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Thread: Inflation: Understanding the Current Economic Crisis and How to Protect Yourself

  1. #1

    Inflation: Understanding the Current Economic Crisis and How to Protect Yourself

    [QUOTE]Money Inflation

    By: Adam Hamilton, Zeal Intelligence LLC


    -- Posted Friday, 16 May 2008 | [url]http://news.goldseek.com/Zealllc/1210954304.php[/url]

    Due to all kinds of prices rising to levels that would have seemed inconceivable only a few years ago, inflation concerns are mushrooming today. And if there is anyone still not worried about inflation yet, they soon will be. Rising food and energy costs really affect the daily lives of nearly everyone on the planet.

    But inflation is woefully misunderstood, even among financially-sophisticated folks who should know better. [B]I’ve heard Chairmen of the Federal Reserve, elite Wall Street analysts, and countless news-media personalities claim rising prices are inflation. This common misperception is flat-out wrong. Rising prices alone are not necessarily inflation. Inflation is purely and exclusively a monetary phenomenon.[/B]

    [B]If driven solely by a supply-and-demand imbalance, rising prices have absolutely nothing to do with inflation. If gasoline prices rise because supplies decrease relative to demand, this isn’t inflation. [/B] It is simply the free markets at work addressing a supply imbalance. Rising prices simultaneously retard existing demand and entice new supplies to market, leading to a new equilibrium level between consumption and production. These simple economics work in everything from hamburgers to houses.

    All throughout history, inflation has exclusively been rising prices directly driven by growth in money supplies. [B] If you have relatively more money competing to buy relatively fewer goods and services, the only possible outcome is higher prices.[/B] And although the meaning of words gradually changes over centuries, if you look in any dictionary, encyclopedia, or economic textbook today you’ll find that inflation is monetary.

    Dictionary.com defines inflation as “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency”. American Heritage says inflation is “a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services”. I added the italics for emphasis.

    So if anyone ever tells you rising prices are inflation, realize they either don’t know what they are talking about or they are intentionally trying to mislead you. Rising prices are only inflation if they are directly caused by an increasing money supply. The problem is rising money supplies often coincide with supply imbalances in specific commodities, so usually both inflation and simple economics are co-drivers.

    [B]For example, global oil demand is growing as China, India, and the rest of the developing world drive more cars and transport more goods. But supply growth can’t keep pace, as big new oilfields are exceedingly rare. So much of oil’s bull is fundamental, it has nothing at all to do with inflation. But at the same time, oil priced in euros has risen slightly less than half as much as it has in dollars. So about half of the oil bull seen by Americans is largely driven by dollar inflation.[/B]

    So as you live your life in constant sticker shock this summer, realize that varying large fractions of the rising prices you see are purely fundamental. Global demand is straining global supplies. Rice is a great example of this today. But the remaining fractions of price increases we are seeing in the States are the result of true monetary inflation. You can thank the Federal Reserve for this unwelcome development.

    [B]The Fed is the greatest engine of inflation the world has ever seen. Its only function is to create new US dollars out of thin air, every one of which is pure inflation. Every second of every day, the Fed ramps US money supplies at much faster rates than underlying US or global economic growth. The result is higher prices thanks to relatively more fiat-paper dollars bidding on relatively fewer real goods and services.[/B]

    And as if the steep fundamentally-driven price increases we’ve seen in oil, gasoline, and the grains are not bad enough, Ben Bernanke’s Fed is pouring rocket fuel on this fire. The Fed is so worried that some real-estate speculators might actually have to take responsibility for their own bad decisions that it is flooding the market with inflationary new dollars at a truly breathtaking and frightening pace.

    While it is a case of the fox guarding the chicken coop, the offending Fed maintains measures of various money supplies. [B]For nearly half a century, the M3 measure of US money was the broadest measuring stick. But the Fed suddenly discontinued this popular measure, without explanation, in early 2006. [/B] Conspiracy theorists pointed out M3 had been growing much faster than M2, so perhaps the Fed was trying to hide this. And provocatively M3 was killed right when Ben Bernanke officially took the helm.

    When the Fed took my M3 away, my replacement favorite broad money supply measurement became MZM, or money of zero maturity. It is equal to the M2 money supply less time deposits (like CDs) plus money-market funds. It effectively measures the supply of US money redeemable on demand, hence available for immediate spending. While economists argue about whether M2 or MZM is a better broad measure, my research leads me to cast my vote with MZM.

    And if you look at MZM growth today, it is frightening. While the Fed and Keynesian (socialist) economists argue that money-supply growth is largely out of the Fed’s control, this is a foolish thesis. [B]If the Fed shut down its proverbial printing presses and stopped bullying around free-market interest rates, money supply growth would plummet and inflation would soon evaporate. Make no mistake, the central bank issuing the currency is to blame here![/B]

    This chart renders the Fed’s annual year-over-year growth rate in MZM along with the YoY growth rate in Washington’s lowballed Consumer Price Index. Wall Street generally accepts the CPI gospel on inflation, so I included CPI growth here as well to show how ridiculously improbable it is given true monetary growth. The raw MZM is rendered in the background. Its accelerating growth is very disturbing.

    [IMG]http://goldseek.com/news/Zealllc/2008/5-16zi/Zeal051608A.gif[/IMG]

    In Alan Greenspan’s final years at the Fed leading into early 2006, the blue MZM YoY growth rate was trending lower. It was always still positive, so money supplies were growing. But monetary growth only becomes inflationary when it exceeds the growth rate in stuff on which to spend it. If money is growing at 3% a year but the US economy is also growing at 3%, then little or no monetary inflation will be witnessed.

    The week Greenspan left office, I wrote an essay on his monetary legacy. He did a horrible job. Like a Communist boss in old Russia, he continually tried to manipulate prices and failed. At the time, I thought he was one of the greatest inflationists in history. But after seeing Ben Bernanke’s sorry record since he took office, it is crystal clear that this new central banker is trying to radically out-inflate his predecessor.

    Left with low broad money growth by historical standards, Bernanke’s Fed soon started accelerating it in late 2006. Then in early 2007 the subprime crisis erupted, and the Fed panicked. Rather than letting reckless real-estate speculators (both banks and mortgage holders) go under and clean out the system, the Fed rewarded them. It started ramping money way faster in the curious hope endemic to central bankers that more cheap money will magically fix an imbalance that previous cheap money created.

    Until this point, MZM growth was still near 8%. This is faster than economic growth and definitely inflationary, but all over the world central banks inflate their own currencies by 7% to 8% a year on average. So 8% in early 2007 was on the high side, but still reasonable in light of fiat-currency history. But as subprime problems snowballed, the general credit crunch hit last summer.

    Again Bernanke’s Fed, rather than trying to fight inflation and preserve the dollar’s purchasing power, decided that its real-estate speculating buddies in the banking industry shouldn’t have to bear the fruit of their own bad decisions. By the end of 2007 monetary growth was running a scary 12%, but it was stabilizing. The Fed was gumming up healthy free-market cleansing action with floodgates of new money.

    Then in early January 2008, the global stock markets sold off aggressively. Fears of an impending US recession drove heavy selling overseas. This worldwide selloff was so extraordinary that we are unlikely to see anything resembling it again for decades. But instead of reining in monetary growth, the Fed accelerated it. Absolute annual MZM growth peaked at a staggering 16.7% in March 2008!

    You read that right. There were 16.7% more US dollars available for spending this March than last! This is incredible, especially during challenging times when the US economy was barely chugging along around 2.2% growth for all of 2007. Sooner or later all this excess money will eventually bid up prices. Some of this inflation will be perceived as good, primarily the part that flows into stocks. But the part bidding up scarce food and energy is not going to make Americans very happy.

    Now these growth rates defy the imagination. At 12% growth compounded annually, it only takes 6 years for something to double. At 16%, this drops to well under 5 years. If the Fed doesn’t stop this madness, there could be twice as many dollars floating around in 5 or 6 years as there are today. Even with modest economic growth, this means general price levels would probably almost double. And this inflation is totally above and beyond all the supply-and-demand-driven global commodities bulls’ increases!

    Bernanke’s Fed has been ramping money-supply growth so fast that actual MZM is starting to look parabolic even on a short-term chart. [B]In just over 2 years under him, MZM has ballooned 25.1% unchecked![/B] And since the Fed almost never shrinks money supplies, all the inflation evidenced in this parabola is already in the pipeline. Eventually this excess money will filter into and really drive up general price levels.

    Now since MZM includes money-market funds, stock-market performance does affect it too. So some analysts argue that this staggering MZM growth is largely the result of market turbulence. This thesis is problematic though. Whenever stocks change hands, so does cash. Buyers’ money is transferred to sellers’ accounts where it is still, amazingly enough, money. Unless cash is routed into time deposits like CDs, stock buying and selling shouldn’t affect MZM all that much. This same logic applies to bonds.

    Another interesting point is MZM really started accelerating in late 2006. But the US stock markets didn’t top until one year later. In the year leading into its October 2007 top, the S&P 500 surged 15.9% higher. This is a great year highly unlikely to drive heavy stock selling and cash accumulation. Yet MZM still soared by 11.9% over this very span. The Fed recklessly running its printing presses was the culprit, not stock selling.

    Thanks to this incredible monetary spike, a massive growing gap exists between the annual CPI growth and the annual money growth. Since monetary growth is the direct driver of all true inflation, shouldn’t the CPI reflect this MZM surge eventually? Theoretically yes. But since the CPI has become a US government propaganda tool rather than an honest inflation gauge, it probably won’t. Nevertheless, this MZM surge will certainly flow into real-world inflation and drive up general price levels of nearly everything we consume.

    Now the 5 years rendered in this first chart really isn’t all that long. While 16% MZM growth is staggeringly extreme over this short span, is it extreme relative to history too? Absolutely! This next chart zooms out to the past 20 years to provide perspective. Bernanke’s Fed is really pushing the limits monetarily, blasting out shiny new fiat dollars at the fastest rate in decades with the exception of the 9/11 crisis.

    [IMG]http://goldseek.com/news/Zealllc/2008/5-16zi/Zeal051608B.gif[/IMG]

    The incredible acceleration in YoY MZM growth rates in 2007 is even more apparent in this long-term chart. And the post-9/11 high is very telling. By the looks of this, the Fed sees bailing out real-estate speculators as its highest priority since trying to maintain a functioning economy in the intense fear and uncertainty after the September 2001 terrorist attacks! [B]The Fed is clearly scared today, and it is doing the only thing it can do. Inflate.[/B]

    [B]Bailouts are terrible for capitalism, even for the people getting bailed out. When speculators make bad decisions, they should face the full consequences so they learn from their mistakes. Failures are good because the assets used inefficiently and unprofitably by the bad speculators are naturally redistributed by the markets to those who will manage them efficiently for profits. Yet the Fed willingly keeps short-circuiting this important process which keeps making matters worse.[/B]

    In late 1998, the Fed ramped money supplies to try and stave off necessary deleveraging following the Russian debt default that led to the implosion of elite hedge fund Long-Term Capital Management. But that deluge of cash soon found its way into stocks, particularly the speculative tech sector. The Fed’s LTCM bailout directly led to the tech-stock bubble by providing the surge in liquidity that drove the latter parabolic.

    Then when the tech bubble burst, Alan Greenspan desperately tried to bail out stock speculators by slashing rates and radically ramping monetary growth in early 2001. Later that year when MZM growth was already 16% yet stocks kept grinding lower, the 9/11 attacks hit. So the Fed flooded the reeling system with even more newly-created money and pushed MZM nearly parabolic with staggering 22% annual growth!

    But all this excess cash had to go somewhere too. Eventually all money the Fed creates will bid on something. Greenspan’s massive monetary growth in 2001 directly led to the housing bubble that he brazenly tries to accept no responsibility whatsoever for today. The torrents of excess money, which the Fed refused to take back out of the system after 9/11, flooded into real estate. And then that bubble started crashing in late 2006.

    [B]See the pattern here? The Fed gets scared because some speculators might actually lose on their bad bets so it floods the system with money to help them. But all of the money created in these huge surges eventually has to find a home somewhere, so another bubble is born. And then that bubble pops, scaring the Fed more. So it ramps money growth again, birthing a new bubble. It is a nasty vicious circle.[/B]

    Other than abolishing the unconstitutional abomination that is the Federal Reserve, which isn’t going to happen since Washington would then have to live within its means financially, all we can do is try and anticipate the Fed’s bubbles and deploy our capital to ride them. Without a doubt, the massive surge in MZM under Bernanke is going to go somewhere. I suspect it will flow into and eventually create bubbles in the next hot sector, commodities.

    It is ironic that the surges in money never go into the sector the Fed is trying to bail out. The tech-stock bailout attempt went into housing. And the housing bail out is already starting to flow into commodities. This is a serious problem for the Fed. When monetary inflation hit tech stocks and housing, people saw it as good. But when monetary inflation hits commodities, most folks aren’t going to be thrilled.

    Despite their surges so far, commodities are not in bubbles yet because the majority of mainstream investors aren’t heavily involved yet like they were during the peaks in the tech-stock and housing bubbles. Bubbles are impossible without popular manias. And if Bernanke’s inflation indeed flows into commodities, they could prove to be the biggest bubbles yet. This money inflation gravitating towards an already fundamentally-hot sector is like a perfect storm of bullishness.

    Today something like 2/3rds of the world’s population is starting to strive to live and consume like we blessed few do in the first world. Yet the world’s commodities-producing infrastructure was never designed to cope with such immense and fast-growing demand. It will catch up eventually, but prices will have to rise and stay really high for a long time to entice enough new capacity online to supply increased consumption.

    So even if we were on a gold standard with no fiat-paper inflation whatsoever, commodities prices would still have to rise tremendously. But to have such a fundamental secular bull coincide with massive monetary inflation is incredible. Relatively more dollars bidding on relatively fewer already-fundamentally-scarce commodities is going to seriously amplify these bulls. And eventually the general public will flood in to speculate leading into the final apex, driving a superspike like never before witnessed.

    Accelerating monetary inflation on top of global supply shortfalls is a truly incendiary mix. It leads me to believe we haven’t seen anything yet in commodities. At Zeal we’ve been riding these commodities bulls since the early 2000s. We were early contrarians starting way back when everyone thought commodities would never rise again. Since then our subscribers have made fortunes mirroring our trades.

    So if you want to thrive in the coming inflationary times, subscribe today to our acclaimed monthly newsletter. We are constantly researching the markets, looking for high-potential opportunities in commodities stocks. You can learn from our hard work, see the logic behind all our real-world trades going forward, and mirror them with your own capital as you wish. The opportunities approaching are immense.

    The bottom line is the commodities price increases we have seen lately are not all inflation. A large portion, the majority in most cases, is due simply to global imbalances in production and consumption growth. Inflation is purely a monetary phenomenon, it has nothing to do with supply and demand in individual commodities. It has everything to do with relatively more money chasing after relatively fewer goods and services.

    But while investors wrongly attribute too much to inflation today, a massive surge in real inflation is already baked into the pipeline. Bernanke’s Fed has flooded the markets with cash in a futile attempt to bail out real-estate speculators. [B]This new money has to go somewhere, and it will probably be commodities. We may as well buy in ahead of it and reap the big profits to come.[/B]



    Adam Hamilton, CPA
    [/QUOTE]

    Protect you and your families savings and invest in commodities before they are eroded even further by inflation.
    Last edited by jefethegreat; 05-16-2008 at 09:17 PM.

  2. #2
    [QUOTE=jefethegreat;2542872]Protect you and your families savings and invest in commodities before they are eroded even further by inflation.[/QUOTE]

    The biggest rises in commodities this go-around are now behind us - deflation is now with us and ahead of us.

    Already gold has fallen off its highs by about 15% - many other commodities have also fallen. Oil will also fall in price in time. Deflation has hit the stock market and real

    Deflation, not inflation, is ahead of us.

  3. #3
    [QUOTE]So if anyone ever tells you rising prices are inflation, realize they either donít know what they are talking about or they are intentionally trying to mislead you. [b]Rising prices are only inflation if they are directly caused by an increasing money supply.[/b] The problem is rising money supplies often coincide with supply imbalances in specific commodities, so usually both inflation and simple economics are co-drivers.

    [/QUOTE]
    While the Fed may be the primary source of inflation, it's also caused by two other things:

    1-unions...when they force a company to increase wages w/o a corresponding increase in production, what happens? The price of the product made increases too!

    2-Govt. regulations have increased prices as well

  4. #4
    Jets Insider VIP
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    [QUOTE=asuusa;2543879]While the Fed may be the primary source of inflation, it's also caused by two other things:

    1-unions...when they force a company to increase wages w/o a corresponding increase in production, what happens? The price of the product made increases [/QUOTE]


    Always first to blame the American worker, right Comrade? It's never the fault of a**hole CEO's paying themselves enough to start their own space program even when the economy is in a downturn. It's never ever their fault, right? How dare thes peon low class morons expect to profit from their own hard work!!! That right only belongs to empty suits and shareholders.

    I mean, can you believe the gall of these low class ingrates to expect a small fraction of the profits? They should just worry about paying the lot rent for their trailer...

  5. #5
    [QUOTE=Black Death;2542909]The biggest rises in commodities this go-around are now behind us - deflation is now with us and ahead of us.

    Already gold has fallen off its highs by about 15% - many other commodities have also fallen. Oil will also fall in price in time. Deflation has hit the stock market and real

    Deflation, not inflation, is ahead of us.[/QUOTE]

    You're supposed to buy low. Gold has already reached its low and will go up from here.

  6. #6
    [QUOTE=JetsCrazey;2544987]You're supposed to buy low. Gold has already reached its low and will go up from here.[/QUOTE]

    Golds low was some years back - from memory around $250 an ounce. It is now just under $800 an ounce.

    You have to remember people were saying the same things in 1980 when the precious metals were around the same price they are now - if you had of bought then you would have had to of waited 30 years just to get your money back.

    The big rises in gold and silver are now behind us.

  7. #7
    [QUOTE=PlumberKhan;2544204]Always first to blame the American worker, right Comrade? It's never the fault of a**hole CEO's paying themselves enough to start their own space program even when the economy is in a downturn. It's never ever their fault, right? How dare thes peon low class morons expect to profit from their own hard work!!! That right only belongs to empty suits and shareholders.

    I mean, can you believe the gall of these low class ingrates to expect a small fraction of the profits? They should just worry about paying the lot rent for their trailer...[/QUOTE]


    That must be why a GM car costs over $7000 in benefits and salary dollars right off the assembly line. Nothing to do with those monopolies known as unions.

  8. #8
    [QUOTE=Black Death;2544998]Golds low was some years back - from memory around $250 an ounce. It is now just under $800 an ounce.

    You have to remember people were saying the same things in 1980 when the precious metals were around the same price they are now - if you had of bought then you would have had to of waited 30 years just to get your money back.

    The big rises in gold and silver are now behind us.[/QUOTE]

    That's a comical statement. Gold is going to at least $1650 in the next few years.

    Gold is a reflection of the US dollar index. There is nothing dollar bullish out there for the next few years and the price of gold will rise as a result.

  9. #9
    [QUOTE=JetsCrazey;2545181]That's a comical statement. Gold is going to at least $1650 in the next few years.

    Gold is a reflection of the US dollar index. There is nothing dollar bullish out there for the next few years and the price of gold will rise as a result.[/QUOTE]

    The only think comical about my statement is that gold is actually just under $900 an ounce, not $800 as I stated - which makes your statement that gold is has 'reached a low' and 'will go up from here' the comical one.

    It's a fact gold was around $250 an ounce in the year 2000 - that was where its lows were - you can check any historical chart you want and you will find that that is the case. Go to Kitco.com and have a look. To match the rise gold had from its lows in 2000 to its highs early this year, when it rose over 300%, gold from here would now have to go to well over $3000 an ounce.

    I'm very happy for you that you can see into the future and can safely say that gold will go to $1600 an ounce. I know what I can safely say, however, and that is based on history you are completely clueless. Those who use crystal balls will soon be eating ground glass.

    I think that over the long term it is now down from here for gold - week to week we might see incremental rises, but as I said, deflation has hit in the real-estate markets, in the stock markets, and it has also hit gold. Because of the credit crunch precipitated by the US sub-prime crisis, there is now less speculative money chasing these 'hot' commodities around.

    I am calling gold down in the medium to long term.....and that call is based on the history of boom and bust cycles in all of these commodities.

  10. #10
    [QUOTE=Black Death;2545540]The only think comical about my statement is that gold is actually just under $900 an ounce, not $800 as I stated - which makes your statement that gold is has 'reached a low' and 'will go up from here' the comical one.

    It's a fact gold was around $250 an ounce in the year 2000 - that was where its lows were - you can check any historical chart you want and you will find that that is the case. Go to Kitco.com and have a look. To match the rise gold had from its lows in 2000 to its highs early this year, when it rose over 300%, gold from here would now have to go to well over $3000 an ounce.

    I'm very happy for you that you can see into the future and can safely say that gold will go to $1600 an ounce. I know what I can safely say, however, and that is based on history you are completely clueless. Those who use crystal balls will soon be eating ground glass.

    I think that over the long term it is now down from here for gold - week to week we might see incremental rises, but as I said, deflation has hit in the real-estate markets, in the stock markets, and it has also hit gold. Because of the credit crunch precipitated by the US sub-prime crisis, there is now less speculative money chasing these 'hot' commodities around.

    I am calling gold down in the medium to long term.....and that call is based on the history of boom and bust cycles in all of these commodities.[/QUOTE]

    The Fed will NEVER allow deflation. They will create a prolonged period of stagflation before they ever allow deflation because deflation will lead to an over-the-counter derivatives nightmare that will collapse the entire financial system.

    As we have seen the last couple of months, the Fed will do whatever is necessary to keep the equity markets propped up, because that creates the mass perception that all is well. Yes, there is deleveraging, but this does not play into the price of gold as much as you would think because the Fed is conversely ruining its balance sheet with the monetization of bad debt, reflected in the US dollar.

    We are about the see record-high inflation as a result of record amounts of liquidity being pumped into the system. The price of gold will go way up as a result.

    Thinking that gold will go down from this point is underestimating the magnitude of the financial crisis we are currently in.

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    [QUOTE=JetsCrazey;2546137]The Fed will NEVER allow deflation. They will create a prolonged period of stagflation before they ever allow deflation because deflation will lead to an over-the-counter derivatives nightmare that will collapse the entire financial system.

    As we have seen the last couple of months, the Fed will do whatever is necessary to keep the equity markets propped up, because that creates the mass perception that all is well. Yes, there is deleveraging, but this does not play into the price of gold as much as you would think because the Fed is conversely ruining its balance sheet with the monetization of bad debt, reflected in the US dollar.

    We are about the see record-high inflation as a result of record amounts of liquidity being pumped into the system. The price of gold will go way up as a result.

    Thinking that gold will go down from this point is underestimating the magnitude of the financial crisis we are currently in.[/QUOTE]


    The Fed won't have a say in the matter - already there are signs that their monetary policy is having less and less effect. That's the problem with interest rates - they work much better when there is little debt around. Now there are extraordinairy levels of debt - lowering interest rates really won't have much effect because there is only so much debt that people can take on. You can lower interest rates as much as you like but if people already have huge levels of debt they won't take on any more.

    You have to also remember that the Fed is starting to realise what effect their loosening policies are having on the price of oil. Namely, greatly increasing it. They can't keep interest rates at these levels forever. The effects of the credit crunch have been delayed, not averted, and when that lack of credit truly hits, look out for deflation in a big way.

  12. #12
    [QUOTE=Black Death;2546595]The Fed won't have a say in the matter - already there are signs that their monetary policy is having less and less effect. That's the problem with interest rates - they work much better when there is little debt around. Now there are extraordinairy levels of debt - lowering interest rates really won't have much effect because there is only so much debt that people can take on. You can lower interest rates as much as you like but if people already have huge levels of debt they won't take on any more.
    You have to also remember that the Fed is starting to realise what effect their loosening policies are having on the price of oil. Namely, greatly increasing it. They can't keep interest rates at these levels forever. The effects of the credit crunch have been delayed, not averted, and when that lack of credit truly hits, look out for deflation in a big way.[/QUOTE]

    It's not a matter of creating more debt. It's a matter of guaranteeing the existing debt, however worthless it may be.

    It is in the Federal Reserve's mandate to prevent deflationary disasters. They will do whatever is necessary to do so. No sitting administration will ever allow deflation because it bears the cost on the present generation (VOTERS). It is much more politically convenient to inflate and put the cost on future generations when the present politicians will not have to hear about it. They have already invented 4 new ways of creating money since the subprime disaster began (hasn't been done since the Fed was created in 1913) and they will continue to monetize bad debt, create inflation, and kill the Fed's balance sheet and thus the dollar in the process.

    You cannot bankrupt a central bank because it has a blank checkbook. But you sure can kill a currency.

    They have already begun monetizing worthless mortgages and if necessary they will also monetize auto loans, student loans, and credit card debt. It's only just started. In the Bear Stearns bailout and its aftermath the Fed sent a clear message that they will monetize whatever necessary to prevent a chain reaction of credit default derivative failure. Confidence is back but at the expense of confidence in the US dollar.

    To this economic action there will be consequences, and that is why gold is going to $1600 within the next 4 years, and likely significantly higher.
    Last edited by JetsCrazey; 05-19-2008 at 09:38 PM.

  13. #13
    [QUOTE=JetsCrazey;2546985]It's not a matter of creating more debt. It's a matter of guaranteeing the existing debt, however worthless it may be.

    It is in the Federal Reserve's mandate to prevent deflationary disasters. They will do whatever is necessary to do so. No sitting administration will ever allow deflation because it bears the cost on the present generation (VOTERS). It is much more politically convenient to inflate and put the cost on future generations when the present politicians will not have to hear about it. They have already invented 4 new ways of creating money since the subprime disaster began (hasn't been done since the Fed was created in 1913) and they will continue to monetize bad debt, create inflation, and kill the Fed's balance sheet and thus the dollar in the process.

    You cannot bankrupt a central bank because it has a blank checkbook. But you sure can kill a currency.

    They have already begun monetizing worthless mortgages and if necessary they will also monetize auto loans, student loans, and credit card debt. It's only just started. In the Bear Stearns bailout and its aftermath the Fed sent a clear message that they will monetize whatever necessary to prevent a chain reaction of credit default derivative failure. Confidence is back but at the expense of confidence in the US dollar.

    To this economic action there will be consequences, and that is why gold is going to $1600 within the next 4 years, and likely significantly higher.[/QUOTE]


    The issue is what is powering the world economy at the moment - and that is debt. In particular US debt. Once that debt starts to contract, that is when the deflationary spiral will truly hit.

    I quote from Professor Steve Keen in his recent blog entry: "with inflation now even lower than it was when the í90s bubble burst, the real future danger is not rising prices, but the possibility of deflation."

  14. #14
    [QUOTE=Black Death;2547230]The issue is what is powering the world economy at the moment - and that is debt. In particular US debt. Once that debt starts to contract, that is when the deflationary spiral will truly hit.

    I quote from Professor Steve Keen in his recent blog entry: "[B]with inflation now even lower than it was when the í90s bubble burst[/B], the real future danger is not rising prices, but the possibility of deflation."[/QUOTE]

    I lose all respect for your source when he makes ridiculous statements like this. Inflation is much higher than when the 90s bubble burst.

  15. #15
    [QUOTE=jefethegreat;2547265]I lose all respect for your source when he makes ridiculous statements like this. Inflation is much higher than when the 90s bubble burst.[/QUOTE]

    One of the world's leading economists on debt-economics - and yet you call his statements 'ridiculous'.

    Besides which, he was referring to the Australian economy, not the US - however, he still is claiming that deflation will hit the global economy - and he isn't the only economist to be claiming that.

    I'm not so sure about your claim about inflation being higher now in the US economy than when the 90's bubble burst anyway - but I don't have time to check it at this stage.

  16. #16
    the contraction of debt will not lead to deflation but stagflation because money is now being created by means other than monetizing govt. securities. The monetization of mortgages is not desirable, but necessary to prevent financial armageddon.

    also, don't forget these 2 important points:
    1) the forthcoming skyrocketing federal budget deficit will increase inflation even more as tax receipts go down
    2) the creation of more debt devalues existing debt, making the additional debt easier to take on

    as for worldwide inflation being down, that is wrong.
    Guild Investment Management commentary yesterday:
    [QUOTE]In a note from the U.K. Telegraph on May 15, 2008, Ambrose Evans-Pritchard states "price pressures across the emerging world are reaching levels that may soon threaten stability unless governments jam on the brakes."
    Inflation rates have reached: Venezuela 22%; Vietnam 21%; Latvia 18%; Qatar 17%; Pakistan 17%; Egypt 16%; Bulgaria 15%; UAE15%; Estonia 11%, etc., and the article names Turkey, China , Romania, Argentina, Indonesia, the Philippines, and Saudi Arabia all as having inflation between 8.5% and 9.6%.
    "Many of these countries are now suffering the worst prices spiral in thirty years, setting off widespread riots."[/QUOTE]

    The Fed fudges its inflation numbers and is losing credibility with each passing day
    Last edited by JetsCrazey; 05-20-2008 at 09:20 AM.

  17. #17
    Have actually just had a look at gold's chart - technical indicators tell me it will probably go on a run till about 960 an ounce - if it breaks through that ceiling it will probably test the highs reached earlier this year.

    However, long term, with the housing market in the doldrums, the banking sector well and truly rooted, record levels of debt, a Fed that is about to stop loosening its monetary policy, and a stock market that will tank under the weight of a recessionary economy, I see deflation. There is nothing posted in this thread which will sway me from that opinion. And when deflation hits, gold will be no shelter from the storm.

  18. #18
    [QUOTE=Black Death;2551494]Have actually just had a look at gold's chart - technical indicators tell me it will probably go on a run till about 960 an ounce - if it breaks through that ceiling it will probably test the highs reached earlier this year.

    However, long term, with the housing market in the doldrums, the banking sector well and truly rooted, record levels of debt, a Fed that is about to stop loosening its monetary policy, and a stock market that will tank under the weight of a recessionary economy, I see deflation. There is nothing posted in this thread which will sway me from that opinion. And when deflation hits, gold will be no shelter from the storm.[/QUOTE]

    Hold dollars at your own risk my friend. Deflation cannot happen, instead we will see a less extreme version of the weimar republic. No modern American politician will allow deflation. They will drop money out of helicopters before deflation happens because of the chain reaction of OTC derivative failure that will ensue if deflation occurs. It will be total financial armageddeon and it won't be allowed to happen.
    Last edited by JetsCrazey; 05-22-2008 at 10:11 AM.

  19. #19
    [QUOTE=JetsCrazey;2551626]Hold dollars at your own risk my friend. Deflation cannot happen, instead we will see a less extreme version of the weimar republic. No modern American politician will allow deflation. They will drop money out of helicopters before deflation happens because of the chain reaction of OTC derivative failure that will ensue if deflation occurs. It will be total financial armageddeon and it won't be allowed to happen.[/QUOTE]

    The Fed's monetary mechanism is failing.

    We are on the edge of what I believe will be one of the most brutal bear markets in history - it will be devastatingly long and vicious. I think 8 years to a decade at least.

    In the markets, I think we will easily see the 2002 lows plumbed to, and then go much lower than that.

    Nothing will escape the ensuing deflation - not gold, for one.

    I would not like to be the President voted in at the next election - they may well be a one-termer.

  20. #20
    [QUOTE=Black Death;2558679]The Fed's monetary mechanism is failing.

    We are on the edge of what I believe will be one of the most brutal bear markets in history - it will be devastatingly long and vicious. I think 8 years to a decade at least.

    In the markets, I think we will easily see the 2002 lows plumbed to, and then go much lower than that.

    Nothing will escape the ensuing deflation - not gold, for one.

    I would not like to be the President voted in at the next election - they may well be a one-termer.[/QUOTE]

    If you are truly convinced of this then you should be buying cans of food and move out to the middle of nowhere because it means a derivative failure chain reaction which puts us into armageddon.

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