Inflation or Deflation?

The only way to halt the gold bull

Mike, the only thing to halt the gold bull market is a significant increase in real interest rates. Real interest rates must be at least 4-5% to break the back of gold. (You may say "real interest rates are determined by bogus government statistics, so I don't care it." Yes, government statistics are bogus but ordinary people care the headline inflation numbers.) The cost of an increase in short term interest rates by 5-6% is roughly $600-700 billion per year for US banking system, in other words it is the declaration of the death of financial system. Volcker had done it at the beginning of the 1980s, but today's America is far weaker from A to Z than 1980's America. In order for the US economy to really recover, the excessive debt must be wiped out. This huge debt burden cannot be paid back in today's dollars' purchasing power. The system needs bankruptcies, defaults, debt restructuring, debt-equity conversion and most importantly currency depreciation. Only after the excessive debt is wiped out we can see more realistic interest rates and a stable financial system.

I am not a gold bug but I think the introduction of gold as a monetary asset would be a very useful event. Sooner or later we will face precious metals shortages. Make no mistake, gold is still the #1 reserve currency of the world. China, Russia, India want it, the price of gold is not important for these sovereign states, how much gold they possess matters. Precious metals shortages will trigger the interest rates in an upward manner. So to avoid this inevitable outcome, gold must be accepted as a currency in classical terms, namely gold must be deposited in banks and it must pay interest.

Even at the height of the financial crisis we will surely use dollars, euros, pounds etc. to meet ordinary life's necessities cos they are bad money. Since gold is good money it won't circulate in the economy unless we are obliged to sell, it will be hoarded and hidden. I agree with you, as long as oil and basic commodities are priced in U

Shelby wrote:10 grocery products 20% smaller for the same price:

What inflation? Just make it smaller, but hide it:

http://money.cnn.com/galleries/2011/pf/1101/gallery.downsized_consumer_products/index.html

So the point is that to get REAL positive interest rates, is going to take nominal rates in the realm of 20+%, which no western nation can survive fiscally.

For example, in USA with $15 trillion of debt, 20% is $3 trillion a year in interest payments, but the USA collects less than $2 trillion in taxes. And then how do you run the government on $-1 trillion? So the governments would borrow more, which would cause the inflation rate to go even higher, it is a spiral that has no solution.

But the end game is very simple to understand. The wise people will buy gold & silver, and the rest will be bankrupted. Sorry to say, but that is the fact. It may just take some people a little time to figure it out.

Have you seen the Silver Eagle sales in USA for month of January? Unfreakinbelievable! 6 million oz in 1 month. It is more than 50% higher than any other month in history.

The end game is rapidly approaching. You've got to be crazy to keep your money in fiat or a bank. They (including the government banking insurance) are all bankrupt. It is a clicking time bomb.

Rather deal your silver and gold, and gain +15% a year in ounces, whilest keeping your networth in metal at all times.

Shelby wrote:Brian Thiesen,

There is no confusion as to who gained more, those in silver or those who follow Mike Stathis, just see my reply to your comment in the other article:

http://www.marketoracle.co.uk/Article25961.html#comment100063

On your other points, yes silver will be priced in gold and gold will be priced in silver, as it was for 2000+ years of human civilization, except just recently since 1920s when the 300 year public cycle wave was peaking and fiat central banks spread all over the world.

Now the *national* central banks are all going to die, as the 300 year private wave cycle begins. Because as I explained the math in my prior comment above, there is no mathematical way the current western fiat systems can survive a return to positive REAL interest rates.

No, there won't be only gold & silver. The politicians will get together and figure out how to make new fiat system that with regional central banks that bankrupts those who prevent the current one from returning to positive REAL interest rates. After that bankruptcy, then we can get back to high interest rates, saving in bonds, etc.. Similar to the 1980s, except with severe bankruptcies much more severe than 1920s (because the debt-to-GDP ratios are much more severe), so much more global turmoil and change (as we are seeing now in Africa with govts overthrown due to bankruptcy of the people due to food price inflation and thus hunger).

The big question is what form with those bankruptcies take? Will it be a steady devaluation of paper fiats relative to gold & silver, until the paper fiats are worth say 5% of what they were in 2001? Or will it be a quick devaluation at some point, due to denial to deal with the problem by the western govts?

I think it will be a combination of the two, and thus I would trust your brokerage paper digits, because eventually the govt is going to be forced to get nasty in order to force the bankruptcy on people. And usually socialist democracies steal from the middle class to give to the entitled class and the rich. So just ask yourself, does your brokerage account put you in the middle class?

Brian Thiesen wrote:
"By the way 20-500 trillion is nothing, that is all a show when you decide to take some time and understand Uniform Commercial Code you will realize owning slaves (humans) is the ultimate commodity, the market is just a game to further that goal."

Yes you are correct, because the slaves refuse to stop using debt, and debt requires a fractional reserve system, because if you loaned all the gold in the world at 5% for 300 years, then the interest compounded (the increase of the money supply needed) would be 2,273,996 times greater, but gold can only be mined at about 2 - 3% increase. Thus all fiat systems are inherently debased and bankrupt. This only becomes apparent then when the fractional ratio gets so far out-of-whack that the people stampede. We are very close to that now, because there is no mathematical way to get back to positive REAL interest rates.

The effect of higher prices will be called economic growth. The price inflation within the adjustment process with full motive will grossly under-estimate the actual rising price rate. Therefore, the adjustment off the nominal economic activity will be grossly inadequate. The 10% to 12% price inflation will be called 3% to 4%, and thus a 6% to 9% error in the Gross Domestic Product will be made. The consequence will be that a powerful recessionary surge downward will be called a positive 4% to 5% GDP growth.

My opinion is those yields are going much higher and late this year or sometime next year things bust wide open for the Western world, and I do not mean that in a positive way

I basically agree with this article:
http://www.321gold.com/editorials/schiff/schiff021011.html
Food prices will likely be a major factor for breaking away from the USD.

This would likely set off a chain reaction, that is, once people start wanting other currencies for payment rather then US dollars (and in some cases this may be legislated) this will unleased a tsunami of USD trying to find a home. Ultimately that home is the USA. and at some point I think people will buy anything just to get rid of USD so all those USD around the word will be trying to buy goods and services from the US thus pushing paper prices up incredibly for those living there.

This of course almost effects everyone, so maybe why everyone including non US citizens like myself have an option about it. For example the NZ government does not hold any Gold or Silver and our currency has never been backed with precious metals, we have USD and other paper currency holdings. Countries like China will try to buy food from NZ with USD, maybe there will be a small window where they will be accepted, but then that will close, but then what is so good about NZD??... So the dominos fall.

What happens when every USD ever printed that is located outside the US is sent home? Hyperinflation I think, and not just for the USA.

Dan,

Assuming this is not illegal in your jurisdiction, assuming you won't owe tax on the forgiven debt, assuming you feel the banksters have looted our society and the value of money and thus stolen from us, gut your house of everything you can sell all for cash, the toilet, bathtub, doors, windows, etc.. Go buy 500oz of silver with cash, and hide it. Declare bankruptcy. Buy a $3000 used mobile home, then go park it some where free where you can grow your own food and catch fish. Wait. Within 10 years or so, you may be a millionaire (see my prior post I expect silver $400+ by then).

This video may be relevant to my justification:

https://www.youtube.com/watch?v=Cmg-41xACTA

Cheers.

Hi Brian,

Here are some replies to your questions:

1) Anyone who buys on margin can lose several times their investment. Additionally, since most people are in net debt, they are effectively on margin, even if not in a margin brokerage account.

2) I do not need to use it in a store, I can sell it for fiat. Or even lease it for rents that disguise an interest bearing return for tax purposes. The end game is where the globalists back the new regional currencies with gold, and pay very high interest rates to suck all the gold back into the banking system, and gold will be convertible at the banks. There is even a video at the Fed showing this coming future. The globalists have started hinting at this. One of their code-of-ethics is they must warn you, before they screw you.

3) People comment because they want to distill truth.

4) Bunker mentality applies generally to all forms of preparing for outcomes that are paranoid, not necessary a nuclear attack, but the general concept of not respecting the perpetual march of the maximum division-of-labor trend.

5) Yes the globalists will profit handsomely on the rise of the gold price as they purchased back at $200s, and will sell for the new bonds that will pay 20+% interest in coming regional currencies. Who said bankers will get rid of currencies? Not me. I said the end game by around 2024 or before, is to destroy the national currencies and replace them with regional currencies and regional central banks, so that the globalists have more control and we can less affect them locally. But to get this, they have to sacrifice something temporarily. They will temporarily let gold come back as money, but not as a currency, only as a store-of-value and convertible at banks. This will enable them to raise interest rate super high, and then they bring the entire world (including developing world) into their next big bond bond bubble as they then slowly fractionally debase the gold backing while no one is paying attention. Then the death of the regional currencies (like today's crisis but some decades from now), will be the final end game leading to a one world currency and end times. This has all been known and planned for 2000 years. Do you want me to show you the public plans written about 100 years ago?

6) Agreed, they are monitoring everything.

7) Correct money can not buy salvation. Jesus said so in Matthew 19, that the only way to perfection is to give it all away and walk from this life of death, to the life of life. You are getting into the philosophical. Maybe we should stay on the financial.

8.) My point is I have to buy something. I can't buy $1 million of food. What do you suggest I buy other than gold and silver? Land is also illiquid. Stocks (and bonds) are losing value relative to gold and silver since 2001 and 2004 respectively. I don't think you can find anything but gold and silver. Eventually everyone will figure this out, and I want to be early.

9) Ah 1% now, but by the end game, at least 10%, as was the case in 1980. All mass psychology phenomenons have this pattern, and it is known as the exponential function. The early adopters profit the most. The globalists were the earliest as they purchased around $200s as they told the central banks to sell to them (such as Gordon Brown who sold away most of UK's gold). The central banks have stopped selling now.

10) Since gold can always be converted to fiat, then I can profit on silver by taking profits in gold. As for the time when real interest rates go skyhigh and gold and silver fall in price (the new regional currencies coming), then I can loan my silver and gold at 0% interest rate, and watch my ounces increase as fast as the fiat interest rate. Thus I capture all the gain (the loss in the price of silver) in terms of increased ounces, while my borrower pays a 0% interest rate, while everyone else pays 20+%. I detailed the math on this at the "How will we trade..." thread in Precious Metals forum (goldwetrust.forumotion.com).

11) Not sure what you mean here, but life does not reward burying money in any form. I am eager to lease mine (a form of investing in others' businesses), or invest it directly in their businesses as soon as possible.

12) Nothing on earth has a high above ground inventory relative to industrial demand, except gold. Second is silver. Copper and everything else isn't even close. Copper has only 6 month inventory above ground. This means it can never be a store-of-value, because it is primarily consumed and thus has no store-of-liquidity and thus is a very unstable value that is not orthogonal to economic conditions. You can Wikipedia "orthogonal", it is a critical mathematical concept.

13) The idea of profiting on catastrophe is that you profit because you help make it less of catastrophe by providing some needed function, such as storing up real capital in the form of real money, and only gold (and silver) qualifies because of #12 above.

14) The globalists want you to believe that paper is money. It is only an illusion. Paper money has lost 95+% of its value since 1900. One ounce of gold can still buy a fine man's suit, just as it could in 1900.

15) Agreed gold and silver are only tools, but when you have $1 million and no other suitable investment options, then they become your main tool at certain junctures.

16) Much better people will buy gold and silver than hoarding commodities. The sooner we kill the corruption of the central banks printing paper money like crazy, the less damage will be done to the world's poor. The more we delay, the worse it is going to be for everyone.

17) Money is the root of all evil, whether it is paper or gold or whatever. That is just nature. Nevertheless still doesn't tell me what to do with my $1 million?

18) It matters. If you put $1 million in paper in 1900, you would have less than $50,000 now in purchasing power parity. If you put it in gold, you would still have the same $1 million in purchasing power.

Cheers.

Nadeem wrote:

"However the interest rate risks are transferred to the currency markets and this also suggests that the risk of hyperinflation is higher as the system is geared towards perpetually increasing debt until the bubble bursts amidst an hyperinflationary panic rather than mechanisms for less severe normalisation of debt due to just high inflation but rather an hyperinflation outcome."

This is because the currencies are not backed by anything (gold) that tracks the inflation. But hyperinflation is not sustainable when the whole globe is locked into it, because hyperinflation of commodities is unsustainable globally (no release value), thus we are certain to get bouts of renewed collapse, similar to 2008.

This is why only gold can retire the debt, so what we have is a process of transfer of wealth from those who don't have gold to those who do. The end game is those who don't have gold end up with about 1% of their purchasing power by 2021 or so.

The UK will not succeed in moderating this by 2015, that is pure fantasy. The fallacy in the GDP projection in part 1, is that it is not real GDP as measured against the increase in the gold price (the only true metric of inflation). This will become more evident as time goes on...

Nadeem, you continue to confuse _NOMINAL_ inflation with _REAL_ inflation. Nominal inflation is the change in fiat prices. Real inflation is the change in fiat prices minus the interest paid on bonds. Another measure of the real inflation is the price of gold. This is why gold increases when the interest rate paid on bonds, is lower than the increase in fiat prices.

I have written in numerous of my published articles on this site, as well as repeated in numerous comments I have made on this site as follows:

http://www.marketoracle.co.uk/Article26704.html#comment101931

"Gold stores more value than fiat, when the interest paid on fiat bonds is less than the (nominal) inflation rate, which over any sufficient period of time, is ALWAYS. Period."

So the point is that gold is telling us that the real inflation rate is much higher than the nominal inflation rate the govt is using to arrive at REAL GDP from NOMINAL GDP.

You see the globalists have you totally fooled, because they have convinced you to use nominal inflation and ignore the relationship between opportunity cost (bond interest rates) and fiat prices.

During the 1980s, the real inflation rate was negative, because the interest rate paid on bonds was double-digits and much higher than the rise of fiat prices.

And that is the entire crux of why the world is in the problems it is. Humans can not understand why gold is money, and fiat is not. I just explained why above. Fiat is the way the globalists deceive, steal, and screw up society. Why do they do it? Because we let them, and power is addictive.

Beijing also has resorted to the blunt tool of freezing prices of electricity and some other basic goods, but that is starting to backfire.

In the southeast, export regions are suffering power shortages that force factories to suspend production every other day. Power companies are squeezed between low state-set rates and high gas and coal prices, so they have avoided adding more generating capacity despite double-digit annual increases in demand.

"At the moment it is not very attractive to build an electricity plant in China and some regions have a shortage of electricity," said Louis Kuijs, a World Bank economist in Beijing. "At some point these administrative prices must be raised."

Chinese leaders have ordered local authorities to ensure adequate supplies of vegetables in markets and to pay subsidies to poor families.

In a possible effort to deflect criticism, it has imposed fines on retailers who it said cheated shoppers by overstating the size of price cuts on discounted items.

"I think you should have confidence in the Chinese government's capability in managing vegetable prices well," said a deputy commerce minister, Fu Ziying, at a news conference this week. He gave no time frame for when inflation might subside.

IMF Board Approves $36.8 Billion Loan to Portugal

Portugal has until 2013 to cut its budget gap to 3 percent from 9.1 percent of gross domestic product last year. Photographer: Mario Proenca/Bloomberg

Greek Government Bonds Slump on Concerns Over Debt Restructuring

Greek government bonds plunged, driving up 10-year yields to a record, amid mounting bets the nation won’t be able to avoid reorganizing its debt.

Greek two-year notes fell for the first time in three weeks. The spread, or yield difference, between the 10-year bonds and similar-maturity German bunds widened to an all-time high. Fitch downgraded Greece’s credit rating to B+ from BB+, four notches below investment grade, boosting demand for the relative safety of German government bonds.

“We still have the backdrop of possible Greek restructuring, and concerns over that are driving peripherals lower and pushing spreads wider,” said Peter Chatwell, a fixed- income strategist at Credit Agricole Corporate & Investment Bank in London.

The Greek 10-year yield rose 113 basis points in the week to 16.57 percent as of 5:18 p.m. yesterday in London after reaching a euro-era record 16.59 percent earlier. The nation’s two-year note yield climbed 57 basis points to 25.46 percent. It reached a record 26.77 percent on May 12.

Greece’s budget deficit is forecast to exceed the 7.5 percent of GDP target under the EU-led bailout, reaching 9.5 percent this year, the European Commission said on May 13. The nation’s debt, already the euro area’s biggest relative to economic output, may reach 158 percent of GDP this year and peak at 166 percent next year.

Our recession model typically provides several months warning before a recession begins and the 20% mark is often the line in the sand with only one false signal (1987) over the last thirty years. Given the current reading rests at a 3% probability of a recession beginning over the next 6 months, I am in agreement with the ECRI’s Lakshman Achuthan that a recession is not in the cards as of yet.

1)Yes, but not yet. It will take a decline in investment growth to reduce labor demand.

2)Yes, an increasing if still-minority number of economists now recognize that the growth model is unsustainable, although I am not sure all of them fully understand why it is unsustainable and the role of rising debt. For that reason, I think they misunderstand the nature and difficulty of the adjustment process. I suspect that after another year or two in which consumption growth continues to remain below GDP growth, there will be much greater awareness of how intractable the problems are.