Inflation, deflation, gold and currencies

[vincecate]

It's not practical to drive over to the Federal Reserve Bank and get a fixed weight of real estate or oil for a Federal Reserve Note.

Saudi Arabia could have an oil backed currency. They just say the first X oil dollars to be deposited for each day could get delivery at port Y. They could have a processing overhead charge of Z dollars, so that they only dealt with large orders. But even though very few individuals would ever drive up with a supertanker and get oil, the currency would be fully backed. The value of this Saudi oil dollar would stay pegged to the value of oil. It could really work. If I was king of Saudi Arabia I would do it.

[Higgenbotham]

It's not practical to drive over to the Federal Reserve Bank and get a fixed weight of real estate or oil for a Federal Reserve Note.

Saudi Arabia could have an oil backed currency. They just say the first X oil dollars to be deposited for each day could get delivery at port Y. They could have a processing overhead charge of Z dollars, so that they only dealt with large orders. But even though very few individuals would ever drive up with a supertanker and get oil, the currency would be fully backed. The value of this Saudi oil dollar would stay pegged to the value of oil. It could really work. If I was king of Saudi Arabia I would do it.

A currency that is convertible to a fixed volume of oil backed by proven reserves might work. The amount of currency would have to be constantly shrinking as the oil gets sold unless proven reserves increased. Maybe there would need to be a second currency that is not convertible, kind of like the peaking concept that power companies have. If an oil company with service stations in the US wants to issue a currency convertible to a fixed volume of gasoline at their stations, I think the US government should let them do it. It would eventually become worthless, but at least there would be some alternatives. If a group of oil companies agreed to honor each other's currency that would be even better.

Which reminds me, I think Arthur C. Clarke once suggested that currency should be convertible to kilowatt-hours. Sounds good to me.

http://seekingalpha.com/instablog/44350 ... u-s-dollar

My comment to the article above is that as long as a free market in currencies exists and people aren't forced into using one currency solely convertible to kilowatt-hours, then it should be allowed to be made available if there's a market for it. Let the market decide.

[Higgenbotham]

http://www.martinarmstrong.org/files/Go ... 7-2010.pdf

This will be my last post in this thread. If anyone wants to discuss this more, let's move it to one of the other threads. I'm surprised John hasn't done that already.

Armstrong discusses gold and some of the points made above about the price of gold and inflation/deflation, and the role of gold and money as history evolves:

"It is NOT likely that the United States would enter a HYPERINFLATION mode. The system would collapse long before that takes place."

Armstrong is correct.

"It is misnomer to claim gold is a hedge against inflation. That is just total nonsense."

Armstrong is correct again.

"Those who tout a return to the gold standard as some sort of panacea cure-all, are clinging to some golden pantheism unsupported by history."

Armstrong is correct once again.

[John]

Dear Higgie,

> This will be my last post in this thread. If anyone wants to
> discuss this more, let's move it to one of the other threads. I'm
> surprised John hasn't done that already.

Actually, I hadn't even thought about it. Is that what you want me
to do - merge these posts into the Financial Topics thread?

John

[Higgenbotham]

Dear Higgie,

> This will be my last post in this thread. If anyone wants to
> discuss this more, let's move it to one of the other threads. I'm
> surprised John hasn't done that already.

Actually, I hadn't even thought about it. Is that what you want me
to do - merge these posts into the Financial Topics thread?

John

What ever you want to do - every time I make a post here lately it's in the back of my head that it's perhaps off topic. I was thinking these posts would fit well in the Inflation, deflation, gold, and currencies thread just under the Financial Topics thread . Vince has contributed heavily to that thread too. The last post in that thread was October 6 and since then the discussion seems to have moved over here.

[vincecate]

Higgenbotham posted a link to paper by Armstrong:
http://www.martinarmstrong.org/files/Go ... 7-2010.pdf

I think I basically agree with what Armstrong wrote in this paper.

I had not realized that from the fall of Rome till the 13th century there were no gold coins in Europe, just silver. Interesting. I like silver.

It is interesting that Armstrong was buying scrap gold and getting it refined into bars. I am buying scrap gold and refining it to make coins. I don't know where he gets that 6 weeks to refine idea, for me it is 24 hours. I don't think I am particularly fast.

I agree that gold is not just tracking the CPI. It really indicates the soundness of the paper currency you are quoting it in.

"It is NOT likely that the United States would enter a HYPERINFLATION mode. The system would collapse long before that takes place."

Armstrong is correct.

I am not aware of any fiat money that just did an instant collapse. I think hyperinflation is the transition period from normal money to nobody taking that money. It is a time when it is still used for transactions but nobody likes it as a store of value. In the end nobody likes it for transactions either.

One definition, which I like, of hyperinflation is any inflation so high that it is reported in less than yearly time periods. So to me 5% inflation per month counts as hyperinflation (80% per year rate). However, some real experts, like Bernholz, define it as 50% inflation per month and up. I agree the system will collapse before it gets to that definition of hyperinflation. So I am probably in agreement with Armstrong.

"Those who tout a return to the gold standard as some sort of panacea cure-all, are clinging to some golden pantheism unsupported by history."

Armstrong is correct once again.

I don't really expect most countries will use gold or silver coins internally. As Armstrong points out a government can tax gold transactions and so kill it as a money. I mostly think that international trade will not be done in a single fiat dollar any more (US or other). It is just not fair that one country can print up paper and buy supertankers full of oil or goods from China while other countries have to produce real stuff to get money. So I expect trade will be cleared in gold/silver, but there is some chance that a patchwork of bilateral currency agreements, or something else, could work.

He says, "The biggest problem we have is that we are moving far too fast toward the END TIME from an economic perspective." It seems like he means the end of the dollar. Do you think that is what he means? Do you agree?

[Higgenbotham]

I think I basically agree with what Armstrong wrote in this paper.

I had not realized that from the fall of Rome till the 13th century there were no gold coins in Europe, just silver. Interesting. I like silver.

Armstrong has a very deep understanding of economics in my opinion. I'm basing that on his writings, not his supposed reputation of having forecasting capability the government wanted. The only thing I've read about the period after the fall of Rome was that gold hoards accumulated prior to the fall were useless. That kind of fits in with a comment I had made once about the collapse being so steep that your gold would do you no good. After thinking about that a bit more and reading another comment, I agreed it would be likely there would at least be a transition period of some kind that would last a few years.

I agree that gold is not just tracking the CPI. It really indicates the soundness of the paper currency you are quoting it in.

My tendency would be to say it indicates the complexity and soundness of the underlying economy that supports the paper currency. That might really be the same thing. Today I was reading about the foreclosure mess and thinking about how that has possibly impacted the dollar. If the US political economy is breaking down to the extent that real estate transactions can't be trusted due to fraud and disregard of the rule of law, that is a problem for the dollar. Going back to some previous comments, lack of confidence in the authorities to guarantee purchasers clear title on foreclosed properties undermines confidence in real estate values and hinders the collection of property taxes. That could have as much or more to do with the recent decline in the dollar and the skyrocketing metals prices as the QE rumors. Granted, they are related though.

"It is NOT likely that the United States would enter a HYPERINFLATION mode. The system would collapse long before that takes place."

Armstrong is correct.

I am not aware of any fiat money that just did an instant collapse. I think hyperinflation is the transition period from normal money to nobody taking that money. It is a time when it is still used for transactions but nobody likes it as a store of value. In the end nobody likes it for transactions either.

One definition, which I like, of hyperinflation is any inflation so high that it is reported in less than yearly time periods. So to me 5% inflation per month counts as hyperinflation (80% per year rate). However, some real experts, like Bernholz, define it as 50% inflation per month and up. I agree the system will collapse before it gets to that definition of hyperinflation. So I am probably in agreement with Armstrong.

He says long before and that's my thought too. My guess is he's thinking that long before inflation gets to, say, 1% per month interest rates would be forced high enough that the US would have already defaulted.

I mostly think that international trade will not be done in a single fiat dollar any more (US or other). It is just not fair that one country can print up paper and buy supertankers full of oil or goods from China while other countries have to produce real stuff to get money. So I expect trade will be cleared in gold/silver, but there is some chance that a patchwork of bilateral currency agreements, or something else, could work.

Somewhere in this forum I laid out my vision of how I think the future worldwide monetary system will work. I think the main feature will be that a balance of trade will be required around small economic units or zones, where the units or zones have their own currency and are required to be productive. I think it will be a time of great experimention. Many units or zones will fail and be absorbed into successful models. There will probably be a worldwide currency, but it won't be "owned" by any certain geographic area. Central banking will be abolished and the currency system will be run by markets and intelligent computers.

He says, "The biggest problem we have is that we are moving far too fast toward the END TIME from an economic perspective." It seems like he means the end of the dollar. Do you think that is what he means? Do you agree?

The short answer is yes, I think he does mean that.

I think he means there will be cascading worldwide sovereign debt defaults. The sovereign debt defaults will be partial at first. He's covered some different possibilities of partial default as I have on the forum. As defaults approach, there will be wide currency swings, which will set off wide swings in other markets, and then cause a derivatives blowup/flash crash type of thing (I'm perhaps filling in the blanks a bit here). We've seen a mild case of that already but it should get much worse. Somewhere he says there will be a currency default and replacement of the currency long before there is a hyperinflation. Any default process would typically start on the long end of the curve and with interest, then extend into principal. In a sense, the US has already started the default process because effectively no interest is being paid on short term bills. That's the first step. The currency default if it happens would be the last step. The implication seems to be that he expects all of those things to happen rather quickly. Somewhere I got the idea he expects by about 2016.

I agree there will be at least partial sovereign debt defaults. My guess has been that during this fourth turning the US will break apart into loosely associated pieces that will eventually have their own currencies. There will still be a weak central government and possibly a national currency, but there won't need to be a national currency. I'm guessing national currencies wil just decline in importance over time as better systems take over that are more compatible with the new technologies. That's just one of a range of possibilities though.

[at99sy]

http://www.martinarmstrong.org/files/Go ... 7-2010.pdf

Armstrong discusses gold and some of the points made above about the price of gold and inflation/deflation, and the role of gold and money as history evolves:
"It is NOT likely that the United States would enter a HYPERINFLATION mode. The system would collapse long before that takes place."

"It is misnomer to claim gold is a hedge against inflation. That is just total nonsense."
Armstrong is correct again.

"Those who tout a return to the gold standard as some sort of panacea cure-all, are clinging to some golden pantheism unsupported by history."
Armstrong is correct once again.

Gold is a beatuiful metal that can be used to created fantastic works of art, jewelry and coins of many stunning designs and denominations. However, I noticed long ago that it has zero nutritional value. A shame really. As I understand it, the dollar value of gold is linked to the strength in and confidence of the U.S. Dollar by the World Markets. A weakening dollar typically equates a rising value in the price of gold. This can be a magnificent source of wealth/profit for those who already possess quantities of the metal in any form(buy low-sell high), who can obtain the metal from the ground(mining on any scale) or speculators who successfully bet on the direction of the market.

The vast majority of people will never obtain gold bullion or coins of any quantity. There are collectors and investors who will continue to buy at any price and some who will obtain a small quantity in hopes of it offering a hedge against "hard-times."

It's not a bad idea to have a little put away for a rainy day, or if you can, buy scrap gold at a reasonable price and quickly turn it for a profit. I remember a lot of guys in the 80's getting left holding the bag after the silver market collapsed. People were buying up scrap left and right and instead of turning it they held out for even higher prices and got burned. The scrappers I know around my town are buying everything in sight, but are turning it as fast as they can.

If the dollar gets totally shredded, and it might, the price/value of gold a silver may go through the roof, $5000 oz, $10,000 oz hell even a Million dollars an ounce! But who cares? Unless you're holding the metal it doesn't affect you at all. Who the hell can afford to buy it? If the dollar is trashed what are you going to buy it with? What are you going to do with it? Who is going to buy it from you? What would you take as payment? You'd be an idiot to take worthless dollars unless you believe the value would return. You sure as hell can't eat it and if things get to that point( hyperinflation or a economic meltdown) then we all have bigger things to worry about than the value of gold.

I don't think there is enough bullion in the world today to replace just our printed currency, not to mention the e-money sitting in electronic accounts. Gold would likely have to be revalued to tens of thousands or hundreds of thousands of dollars or barrels of oil per ounce. If that happened do you really think our government, considering past aggregious behavior, would allow American citizens to keep any accumulations of gold or even silver? They would probably confiscate everything, jewelry, collections, art, everything in the name of National Economic Stability or some other hokey sounding patriotic joke.

I can see the writing on the wall, there almost has to be some form of global currency realignment. The Euro is mostly a failure, something like that could only work in a closed system with no outside influence, and unless their is a global agreement on a standard currency or exchange rate that is fixed and interest rates are fixed then the problems that we have now will continue until there is an all out war, domsetically and internationally. Even if there was a global agreement on currency standards and fixing all interest rates etc. you will have winners and losers. I can guess who the biggest losers would be.. I don't like to lose and I can't think of too many American who would willingly give up their standard of living to pacify the poor nations around the globe.

I was in spec-ops in the 80's during the Reagan era and I remember the militia's and survivalists being made out to be lunatics and whack-jobs by the press. In many cases they were nutty people. The fears were about a war with Russia, which most rational people and as John has pointed out in Gd, knew were impossible. The fears were real but the timing and targets were off. People buy gold to feel safe and protected, but when the $hit hits the fan there are many other items I would prefer to have, and do. If the electric grids, fuel supplies, food production and delivery chanis stop working, even for short periods of time, do you really think people with alot of gold are going to be protected? I cannot imagine somebody trading the food they have stored for themselves for gold. If you somehow amased a large surplus of a trade good, you might take it in trade but only if you could them trade it for something else.

Currency has to be portable, durable and convertible. Gold is certainly durable but it's portability is limited and is limited in convertibility. Don't get me wrong. I wish I had several hundred ounces!! But I would be selling the hell out of it right now. Paying off debt and buying things I could use when the CoC war eventually does go down.

On the historical note, I find it fascinating that people are still finding buried and long forgotten gold hoards buried all over Europe from the time of the Roman Empires demise. I don't think those hoarders benefited greatly from the large quantity of gold they buried. It was buried to be protected. If you're no longer amongst the breathing, have been enslaved, forced off your land and out of your "home" then what real value did it have. If you try ot take it with you , then someone will take it from you unless you're willing to fight for it, then you'll constantly have to "protect it" somehow.

I enjoy reading the debate going on about this subject and just wanted to toss my 5 cent in. I know that scrappers are only paying about 10X-12X face value for silver coins and they are selling silver coins for 20X-30X face value for non-collectible coins. So unless you already possess the silver coins and you bought them REALLY cheap, you will not make much profit selling them, unless you find a retail buyer(craigslist etc..)If you have a large quantity you could get a higher price by skipping the middle man, but most people can't meet the melt minimums.
People buying gold and silver Eagles are paying a premium above the currency value and the melt value. The secondary market in "collectibles" has an even higher premium on graded and select coins due to supposed rarity and scarcity. Try to sell most of them and you will get far less than you paid for them. A $1 silver eagle is selling for far more than $1 and the silver value is about $24.00 right now. You'll pay more than that and receive less from dealers for it. Where is the logic in buying these items right now? Perhaps I am naive but I just cannot justify speculating on these items right now. For less than the price of a one ounce gold Eagle I can buy several months worth of food, or a brand new Remington 700 with several hundred rounds of ammo, about 500 gallons of gas, fill my propane tank for heating about 5 times, I could go on and so could you. If housing was in a bubble, the stocks were and are again in a bubble, mortgage backed securities were in a bubble, treasuries- a bubble, tulips, oil, corn etc......... What logic is there in saying that gold isn't in a bubble? Of course this time it's different, what was I thinking. LOL


It's going to be a trip seeing the unravelling. I only fear for my daughter(6yrs old) and her future. I can protect her but what she may have to look forward to is chilling. I welcome your comments.

Chillin in NH!!
SY out!

[vincecate]

That kind of fits in with a comment I had made once about the collapse being so steep that your gold would do you no good. After thinking about that a bit more and reading another comment, I agreed it would be likely there would at least be a transition period of some kind that would last a few years.

Ya, how long it takes before nobody will accept the dollar is a hard question. I think 24 hours is too fast and 10 years too slow. It is a big world and there is lots of inertia. But as you say, even 1% inflation per month is probably more than enough to get people to flee the dollar.

I don't think the government can just replace the dollar with another currency and have solved the problem. If the budget is not balanced the new currency is still headed for hyperinflation. Balancing the budget is just not an easy thing.

And even if the dollar crashes in 1 week, that still counts as hyperinflation in my book. But my guess is it will be more like 6 months to 2 years timeframe before people can really believe that the dollar is going down for the count. People will keep expecting it to bounce back or that somehow the government can fix things.

Today I was reading about the foreclosure mess and thinking about how that has possibly impacted the dollar. If the US political economy is breaking down to the extent that real estate transactions can't be trusted due to fraud and disregard of the rule of law, that is a problem for the dollar.

Yes. It seems somebody will be taking a big loss. It may be the pension funds, it may be the banks, or it may be the government. But almost whichever way it goes it will probably result in more money printing.

I think the main feature will be that a balance of trade will be required around small economic units or zones, where the units or zones have their own currency and are required to be productive.

I think Russia and China now understand that having countries near them peg to their currency and use their currency for central bank reserves would let them play the fun game the US has of printing money and getting real things. Assuming the dollar does crash, I don't think Russia and China will be able to pull off the trick. Everyone will understand how the trick works at that point. The US will be poor without the money printing trick so it will become obvious where their wealth came from.

[vincecate]

I cannot imagine somebody trading the food they have stored for themselves for gold. If you somehow amased a large surplus of a trade good, you might take it in trade but only if you could them trade it for something else.

In other previous cases of hyperinflation part of what is going on is that the two normal functions of money are split. Normally money is good for transactions and as a store of value. But in hyperinflation it is only good for transactions and not acceptable as a store of value. While a gold coin may not be good for transactions, it is probably still good as a store of value.

I was reading a book about hyperinflation in Argentina and one thing that the author said was there were all kinds of gold dealers popping up. People would store value in gold and exchange it for local currency when they needed to buy something. It was after reading that book that I decided to get into the gold business.

Part of the reason I am making very small coins, 1/10th oz in both gold and silver, is that I think they will become very valuable and smaller sizes will be good. Already, 1 oz of gold at $1,360 is too big. If you think of going to the gold exchange like going to an ATM to get some cash, you really want smaller amounts. And if gold goes up lots, it is just too valuable. My 1/10th oz coins are like $136, which you could cash in and go shopping. But if gold goes up by 5 or 10 even these could be too high for ease of use.

I suspect silver will be the "poor man's gold" as it has in the past. Gold may just be priced out of reach of normal use.

For central bank use as backing for a paper currency, gold is nice because it is so small it is easy to store in a safe. But for real life coin usage, silver is probably better.