trade and your timely exit from real estate, and your relocation to the Caribbean.

Kid Dynamite wrote:ps - Dow Industrials and Transports are highly correlated. Consumer staples and cyclicals are highly correlated. Oil and the dollar are highly correlated... lots of things that aren't "the same" are highly correlated, Darkmath. Maybe if you end up taking that stats course you were talking about, you'll learn the difference between correlation and causation. I learned that when I got my degree in mathematics from MIT.

flash9 wrote:

Shelby wrote:http://seekingalpha.com/article/241152-jp-morgan-and-the-massive-silver-short-the-greatest-story-ever-told#comment-1377586

The 98% loss in the value of fiat is typically ignored by a fool (or callous person) who doesn't have sufficient conceptual math ability (yes I am talking to you MIT Math graduate), to understand mathematically that such "casino money system" paradigm destroys human capital on the aggregate.

Sure I agree that if you are smart (i.e. training in applied mathematics from MIT), you can use the fiat system to arbitrage (I mean steal) capital from society, and claim to your conscience that you are helping the free market allocate capital more efficiently.

But what you are missing is that physical world supply and demand curves can be distorted by interest rates, which can be manipulated by the printing press (even the new exotic forms of "money" such as derivatives, where Bernanke can thus claims he is not printing M1). I say "distorted" instead of "manipulated", but the latter requires proof of intent, the distinction being irrelevant to my point.

Any one with sufficient math visualization skills, will readily understand that any such distortions increase frictional losses, i.e. destroy physical world capital. Examples would be overbuilding, underinvesting in education, producing insufficient children to support demographics, etc. In general over-investing and under-investing in the real world.

And this paradigm leads to aggregate failure, i.e. "too big to fail". Thus fiat systems die when the aggregate does. Thus it is very difficult for you to hold on those so called "profits" in the fiat system.

But those long-tail events don't happen in every person's lifetime, so we ignore them.

Nevertheless, if we didn't use fractional reserve finance, the entire world would orders-of-magnitude more prosperous, because frictional capital losses are a compounding phenomenon. I hope everyone can appreciate the power of compounding (exponential function), even I know most people can not even understand that it is impossible for usury to compound on the aggregate if gold and silver are money, because you eventually run out of money to pay the interest on the aggregate. This is why humans will always demand fractional reserve financial systems and thus demand that capital is destroyed.

Pity the human condition.

P.S. My overall IQ is some where in the 135+ range, but my IQ in the math visualization/conceptualization realm is apparently up in genius range.

You forgot the most impt thing the smart people do for the system it used to be called frontrunning and stock manipulation but it's really that ALL impt function providing liquidity.

Author has mathematical assumption errors.

Correlation can not predict the long-tail distribution, because for one reason correlation does not imply understanding.

His parameters and assertion that housing prices have only another -15% to decline, assume (among other expectations) that interest rates don't rise at pace (or exceed) with nominal GDP growth. But to get gold and silver to not spiral off to forever compounded increases in fiat price, then real interest rates have to become positive. But we know the actuarial fiscal reality is real interest rates can't go positive without causing sovereign default for many western nations, including the USA. Thus GDP has to contract massively at some point.

This can be viewed another way, which is that western jobs are being outsourced to developing countries (6 for the cost of 1), thus the westerner will have no choice but to eventually reduce his/her relative resource usage, so this means multiple people moving in together (retirees moving back in with kids, kids moving back in with parents).

Also the author's has a mathematically erroneous assertion that the future housing prices must fall below the long-term mean in Schiller's chart in order to keep the long-term mean from falling. The current price is nearly at the mean in Schiller's chart.

The author is correct that CPI has been understated compounded since early 1990s (this can be proven numerous ways), but thus Schiller's chart does not correct show how current price is already _BELOW_ the long-term mean.

Thus neither Schiller's chart nor this author's method is particularly predicted of the long-tail event that lies ahead. That is why only gold and silver are the Ultimate Market Regulators:

http://www.marketoracle.co.uk/Article20263.html

It is hard to say which way housing prices will go, because it depends on how much inflation the central banks give us, but one thing we can say for sure, is that until real interest rates return to positive (which means a new world currency system), then gold and silver will outperform housing.

Nadeem wrote:The deflation delusional continues to persist, where deflationists call upon anything other than the rising inflation indices to support ideological based thesis such as constructing nonsensical arguments that deflation exists if consumer prices are compared against the price of gold price to imply that the INFLATIONARY rise in the Gold price is a manifestation of DEFLATION because when priced in Gold (which has risen) then many consumer goods have deflated in price, despite the fact that 99.999% of the worlds population's transactions for consumer goods and services are NOT conducted in gold and furthermore ignoring the fact that the rise in the gold price is a manifestation of INFLATION, as the price of GOLD INFLATES in virtually EVERY FIAT Currency.

Nadeem, for those holding gold and silver, indeed we are seeing deflation, which is exactly what is expected given that cost of labor is decreasing as 6 billion poor people compete for jobs against 1 billion overpaid westerners.

And moreover, the delusion is the one who "banks profits" in casino chips (i.e. fiat currency), which goes along with your fantasy forecasts of the UK fiscal problem mitigating by 2014-15, in that the only way you stop the devaluation of casino money relative to real money (gold and silver), is to raise real interest rates to positive values, but the ACTUARIAL accounting sovereign debts (and I mean the 2nd and 3rd order derivative effects that happens when 50% of the population sucks the tit of govt) says that at such interest rates, that taxing 100% of income can't pay the interest on the ACTUARIAL debt. Thus the casino chips will be defaulted on, there is no other possibility.

So the end game is only gold and silver will "bank any profit" at the end. One of those times when you "bank profits" into fiat, will be your last one before destitution.

Nevertheless, some of us will take a chance in the casino, if we see severely overbought stage for silver, e.g. $21 in March 2008 when I screamed to sell. But the difference is that we will be banking our profits in silver for gold, and then waiting to trade our gold back to silver to capture that again in a silver unit-of-account.

Mark my words my friend.

I even explained how to never pay taxes again, by leasing your silver at the end game. What do you think the Rothschild do? Learn to emulate them.

Nadeem Walayat, owner of marketoracle.co.uk wrote:Gold delusion
Shelby

Gold is irrelevant to inflation or deflation, it drives nothing, it does not drive interest rates or inflation.

Whereas CPI drives interest rates and the wage price spiral

Gold bugs exist in a universe of ever rising gold prices which is why they will give up ALL of their gains when gold experiences a bear market which it eventually WILL!

If my forecast for GBP transpires then sterling holders of gold will give up a lot of their profits over the next 6 months.

Now don't get me wrong, gold as is the case for other commodities is great to ride and profit from the inflation mega-trend as long as investors don't get married to their positions!

Best

NW

Nadeem, thank you for publishing my comment, for your response, and for the opportunity to reply to your comments. I appreciate the civil debate and I will try to end up my comments on this matter as follows.

Also I wanted my best wishes for your fast and full recovery from your recent flu. Please do understand that I have no personal animosity in this. I am only saddened that you can't see over the forest to the big picture of what is happening. I invested a fair amount of my time commenting at your site, to try to teach you and your readers. And I don't have enough time to continue to do so. So this post will need to suffice.

1. How can you ignore the fact that the average lifespan is 15 years for the 599 defunct paper currencies in the history of the world?

http://goldnews.bullionvault.com/paper_money_010720091

"More spectacular still, however, is the number of paper money currencies no longer in circulation. Our analysis includes 599 paper money currencies that have ceased to be used as money... The median age for these now defunct currencies is only fifteen years."

Here are a few examples:

http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation
http://www.sjsu.edu/faculty/watkins/hyper.htm

But only 26% dies by hyperflation, the others died by "monetary reforms" (which means you wake up to a bank holiday and govt seizure of your wealth), and war (you lose everything in war time).


2. Did you not know that it was only 1970 that most every major paper money in use in the world today, was removed from the silver or gold standard and turned loose to be nothing more than casino chips? Your pound sterling and the US dollar was still convertible to gold and/or silver up to mid-1960s or 1971 at latest. Since then, they raised the interest rates to nearly 20% in early 1980s to arrest the demand for gold and silver, and we had a multi-decade bond bubble. This (debt and derivatives) is the only thing that kept the world's fiat system going, and the end game nearly upon us.


3. Just like what happened to every paper currency in the history of the world that was untied from gold and silver backing, they don't last more than a couple of decades or so before they die. Take John Law in France from 1700 to 1720, and the French Revolution that resulted where the people were so impoverished that they chopped off the heads of nearly every one who had been in govt or banking spheres.


4. If you don't understand that gold and silver have always regulated interest rates, then I pity you, because you won't see what is coming. And I will come back here to tell you, "I TOLD YOU SO". Just study history a little bit. Paper money untied to gold and silver has never lasted more than a few decades at most.


5. Gold bugs don't exist "in a universe of ever rising gold prices". We know that if the interest rates are allowed to rise higher than the CPI, then it is time for us to sell. This is exactly how gold regulates interest rates. If the Central Banks print money and hold interest rates too low, then gold price rises (people move from fiat to gold).


6. But the important thing you MUST know, is the central banks can not allow interest rates to rise above CPI for the current fiat system ever again. The game is over. They will hang on for as long as they can, but eventually this system must die and they will be able to raised interest rates enough in a new currency, after a total reset of the financial system. Why? I already told you in my prior comment. The current system can not pay back the debts, even if you taxed income at 100%. And the more they inflate and the more they tax, the more jobs are going bye bye from the west and the worse the fiscal situation will get. Every year you will have to revise your fiscal projections and they will get worse and worse, and your 2014 hump will never come. This will only end when the current fiat system ends.

Then we will see how they reset the system. War? Hyperinflation? "Monetary reforms"?

Ok Nadeem you go ahead, and just remember "I WARNED YOU".

You are an excellent short-term prognosticator. But you don't understand the macro-economics.

Your first point is correct, that inflation transfers wealth to those on the coattails of the central bank and government; whereas deflation transfers wealth from debtors to savers.

However, your assertion that bankers will suffer from inflation (due to their interest return debased) is incorrect, because they merely transfer the losses to the public sector. Also you need to understand that there is something much bigger in scope taking place right now. The top-most bankers of the world (e.g. Rothschild and Rockefeller) who own the world's central banks, like to eat the other bankers. Using their power to print money, they can buy up the other bankers for pennies as those other bankers fail because they don't have access to the tit of bailouts (until after they have failed and been acquired by the top-most bankers).

Also it is important that you understand that it was impossible politically to inflate in Japan, because the country was net savers in the private sector. Whereas, the western world today is severely in the net debtor category, so massive inflation is the only politically palatable choice forward.

Fekete wrote:The idea that an artificial increase in the money supply must raise commodity prices dies hard. But as my theory suggests, and as events have repeatedly shown (first during the Great Depression of the 1930’s, and again, during the present crisis), the presence of risk-free speculation renders the increase in the money supply counter-productive. It causes prices to fall rather than rise.

"conjure up in order to scare people into loading up on excessive amounts of physical gold"

"those who make money from gold ads and commercials aren’t spending that money buying gold"

"Needless to say, this is a very dangerous move because gold will not remain above $1000 forever."

"Those who have listened to these hacks have missed out on more than 85% gains from the largest stock market rally since the Great Depression."