Inflation, deflation, gold and currencies

[vincecate]

If I understand you correctly, what you are saying is that the world will experience a bigger crash when the currency hyperinflates by virtue of the fact that they are awash in the US currency.

If a single country, say Argentina, gets hyperinflation it is a much smaller problem than when the world reserve currency, which is also the world trade currency, and currency for long term contracts of all kinds, gets hyperinflation. It is at least an order of magnitude bigger problem than any previous hyperinflation.

[jdcpapa]

If I understand you correctly, what you are saying is that the world will experience a bigger crash when the currency hyperinflates by virtue of the fact that they are awash in the US currency.

If a single country, say Argentina, gets hyperinflation it is a much smaller problem than when the world reserve currency, which is also the world trade currency, and currency for long term contracts of all kinds, gets hyperinflation. It is at least an order of magnitude bigger problem than any previous hyperinflation.

So in other words, the US dollar is the glue in this worldwide crisis. The QE's, although welcomed at first, are now frowned upon worldwide in part because of the continued economic weakness and the risk of hyperinflation. Further, there is too much risk, given the present posture of things to initiate the introduction of a new form of world currency. In response, "the Bernanke" has fixed interest rates for the next 2 years, turned-off the printing presses and passed the ball to Washington (for now). The US will now have to manage the on coming blow-back implosive " wave". Essentially, and arguably under the "wave" theory, the US is faced with the challenge of the blow-back and the collapse.


In theory, as the pressure of the "fear" vs "greed" factor over hyperinflation eases, the US accepts it's fate and implements programs to ease the pain (restoring confidence), the world realizes that we (US) are finally getting our "just due" (in other words they "feel" our pain), the price of gold will decline. Further, US consumption will decline and our economy will contract ushering in a period of deflation. Upon which time, under the "wave" and Mayan (among others) forecasts, will commence the "golden era" and inflation.

If the above hypothetical scenario plays out: "cash is king"

Nice photo Vince. Have a great day all!

[vincecate]

In response, "the Bernanke" has fixed interest rates for the next 2 years, turned-off the printing presses and passed the ball to Washington (for now). The US will now have to manage the on coming blow-back implosive " wave".

The promise to hold interest rates at 0% for the next 2 years is QE3, it can only be done with printing money and buying up bonds to keep the interest rates down. They are not turning off the printing presses. They are not slowing them down. They just don't want to call it "QE3" as now QE has a bad name. So now they have a "zero interest rate policy". This has clearly fooled most of the smart people in this forum and most others also. But in time it will be clear that:

"printing money" = "quantitative easing" = "zero interest rate policy" = "monetizing debt"

When QE started most people did not understand it was just printing money, but I think most do now. Soon enough most people will understand that "zero interest rate policy" is just another name for the same activity. At the end of the day, central banks really have only one trick, printing money. They can make up many names for it, but it is really only one trick.

http://howfiatdies.blogspot.com/2010/11 ... money.html

[jdcpapa]

The promise to hold interest rates at 0% for the next 2 years is QE3, ........ But in time it will be clear that:

"printing money" = "quantitative easing" = "zero interest rate policy" = "monetizing"

The promise to hold interest rates down is an extention of the policy set in place by "the Bernanke" a few years ago. It signals an acknowledgement of the failure of QE regardless of how you slice it. Essentially, printing money is monetizing debt. You can name it QE or just about any name that fits the circumstance. The Fed set the interest rate,in part, to cause a credit ripple and stimulate the economy, it failed.

The condition of the US economy (and the world's) is undeniable. The question is: IF the world decides to stop buying the "safety"(sarcasm) of the US, will the Fed step up? It's all about timing and arguably "slight of hand". We all know where this is headed.

Have a great day!

[richard5za]

The promise to hold interest rates at 0% for the next 2 years is QE3, it can only be done with printing money and buying up bonds to keep the interest rates down. They are not turning off the printing presses. They are not slowing them down. They just don't want to call it "QE3" as now QE has a bad name.

I think that this is the reason that gold will go to $ 3 000 maybe $ 25 000 / ounce.

[vincecate]

The promise to hold interest rates at 0% for the next 2 years is QE3, it can only be done with printing money and buying up bonds to keep the interest rates down. They are not turning off the printing presses. They are not slowing them down. They just don't want to call it "QE3" as now QE has a bad name.

I think that this is the reason that gold will go to $ 3 000 maybe $ 25 000 / ounce.

The dollar:gold ratio has gone from 20:1 to 1900:1. They will keep printing dollars. Nobody is printing gold. I think it is really safe to say it will reach those higher ratios at some point. The question is just how soon. Is it 2 years or 20? I think closer to 2.

[CrosstimbersOkie]

When QE started most people did not understand it was just printing money, but I think most do now. Soon enough most people will understand that "zero interest rate policy" is just another name for the same activity. At the end of the day, central banks really have only one trick, printing money. They can make up many names for it, but it is really only one trick.

People already understand it, which is why hyperinflation will not happen in the US. I'm with John. Deflation will be the wave of the currency. I suspect that precious metals have another 12-18 months to run before the bubble begins to deflate. Gold & silver have been a wonderful investment, but I expect I'll start selling next summer. I'm content to have doubled & tripled my money in the 3 and 4 years that I will have held them.

I think that the return to a currency based on precious metals is not going to happen, and it's probably not realistic given the volume and speed that money needs to move in order to be an effective medium of exchange in the modern world.

[vincecate]

When QE started most people did not understand it was just printing money, but I think most do now. Soon enough most people will understand that "zero interest rate policy" is just another name for the same activity. At the end of the day, central banks really have only one trick, printing money. They can make up many names for it, but it is really only one trick.

People already understand it, which is why hyperinflation will not happen in the US. I'm with John. Deflation will be the wave of the currency.

The best example of deflation of a fiat currency (no tie to gold, silver, or other currency) I have seen on this forum or anywhere else is Japanese Yen with a few years of around 2% deflation. From 1929 to 1933 US prices went down about 30%. I contend it is because the Fed made 2.5 paper dollars for every 1 dollar in gold they got, so as people took out their gold there was less total money. Do you know of any example of a fiat currency getting double digit deflation?

I think that the return to a currency based on precious metals is not going to happen, and it's probably not realistic given the volume and speed that money needs to move in order to be an effective medium of exchange in the modern world.

Do you really think armored trucks can move paper money faster than gold? There are internet gold currencies that "move money" electronically as fast as anyone. Any account that is currently denominated in dollars could be denominated in gold. No reason "wire transfers" could not be done with accounts denominated in gold. If the Federal reserve only issued gold coins instead of paper money all the electronic movement of money could be the same (bank to bank transfers done at accounts at the Fed etc) and the physical movement could be the same too (armored cars).

I am rather confident that you could "send money electronically" back under the gold standard, even before there were computers. I am confident banks used telegraph wires to "move money electronically" before phones even existed because it is called a "telegraphic transfer" or a "wire transfer". Also, Wells Fargo bank has had the stagecoach as their symbol since 1852, shortly after telegraph wires were operational. I think the stagecoach was the precursor to armored cars to physically move money when wire transfers in opposite directions did not balance out. Update: Wells Fargo did use telegraphs back then to send money and operated many stagecoach lines moving gold around!

http://en.wikipedia.org/wiki/Telegraphic_transfer
http://en.wikipedia.org/wiki/Wire_transfer
http://howfiatdies.blogspot.com/2010/11 ... ndard.html
https://www.wellsfargo.com/about/histor ... since_1852

[richard5za]

People already understand it, which is why hyperinflation will not happen in the US. I'm with John. Deflation will be the wave of the currency.

I am not understanding. Lets discuss:

Inflation is an increase in the money supply without a corresponding increase in goods and services. For example, if we take a hyperthetical example of a totally closed economy, such as an island somewhere with no contact with the outside world: Say a shirt costs $ 2 and then you suddenly double the amount of money on the island, very soon the shirt will cost $ 4. Inflation is a monetary matter at its essence.

Coming back to the USA the economic growth rate for the last 10 years has averaged less than 2.5% per annum but the supply of money has increased much faster than this. The consqence must be inflation sooner or later. And the faster they print the money the higher the inflation.

I don't think that hyper inflation will be permitted, but 10% to 20% for a few years would make a wonderful difference to the USA real debt: This is the route I think is most probable for the medium term at least. (This is a so called 'beggar my neighbour' economic method and will probable result in global currency wars which may have unpredictable consquences)

It would be economic suicide for the USA monetary authorities to allow deflation in a substantial debtor nation with the dollar as the world's reserve currency as well. Deflation will only happen if for some reason control of the printing presses is lost, or the USA government is overwhelmed in some way.

It was in one of Bernanke's speeches some years ago that he reminded the audience that the government had printing presses and could ensure that deflation didn't happen. I'll try to find the speech but can't promise.
Richard

[richard5za]

It was in one of Bernanke's speeches some years ago that he reminded the audience that the government had printing presses and could ensure that deflation didn't happen. I'll try to find the speech but can't promise.

Found it

Here it is: the relavent exerts of Bernanke's speech on avoiding inflation delivered in 2002:

"However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero. In the remainder of my talk, I will first discuss measures for preventing deflation--the preferable option if feasible. I will then turn to policy measures that the Fed and other government authorities can take if prevention efforts fail and deflation appears to be gaining a foothold in the economy...

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.

There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates.

A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association). Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities...

If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly. However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral. (Obviously the Fed has already been doing this as well).

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.

Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money. (I think the Obama Administration used this as the rationale for extending the Bush tax cuts).

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets."