Financial topics

[MnMark]

I try, as much as I can stand, to avoid getting involved in these
discussions, because I'm so contemptuous of this total nonsense, and I
try not to insult the nice people in my own forum unless I'm really
forced to.

Gee, thanks for your herculean patience in responding to my "total nonsense." I didn't realize I was "forcing" you to insult me. How wearying it must be to have to respond to the little people.

First off, I can ask you the same question -- what would it take to
finally convince you that hyperinflation is NOT going to occur? How
many years of being totally wrong will it take for you to change your
mind?

One thing I've learned over the last 30 years is that predictions of imminent disaster are almost never right. (I can't think of one that HAS been right in my lifetime. The last one I was really convinced of was Y2K and that amounted to nothing.) In this case, you can look at the mathematics of it. The U.S. has a very large debt load - public and private - and we are currently blessed with only have to pay very low interest on the very large public debt, which is now around 100% of GDP. At some point the interest rates will rise and we'll be paying more and more for the interest on the debt, on top of our already huge annual deficit. Consumers are burdened with too much debt and won't have money to spend until that debt is relieved, be it by default or by high inflation that wipes out the value of the debt.

I am operating on the assumption that the government will not take effective action to lower the deficit. The recent debt-ceiling hike politicking played out exactly as I expected: lots of posturing, with the expected end result that the debt ceiling was raised but nothing was done to address the deficit. The same will happen with the "supercommittee". They will make recommendations, and then the recommendations will be ignored and the day of reckoning will be pushed off until after the election.

If the Republicans succeeded in actually cutting government spending by even half the amount it needs to be cut, they'd be voted out of office. Same if the Dems tried to raise taxes enough. The people have spoken: they want the spending to continue as it has, and they don't want more taxes. Anyone who tries to do otherwise will have no more than two years in power before being voted out.

So how long can the debt keep rising, the interest on the debt keep rising, the Congress continue raising the debt ceiling, and the Fed continue printing money to buy the bonds the Treasury has to sell to fund the deficit, before people around the world decide they don't trust dollars anymore and the dollars flood back into the US and the velocity of money increases dramatically? I don't know, but I'd say I'd be surprised if we haven't had very high inflation - at least one year of 100% inflation - within five years. (And now I've answered your question, though you did not answer mine.)

I've been dealing with this question for almost ten years. Month
after month, year after year, I've had to listen to people in your
camp claiming that hyperinflation is coming next month, next quarter,
next year.

That's not me. I don't think I've ever used the word "hyperinflation". My current thinking is that we will have very high inflation (25% - 200%) for a period of perhaps a year or two or three, before we reach a point where the loss of confidence in the dollar begins to accelerate and the government is forced to begin buying or selling gold to reinstill confidence in the dollar. I expect they may do that at a price of many thousands of dollars an ounce, so that they can back the trillions of dollars in existence with the hundreds of millions of ounces of gold they have. And I don't recall every saying it was going to happen in the next month or next quarter. I know I've never been that sure of the timing. LIke I said, I've learned that these things can take much longer than you think. The main question is not so much the time frame but the direction of things, the way they are going to unfold.

What's the shadowstats inflation value for the 1970s and 1980s? If
you can't answer that question, then your whole argument is
meaningless.

My understanding of ShadowStats is that the point if it is to calculate inflation in the same way the government did before the 1980s when they began fudging the number to keep it artificiallly low in order to avoid having to pay so much for Social Security cost of living increases. Thus, the ShadowStats inflation values for the 1970s and early 1980s are exactly the same as the government's figures. Then the government began fudging them artificially low, and ShadowStats continued to calculate them the old way. Here you can see their chart of the inflation rate calculated the same way it was calculated in 1980. You can see that it has been generally rising ever since the 1980s, that even during the worst of the 2008 crisis it never dropped below 5%, and that currently it is over 10% and continuing to climb. http://www.shadowstats.com/alternate_da ... ion-charts

And STILL the CPI is only a small fraction of what it was in the
1970s, when the Fed Funds Rate was 5-10%, and there was NO
quantitative easily and fiscal bailouts.

No, the inflation rate as calculated the way the government did in 1980 is over 10% and climbing. See the above chart. Do not be bamboozled into using the phony current government CPI calculations. Use the consistent ShadowStats calculations which consistently use the same formula the government used to use.

The U.S. did NOT have a "fiat currency" in the 1930s any more than it
has today, despite the political rantings of politicians. There was a
"gold standard," but that wasn't an immutable law of physics, and the
government could simply have ignored it and lowered the Fed rate or
supplied quantitative easing or fiscal stimulus if they have wanted
to. The thing that stopped them was political opposition - the same
thing that's preventing QE3 today.

Not sure what you're talking about. Who claimed the US had a fiat currency in the 1930s? It was backed by gold then. It stopped being backed by gold in 1971 when Nixon closed the gold window, which is when it became a fiat currency - which I understand to mean backed by nothing but pure faith.

Wait until the next crash and we will have QE3 in some form just as we had QE1 and QE2 - which I will note I believe you said would not happen when you said they would not print money to address these problems. We already had a form of QE3 and have it ongoing when Bernanke says he will not raise rates from 0% for two more years.

And so the answer to your last question is -- Japan today and the U.S.
in the 1930s.

The US in the 1930s did not have a fiat currency, so that does not answer my question asking for examples of fiat currencies that had deflations.

Has Japan had a deflation? Japan had a major run-up in real estate and stock market values and had a crash, the banks got loaded with bad debt which they didn't write down (with the help of their government allowing them not to), and the Japanese government has printed money to the point that their national debt is three times their GDP. Here is a graphhttp://www.tradingeconomics.com/japan/inflation-cpi where you can check out Japan's inflation rate since 1990. It varies from positive 4% to negative 2%. In other words, they have massively printed money to offset what would certainly otherwise have been a massive deflation. They have never had an inflation rate less than -2%. That is not deflation. What it demonstrates is not that a fiat currency can have a deflation; what it demonstrates is that a government that has a fiat currency that it can print in unlimited amounts can prevent a deflation by printing money. Japan has done that. So in fact Japan is more support for me than it is for you.

Let me re-iterate my key belief in this area: when faced by serious economic collapse and deflation, the choice for a government that has a fiat (unbacked) currency is between letting the bad debt (both government and "too big to fail" institutions) default -which is what it SHOULD do, and which would result in a deflation as you expect - or putting off the problem longer, hoping that we can "grow out of it", giving tax cuts and "stimulus" and QE's and bailouts paid for by printed money, growing the debt and keeping their political offices. They will choose to print money. As Bernanke famously said, he can dump money out of helicopters if necessary to prevent a deflation like the 1930s. And he will if he has to. You think he won't. You think he won't be allowed to. I think the people will DEMAND that he do it if anything like real deflation gets started.

While I'm at it, let me quote again something that you wrote
in February 2009:

> A year or two ago we exchanged some emails where I predicted that
> because there is no real sense of fiscal restraint or respect for
> real capitalism and the free market's price signals left in our
> government, the government's response to the approaching fiscal
> crisis would be to bail out and nationalize companies and
> industries left and right. You ridiculed that idea, saying the
> government would never nationalize. Well that's just what's
> happened on a trillion dollar scale. And they're not done yet.

Well, guess what? I was right to ridicule the idea. Nothing has
been nationalized, and the reason is that there's too much political
opposition to nationalization. What will it take for you to finally
admit that you were wrong about nationalization?

John

I'm surprised that you aren't aware of the nationalizations that have occurred. Are you familiar with Fannie Mae and Freddie Mac, which the government has taken under it's wing and funneled billions into and is still funnelling billions into? Did you hear about how the government bought General Motors and Chrysler? How about AIG, taken over by the government for $85 billion? Maybe you are taking the term "nationalization" more literally then I meant it. In a country that still nominally opposes at least the language of socialism, the government can't call it "nationalization", though that's what it is when it takes over GM and AIG. They call it other, polite, more "capitalistic" sounding names. But the result is the same: massive taxpayer money used to bail out private companies. I was certainly not wrong about that.

When the system nearly collapsed in 2008 the Fed and Congress rolled out trillions of dollars of printed money to buy, bail out, "stimulate", etc. They stopped the deflation in its tracks. We have over 10% inflation now, calculated by the method used by the government in 1980. The next time there is a crisis - and there will continue to be crises until enough of the bad debt is wiped out (ie moved onto the government and the Fed's balance sheets by bailouts, "cash for clunkers", homeowner buying incentives, outright purchases of major corporations and banks, etc etc etc) - and that crisis may well be in the next few months, though I do not pretend to predict that - Bernanke will print and buy, print and buy just like he did in 2008 and since.

[MnMark]

I do not think the mob issue is about race. It is about circumstances and opportunity. If by your circumstances you are fearful, you best not provide the opportunity.

Riiiiiiight. The mobs, which are entirely composed of black people, have nothing to do with race.

If it was not about race, the mob should be composed of 13% blacks, 15% hispanics, 65% whites, etc etc according to the demographic makeup of the population.

THEY ARE ALL ENTIRELY COMPOSED OF BLACK PEOPLE.

Don't insult our intelligence by suggesting race is not involved. It is black people behaving like savages run amok, robbing and looting and assaulting. It is exactly like living on the frontier in 1860 and being invaded by a band of hostile Indians, whooping and enjoying themselves assaulting and burning and robbing. The black people in the inner cities do not see themselves as part of the same people, part of the same nation as the whites and people of other races they assault. They are hostile savages "counting coup" on their enemies, running a war party, a raiding party, into the "settlements". They are having the time of their lives doing it, too. It's not about economic frustration. It's about hatred and a complete lack of morals. It's about seeing us as the enemy, as "easy targets" to be preyed upon.

[MnMark]

I try, as much as I can stand, to avoid getting involved in these
discussions, because I'm so contemptuous of this total nonsense, and I
try not to insult the nice people in my own forum unless I'm really
forced to.

You know, I'm not sure why you're so contemptuous of people who think we're going to have high inflation instead of deflation. It is an important financial topic, one of the most important, and subject to wide disagreement.

What are we supposed to discuss on a forum thread about financial topics? Only the things you personally haven't made up your mind on yet?

If the subject was as cut and dried as you seem to think it is, there wouldn't be so much disagreement on it.

[richard5za]

and the Fed continue printing money to buy the bonds the Treasury has to sell to fund the deficit, before people around the world decide they don't trust dollars anymore and the dollars flood back into the US and the velocity of money increases dramatically? I don't know, but I'd say I'd be surprised if we haven't had very high inflation - at least one year of 100% inflation - within five years.

I have no doubt that the Fed will try to inflate its way out of the current financial mess for the reasons you state. The question is whether events will overtake them and force a defationery collapse.
The USA as a debtor nation will be devastated by a deflationery collapse and the scenario that John has been painting will probably come true.
As far as I am concerned the "jury is still out" on an inflationery versus deflationery final outcome.
I am now in financial retirement and planning how to preserve the value of retirement funds is not easy while a scenario is still unfolding. I reckon that you can see inflation coming in enough time to get into inflationery hedges, so am 95% in cash at present.
Seeing a crash coming is harder; I reckon that an equities crash has a good probability at present, and don't discount the possibility of a bond market crash.

[vincecate]

I try, as much as I can stand, to avoid getting involved in these
discussions, because I'm so contemptuous of this total nonsense, and I
try not to insult the nice people in my own forum unless I'm really
forced to.

You know, I'm not sure why you're so contemptuous of people who think we're going to have high inflation instead of deflation. It is an important financial topic, one of the most important, and subject to wide disagreement.

His logic that gold averaged around $300 in the 1970s and 1980s so it should return to that price is terribly flawed. It is as logical to say gold was $35 in the 1950s and 1960s so it should return to that price. Any logic that can claim $300 and $35 at the same time is clearly flawed.

There has never been a pure fiat currency (no backing by gold or silver or peg to another currency backed by gold or silver) that had 30% deflation and there never will be. What that would mean is that a currency got 30% more valuable compared to real goods. However, every central bank everywhere knows how to make a fiat currency weaker, just print a bunch of money and buy any crap until prices go up and the currency gets weaker. They could buy up bonds, other currencies, toxic assets, rice, used cars, whatever, and it would work.

The US is making over $1 trillion in new dollars per year now and in the 1930s they were only making around $1 billion per year. It is silly to think that gold, which has been money for 5,000 years, would have the same ratio to dollars now that it did back in the 1930s.

When people can't win an argument on logic they often get angry and contemptuous. But John is right on so many other things he is still well worth following even if he does not really get inflation and fiat money. I have said before, I look at John as a Superman with fiat money his Kryptonite. Even supermen have some weakness.

[richard5za]

However, every central bank everywhere knows how to make a fiat currency weaker, just print a bunch of money and buy any crap until prices go up and the currency gets weaker. They could buy up bonds, other currencies, toxic assets, rice, used cars, whatever, and it would work.

Yes, but consider this possibility: I suspect that sooner or later the European crisis is going to "pop" the sovereign debt bubble, at first in Europe and then globally. The banking system becomes dysfunctional, and 'hundreds of Trillions' of derivatives stop functioning. World trade becomes hobbled; business everywhere beomes hobbled and lays off massive numbers of employees. Its beyond the control of government. It was the brakes on world trade that made the 1930's so very deflaionery; same is posible here in a different way.

I think defalion also needs to be measured in real terms. If I have 30% deflation is real terms but simply the currency has been manipulated to that it looks inflationery, it remains a deflationery problem at its core. The Fed can create money but it cannot make that into the commerce that oils the economy. Currency manipulation, especially be the world largest economy will create an immediate reaction probably along the lines of currency wars.

My example above may be extreme but it is possible.

[jdcpapa]

I do not think the mob issue is about race. It is about circumstances and opportunity. If by your circumstances you are fearful, you best not provide the opportunity.

Don't insult our intelligence by suggesting race is not involved. It's about seeing......... "easy targets" to be preyed upon.

EXACTLY my point!

It was not my intention to insult anyone's intelligence. Apologies. I am doing a poor job of appealing to your intelligence. In doing so, I am sharing my first hand experience as I have been on the receiving end of a mob. This is financial thread. Sorry, John.

[Higgenbotham]

It's not time to attempt a short on silver yet in my opinion. My preferred time window at present is August 16-18. If the gold silver ratio approaches or breaks through its post April high and silver is still lagging, then it may be time to short silver (with very tight control of risk and minimization of losses). If silver breaks through $50, it could REALLY run.

This quote is from early this month in the inflation thread. Silver is now setting up for a potential plunge (as is gold). It's just a bit below my target now for going short. At the moment, I am still figuring on trying a heavy short. It should be this week. I've never been outright bearish on metals in my life, but have turned very bearish now. If/when silver hits the target I outlined earlier this month, that's the first place I think the gold bubble can pop. But I don't think it can pop today. It may need to flirt with $2000.

[vincecate]

It was the brakes on world trade that made the 1930's so very deflaionery; same is posible here in a different way.

The thing that made 1929 to 1933 so deflationary was people/countries taking gold out of the Federal reserve system. When the Fed held gold they made $2.50 in paper money for every $1.00 worth of gold. When this ponzi scheme started to fail there was less money, until they made it illegal for US citizens to hold gold and just printed money.

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

[vincecate]

It's not time to attempt a short on silver yet in my opinion. My preferred time window at present is August 16-18. If the gold silver ratio approaches or breaks through its post April high and silver is still lagging, then it may be time to short silver (with very tight control of risk and minimization of losses). If silver breaks through $50, it could REALLY run.

This quote is from early this month in the inflation thread. Silver is now setting up for a potential plunge (as is gold). It's just a bit below my target now for going short. At the moment, I am still figuring on trying a heavy short. It should be this week. I've never been outright bearish on metals in my life, but have turned very bearish now. If/when silver hits the target I outlined earlier this month, that's the first place I think the gold bubble can pop. But I don't think it can pop today. It may need to flirt with $2000.

I have SLV calls for 2013. So if you are short silver we would be betting opposite directions. Of course, I think I have the right direction.