Inflation, deflation, gold and currencies

[mannfm11]

Sorry about double posting here, but I am going to back John up. Some of you guys have probably seen me write somewhere on the net and know my position. I don't blame anyone for holding gold, but I feel it is speculative as well. The 1929 price was $20 and something per ounce. Check out the prices of most other goods. The all time low on cotton was 5 cents. Not the typical price, but the all time low. The techniques of finding gold have improved over the years as has the techniques for growing cotton. Cotton was typically about 18 cents a pound, wheat about $1.50 a bushel. Normal cotton prices range from 50 cents to $100. I believe the CPI from 1929 to present is about 20 times so $400 is reasonable for gold. But, then again, this depends as well on what side of the coin paper is on as well as paper also inflates and deflates and speculation ebbs and flows. I do know if I was going to be buying any metal, it wouldn't be gold, but platinum, a truly rare metal that I can assure you isn't laying around in the typical coin shop to any great degree. You can have platinum for $1000 and it is probably worth on a real basis two times at a minimun what gold is worth. There are catalytic processes that make platinum absolutely necessary, but it is clear that gold is being promoted and platinum is seeking a real price. The average idiot couldn't make this connection, as it is what he hears in the case of bubbles and not facts.

I am going to be honest and tell you I don't like being without gold, but I am also confident that the positions in gold will be liquidated as well. The bankers can get the vast majority of it back about any time they want. Silver is even worse, as I believe it will be back in its price range of 1990 in the $4 area. Want to get these guys mad, bring that one up, as they all know silver is scarce, in short supply and underpriced. The truth is that silver is in oversupply and being hoarded by those that don't realize that. Silver went to something like 25 cents an ounce in the 1930's and I often wonder why the government didn't flood the market with it in trying to stop the deflation. But, then again, deflation is a mathematical debt model which can't be remedied by what people commonly think. People don't have enough sense to stop a bubble. Greenspan was not only too young to have been there when the crash happened, but was never told the truth of what happened in the 1920's. I doubt the bankers want any of us to know what causes depressions, as you have to read Austrian economics to learn that. I am waiting to buy gold, as I have to believe the risk is going to be too high. The Fed hasn't printed a free dime yet and I don't believe they will. Money doesn't exist inside banks, only in accounts and not one dime has been put in any account directly by the Fed.

[GeminiRising]

If money is scarcer, and on the basic laws of supply and demand why does it not lead to inflation? The less money there is the more expensive it will become leading to inflation.

[Matt1989]

If money is scarcer, and on the basic laws of supply and demand why does it not lead to inflation? The less money there is the more expensive it will become leading to inflation.

Unlike basic goods, money has a fixed notation i.e. $10 does not change to $20 when there is less money circulating. Less money circulating means a drop in prices of goods, leading to deflation.

[John]

> The only problem I have with it is the way Bernanke is running
> this game, kind of like the boy with his finger in the dike and he
> might just bankrupt the Fed and the government before we deflate.
> I am looking for gold at about $500 an ounce and I think
> speculation is still rampant and gold is just one of the
> speculations.

Thanks for posting this. It's a relief that someone else agrees.

However, I would have to say that Bernanke has no control whatsoever
over what's going to happen, no matter what he does.

> The sell off during and after the government bail out vote wasn't
> bears selling, it was the guys that bought the rumor and there
> wasn't anyone to sell to. They were all in. Money on the
> sidelines? Where? Those accounts aren't liquid. They have to
> expand credit to actually have money move markets upward as money
> can only change accounts. This is where the hyperinflation guys
> are way out on the limb, as there isn't credit to expand demand.

That's the same question I have. I keep hearing pundits and analysts
say, "There's plenty of money on the sidelines. All we have to do is
improve confidence, and the money will pour back into the market."

As you say, those accounts aren't liquid. They contain
mortgage-backed securities, credit default swaps, and other credit
derivatives, and the little cash that's available is being hoarded
like diamonds.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

[John]

> If money is scarcer, and on the basic laws of supply and demand
> why does it not lead to inflation? The less money there is the
> more expensive it will become leading to inflation.

To understand this, you have to look at the dollar from the point of
view of another currency, like the euro or yen.

If you hold euros, and you want to buy dollars, and dollars are
getting scarcer and scarcer, then by the law of supply and demand the
price of dollars in euros is going to increase, which means that
dollars become more valuable relative to the euro.

Therefore, the exchange rate (euros per dollar) will go up, meaning
that it's the euro that's inflating relative to the dollar, while the
dollar is deflating relative to the euro.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

[John]

A message from a web site reader:

> I was a bit confused by the last part of the "Markets plummet"
> post, about the inflation vs deflation thing. The gist of what it
> sounded like was that because the US$ is the reserve currency, and
> many other currencies are in bad shape, it can't undergo
> significant inflation. It seems to me that there are two issues
> here - the relative value of the US$ (relative to other
> currencies), and the absolute value of the US$ (how much you can
> buy with a dollar). I think it is quite plausible that, relative
> to the euro (or even a basket of currencies), the dollar could be
> roughly stable, or even appreciate, if the euro and dollar both
> are inflating, or deflating. If one inflates while the other
> deflates, then obviously their relative prices (in the other)
> would change, but you have presented fairly strong arguments that
> BOTH the US and Europe (and much of elsewhere) are economic
> train-wrecks waiting to happen - so BOTH will suffer inflation or
> BOTH suffer deflation. If deflation occurs in the US, then
> arguments for it apply equally (if not better) to the rest of the
> world, so there is no inherent advantage to the US$.

> If the euro is disbanded and Europe returns to a multi-currency
> system not much changes (other than the financial havoc that
> creates) - but it'll be more complicated in terms of comparisons.
> BTW, I'd say that the euro would probably not be disbanded at once
> - rather one country after another would leave it (or be kicked
> out) due to local strains. I think it would end up as a currency
> for a rump of countries - France/Benelux/Germany, or even just
> Germany or France.

> "In the case of Germany's Weimar Republic, which suffered
> hyper-inflation in the 1920s, few people outside of Germany owned
> marks. In the case of Zimbabwe today, no one outside of Zimbabwe
> owns Zimbabwe dollars. But there are huge amounts of dollars
> outside of America -- Europe, China, the Mideast -- and all of
> those holders are as committed to the value and integrity of the
> dollar as America is. Forget about the dollar as an American
> currency. Think of the dollar as a world currency."

> This seems to me kind of self-contradictory: If we think of the
> US$ as a world currency, then there are no people outside the
> world that own US$s, so the whole world is like Zimbabwe - there's
> no one outside the world that owns world currency. Yes, people
> inside the world have a vested interest in maintaining the value
> of US$s. But then, so did people inside Zimbabwe (i.e. they had an
> interest in maintaining the value of their cash), but that didn't
> stop the inflation. In Zimbabwe's case people with good
> connections or influence could buy other currencies with their
> Zimbabwe currency, and so preserve the value of their cash, but
> they did that after the inflation set in - their currency sales
> did not cause the inflation. And average people were unable to do
> so, and so lost that value. In the case of the world currency,
> everyone is trapped (at least those who hold cash) if it inflates
> - but that won't stop inflation. (And a side point - the rest of
> the world held huge amounts of debt issued by the Weimar republic
> - they had a lot of interest in ensuring that those debts were
> paid back).

> "...there are huge amounts of dollars in countries around the
> world. Even if America no longer had any dollars whatsoever, the
> dollar would still be valuable on international markets as a world
> currency." This seems like an argument AGAINST deflation! If
> deflation starts to rear its head, then the US could pressure
> these holders of US$s to sell. "It's true that America is deeply
> in debt, inasmuch as we owe China, Japan and other foreign
> countries far more money than we can ever pay back. But that's not
> the issue." But it is the issue because the currency is a lot of
> IOUs. As I understand it, most US$ reserves are not held in cash,
> but in US gov't debt - that's the beauty of the system for the US,
> right? First the other countries buy up the extra dollars the US
> puts out to pay for imports, etc., then they use them to buy US
> gov't debt - pays interest - and so they end up funding the
> perennial US gov't deficit. I think even saying that the US can't
> pay back existing debt is ominous, as it's going to keep piling on
> more and more. I personally think it can and will pay them (my
> inflationary solutions) - there are two scenarios I can envision:
> a German scenario and a Russian scenario.

> In the German scenario there is initially significant inflation
> that whittles down the existing debt. Next, a generational crisis
> bloody enough and destructive enough on US soil to make other
> countries forgive some of the debt and forces the US ruling elite
> to step aside or change enough to stop the wholesale robbery of
> the productive economy. Then an austerity era like post-WWII
> Germany when the rest of the debt is dutifully paid off through
> honest economic development and growth. In the Russian scenario
> there is initially significant inflation, reducing the debt load.
> This leads to grinding poverty for most residents, but reinforces
> the power and wealth of the existing
> congressional-military-financial elite leading to the extreme
> income disparities of today's Russia. The rest of the debt is paid
> of through continuing inflation, the wholesale exports of natural
> resources, and remittances sent back by the many Americans working
> overseas. If deflation happens, the scenario I'd see is that the
> debt load will continue to increase both due to gov't borrowing
> and because deflation makes the debt worth more. Eventually the
> government will default on the debt as it becomes insupportable.
> US$ immediately loses it's reserve status, throwing world finance
> into disarray, and suddenly forcing the US to live within its
> means. Not sure of what happens next, but it wouldn't be pretty.

> "And you should take Jim Cramer's advice..." I can't believe
> you're recommending the advice of that shill! Sure, get out of
> the stockmarket, but I don't think anyone really knows if
> inflation or deflation is going to happen. In fact, if Cramer says
> to hold cash, I'd do the opposite! I'm sure that he's saying that
> to help his old hedge fund buddies in some way...

"If deflation occurs in the US, then arguments for it apply equally
(if not better) to the rest of the world..." -- the reason that
deflation applies specifically to the dollar is that the credit
bubble was conducted almost entirely in dollars, rather than other
currencies.

Zimbabwe and Weimar: The government printed enormous amounts of
money, deflating the currency, and there was no credit bubble to
counterbalance it. You can think of the $700 billion bailout as
being similar to "printing money," but it's tiny compared to the
tens or hundreds of trillions of dollars in the real estate bubble,
credit default swaps, and other credit derivatives.

It's the collapse of the credit bubble that offsets all other factors
that might otherwise be inflationary.

If the world war completely destroys the US infrastructure, then the
dollar may indeed become worthless, but that scenario seems unlikely
to me.

In only quoted Jim Cramer because what he said was so unlike other
pundits.

** CNBC's Jim Cramer announces that the market has hit bottom.
** http://www.generationaldynamics.com/cgi ... b#e080801b

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

[mannfm11]

There are some holes in your readers theory John, but much of it is correct. For one, Weimar Germany didn't buy anything with its marks it printed, which escapes the people who keep bringing up. They were merely buying gold with printed marks and paying France. Your post of the Bubble that Broke the world is a nice expose on what was behind the depression and the bubble. Most people think this is going to be hyperinflation, but i only believe it is going to be the final solution, as math cannot be solved.

The odd thing that is so hard for most people to understand is that currency exchange deals mainly with values between bankers. On a day to day basis, it has almost nothing to do with the guy on the street in a certain country. They either have enough dollars or they don't. If they have enough dollars, do they like the rate of interest they draw? Only a portion of it and only over time does this have a lot to do with value.

Where the dollar has derived its value is being the reserve currency. Its real value is in its value to countries that don't have enough dollars to engage in the world trade game. Look at what is going on now? The BRIC countries are crumbling fast. Why? Their inflow of dollars isn't sufficient enough to keep their games going. I highly doubt that most of the SWF's in those countries was actually trade dollars and was instead hot speculations. This speculation, mainly in China, created a demand to the highest scale for commodities out of Russia and Brazil and spilled over into labor in India as well, which had the benefit of a large population that could speak English. Now the trade has slowed down and these countries, none of which could manufacture a piece of money out of paper you could pass across the street, much less around the world need the cash flow. It doesnt' register to people that the world has depended for decades on growing export of dollars to create their own domestic money. Bretton Woods might be dead, but the concept hasn't been replaced.

I always hear, they are going to sell their bonds. For what? They going to buy up the world supply of rupee or Bhat or whatever they call the China currency? The Russians going to demand payment in their domestic currencies? I sense that Russians keep their stuff in the matress in case they run out of toilet paper. Really think the average Brazillian keeps real or whatever that money is they have in their matressses? Not with their experience.

People think the Fed is printing money and throwing it in the streets. My worry about the fed is that the paper they are buying isn't up to snuff and I suspect this is one of the reason for the $700 billion, to get that paper out of the Fed. The Fed is only supplying money the system can't supply itself and covering up systematic insolvencies. The liabilities were already created. Citi loaned money that to the tune of a $400 billion fed funds liability, ended up in other banks, who under usual terms loans the money back to Citi. Citi imploded last year, which is generally what happens to banks that create imbalances of this style. Citi being one of the Fed's pets and maybe their masters has to have money to balance their books and cover their checks, but if you read the Bubble that Broke the World, you realize that the outlying banks went broke lending to NYC banks and buying Wall Street paper. I am sure the words, "Beware of New York" are in the operation manuel of every small town bank. The point being, there is a $400 billion hole at a minimum in Citi and most likely, any corporation with any sense has moved at least some of their money out of Citi. We haven't been informed of the other NY bank, Chase, now JPM, but I suspect it isn't in any better shape.

The government bailout isn't going to be a piece of cake. The game, whether it be preferred stock or buying crap almost has to go on as a swap of treasuries for assets or equity. In the banking world, treasuries are the same as FRN's, except the earn interest. I don't believe the world has the cash right now to sell treasuries and bring in cash, not to this extent. The government has to get some of this stuff off the Fed balance sheet.

Most people that talk this crap about hyperinflation don't know how banks work and how compound interest works against the middle. If they are cancelling credit cards and home equity is drying up, who is going to have a Merry Christmas? People always point to Japan, say they didn't do it right, etc., but then when it happens here, we do the same thing? We did the same thing in 1929 and it is being done by a guy that studied what they did then and said he would have done it differently. There may be more than one way to skin a cat, but in the end you have a skinned cat. There is only one kind of deflated bubble, but it might take a thousand directions to deflating. In any case, the supply of goods or at least the capacity to produce them is going to remain the same, but the capacity for credit to drive expansion is not going to be the same. The system is driven by the need for money to pay debts, not to buy things anyhow. It isn't by chance that is what FDR put on the currency, "This note is Legal Tender for All Debts, Public and Private"

[freddyv]

The really sad thing, Fred, is that when you have the kind of craziness and uncertainty that is going on now even "savers" are forced to speculate into things other than money markets, bonds, and CD's because a potential looming currency and/or banking crisis in this country could wipe them out. What do you tell people retired on pensions, bonds, and social security if the U.S. Dollar gets wiped out? You were responsible and "saved" and stayed "safe" but sorry it didn't work out - you should have speculated in precious metals. It's crazy and very unfair for our Fascist banking and government elites to have put decent honest hardworking people into a position where they felt compelled to "speculate".
...

I disagree. My father was told by me a few years ago that he needed to go to a conservative investing approach but he got angry with me and insisted that the market would continue to go up and up and... If he had used tried and true investing approaches he would be in much better shape today. At least he is debt free and that is a big help.

You should only speculate if you understand that you might lose everything. I am doing so right now: I have hedged the entire amount in my brokerage account (It's all short the market) against my business; I understand that if the economy turns around I will get beaten senseless but my business will take care of me; if it continues as it is I will have an awful lot of money to make up for what I might lose in business. I understand my risks and take the risk not with greed in mind but survival.

As an example: If you had invested wisely since 1970 and dollar-cost-averaged into the market over the years you would be in great shape today, especially if you became more conservative over the years. No need to speculate in anything and you should have enough money and a paid-off house to make your retirement fairly easy, even as the economy around you goes to hell.

People who managed their investments wisely and lived frugaly and within their means didn't suffer too much through the Great Depression and this time around we do have more backstops available that should be understood and used by everyone.

Panic and foolish speculation only makes you more vulnerable. Get a plan that makes sense for you and STICK TO IT!

I think that this site and the Generational Dynamics theory is very helpful in explaining what is happening but I also feel that there is a bit of hyperbole in some of the dire predictions I have read. We have already seen a great deal of trouble and panic and yet people go on and live their lives and unemployement is only 6.1%; it was over 10% in the early 80's and 25% in the Depression. People lived through the Depression and some lived well while many did not. Regardless, I have taken the attitude that I will do everything possible to ensure that I and those I care about live a good life regardless of the economy. Money is important but it will not rule or ruin my life...the best things in life are free.

--Fred

[GeminiRising]

So what does this all mean for interest rates? Will they stay low?

[mannfm11]

I think interest rates are going up. The Fed and Eurobank are forcing money into the system like the problem can be solved that way. But, we don't have a money shortage, we have a capital shortage. The whole problem is the banks lost their capital and they have lost a lot more of it than most of them care to admit. Look at the deal Well Fargo made for Wachovia. My bet is both of them have a big enough hole in them that the new bank goes under. WFC made too many HELOCs to not be under water. Citi couldn't have bought them if they had wanted and I think that i why they bailed out. Look at what all these guys are paying for capital. People out there fawn over Goldman Sachs. Goldman gave Buffett 10% on $5 billion of preferred with warrants to buy $5 billion of stock at $115 per share for 5 years. Do you know what a 5 year leap on a hot stock is worth? If Buffet held onto those warrants, he is losing his touch, but 10% isn't a bargain unless you are broke. It costs them another 10% to get out from under the $500 milion annual payment. Can you imagine paying $500 million dollars out forever on an annual basis?

If they try to float bonds against this bailout, that will be a lead balloon. I bet treasuries go to 5% or more. T-bills might stay low, as they are liquid and risk free as they pertain to currency,but I suspect the 10 year bond is going to rise in yield. This is a capital crisis of epic proportions and money on the sidelines don't equate to capital.