Inflation, deflation, gold and currencies

[Higgenbotham]

An insolvent banking system where asset prices are falling below loan values is where deflation starts, especially when 67% of the US population are homeowners. Bernanke started using his pre-announced anti-deflation toolkit when house prices started falling, and nothing else was falling in price except housing.

As well, a significant percentage of income is tied to the performance of the stock market (pension funds). Stock market wealth creates spendable cash and Bernanke's November 2010 op-ed speaks to the importance of that.

I remember laughing out loud when I read this back in 2003 and Lips answered "Yes".

http://www.fame.org/pdf/Puplava%20Lips% ... iption.pdf

JIM: The depression that plagued the United States and much of the world in the
1930s was a deflationary depression. There's a big debate in the gold camp today
about the outcome of this depression. Will it be deflationary, inflationary, or a bit of
both?

MR. LIPS: Yes.

JIM: Will we end up like Argentina and Germany, or will it be once again what is
going on in Japan today and the U.S. in the 1930s in your opinion?

MR. LIPS: I think we will see both, first an Argentinean situation and afterwards, if
sound policies are not applied, it will be a repeat of Weimar Germany. We know what
happened after that. For the immediate future, the U.S. will go through some kind of
Japanese experience. But there is a difference. The Japanese have savings. Americans are in debt. Everything has become too unpredictable. When people realize this, a time will come when gold will again be the master of the monetary world. One cannot sin against the eternal rules of God and nature. Gold will come back in a major way.

[jdcpapa]

no where did I say "jdcpapa" has no life.

I understood where you were coming from. In fact, thanks to you, I was reminded that salt had a monetary value in times past.

[jdcpapa]

and nothing else was falling in price except housing.

The construction industry has taken a major hit. Finish carpenters are making $12 per hour. During the housing boom they were making $50 per hour. In 1974 finish carpenters were making $7 per hour.

[CrosstimbersOkie]

I'm just a poor ignorant redneck. But, it seems to me, that it's just as possible to inflate a currency that's based on precious metals as it is to inflate one that isn't. True a treasury department can't create gold or silver out of thin air, but that's not the point. Or so it seems to me.

It seems to me that any currency that's issued by a government is fiat currency by definition. For instance, if I, the US Government, decree that 1$ shall equal 1 ounce of .999 Fine Silver, what's to prevent me 10 years later from decreeing that 1 ounce of .999 Fine Silver shall equal $10 and repay my governmental obligations in the Dollar denominated debt in which they were incurred? Even the precious metals based currency would be a fiat currency.

It seems to me that this isn't like the 1970s. Today private debt is so much greater than government debt, combined with the Libertarian-Tea Party movements that have been so successful in educating the public mind about the danger of inflation, it's unlikely that hyperinflation will occur. Everything depends on politics and Ron Paul and his followers have been so successful in shaping the debate that hyperinflation will not be allowed to occur. Even Rick Perry is calling the Federal Reserve Chairman a traitor.

Then consider that the US and China are moving rapidly toward war. The US Government will partially default and it's the Chinese who will be defaulted on. And we all know how the Chinese love gold. No doubt the gold market will become a weapon of war wielded by the US against China once the war begins or, it could very well be a cause of the war.

When I began purchasing gold and silver back in '08, I told myself that I would begin to sell if gold reached $2,000 an ounce and silver $50 an ounce. I see no reason to alter that strategy. So, next summer or $2,000/$50 an ounce whichever comes first, I intent to start selling.

[CrosstimbersOkie]

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 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.

I don't think Us monetary authorities can control deflation any more than they can control the hurricane that hit the east coast. They don't have control of those debt instruments. They are in private hands and many are beyond the reach of the US Government.

[jdcpapa]

I don't think Us monetary authorities can control deflation any more than they can control the hurricane that hit the east coast. They don't have control of those debt instruments. They are in private hands and many are beyond the reach of the US Government.

Did Sir Isaac Newton refer to it as "gravity"?

[richard5za]

I don't think Us monetary authorities can control deflation any more than they can control the hurricane that hit the east coast

Well, in so far as the US dollar is a fiat currency, meaning that total control of the money supply is with the USA government, and therefore the US monetary authorities can create as much money as they like, they can control deflation.

Its possible however that the people may vote in a government on a "no more money created platform", or some other unforseen factors may limit their options, and the authorities lose control, and deflation results.

There are a number of possibilities: Hyperinflation, stagflation, deflation, etc. The possibility with the lowest probability I suspect is reasonavble economic growth and low inflation. The current financial mess makes sure that this won't happen. The highest probability I suspect is little to no economic growth with "highish" inflation e.g. 8% to 18% per annum for a number of years. This is the so called stagflation. I suspect that hyperinflation and deflation are lower probabilities.

My view is that we need to be prepared for all possibilities because predicting the future in the current mess is very difficult.

[jdcpapa]

Good afternoon everyone,

For the record, this quote belongs to crosstimberokie.

I don't think Us monetary authorities can control deflation any more than they can control the hurricane that hit the east coast

I don't think Us monetary authorities can control deflation any more than they can control the hurricane that hit the east coast

Well, in so far as the US dollar is a fiat currency, meaning that total control of the money supply is with the USA government, and therefore the US monetary authorities can create as much money as they like, they can control deflation.

Its possible however that the people may vote in a government on a "no more money created platform", or some other unforseen factors may limit their options, and the authorities lose control, and deflation results.

There are a number of possibilities: Hyperinflation, stagflation, deflation, etc. The possibility with the lowest probability I suspect is reasonavble economic growth and low inflation. The current financial mess makes sure that this won't happen. The highest probability I suspect is little to no economic growth with "highish" inflation e.g. 8% to 18% per annum for a number of years. This is the so called stagflation. I suspect that hyperinflation and deflation are lower probabilities.

My view is that we need to be prepared for all possibilities because predicting the future in the current mess is very difficult.

I agree that we need to prepare for all possibilities. I believe that consumer demand will play an important role in the ultimate outcome. The baby boomer transition and the ever increasing unemployment problem will put downward pressure on demand. In theory, that action should result in a continuance of deflation. However, if "the Bernanke" stokes up the printing presses; uncertainty prevails. As of this writing, the US dollar is up, gold is down, the markets are down and 10 year treasuries are below 2%.

Here is an amendment to my previous post: "Gold fever" and "flight to safety" are polar extreme leading indicators of doom.

[shoshin]

Krugman on gold, deflation, inflation, etc...

http://krugman.blogs.nytimes.com/2011/0 ... d-wonkish/

[richard5za]

Technical analysis

On technical analysis alone I calculated gold is heading for around $ 2080. Timing is not clear. I calculate on current data that gold could eventually reach around $ 6400 before a bear market sets in. Of course this needs to be reviewed on a regular basis.
Richard