Inflation or Deflation?

Shelby wrote:...When I listen to the key man in china:

http://www.charlierose.com/view/interview/11663

I come away with the sense that they think they can solve the growth vs. inflation problem "by having everyone on the same page" (that is what he said). So clearly this is a model of totalitarianism. They are going to try to micro-manage the solution, by suppressing some sectors and subsidizing other sectors. It will of course fail horrendously, as it is a friction on the free market adjustments which thus won't take place.

So the conclusion is that inflation will get out-of-control, and it will take a year or two for China to burn itself to the ground with rampant inflation, before their growth model is proven to be unsustainable with a horrendous crash...

At around the 30 min point, China's vice premier provided a list of 5 things that were different in comparing Japan and China, with respect to world trade.

He made 3 points that struck me:

1. Never before in history of world had the world's #2 economy had 100th country per capita wages.

2. USA willingly sold all of it's technology to Japan, but not to China.

3. China has no brand names known in the world, and most of the valued-added is not produced in China, for the products that China makes. (e.g. only $40 of the $400 iPod is produced in China)

Then I remembered that Chanos said that maybe the reason the Chinese elite are taking their money out of the country, is because they fear the ultimate failure of China and the resultant uprisings. Note that in the above linked interview, the Premier said that "uprisings can NEVER happen in China" with a very stern face. The Chinese elite understand that it is an all-or-nothing game for them.

Chanos says 70% of China's GDP is fixed investment. China's problem is how to move up the chain of technology and value-added. The problem is that China can't do that via exports, because it is not small population that can do technology for the rest of the world. It is nearly endless supply of labor.

Thus I conclude that China can not allow fixed investment to decrease. They have no choice. They will spend $2 trillion of their $3 trillion dollar reserves, before they will succumb to political suicide.

But what can they spend the $2 trillion on? They can't spend dollars inside their own country. And what can they buy external to their country that can help their people have jobs? (also when those $2 trillion are dumped on the world that means more inflation)

More fixed investment coming... I don't see any other way. They will do fixed investment until they are bankrupt.

And realize that China has immense private savings too. So there is no chance of a quick overshoot with interest rate hikes leading to a contagion. There simply isn't that kind of naked leverage in China.

China won't stop until it has no more savings or until that savings has run to gold and silver, which btw is accelerating:

http://www.zerohedge.com/article/chinese-silver-demand-surges-four-fold-just-one-year (silver demand up 4x in 1 year)

http://www.caseyresearch.com/gsd/edition/china-now-top-gold-bug



Even if China expands foreign investment, this will likely be in developing countries, which will drive more demand for commodities:

http://www.zerohedge.com/article/china-proposes-cut-two-thirds-its-3-trillion-usd-holdings

...expanding overseas investment...

The fundamental issue is that as long as the dollar has very low interest rates, this will drive excess liquidity into China, for as long as China's currency is undervalued. China has only two choices, go back to poverty or spend those dollars on something. If China had allowed a free market in exchange, then its people would be all over the world finding opportunities, exchanging technology, etc.. Instead China's central control over the income earned by its people, means they are limited in terms of what they can spend it on.

China can not open its economy letting people come and go freely and move money in and out freely. If they do that, the uprisings will overthrow the elite. They have to keep their people ignorant.

Unless this official data is a lie, I can't see a sign that China is imploding:

http://chinadataonline.org/freesource/zixunshow.asp?id=581
http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1127942/1/.html



They've had huge 20 - 40% growth in fixed investment, now it is easing a bit, but far from negative.

Looks to me that China is trying to cool commodity prices down, before they go spend their $2 trillion hoard on more.

China can't implode until it gets much worse, like hyperinflation, NPLs exhausting their savings, or the global economy (their export customers) fails.

The USA is not ready to roll over and cause the 2008 contagion (its coming but its still too early in the reflation cycle). And the EU is going to bailout member nations.

For sure China is wasting resources, but they started from a very low level and still only have 100th country in world level of wages. China will have to exhaust its resources first, but that is sort of hard to do when you keep generating more dollar reserves and surpluses.

When the rest of the world implodes, China is going to be hit hard with an oversupply of fixed investment, just as the USA was hit hard in the Great Depression after wasting money for example on Florida land. But I don't think China can lead the world down. China is not the tail wagging the dog. The USA is leading the world with its zero interest rate policy.

Surely China has huge NPLs in the fixed investment sector, but they have huge savings and reserves also.

If China collapses, Germany exports collapse, then the EU collapses. I don't think the central banks are going to opt for that outcome. I think they will prefer to fight for as long as they can with stimulus as needed.

I could be wrong about all this and the contagion and collapse could be imminent.

===============
ADD: EU and USA still account for about 40% of world GDP on PPP basis as shown below, thus EU and USA collapse is far more important than China for determining direction of global economy:

China has to choose between destroying jobs, or spending its reserves to soften the impact of inflation on the most vulnerable sectors.

I think China will opt for subsidies instead of free market pain, because the free market pain could spin out-of-control. Listening to the vice premier, one thing I think you can see clearly is China's leaders believe in "the oriental way", meaning they will not give up their control.

Appears most of the inflation in China is energy and food related, so perhaps China will increase subsidies in that area.

I bet it will be a combination of measures, it will cool the economy somewhat, use control to suppress protest by jobless or underpaid, it will increase salaries (inflationary), it will subsidize in marginal sectors that it can not shutdown (e.g. trucking).

Now here is the key thing you need to note. Even if they cool the economy, fixed investment is still growing at double-digit rates (note exception for planned investment below), thus commodity inputs are still growing at double-digit rates. Cooling means slowing down growth in fixed investment, it doesn't mean fixed investment growth will be negative. If something is growing at say 20-40% per year, it means it is that much greater demand for commodities as compared to the prior year. I hope Chanos closed out his short-bets or plans on holding them to the end game when China does implode, because China has too much cash and savings to implode now. And any fallback in commodity prices now is going to reverse as China's double-digit fixed investment growth continues to suck in more commodities (however, note the planned investment is down 1.1%, if this becomes a trend then Chanos is correct).

http://chinadataonline.org/freesource/zixunshow.asp?id=581

In the first four months of this year, the investment in primary industry, secondary industry and the tertiary industry went up by 12.6 percent, 24.6 percent and 26.5 percent respectively. Grouped by different sectors, in the first four months of this year, the investment in production and supply of electric power and heat power was 228.7 billion yuan, up by 4.2 percent; that in extraction of petroleum and natural gas 49.1 billion yuan, up 8.3 percent; and that in railway transport 141.5 billion yuan, up 26.9 percent.

Analysis on projects under construction or started this year showed that in the first four months of this year, the total planned investment in projects under construction reached 38,509.6 billion yuan, up by 19.1 percent year-on-year; the total planned investment in newly started projects was 5,338.9 billion yuan, down by 1.1 percent over the same period of last year.

In terms of funds in place for investment, in the first four months of this year, 8,637.7billion yuan had been invested, a year-on-year growth of 20.6 percent. Of this total, the growth of government budgetary funds went up by 7.8 percent; investment from domestic loans went up by 10.9 percent; that from self-raising funds went up by 27.2 percent and that from foreign investment rose by 14.9 percent.

Railroads are more efficient than trucking and create new opportunities along their lines.

So actually started construction is up 19.1%, but planned construction is down 1.1%. The tightening measures are fairly new. We have read else where that the construction firms are scrambling to find new sources of funding to keep up their growth in fixed investment. They are doing IPOs in Hong Kong for example, in order to raise foreign money. Apparently they are raising money from private sector and we've heard rumors of dollar carry trade, or this could just be internal private savings.

Let me not mince my words, I think China's experiment with central policy is going to fail horrendously, but I am trying to understand when they run out of cash (or refuse to spend it, which I doubt). When is China checkmated, where any new credit causes a decline in REAL GDP (negative marginal utility of debt), i.e. that inflation rises faster than GDP? Right now that does not appear to be the case, except in energy and food sectors. I mean China is getting close to that point and $175 oil in 2012 will topple China's economy, as it will also the global economy. But I think China is going to try to spend its cash before they go down in flames.

I think China is reseting the economy a bit before they unload their cash. The question is do we get some kind of global implosion before they do? How? The USA is not ready to implode yet. Germany's economy is strong. Etc. The nuisance economies such as Greece, Spain, Italy will be papered over. China will unload its dollar hoard.

My basic understanding is that none of the world can back off the accelerator pedal, because it is end game implosion when they do. I am thinking we have reached the point in the crackup boom, that it is too late to slow down, there is only one direction.

We are headed for inflation madness in 2012.

We are still early in the reflation, and the govts are going to fight for their last stand before inflation kills their printing. The inflation we have now is not yet enough to bust the "lala land" head-in-the-stand state of westerners. China will not go down in pride without wasting its $2 trillion hoard first and causing worse inflation than they have now. EU will not go down without trying to keep their monetary union with lies to themselves while they slip the money under the table.

Let me add to my prior post, that I had been thinking that China would try to not drive themselves back into worse inflation, but the more I think about this, they will of course err to the side of spending that cash to "better their people". They firmly believe in a centrally managed economy being more ethical, fair, concerned, etc... They are deluded by their Confucianism.

And the EU will definitely not WILLINGLY allow disintegration of their union. Germany is profiting too much right now from exports-- their economy is booming.

Neither EU nor China is at the stage where they have no options and MUST "cry uncle". For as long as the kids have gun powder, they will use it. Don't you remember being a little kid?

Statue of Limitations of 2007 securities fraud is 2012:

http://market-ticker.org/akcs-www?post=186709

Tangentially, note there is a more complete (adds images and important links) and easier-to-read version of the essay Understand Everything Fundamentally.

Build more railroads to make all those excess buildings more utilized! China is trying to transition their economy to an information economy (knowledge and travel will increase according to Daniel in Bible). I still think Chanos is correct and China, will have a real estate crash at some point, but this "information and travel" capital investment will delay that crash (2013?), and then coming out of that crash, China will be a modern economy.

Looks like a good long-term investment, and a short-term fill in for cooling real estate sector, but medium-term I still think Chanos is correct.

This will have a powerful boost near-term on sentiment within China, as investors in real estate will visualize more progress and rises in prices ahead (euphoria feeds more euphoria).

Jim wrote:http://www.usfunds.com/investor-resources/investor-alert/?CFID=2589066&CFTOKEN=92999534

Investor Alert - Railway Revolution Builds China's Consumer Culture

http://www.marketoracle.co.uk/Article31232.html

The New Steel Silk Road

The project will include three major high speed lines:

• UK/Europe to Beijing (8,100 km) and then extend south to Singapore
  
• A second line will connect into Vietnam, Thailand, Burma and Malaysia
  
• The third line will connect Germany to Russia, cross Siberia and then back into China
  

Financing and planning for this monumental project is being provided by China - who is already in negotiations with 17 countries to develop the project. In return the partnering nation will provide natural resources to China.

China's marathon long bridge to no where (an island)

http://news.yahoo.com/photos/china-s-jiaozhou-bay-bridge-1309439624-slideshow/



My prior posts in this thread...

Shelby wrote:China has to choose between destroying jobs, or spending its reserves to soften the impact of inflation on the most vulnerable sectors.

I think China will opt for subsidies instead of free market pain, because the free market pain could spin out-of-control. Listening to the vice premier, one thing I think you can see clearly is China's leaders believe in "the oriental way", meaning they will not give up their control.

Appears most of the inflation in China is energy and food related, so perhaps China will increase subsidies in that area.

I bet it will be a combination of measures, it will cool the economy somewhat, use control to suppress protest by jobless or underpaid, it will increase salaries (inflationary), it will subsidize in marginal sectors that it can not shutdown (e.g. trucking).

Now here is the key thing you need to note. Even if they cool the economy, fixed investment is still growing at double-digit rates (note exception for planned investment below), thus commodity inputs are still growing at double-digit rates. Cooling means slowing down growth in fixed investment, it doesn't mean fixed investment growth will be negative. If something is growing at say 20-40% per year, it means it is that much greater demand for commodities as compared to the prior year. I hope Chanos closed out his short-bets or plans on holding them to the end game when China does implode, because China has too much cash and savings to implode now. And any fallback in commodity prices now is going to reverse as China's double-digit fixed investment growth continues to suck in more commodities (however, note the planned investment is down 1.1%, if this becomes a trend then Chanos is correct).

http://chinadataonline.org/freesource/zixunshow.asp?id=581

In the first four months of this year, the investment in primary industry, secondary industry and the tertiary industry went up by 12.6 percent, 24.6 percent and 26.5 percent respectively. Grouped by different sectors, in the first four months of this year, the investment in production and supply of electric power and heat power was 228.7 billion yuan, up by 4.2 percent; that in extraction of petroleum and natural gas 49.1 billion yuan, up 8.3 percent; and that in railway transport 141.5 billion yuan, up 26.9 percent.

Analysis on projects under construction or started this year showed that in the first four months of this year, the total planned investment in projects under construction reached 38,509.6 billion yuan, up by 19.1 percent year-on-year; the total planned investment in newly started projects was 5,338.9 billion yuan, down by 1.1 percent over the same period of last year.

In terms of funds in place for investment, in the first four months of this year, 8,637.7billion yuan had been invested, a year-on-year growth of 20.6 percent. Of this total, the growth of government budgetary funds went up by 7.8 percent; investment from domestic loans went up by 10.9 percent; that from self-raising funds went up by 27.2 percent and that from foreign investment rose by 14.9 percent.

Railroads are more efficient than trucking and create new opportunities along their lines.

So actually started construction is up 19.1%, but planned construction is down 1.1%. The tightening measures are fairly new. We have read else where that the construction firms are scrambling to find new sources of funding to keep up their growth in fixed investment. They are doing IPOs in Hong Kong for example, in order to raise foreign money. Apparently they are raising money from private sector and we've heard rumors of dollar carry trade, or this could just be internal private savings.

Let me not mince my words, I think China's experiment with central policy is going to fail horrendously, but I am trying to understand when they run out of cash (or refuse to spend it, which I doubt). When is China checkmated, where any new credit causes a decline in REAL GDP (negative marginal utility of debt), i.e. that inflation rises faster than GDP? Right now that does not appear to be the case, except in energy and food sectors. I mean China is getting close to that point and $175 oil in 2012 will topple China's economy, as it will also the global economy. But I think China is going to try to spend its cash before they go down in flames.

I think China is reseting the economy a bit before they unload their cash. The question is do we get some kind of global implosion before they do? How? The USA is not ready to implode yet. Germany's economy is strong. Etc. The nuisance economies such as Greece, Spain, Italy will be papered over. China will unload its dollar hoard.

My basic understanding is that none of the world can back off the accelerator pedal, because it is end game implosion when they do. I am thinking we have reached the point in the crackup boom, that it is too late to slow down, there is only one direction.

We are headed for inflation madness in 2012.

==================================

Shelby wrote:http://english.eastday.com/e/110501/u1a5867424.html



If China is going to prioritize industries that are less capital intensive and more valued added, then might this not increase demand for silver?

Silver is used in high valued added products and demand for precious metals increase during negative REAL interest rates when inflation rate moves higher than growth rate and forces shifts in priorities.

Also as China tries to morph their priorities, such as opening more to making foreign investment, they are going to drive fixed investment demand in emerging markets. Sort of a handoff of the baton.

However this will probably not go smoothly.

I am back to my point that I made a few weeks ago, that volatility is going to increase.

==================================

Shelby wrote:http://www.marketoracle.co.uk/Article28222.html

In the Scotiabank Commodity Price Index report for April Mohr said “Copper could still retest the previous US$4.60 record of February 14. Chinese copper fabricators destocked copper and produced 2.1% fewer copper semis in January and February due to credit restrictions and high prices. However a big seasonal pick-up in consumption in the second quarter will lift prices."
“We see renewed strength in the second half and you’ve got to be bullish copper for the next few years. The global recovery is becoming more broad-based and you’re not going to see any new mines coming on stream for at least this year.” Christin Tuxen, analyst at Danske Bank A/S

Australian equity research firm Resource Capital Research (RCR) said it expects the copper market to move from a small surplus in 2010 to a deficit of around 400,000 tonnes by 2011.

According to JPMorgan Securities Ltd, the world refined copper market will have a 500,000-metric-ton deficit in 2011.

Barclays Capital says copper demand growth will slow to 4.1 percent this year, down from 9.6 percent in 2010 - still more than twice the anticipated 1.7 percent expansion in supply. Barclays forecasts an 889,000 ton shortfall for 2011.

Infrastructure spending geographically:

Middle East $0.9 trillion
Africa $1.1 trillion
US/Canada $6.5 trillion
South America/Latin America $7.4 trillion
Europe $9.1 trillion
Asia/Oceania $15.8 trillion

China’s already found an area where it could rapidly increase public investment to stimulate growth - rail construction.

China's total investment in high speed rail was first reported to be about US$300 billion - the Chinese planned a 12,000km high speed passenger network supplemented by 20,000km of mixed traffic lines capable of 200-250kph.
Recent reports indicate that over US$600 billion will be spent on rail construction during the 2011-2015 Five Year Plan. By 2020 there would be at least 16,000 km of passenger dedicated high speed rail. The total rail network by 2020 would be 120,000 km - 80% of it electrified.
By early fall 2010, the Ministry of Railways announced that China had more than doubled the length of high speed track to over 7000km.
China has plans to construct its high speed rail line through Asia and Eastern Europe in order to connect to the existing infrastructure in the European Union (EU). Additional rail lines are planned into South East Asia as well as Russia – this will likely be the largest infrastructure project in history.
The project will include three major high speed lines:

UK/Europe to Beijing (8,100 km) and then extend south to Singapore
A second line will connect into Vietnam, Thailand, Burma and Malaysia
The third line will connect Germany to Russia, cross Siberia and then back into China
Financing and planning for this monumental project is being provided by China – who is already in negotiations with 17 countries to develop the project . In return the partnering nation will provide natural resources to China.

Jim wrote:Chanos, among other things, teaches at Yale.

http://www.bloomberg.com/video/70128022/

It is difficult to reconcile Chanos's bearish view on China with rising silver and copper prices ahead.

The property developers are now borrowing at 15+% in Hong Kong in order to keep their momentum going. This feels like a "doubling down" phase, where this sucker is rolling over but it isn't going to crash until the cash from the USA dries up. Even Chanos is feeding those developers by buying their debt while shorting their stocks.

So what it means is they will crash more horribly, but later.

Looks 2012 is going to be a very high inflation year, just as Gordon Lira expects (30% inflation).

Then 2013 is likely to be a global chaos and crash year.

Fed said they may tighten by July 2012.

The silver market is starting to sniff this out.

I am getting itchy to go long silver again. Next drop into mid to low $30s, I go long.

http://www.kitco.com/ind/GoldReport/may272011.html

The United States is a bigger economic basket case than Europe. The entire European debt crisis is way overblown. Places like Portugal, Ireland and Greece are tiny. They would be the equivalent of Rhode Island and Alabama going under; that wouldn’t exactly take down the U.S. economy. In addition, Europe has such a bloated social welfare system that it can easily cut these expenditures. Also, Europeans, unlike Americans, are willing to pay taxes for government services.

The next part of the cycle is going to be very interesting, in my opinion. Because of the 2008 market and gold price crash the fact that everything rebounded together from 2009 to 2011, people think that gold moves with the market. However, I really think the next bear market in U.S. stocks will be caused by the weakening of the dollar and inflationary pressures. Therefore, I expect a situation where bonds go down in price, stocks overall go down in price and gold and gold stocks go up. In addition, I think that once people see that precious metals are the only game in town, this will allow the sector to attract more money.

I will now assert that the next tipping point will NOT be caused by China, but by the USA. When the USA implodes, this is what will pop China's and emerging markets overbuilding. China and emerging markets have far too much savings to pop on their own accord. The emerging markets are taking gold from the west every day, so the leverage they are building is backed by an increase in real reserves. But when they can no longer continue their siphoning of gold from the west, then their overbuilding has to be justified internally.

The roaring 20s (and wild real estate bubble in Florida) was caused by gold leaving war-torn and bankrupt Europe to go to USA. USA did not crash until 1929, when the gold flows had completed.

This is going to take a lot longer and be a lot uglier than most people are imagining. The USA has to be brought its knees with QE and massive inflation and the inability to politically make any adjustments. As Chanos said, health care is the only issue creating USA deficits and there is no political will to do anything about it.

See also my prior post today in this thread.

==============
ADD: Puru Saxena agrees:

http://www.gold-eagle.com/editorials_08/saxena052711.html

Oh yeah, this is what negative marginal utility of debt looks like:

http://news.yahoo.com/photos/china-s-jiaozhou-bay-bridge-1309439624-slideshow/

http://news.yahoo.com/analysis-debt-deal-not-far-reach-050609211.html

Both sides have also taken a look at changing the inflation index, which could slow the growth of benefit payments and tax exemptions.

What this means is that Americans will continually receive less benefits in terms of purchasing power, due to inflation. While Americans will also support debt ceiling increases forever, because the alternative is they don't receive any benefits from the govt. This process will continue until the value of those benefits from the govt are so small, that no one has a vested interest in stealing from themselves any longer.

I predicted this in my "Inflating Deflation" article in early 2006:

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

Isn't it amazing how stupid herds of sheep are? The people would rather take 10+ years to steal from their own future (by demanding benefits which forces the govt to lie about inflation adjustments), rather than bite the bullet now and lower their standard-of-living (real wages in terms of purchasing power), so they can compete globally.

Wasted decades in west. Pure waste, and the people can not even see that they are doing to themselves. Herded myopia, i.e. socialism.

the futures markets exist only because without them, the fiat couldn't exist. The apparent "liquidity" is necessary to to give the illusion that fiat is convertible (to gold and silver) and thus is real money. Of course this manipulation is demanded by the masses, as without fiat they couldn't steal from their future

I had been looking at capital intensive business opportunities in the Philippines, just to make sure I wasn't missing something better than my computer programming vocation.

I analyzed the netcafe business in the Maybe Goodbye thread. The netcafe business is at least a reasonable ROI, even if the economy slows down, because (afaik) no bank will give you a loan to buy computers for a netcafe and because at $0.25 per hour, there will always be some customers even if the economy turns down.

It took me only 10 seconds to ignore the taxi cab business, where a new Toyota Vios costs about P700,000, and the daily rental to a driver generates about P1000, and that has to also pay the maintenance costs. So that is about 3 years to pay back the capital, because the car depreciates in value very quickly (especially given the horrible quality of the roads and intense heat and humidity here).

So I am shocked to see so many brand new taxis in the past year in the major cities such as Davao City and Cebu City. There are so many taxis now that you need not wait more than 5 seconds for one in the downtown areas, and there are usually many taxis parked all over the cities (several parked waiting for customers outside my subdivision which is 12 kms from downtown).

Well a taxi driver informed me that you can put P50,000 downpayment and pay about P13,000 per month with 5 years term, so you can pay off your investment in about 3 months.

Ah but what happens when the global economy turns down and people stop taking taxis (which cost $2 - $5 per trip) and take the jeepneys (packed like sardines) which only cost $0.25 - $0.50 per trip.

In Asia (as in Spain), the borrower can not be relieved of the debt by bankruptcy. You will be put in jail if you can't pay, and your relatives will be responsible to pay and they can be put in jail too if they don't.

So if the economy turns down, the taxi cab owners will owe perhaps 50 - 90% of the loan amount still, but the car will be worth only 50% of the loan amount, and they will have no cash flow.

So if you want to start a taxi business, be prepared to buy taxis in 2013 at 20% of their brand new price, because the market will be flooded with them and there will be nearly no buyers.

And there will be filipino millionaires rejoining the poverty class.

Just think of all the derivative demand created by this negative ROI investing. So when it implodes, there will be so much derivative demand and jobs that are lost throughout the global economy.

This is going to end up as a very big depression, just what TPTB want in order to push through their world government.

http://www.voiceamerica.com/episode/55096/thinking-the-unthinkable-a-us-treasury-default-is-heading-our-way

July 19, 2011
Hosted by Jay Taylor

Jeffrey Rogers Hummel joins our show this week to tell us the U.S. government will likely default on its Treasury debt. While most inflationists believe a virtual default resulting from hyper inflation is likely, Hummel suggests an outright U.S. failure to repay principal is likely. Third World countries can efficiently inflate their debt away, but it is highly inefficient for an advanced nation like the U.S. with its sophisticated credit and banking system. What would a U.S. Treasury default mean for the life expectancy of the U.S. dollar? What would it mean for gold? Would it lead to massive deflation or inflation or a combination of the two? As always we provide some practical investment ideas to fit our macro economic views.

http://www.jrhummel.com/ (he advocated repudiation since 1981)

Why Default on U.S. Treasuries is Likely (click to read his logic)

On the one hand it seems he is correct, that there is no way to inflate away the national debt, because there is no way to inject money into the economy without increasing the national debt by that amount (this is essentially what he is saying mathematically). But just by sustaining the western economies, this is causing a transfer of wealth to the developing nations, which are ramping up their relative standard-of-living, thus driving commodity prices higher. And gold and silver are going higher. So the value of the debt is declining in real terms. For example I think during the time that gold has doubled in price, afaik the national debt has not doubled in the USA.

However, he is correct that this rise in the developing world standard-of-living and gold, does not help pay the national debt, unless the wages of westerners are allowed to drop or stagnate, so that eventually we can export to the developing nations. And it is unlikely to transition that way timely or smoothly. Thus he is correct that the western governments will repudiate (some portion of) their debts.

But in what form? I have long stated that the western govts will repudiate from their own retirees, by forcing them to invest in treasury bonds at low interest yields while interest rates subsequently climb and then take a decade to decline (1980s repeated), thus reducing the real value of those bonds. The only alternative is to cut entitlement spending, which also hits the retirees, especially the majority with no significant retirement saves. If instead the debt was repudiated to foreigners, then the dollar would collapse, which would also hit retirees in the form of inflation.

So this will be an analog of the FDR gold confiscation. FDR confiscated gold right before he raised the official price of gold. This time they will force retirement plans to buy Treasuries, right before they drop the market value of treasuries. This is why I say capital controls are coming soon, and the tipping point looks to be inflation hell in 2012.

So yes the USA will default, but the retirees will pay for it. But what about in Europe?

Note this is not going to happen now in 2011. There is still a bit more wiggle room for the USA to inflate, because the inflation hell is not yet chaotic. But the tipping point is approaching very fast.

As interest rates rise, gold and silver will peak. But the defaults are going to cause chaos, possibly even war. Only gold can clear the debt, so although the price of gold might peak or even fall, the prices of commodities could plummet, thus gold will still be rising in real terms. Realize that bonds will still be falling in value, while interest rates are still rising.

Silver is harder to predict. If commodities are plummeting because of global contagion, will the monetary demand from the common people offset the loss in industrial demand, and will the production of silver from base mines plummet more than the demand does? However, note that if gold and bonds are both falling in nominal value (even while rising in real value as commodities plummet), this would mean cash bills would be hoarded, thus silver might be forced to be a currency!

This is why I say it will be prudent to shift some silver into gold as we approach the apex of the inflation hell. But that might be say $2000+ gold and $75+ silver, so maybe not even a 20 gold/silver ratio. What will lift silver to the 5 - 15 ratio that we are expecting at the end? Will it take longer than 2013 for this repudiation of USA treasuries? Thus there would be time for say $3000+ and $200+? Or will the developing world race on in spite of western defaults, thus continually increasing silver and commodity demand?

===================
ADD: It seems there is no way the USA can inflate and cause its ability to service the debt to become manageable. There are numerous ways to conclude this, and one of viewing it, is because inflation does not directly increase the _real_ GDP (the marginal-utility-of-debt is negative in west) nor make the USA more competitive in order to increase the _real_ GDP. More debt is only making the debt harder to service.

So the debt will have to be repudiated, as can't add more and we can't continue to pay it if the ponzi scheme isn't continually expanded to keep interest rates low. Assuming you agree with that. The question is, who will the default on the debt be charged to and what will be effect on gold, silver, and the dollar?

I added to my post a little bit since you may have read it. I can only think of the 3 broad categories for repudiation and they all hit the retirees:

1. Cut entitlements
2. Force retirees to own Tdebt while interest rate rise (capital controls)
3. Default to foreigners causing the dollar to plummet (hits the retirees with hyperinflation).

However, the demographics of which retirees are hit is different with each option. It seems option #2 is the smallest demographic and thus will be the sacrificial lamb.

Chanos said (see prior post) that health care is the #1 line item affecting the structural debt. They can only ration health care so much without running out of landfill for the bodies, so I figure they will lockup the remaining money they can find, and retirees is an easy prey, because of the 401(k)/IRA tax entities.

================
Can't get minimum wage jobs because the wage is too high. Why would I pay someone 7 times what I can pay in Asia for the same job, even call centers, medical records, and other office work, it is all being outsourced to Cebu for $350 per month per person. Although minimum wage may be $7 in USA (160 hours work in a month), the overhead costs (health insurance, matching FICA, etc) raise that to $14/hr at least.

I hadn't been to Cebu in 2 years, and it is just amazing how many buildings have been put up since. Changed from a poor city with virtually everyone working for $1/day into a modern one with a significant portion of the population earning > $10/day. There is still hoards of poor to absorb. The west has to come way down.

I understand the "hit the retirees" logic but not sure it will hold because they are the largest single voting group and if they rise up the politicians will all lose their jobs.

Therefore I believe that option 1-Cut all entitlements will be the ultimate solution. The retirees will agree to cuts if everyone is hit.

We all know that there are a lot of other entitlement programs that can be reduced along with the ones that effect the retirees. "Shared Pain" will be the order of the day.

There are hugh numbers of folks receiving medicare and medicade benefits that are nowhere near 62 years of age.

Mortgage entitlement programs, unemployment extended benefits, reduced or eliminated foreign aid, reduced or eliminated foreign wars, the list goes on and on. They all have to go as part of any overall plan if they want to live after touching retiree financial accounts.

I appreciate your sharing. I am just trying to find some way to really feel confident about what you asserted.

The problem is that if you did cut the entitlements sufficiently, it is my understanding that the tax base would shrink (no one to spend money in the economy on services, which is basically all we produce of significance), so then you still would have to default on the debt, because the interest of the debt might rise to be larger than tax income.

Do you really think the demographic that has a net positive savings level is greater than those who don't? Of people that have some retirement savings or benefits owed to them, I would expect the vast majority have a net debt, once the true liquid value of their house and mortgage is factored in. And especially as more and more lose their incomes and are surviving on long-term unemployment. What that bloc votes for is for their retirement payments to continue, so please print more money or tax the rich if necessary to make those payments continue.

I think the only thing propping up the Republicans is that the shit hasn't hit the fan entirely yet. Once it does, the vast majority will be bankrupt and willing to "tax the rich".

Do you see some kind of American spirit returning, where people are proud to live with less and sacrifice for the greater good? That is not the America I see. I see a drugged, crazed, addicted, self-centered, etc.. America. Am I out-of-touch with reality? Maybe there are multiple Americas and the country will fracture?

Fundamentally the west will have to look more like Asia in order to become competitive so it can generate growth again and pay down the debt, which means a very wealthy class and a huge underbelly of slave workerbees. This has to happen because afaik developing world has more people than can be employed and brought to middleclass within this secular cycle. So how can you get there if the majority in west have a net positive savings? Rather most have to fall under the truck as inflation worsens, housing prices tumble, etc..

======================
ADD: Yes it will get very, very, very ugly.

In response to point #1, what I am saying is that any one with net positive savings is a target when the majority are on net balance bankrupt (they are when you factor in the national debt share). This net bankruptcy is sort of hiding now, many not even realize they are the bankrupt class yet because very little has been marked-to-market yet.

And I am saying that the only way to ever get to the point where the tax base can grow again is to default on the national debt and start over with large base of wage competitive workers. USA does not have a large base of highly educated workers (very few people have engineering degrees), who can justify higher salaries than those in Asia, given the internet has flattened the world (all the knowledge/office work can be outsourced and is).

To the extent that any retirees have savings, this is going to depleted while the system resists that reset. Sure the best thing would be to say that the majority should lower than standard-of-living willingly (the test is occurring right now with an August 2 deadline and look at the political gridlock), but I don't think that has ever happened in the history of the world? How many John Wayne types do we have in America (I doubt more than 15% of the population at best)?

Filipinos in Cebu do their jobs better than the Americans they replaced. They even speak English more grammatically correct and with a sweeter sound. And you can hire 7 - 10 of them for the price of one American at minimum wage. Does that provide some clue how far down the non-engineering grads will have to fall?

Although it is true that some enterprising young Americans are going to China and bringing their American "go get it" spirit to bear, this is so small as compared the big problem. America can come back very strong, but from a smaller base. It needs to shrink by at least 70%.

I am overstating this slightly though, as Americans without engineering degrees are more educated than filipinos without them. So that is why I say maybe 70% drop and not a 95% drop. The Americans are potentially more talented, but their attitude is still in the "priviledged" zone which limits their ability to compete. This will change and the lean and mean will rise to the top and those who don't will fall down. Competition will bring out the best of America. For example, I was told by my friend who owns a store, that it is very difficult to find minimum wage workers who will reliably report to work. Whereas in Cebu for 1/7 of USA minimum wage, you can get very enthusiastic workers. And in many cases, you get a college graduate in Cebu and in USA you get a high school graduate.

I didn't expect this, and it is very complex:

http://big.assets.huffingtonpost.com/gangofsix.pdf

Appears to lockin $500 billion of cuts over 10 years in order to raise the debt ceiling. It calls for $3.7 trillion of total deficit reduction over 10 years to be enacted within 6 months. It cuts entitlements, mostly through decreased inflation adjustments. It depends on $1 trillion in additional tax revenues gained by "broadening the tax base", which apparently means the tax rates decline for all brackets, but the number of brackets is reduced, so that more people fall into a higher bracket. It aims to get increased tax revenue by making the USA more competitive on tax rates and attract investment.

Wow this is uber bullish for silver. Gold is taking a hit because this shows a sincere desire to move the USA back in the positive direction.

However, a few hundred $billion per year in deficit reduction is not going to solve the structural problem, given annual deficits in the $1+ trillion range. So what this appears to do is put a damper on gold because the USA is working its way towards solvency adjustments, and it makes silver look like a huge winner because we will have continued deficit spending while taking actions to keep the global economy growing.

Apparently there is enough in this bill to satisfy both parties. The republicans get tax decreases, it even repeals the AMT! The democrats get tax decreases for the poor and tax increases in terms of broadening the tax base in other brackets. The republicans get spending cuts, but the democrats gets clauses that protect the poorest from the effects of these cuts.

This still might not make it into law, but it shows the market that there is more rationality and a path forward for the USA that is more positive than the nonsense we've been hearing from Capitol Hill.

This still might not be sufficient to stop the USA from a waterfall chaos.

I am pleasantly surprised. This is the American spirit, now await the outcome and the devil in the details. Might turn out to be smoke and mirrors.

http://www.bloomberg.com/news/2011-07-19/u-s-house-set-to-pass-doomed-spending-cut-bill-with-no-debt-deal-imminent.html

“In the next 24 hours, you’re going to see a significant portion of the Senate come behind this -- bipartisan -- maybe 60 members, and let’s see how things roll,”

Senator Joseph Lieberman, a Connecticut independent, said in the “best of all worlds” the proposal would be approved as part of the debt-ceiling increase.

Let's study the the banking stocks chart more carefully.

I am gaining clarity now.

QE1 ended in June 2010. But August 2010, it was restarted in the sense that funds were reinvested to keep the balance at the Fed from declining. By Nov, the Fed launched $600 billion of additional buying. You can clearly see the effect on the chart below.

QE2 ended in June 2011, but unlike 2010, the Fed has not stopped reinvesting the keep the balance at the Fed from declining. Notice that when QE1 was stopped in June 2010, the banking stocks were above the 200 dma (red line), whereas in 2011 they were below it. This is probably why the Fed didn't attempt to unwind as they did from June to August 2010. Thus the economy is weaker now than it was in summer of 2010, but the trajectory of decline is slightly slower than summer 2010.

I think the Fed is looking at this chart, because it is clear that when the banking stocks fell below the green line, they acted in August 2010. So what they are waiting for is the banking stocks to fall through at least the upper green line again. But since the economy is weaker and there is more systemic risk now than 2010, they may not be able to contain it as the lower green line, once it breaks through. This is why we might get the selloff to the $30 level as projected by that odd looking bearish H&S patten.

It looks like we have to wait for the 50 dma to come down a bit more, so sometime in August this should occur, unless somehow the economy rebounds (e.g. lower gas prices feeding into the economy and Japan recovery which is what Bernanke said the Fed is hoping for).

http://finance.yahoo.com/news/Greece-gets-new-bailout-with-apf-1229167797.html?x=0&sec=topStories&pos=4&asset=&ccode=

This both includes more stimulus and avoiding lowering Greece wages to make them competitive, thus making the problem worse long-term while adding stimulus short-term, while also setting off a short-term contagion in terms of the selective default (the bonds holders are taking a loss). Perhaps they will allow banks to not mark-to-market these losses thus delaying the contagion effect? But there is also the contagion effect that now the bond vigillantes know that selective default is where it ends up for all the PIIGS and the brave ones are going to start betting against the eurozone. Eventually the entire eurozone will fail because of their guarantees of the PIIGS debt which they had resisted but now have begun.

Lindsey Williams timeline is exactly being fulfilled. The entire eurozone will fail later, perhaps in 2012 since these effects are accelerating.

Besides the BKX bearish H&S and the correlation to period between QE1 and QE2 (which I showed in a prior post), what other evidence of economic slowdown?

If you watch several of these interviews on Yahoo Finance, it seems there is a lot of expectation for a pickup in GDP growth in the 2nd half of the year:

http://finance.yahoo.com/blogs/breakout/wall-street-washington-us-clarity-please-125325914.html;_ylt=AjabAuw8.ySOwVBA79I6Y9O7YWsA;_ylu=X3oDMTE2bXE5cDY1BHBvcwMxMgRzZWMDdG9wU3RvcmllcwRzbGsDd2FsbHN0cmVldHRv?sec=topStories&pos=7&asset=&ccode=

The consistent theme is that pickup from improvement of Japan supply chain. However, I never thought Japan crisis would be much of a factor, and the reason is because we don't have a supply-side problem, we have a demand-side problem. The July business survey seems to confirm my hypothesis:

http://market-ticker.org/akcs-www?post=190431 (zoom the chart for the survey)

The survey compares change since June. Notice that although there was an improvement in new orders from -7% to 0%, that is still not growth, and the increase in shipped orders were taken out of unfilled orders, while inventories grew. Employment weakened. So flat growth is all we got out of that May 2011 reduction in the commodities prices (lower prices for consumers), with demand insufficient to maintain the queue of unfilled orders nor draw down of inventories. And now commodity prices are rising again as China's tightening is winding down.

And why didn't we get more demand? Because the consumer is so tapped out that they are now maxing out their credit cards:

http://market-ticker.org/akcs-www?post=190500

Because they are losing jobs and wages are not rising while inflation does:

http://market-ticker.org/akcs-www?post=190430

Smoke and mirrors or for real? (we will soon find out)

http://market-ticker.org/akcs-www?post=190618

Are political leaders trying to create a new form of elite congress in order to eliminate the power of the tea party?

The so called "deficit reduction" may have been a lie:

http://market-ticker.org/akcs-www?post=190577

It is indeed a lie that we would default if the Aug. 2 deadline passes:

http://market-ticker.org/akcs-www?post=190590

In fact, if the marginal utility of debt is now negative, then reducing debt spending will actually have no material effect on _real_ GDP, other than short-term gyrations. The nominal GDP would drop, but so would inflation. Markets might even (eventually) go up, if the debt reduction was done in a way that had long-term expectations of reduced government regulation, lower inflation, etc.. However, the negative impacts in the markets would be due to uncertainty created from a deadlocked Congress, and from the initial absorption of the nominal reduction in (probably global) GDP.

================ email to Karl Denninger ========================
Subject: Karl I applaud your recent blogs at market-ticker.org

In fact, if the marginal utility of debt is now negative, then reducing debt spending will actually have no material effect on _real_ GDP, other than short-term gyrations. The nominal GDP would drop, but so would inflation. Markets might even (eventually) go up, if the debt reduction was done in a way that had long-term expectations of reduced government regulation, lower inflation, etc.. However, the negative impacts in the markets would be due to uncertainty created from a deadlocked Congress, and from the initial absorption of the nominal reduction in (probably global) GDP.

I am pro-growth. I am for the 7 year jubilee. I think we agree on more than you may realize. I would like to see a world where there are no borders but not for a big govt along with it, i.e. I agree with you that an immigrant shouldn't be allowed to force us to pay taxes for her welfare. I want a world where Americans are just as free to live and invest any where in the world, whereas currently they are not allowed to. Mexico for example discriminates against us, and Asia is even worse.

On the issue of the gold standard, I am not for it. I am for the state not having a monopoly on the issuance of money, because where ever there is a monopoly, the crooks will always gather and gain control. ALWAYS. This is the main area where you and I disagree. You think that a representative form of govt can print a paper legal tender. NO! THAT IS EXACTLY WHAT ROTHSCHILD WANTS. We need the 1000s of private banks issuing money (backed by what ever their patrons demand). Yeah I know the history of banking and this lead to where we are now. What I want you to note is that during the 1800s, depressions were more closely spaced and over with quickly. This was a self-correcting system. Unlike what we have in 1900s under a central authority is a runaway system that never corrects.

The big picture solution is that we have technology that didn't exist in the 1800s. And the more we can get people involved in the knowledge business, then the system can just route around (Coase's Theorem) these attempts at centralization. And I am putting my effort on exactly that:

http://copute.com

Oh I forgot about this chart!

But notice the drops except those since Q3 2008, the deflationary move was gold moving up faster than the stock market, not a crash in either. Looks like we are currently in that short sideways move in 2007 (see the black dot), before another big fall. This is sort of what I expect, a massive acceleration of inflation in 2012 with gold rising faster than the DOW, then fall of the cliff in 2013 as we did in 2008 (because the global economy will be suffocated by the inflation in 2012).

Here it is logarithmic, and it shows a waterfall as should be expected:

http://www.24hgold.com/english/contributor.aspx?article=3550127176G10020



Here it is non-logarithmic (which I don't consider to be correct way to plot charts, so the breakout of the red line is not an accurate timing indicator):

http://www.gold-eagle.com/editorials_08/weytjens072311.html



Note in the short-term, we could still get another rise up to the blue line (30 month or 120 week moving average), meaning correction to silver:



=============
ADD: summary of my outlook

Before 2013, gold rising faster than DOW. After 2013, another global contagion, with DOW falling or stagnant, but gold may rise or not fall as much 2008 (gold doing exceptionally better than DOW in any case).

My near-term point is we have room in that chart short-term for another pullback in silver.

In 2012, the chart must start moving down significantly, and I expect that to coincide with virulent, resurgent, brutal inflation from EU stimulus and QE3 and the knockon effects of the prior stimulii that has the marginal utility of debt negative, i.e. approaching saturation globally and any increase in debt like pouring fire on inflation, so I expect gold to increase faster than the Dow increases and I want to hold silver during this period.

But by roughly 2013, I expect the global economy to fall apart from this inflation, so then I expect more of a 2008 style crash, except the dynamics may be more tilted towards riots, war, and sovereign defaults, so gold may even go up if Dow goes down. This is why I would probably sell some silver for gold towards the peak of the 2012 inflation insanity. Then of course buy back into silver again after say a 25 - 50% rise in the gold/silver ratio.

Perhaps the tea party can block the debt limit rise (they had 90 signers on the cap & cut recently):

http://www.bloomberg.com/news/2011-07-28/house-debt-limit-vote-sets-stage-for-showdown-on-u-s-default.html

The dynamics are more complex than I have time to summarize.

OTOH, the Boehmer plan actually doesn't have any cuts, it is all a lie:

http://market-ticker.org/akcs-www?post=190833

So one would think the democrats will eventually agree to this, if Boehmer can get the tea party to vote for it.

It looks like a trick. Democrats are pretending to be against this, this is so Boehmer can trick the tea party into voting yes. Then after that, they will make some insignificant change, and the Dems will suddenly announce they will accept the plan.

This is all a trick to keep from cutting anything. Boehmer works for the banksters.

Somebody needs to get the word out!! If the tea party will just say "no", then we can perhaps avoid this coffin corner effect coming, where you can't cut the spending any more because then the taxes won't be enough to pay the debt payments:

http://market-ticker.org/akcs-www?post=190845

Go here for epicenter of Tea Party:

http://www.rushlimbaugh.com

Specifically you must read this:

http://www.rushlimbaugh.com/home/daily/site_072711/content/01125113.guest.html

An alternative title for this is "Silver better than gold in every scenario (even if debt ceiling not raised)".

If you would like to send someone a copy of this article, here is a link that does not require a password, just right-click that link and choose "Copy link", then paste it into an email. Google reports that Jason's article is getting attention from other bloggers.

Recently Jason Hommel of the SilverStockReport.com, wrote a very clairvoyant qualitative explanation of why adding more debt and government spending, actually decreases the real GDP. He explained that it would be better to reduce the debt and government spending, as the real GDP would then rise. This is opposite of what most people think would happen, and opposite the fear propaganda being spread in the mass media, but it is a mathematical fact when the marginal-utility-of-debt is negative, then adding more debt actually decreases the real GDP, and thus conversely that reducing debt will increase real GDP. Of course the nominal GDP would decrease (or increase more slowly), so that some people whose income depends on government spending, would see their incomes decline (as deflation would spread into the economy), but the real GDP would actually increase, which means people in productive business would see their fortunes increase and those holding gold would see their fortunes decrease (this will be explained quantitatively).

Hommel also explained that it was possible for the government to spend without borrowing the money by printing the money out-of-thin-air, and at the end of this, I will explain the differences of that versus borrowing the money from "investors" (ahem, I will show the source of money is printed out-of-thin-air by the banks).

First, I think is important to show a quantitative explanation and proof that negative marginal-utility-of-debt is a fact, so that people can put proof behind their qualitative understanding and personal anecdotal experience. At the end, I will show the quantitative differences if we continue to add government spending (with or without adding more debt).

Quantitative Proof

The word "marginal" (debt) means the "added" (debt). When this is negative, it means that adding more debt, is causing the real GDP to decrease, instead of increase. The nominal GDP is increasing (the economic activity measured in current prices), but when you subtract cost-of-living increases (inflation in prices), then the real GDP is decreasing. This means on average, most people are seeing their standard-of-living-decline. Although wages might be increasing slightly or stagnant, the prices are increasing faster.

Also realize the charts that follow are using the governments calculation of CPI (inflation of prices), which has been argued to be vastly understated. Thus the charts below would show a much more drastically negative marginal-utility-of-debt, if the CPI used was reported by the government to be higher. The government reported CPI may be correct, as viewed from the perspective of someone who spends most of their income on housing (as this is declining in price), computers (as these are also declining in price), and imported goods where labor was formerly a big component of their cost (but these prices will start to increase as developing world wages are increasing now). But for people who spend most of their income on education, food, and energy (fuel, electricity, transportation), then the government reported CPI is vastly understating the increase in prices they are paying. Also there is a global factor to this, where inflation is lower for westerners who spend most of their income on deflating houses, versus the other 7 billion people who spend most of their income on food, energy, and education, and who have rising housing costs. The profligate government spending in the west, is exporting this inflation to the developing world.

It is very important when viewing the following chart that you don't get hopeful about the bounce upward in the blue line that may or may not have occurred since 2010, because you must note that the line is still below 0% (it will be if I can find an updated chart), and thus the economy is still shrinking (i.e. in a Great Depression since it has been sustained below 0% for 3 years).

One simplest way to plot the marginal-utility-of-debt is a chart that shows for each $dollar or debt added, how many $dollars of real GDP is increased or decreased. It has been steadily decreasing towards $0, then it fell off a cliff in 2008 to negative and hasn't recovered to positive. Here is that chart:



However, the above chart may not satisfy some people, because it may not be intuitive as to how the chart was calculated, and it doesn't show the absolute level of the real GDP, so we can not see if we are in a Great Depression.

It is very important when viewing the following chart that you don't get hopeful about the bounce upward in the red line for real GDP, because you must note that the line is still below 0%, and thus the economy is still shrinking (i.e. in a Great Depression since it has been sustained below 0% for 3 years).

Another way of visualizing marginal-utility-of-debt, is to plot a chart (with all lines expressed as as percentage change of that metric compared to the prior year, i.e. year-over-year "Y/O/Y"), with a green line for the nominal GDP, a blue line for debt as percentage of GDP, and a red line for real GDP. If the red line is equal to the green line minus the blue line, then it means all increases in debt are reflected as equivalent increase in CPI. If that the blue line is increasing faster than the red line is, there is a negative marginal-utility-of-debt. If the red line is below 0%, we are in recession. If the red line is below 0% for more than 6 months, then we are in a depression. If the red line is well below 0% and for years, then we are in a Great Depression.

However, I don't have such a chart. But there is a chart of real GDP, which you can correlate to the following chart. It confirms that we have continuing negative marginal-utility-of-debt (since 2009 charts show maximum real GDP rise of 5 - 7% and following chart shows public federal government debt rise of 7%), but if you believe the government's CPI then we are not in Great Depression, but if you believe SGS's computation, then we are.

Instead, if we assume that all increases in federal government debt are reflected as equivalent increase in CPI, then we plot the red line as the green line minus the blue line, then we get the following chart (and the article for the chart). Note this chart is assuming the CPI reported from the government is a lie. It is possible the assumption may be wrong, and that some of the government spending is not going into prices, but rather into paying down private debt (i.e. savings), and/or exported to the developing world where the inflation is much higher. But what this chart does show is that marginal-utility-of-debt for nominal GDP is negative, and nominal GDP is where government gets its taxes. So from the standpoint of the fiscal sustainability of the government's borrowing, the following chart is an appropriate assumption.



Govenment Deficit Spending With or Without Debt

Again do not get fooled by a rising nominal GDP, because it is nearly meaningless, because the increase or continuation of your income is meaningless, unless you also factor in the change in prices. Caveat: for those people whose income would be lost entirely, by a decline (or slow down in increase) in nominal GDP that a reduction in government spending would entail, they can argue that nominal GDP is important, except that eventually the declining real GDP will force the outcome any way (i.e. a default by the federal government). Overall for most people (and eventually for all, because kicking the can down the road only works for so long), real GDP measures the direction of the future.

So the charts above proved that increasing the federal government debt is decreasing the real GDP. Increasing federal government debt is the same as saying increase deficit spending (spending more than tax receipts)-- note I will explain later the option of increasing government spending by printing the deficit out-of-thin-air as Hommel proposed. What is important is we first recognize that increased government deficit spending is correlated to reduced real GDP. Thus Hommel's qualitative points about government spending being wasteful and harmful, are proven quantitatively.

If the federal government were to stop deficit spending, which either means a drastic reduction in spending or a large increase in taxes, then the real GDP would increase. That is a fact, proven by the quantitative charts. Note that increasing the tax rates, will also decrease the government spending, because the nominal GDP will decline when taxes are increased. Thus increasing tax rates is the same as decreasing government spending, if the government is committed to a balanced budget. The difference between raising taxes and decreasing spending, is that all throughout history, the government raises taxes, but never lowers the spending, thus the deficit spending never declines. So the tax rates rise versus spending decrease debt, is really about whether the government is serious about reducing spending. That is why the Tea Party republicans are correct, that cutting spending to a balanced budget is the only sane and credible action.

So we know quantitatively that if the government were to do the correct thing and decrease spending to a balanced budget, the real GDP would rise and overall the economy would be more prosperous. Most people would be able to increase their standard-of-living, even though the nominal GDP would decline (or the increase would slow down), prices would decline much faster (or increase much slower). Qualitatively, those wasteful activities from government spending (which are causing the real GDP to decline), would be eliminated, and thus there would be many people without wasteful jobs, looking for productive jobs. Thus businesses would prosper because they would find more opportunities to hire at affordable wages and eager employees.

Quantitatively if the government were to eliminate its borrowing via a balanced budget, then interest rates would decline. Since gold pays no interest, it rises in price when the interest rates are less than the rise in prices (which has been the case lately). So if prices were to drop in price, then since interest rates can not become negative, then gold would fall in price. So it would then be more profitable to hold (corporate, if government stops borrowing) bonds than gold. So we can say quantitatively that productive people would become more prosperous and lazy people and passive investors would become less profitable. Note holding a corporate bond is much more like investing than holding a government bond, because it is more free market (has more degrees-of-freedom), as individual corporations can fail and bond holders can lose, while other corporations and bond holders can prosper. However, a usurious bond is never as free market as capital ownership which can be bought and sold, because usury is a long-term futures contract that has less degrees-of-freedom.

Note silver is a different story, because the 7/8ths of the world's population uses 1/10 per capita of the silver that the other 1/8 does (because silver is used in high-tech and high-end products that middle class economies can afford), thus as the developing world becomes more prosperous (which will be even more the case if the indebted western countries become more prosperous), then demand for silver could increase 70 times (7000%) over next decade or so. Silver has a positive outcome no matter which path the governments take, even world war would drive the demand for silver.

If the federal government instead printed the money out-of-thin-air to fund deficit spending, then the real GDP would continue to decline, because assuming the government just kept spending constant, the wasteful activities would still continue. Realize that the current level of spending far exceeds tax receipts, so a constant level of spending is still deficit spending. The supply of money would increase and prices would go up, while the nominal GDP would not increase. Thus we can say quantitatively (mathematically) that real GDP would continue to decline.

When the government borrows money from "investors", this money was also printed out-of-thin-air by the banks, given the fractional reserve system of making loans that are greater than the money they have on deposit. So the difference is that the government is making interest payments to the banks for nothing. The banks get to create money and loan it and parasite on the economy. So although deficit spending is bad in either case (because wasteful government activities consume resources that private sector would allocate more efficiently), it would be much better for the government to print its own money for deficit spending, than to borrow it from banks.

The debt ceiling deal cuts no spending. It is way of saying "$2.1 trillion in reduced deficits" which really means they are counting that the Bush tax cuts expire in 2012, generating an expected $2.1 trillion in tax revenue (mostly from the lower tax brackets!). Now that the debt ceiling is raised until 2013, the tea party can obtain no cuts until 2013, because there isn't veto override power and Obama will veto any cuts. It is worth listening to Karl Denninger's layman explanation on this.

The $2.1 trillion in revenue will get sucked right out of nominal GDP, so overall tax revenues won't rise, the tax rates will rise, but the tax revenue will be the same (i.e. the GDP will fall by $2.1 trillion), and thus there are not cuts. It is just a restructing of wealth from the middle class to the very rich. The reason the tax revenues can't rise is because it is has been proven that tax policy can not generate new business (i.e. GDP), unless it involves tax cuts. Historically over the decades, the percentage of tax revenues in the GDP has remained constant, even as the tax rates change.

Per my prior post in this thread, the marginal-utility-of-debt is now NEGATIVE, meaning additional debt and deficit spending REDUCES real GDP, i.e. a form of de-stimulus. The more they spend, the faster they will destroy the real GDP. This will take the form of accelerating inflation and defaults-- severe stagflation, i.e. great depression combined with inflation as the developed world defaults and the developing world inflates, a/k/a Collapsflation. I predicted this Inflating Deflation, back in early 2006.

Shelby Moore III wrote in 2006:

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

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

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

The collapse is accelerating. The tea party is now irrelevant. TPTB have won with certainty, barring some technological paradigm shift.

Also Ron Paul is claiming that the debt ceiling raise law contains provisions for a "Super Congress" which will ram through future tax increases and deficit limit raises, thus centralizing power and further removing the representation of frustrated Americans:

http://www.infowars.com/ron-paul-sounds-alarm-on-disturbing-super-congress/

Alex Jones gives his conspiracy theory perspective on this (I am not saying I agree with all of his points, but worth listening to):

https://www.youtube.com/watch?v=NO9JJ7X25Eg (describes the details of how the "Super Congress" can overrule congress to make law)
https://www.youtube.com/watch?v=Kj1uZlV2t9A
http://www.infowars.com/lyndon-larouche-obama-to-become-fuhrer-after-debt-ceiling-vote/ (1st video details the new law, 2nd video says collapse is immediate, 4th video near the end explains that deadlock is caused by people who think they have money in their investments, stocks, etc, but the will lose everything because that value does not exist)
https://www.youtube.com/watch?v=bPJrlxuGdPw
http://www.infowars.com/infowars-special-report-super-congress-paves-super-highway-to-gun-control/
http://www.infowars.com/government-mandates-free-birth-control/ (destroy the birth-rate, then demographics and economics collapses, video shows that western ladies use birth control from teenage forward, which leads to adverse physical and mental health later)

Regarding LaRouche's claims TPTB wants to cull the human population to 1 billion, my conspiracy theory (again this is just a theory and that is not to say I believe it), I had a couple of years ago figured out that the reason they needed to kill all 6 billion people, is because silver would go to the moon if they did not (because the developing world only uses 1/10 of the silver per capita as the developed world).

Since the public holds massive quantities of silverware, it would recapitalize the masses if silver was allowed to rise so incredibly. Imagine 70 times the current demand of silver.

TPTB have to marginalize silver, because it is the money of the masses.

Disclaimer: I am not spreading any hate against any one nor inciting any unrest nor illegal activity. I am pointing out that some people have opinions about what recently happened, but they are not necessarily my opinions.


========================
FROM EMAIL
========================
No can't you see that is a diversionary tactic planted by the infiltrators.

The last line in the sand was the debt ceiling vote. This email is just talk that can never be brought to a vote.

The tea party has been effectively destroyed. Game over. Move to next stage, which is riots and guerrilla warfare from frustrated americans who have no representation. Exactly what the TPTB want so they can move to the "body cavity" searches (announced recently by the TSA) and "show me your papers" stage.

TPTB have calculated that those who suck on the tit of socialism in the USA are sufficient in number to demand that the "terrorists" be controlled. They appear to have calculated correctly.

>
> After I sent you the last reply I opened this TeaParty newsletter which
> confirms that they are still focusing on the bigger picture.


> A one-time limited GAO audit of the Federal Reserve that was mandated by
> the Dodd-Frank Wall Street Reform and Consumer Protection Act has
> uncovered some eye-popping corruption at the Fed and the mainstream media
> is barely even covering it.
>
> It turns out that the Federal Reserve made $16.1 trillion in secret loans
> to their bankster friends during the financial crisis.
>
> These loans only went to the "too big to fail" banks and to foreign
> financial institutions. Not a penny of these loans went to small banks or
> to ordinary Americans. Not only did the banksters get trillions in nearly
> interest-free loans, but the Fed actually paid them over 600 million
> dollars to help run the emergency lending program. The GAO investigation
> revealed some absolutely stunning conflicts of interest, and yet the
> mainstream media does not even seem interested. Solid evidence of the
> looting of America has been put right in front of us, and yet hardly
> anyone wants to talk about it.
>
> The Tea Party Needs Your Help To Stop The Obama Regime

Sent to: grossdaniel11@yahoo.com

Tax revenue can't be raised with rates when marginal-utility-of-debt is negative. You only have one choice, which is lower spending. Any tax rate hikes will chomp on GDP, because debt is, so revenues decline. In short, the more they spend, the more the _real_ GDP is declining, unless you believe the liar CPI stats.

And you claim to be an economist. Geez. You will be just like the economists who study the Great Depression and still never understood economics in the slightest. We need to throw all you fools to your destiny by standing back with our gold and laughing.

Ref: http://finance.yahoo.com/blogs/daniel-gross/u-credit-rating-victim-gop-sabotage-021622372.html

In case you don't believe the marginal-utility-of-debt is negative:

https://goldwetrust.forumotion.com/t9p540-inflation-or-deflation#4484

http://www.google.com/search?q=Operation+Twist

What this means is that the Fed (US central bank) will let short-term credit, e.g. credit cards and consumer credit, interest rates rise. And it will try to put a floor or a bounce in housing (to keep the housing bubble pumped up), and then the Feds (US govt) can borrow as much money as they can agree to spend on bailing out the dying consumer.

This is of course massively monetarily inflationary (to nominal GDP), and at the same time massively deflationary to REAL production, i.e. real GDP.

This is going to fail when the price of things is higher than the Feds can subsidize the consumer to afford. The Feds can't directly print money, i.e. money has to be either loaned into existence from banks, or the Fed has to borrow it from the Fed (via long bonds) and spend it into the economy. So hyper-inflation will rather difficult to sustain, plus it would require that the dollar be dumped as the world currency, because for as long as the other currencies (e.g. Yuan) are semi-pegged to the dollar by money printing of the world's central banks, then any hyperinflation in the dollar would mean the entire world would have to hyperinflate. But we can see with the riots all over, that it is nearly impossible to hyperinflate the entire world, because the people will simply quit producing and strike. I think it would incredibly difficult, instead some countries would have revolutions and stop pegging their currencies to the dollar as their people would demand survival. Understand that in the developing world, the people don't have so much debt, so they don't have any need for inflation, unlike here in the west where inflation is acceptable to debtors for as long as the Feds subsidize them and inflation is acceptable to the wealthy that invest in gold and silver. In the developing world, there is no political base to continue inflation beyond the point where the people can no longer buy food and pay their bills.

I think what is going to happen is we will see massive inflation into 2012 (on the order of $200+ gas, $3000 gold, $75 silver). Then in 2013, China will hit the wall as I described above, where the people can no longer buy food and pay their bills (they have some pockets of this already and it will spread). Middle East has hit the wall (they have no production, so inflation hits their people very hard), so Middle East will go into revolution in 2012 and stop producing oil (because the people aren't getting these profits, so they will fight over it).

When China hits the wall, it means they have no choice, they have to stop tying their currency to the dollar. So they will finally have to eat the loss of exports to the west, and eat the popping of their real estate bubble. But they can finance this internally, because they have huge savings, so we will see China have a bad crash, but it will not be the end of China's growth, as it will return with a stronger base later. For some year or years, China will go through a very bad crash and readjustment, as millions of factory workers will lose their jobs. The alternative is China can try to keep pumping up their bubbles and stay hitched to the dollar longer and basically shoot millions of people, but eventually they be forced to quit because too many of their population won't be able to afford to eat and pay rent. I think that wall is probably 2013, because of the massive inflation wave coming in 2012 and the fact that China is already showing signs of being near that wall. I could be wrong and China could somehow avoid the wall for a few more years. I doubt it. Chanos doubts it.

So at some point the dollar comes unhitched, and at the point the Euro and dollar go into hyperinflation, except that the governments of EU and USA don't really have an effective way to increase money in circulation at exponential rates, because I explained early the money has to be borrowed into existence and the political battles over increasing spending. However, at that the point the dollar becomes illiquid internationally, then wealthy people will wantt to get rid of dollars, so the dollars will return home and that is hyperinflationary. So I think the governments of EU and USA will be forced to prevent the sale of dollar bonds, to prevent hyperinflation. So we will see capital controls towards end of 2012 or in 2013. Since the government won't be able to increase spending fast enough, they will resort to a command economy, i.e. price controls and rationing.

So we are not going to see hyperinflation, rather we will see severe inflation coupled with rationing and capital controls. In terms of exchange value the dollar will plummet (when China is internally forced to unpeg from the dollar), so in that respect it will be hyperinflation, but the government will prevent the prices from reflecting the market exchange value of the dollar via both price and capital controls.

So what this means is that gold is going to skyrocket once the massive inflation of 2012 causes China to become unglued, silver will take hit because loss of industrial demand due to the pullback of China and rationing in the west.

This situation will persist until they reconstitute the dollar and Euro to gold and disenfranchise all the citizenry (force default on them), which will also surely take the form of stealing from all the millionaires they can.

Once the currencies are reconstituted, perhaps with regional currency unions or other form of movement towards world currency unification, then the developing world will become a solid base of growth and the west will bottom. Then silver will be the best investment, as the 7 billion in the developing world have to catch up on their per capita consumption to the west. Silver being an early indicator of the future, will likely bottom and start moving up again early.

The unknowns are to what degree does this transition involve war an/or depopulation. Typically business is detached from these matters. In other words, TPTB just see those as part of the ongoing business progression. So unless they plan world war at this stage, then we are likely to see a quick transition to the new world order. I don't think they want world war, because they do not have enough credit and ownership in the developing world. Right now the developing world is owned by the Taipans and leaders in those nations who have raped their own people. TPTB wants to go put consumer credit the developing world so it can take the whole pie, as it is doing in the west now. So I don't think TPTB will go for the massive depopulation event now at this juncture. I think rather they will use only the necessary violence in the USA to maximize the amount of the USA economy they can own. So they will push it as far as they are still making gains, then they will reconstitute the dollar.

It seems to me they will be constrained in the USA by how much the people will accept. If the people roll over and accept Nazi Germany, then they will get it. But I can clearly see the USA citizenry is not going to allow that. There is going to be some level of violence, we just have to wait and see where the wall is that TPTB can not overcome in terms of efficiency. Efficiency is where their efforts become counter-productive, in that the losses from more people are joining resistance becomes greater than the continued profits from theft of the rest of the compliant citizenry (the good sheep with their behinds raised up at all times for rear entry).

I am also calling for a peak sometime in late 2012 or early 2013:

https://goldwetrust.forumotion.com/t9p540-inflation-or-deflation#4506 (the prior post in this thread)

Thanks for the additional correlating factors. Also note that the Fed was created by a law in 1913 for 99 years, so their expiry is coming. I think TPTB will move us to a new dollar and Euro at that time.

> https://goldwetrust.forumotion.com/t44p75-what-is-money#4505
>
> I'd like to propose
> something extra which is that I remember the Y2K bug (which never
> materialised) with lead to the Snp500 peaking in Jan 2000.
>
> With the Mayan predictions possible that this peak is in Jan 2013?
> Coincides with the Facebook IPO and reelection of Obama.
>
> Only thing that makes me think otherwise is Glencore's IPO. Bit early
> don't you think?

Silver is likely to get a boost today after Fed announcement.

http://www.marketwatch.com/story/qe3-expect-at-most-qe-21-at-fed-meeting-2011-08-08

Fed is likely to move closer in language to the QE3 that I explained.

I don't think they will come out and promise to buy the long bond and hold it below a certain percentage interest rate, but I think they will provide language which indicates that they are prepared to do so, if it becomes necessary.

This should hopefully get silver to catch up with gold to around $44+, so then we can take profits before the economy rolls over and the Fed is actually forced to start the QE3 action of buying long bonds.

The alternative perspective is that there is really no stimulus until the Congress acts to increase spending, because the Fed buying the long bond doesn't actually inject any money into the economy until someone borrows more (due to the lower long term interest rates that the Fed would create). But I suppose that unemployment and food stamp benefits automatically increase as people apply for them? So all the Fed is doing is making a guarantee that the federal government can borrow long-term at lower rates. Hmmm, that might reassure the market that the USA is in no danger of default any time soon. Inflation depends on how much the federal government spends (how large he deficits are). Like I said, unless the Fed starts buying other things directly in the economy, then hyperinflation is difficult, because someone has to borrow the new money into existence.

=====================================
=====================================
=====================================

I do think the Fed will act today, because the stock market is down another 5% today. The S&P downgrade was well timed with the Tuesday Fed meeting.

One problem is gold might take a hit, which might drag silver down. But if the Fed's language is sufficiently inflationary, gold might stabilize and silver catch up.

The Fed can't keep both the bond and stock market up.

It is looking like near to an end game, where you want to be in gold and not commodities and silver, but somehow I think they will find a way to inflate one more time.

Thus I think you need to be a buyer where there is blood in streets, I would be tempted to buy oil futures here. The question is will the Fed be too cautious and this selloff will get no bounce? That can be. I am wishing I sold silver on the bounce to $42, except I didn't because I don't know when the Fed will get inflationary again. It could happen today. You guess is as good as mine.

I can just say with confidence that silver will go to $65 - $100 by sometime in 2012 as they will be forced to inflate.