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Perspectives From Rosenberg On Hyperinflation As A Loss Of Faith In A Currency

Tyler Durden's picture




 

In today's note by David Rosenberg, the economist quotes a reader letter which provides a unique perspective on how hyperinflation arises: it is not so much a monetary supply/demand phenomenon, as it is one of faith in a currency, any currency. With the world stuck with the USD as a reserve currency, the question is how much more monetization and QE (and make no mistake, the Fed will be forced to do more of both of these activities) needs to occur before people give up on the greenback. And for all those who question what could possibly take the place of the dollar as the world reserve currency, we would like to point out that any country that has a massive stockpile of resources, an even more massive producing class (as opposed to consuming), a clean sovereign balance sheet, and a society hell-bent on being far more capitalist than the US, would likely make a great target. One specific country in Asia comes to mind. However, this will not occur before the next global economic collapse as century-old habits are difficult things to break. Once the economic reset button is pushed half way once again, and the US-China vassal linkage is broken, look for fund flows to redirect promptly across the Pacific.

From today's Potluck with Dave:

Here is one of the most insightful — if frightening — emails we have received in some time. We still maintain that portfolios should have a concentration in securities that spin off an income stream. But again, a “barbell” approach with hard assets such as commodities will act as an effective hedge if government policies produce inflation. Have a read of this zinger below:

“I don’t know if you remember but we worked together at Merrill. I ran emerging markets from 1985 to 1996. I’ve always been a loyal fan and kept up with your writings.

As you know, I used to specialize in what we called then toxic waste countries. Reality has obviously taken a turn and what was toxic now is golden and the prime is now toxic. Our best countries are being run like banana republics and the famed moral hazard issues are now at the individual level with the strategic mortgage defaults. Keep in mind that in Mexico, it moved to wholesale credit card defaults at the last stage of the correction.

It is interesting to note that back then (the 80s) without currency zones but a fixed dollar, the order was devaluation, default, restructuring and budget balance with exports beginning the process of recovery. It was not until Summers’ bailout of Mexico that we entered this ridiculous world of constant bailouts, raising the size of them at every turn and lowering the bar to what constitutes risk.

Now, it’s worst than ever. The developed economies have huge fiscal deficits with no state assets to sell. The balance sheets of the developed nations are over leveraged. The deficits have taken a permanence to them. In the case of Europe with no individual devaluation alternative and their new massive debt load, the EU must now make huge fiscal cuts to get credibility. This is very reminiscent of the pre-depression year. If the EU follows through it will push a weak world into a severe double dip and bring the question of capacity to repay to the forefront anyways.

Monetization or printing may end up being the only end alternative. I know, and agree with you, that to have inflation you need demand. Where I disagree is that you can’t have inflation with such a significant slack in the economy. For those of us that lived or worked in the hyperinflationary South American zone of the seventies and eighties, inflation comes when people lose faith in the currency and see material goods as a store of value. Because commodities rise and the goods can no longer be expected to be made at the same cost structure, people assume that they will be worth more in the future creating a self fulfilling upward spiraling effect. You can anticipate that these state governments will introduce price controls as well as potentially fixing exchange rates worsening the situation.

My biggest fear is that these politicians and advisors have little experience in this area and are more concerned about controlling the political short term without regard to the longer term implications. I see this like an attempt at covering holes in a cracking dam with your fingers while the cracks are spreading. Bonds in the thirties were not a safe haven because they were restructured into 30 to 40 year bonds at 1.0-2.0% interest. Ultimately spending habits must decline, debt must be restructured, and growth must be promoted through the private sector.

Political interests must be aligned with long term economic objectives and I don’t see that any time soon. Obviously, I’m very negative right now. What am I missing?”

 

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Wed, 05/19/2010 - 12:51 | 360978 hedgeless_horseman
hedgeless_horseman's picture

I have told my children that the writing is on the wall, and it is in Mandarin.  Having been there many times, "...a society hell-bent on being far more capitalist than the US...," is an excellent description.

Wed, 05/19/2010 - 14:15 | 361193 FedUpGuy
FedUpGuy's picture

Heck, my kids are learning Mandarin... seriously.

 

Wed, 05/19/2010 - 12:48 | 360980 Turd Ferguson
Turd Ferguson's picture

This should be re-read, too. Sorry for the length of the copy&paste. Note the date.

 

GOLD IS NOT GOING UP – PAPER MONEY IS GOING DOWN

December 7th, 2009 by Egon von Greyerz

 

 

GOLD IS NOT GOING UP – PAPER MONEY IS GOING DOWN

by Egon von Greyerz – Matterhorn Asset Management

This month we will discuss the illusion of gold going up. We will  examine the destiny of the dollar and why it will reach its intrinsic value of zero. We will also demonstrate why money printing will accelerate rapidly in the next 12-24 months.

Paper Money Collapsing against Gold

The problem with paper money is that governments can create unlimited amounts. This is what they have done throughout history and especially in the last 100 years and which has led to the total destruction of most currencies. Most people don’t even understand that their government makes their money worthless. Money printing gives them the illusion of being richer whilst all they have are pieces of paper with more zeros on them.  But there is one currency that governments can’t print which is gold. Gold has been real money for almost 5,000 years and it is the only currency that has survived throughout history. Gold can’t be printed and no government controls it. Therefore gold will, over time, always reveal governments’ fraudulent actions in creating money out of thin air. And this is what we are experiencing currently. Gold is not going up. Instead gold is doing what it has always done, namely maintaining its value and purchasing power.

What we are seeing currently is the total annihilation of paper money whether it is Dollars, Pounds or Euros etc. The chart below shows the US dollar against gold. In the last 10 years the dollar has declined by 79% against gold. Most currencies have declined by similar percentages. So it is an illusion to believe that gold is going up when it is the value of paper money that is going down. All gold is doing is to reflect the virtually limitless printing of paper currencies. Since gold can’t be printed, it is the only honest currency that exists. This is why many governments don’t like gold increasing in value against their paper money since it exposes their total incompetence in running their country’s economy.

 

The chart above shows how the purchasing power of the dollar has declined in real money – gold – in the last 10 years. And if we take the period from 1909 to 2009 it shows the total destruction of paper money. In 1909, $1,000 bought 50 ounces of gold. Today it buys 0.83 ounces. This means that in the last 100 years the dollar has declined by 98.3% against gold. So in real money terms the dollar is now only worth 1.7% of what it was worth a century ago. Thus, the US government (as well as most other governments) has totally destroyed the value of real money by issuing unlimited amounts of paper money and in the next few years they will also kill off the remaining 1.7% of value to make the paper dollar reach its intrinsic value of zero. The chart below reflects various currencies fall against the dollar since from 1900 to 2004.

 

To talk about gold being over-extended at these levels is in our view absolute nonsense. As we will discuss later, money printing can only accelerate in the coming months and years. And when worthless pieces of paper are printed, gold will always reveal such a fraud by maintaining its value against the ever increasing supply of paper called “money”.

The Real Move in Gold is Still to Come

In our view we have not seen the real move in gold yet although we have gone from $250 to $1,226. The reasons are many:

Money printing will accelerate as government deficits increase and problems in the financial system re-emerge.

There is a high risk of default of major financial institutions or sovereign states with unpredictable consequences for the world economy.

The fourfold increase in gold since 1999 has taken place without the participation of most investors. It has so far been a stealth market. But this will soon change and there is likely to be a major “gold rush” in the next couple of years.

The average fund manager, pension fund manager, asset manager or individual investor has virtually no exposure to gold today but in the next couple of years they will all invest in gold.

The gold market will soon become primarily a physical market because no one will trust paper gold or quasi physical gold such as Comex, ETF’s or unallocated gold. Nor will the market trust governments many of which might have lent out most of their gold. The last audit of the gold in Fort Knox was in 1953!

Gold production is going down every year and is currently only $90 billion p.a. There will not be sufficient physical gold at current prices to satisfy increased demand.

There is only $900 billion of physical gold held privately for investment purposes. This is circa 0.7% of world financial assets. A mere doubling of the allocation to gold, which is likely, would make the gold price surge. See chart below.

Central banks are now net buyers of gold. Many countries which are underweight in gold such as China, India, Russia, Japan, Singapore Brazil, Korea and many more are major buyers of gold. This means that gold will be underwritten by several sovereign countries for many years to come. Central banks are not fickle investors and a policy decision to increase their gold holdings is unlikely to be reversed for a very long time.

Although difficult to predict, the geopolitical risk in the next few years is substantial. Pakistan, Iran, Afghanistan, Al Qaeda, Middle East, Israel, acts of terrorism in the West etc. The preceding list is potentially explosive and the likelihood that something will happen in one these areas is very high. This would have a major effect on the gold price.

Gold has outperformed most stockmarkets

In the last ten years the Dow Jones has declined against gold by 80%.  The graph below shows gold expressed in local currencies against the Nikkei, Dax, FTSE and S&P in the last 10 years (Nov 1999 – Nov 2009). For example gold in yen has appreciated by 233% whilst the Nikkei has fallen by 46%. The graph shows how badly most stockmarkets have performed measured in “real money” i.e. gold.

 

The Precious Metals market is minuscule

The graph below shows how small the gold and silver industries and markets are in relation to major US corporations and to total world financial assets. The market capitalisation of the silver industry is only $ 9 billion and of the gold industry $ 200 B whilst Microsoft is valued at $250 B and Exxon 350 B.

Both the silver and gold industries as well as the physical markets are so small that any increase in demand is likely to drive prices very substantially higher.

 

 

Quantitative Incr-easing

Governments and especially the US are making noises that money printing will soon cease. This statement is as credible as their statement about “a strong dollar policy”. Let us be very clear; just as there is no chance whatsoever that they actually want a stronger dollar or that the dollar can go up. There is even less of a chance that  money printing or Quantitative Easing will be withdrawn. Instead we will have what we call QI – Quantitative Incr-easing. The Fed will in the next couple of years do what Helicopter Bernanke always promised; i.e. print unlimited amounts of worthless paper which will complete the move of the dollar to its intrinsic value of zero.  This will totally destroy the US economy, thereby creating a frightening political and social climate.

The reasons for an acceleration of money printing are manifold:

1. Unemployment increasing

US unemployment adjusted for short- and long-term discouraged workers is now 22% as shown in the chart below. This is an absolute disaster and will have very severe ramifications for the US economy. And it is likely to get a lot worse. During the 1930s depression non-farm unemployment reached 35%. Since the real problems in the economy have not started we would expect the US unemployment to reach at least 35% in the next 2-3 years and possibly a lot higher. With over 30 million people unemployed, this will put enormous strain on the US economy with a major reduction in GDP and tax revenues and a major increase in social payments. A country that is already bankrupt today is unlikely to cope with this additional burden. Currently 36 million Americans receive food stamps, an increase of almost 3 million in the last 6 months.

 

2. Financial system still very vulnerable

The $12 trillion which the US government has injected to stave off an implosion of the financial system and economy has only benefited the financial sector. Banks that have received these funds have not lent them on to the real economy.

All they have done is to prop up their balance sheets and pay out record bonuses. But even with this massive injection of funds into the banking system virtually all banks are still bankrupt if their assets are taken at market value:

With the blessing of the government, banks have been allowed to value their toxic assets at totally phoney amounts. Instead of valuing these assets at market value they can be valued at expected maturity value which of course banks assume is 100%. This is just another fraudulent collusion between government and banks.

Mortgage loans are deteriorating at a rapid rate. In October 2009 another 330,000 properties went into foreclosure. There are 7 million US homes waiting to be repossessed. Resets of interest rates on Option ARM and ALT A mortgages in 2011-12 will lead to a massive increase in foreclosures and mortgage lender losses.

Commercial property values are declining fast and vacancy rates and defaults are surging. Values have declined by 35-50% but banks are so far not recognising the full reduction in values. For smaller banks, which make up 90% all US banks, 74% of loans are in commercial real estate. There is $1.4 trillion to be refinanced in the next four years much of which is property which is in negative equity or empty. It will be virtually impossible to refinance this amount.

More derivatives are being issued by the banks. The top four US banks now have $200 trillion outstanding. A big percentage of this could not be sold at anywhere near market value.

Over 130 US banks have failed so far in 2009. Values realised when the assets are sold are substantially below the stated values, making a mockery of the current valuation rules. Not to value at market is a crime and against all sound accounting principles. But this is of course done with the total blessing of the government since, if assets were valued at market, there would be no banking system.

3. Government Deficits will escalate

The increase in unemployment and the continued problems in the financial system are two of the major contributing factors that will make government deficits surge. But there are many other problem areas that will necessitate acceleration in money printing:

Tax revenues are falling rapidly

Many states in the US are already bankrupt and most others will follow.

Cash for clunkers and tax credits to new housing buyers are just two of many schemes that the government will launch to support failing industries.

Pension fund deficits will escalate rapidly and the government will need to subsidise pensioners.

Insurance companies will fail and the government will need to step in.

The list of areas which will need government support is endless and the US government will  inevitably print money to “save” the economy.

Zero percent interest rates and unlimited money-printing = Lunacy

To artificially set interest rates at zero and to print whatever money is needed goes against every single principle of sound money and a sound economy. Interest should be set by the market in order not to violate the laws of supply and demand. And money printing should be totally illegal.  So why is it done? For governments to stay in power and bankers to prosper! Nobody else is prospering. Normal people are being conned into taking enormous debts that they will never be able to repay. And the value of their paper money is being totally destroyed as we have demonstrated above.

We have in the last few years made clear to our investors and readers that there will be very serious consequences arising from the actions of the government:

Government deficit will surge. The current borrowings of $12 trillion are likely to increase to over $30 trillion as we have discussed in previous reports. Interest rates could then be 20% or more and the US government would have absolutely no possibility to finance the interest on this debt.

The dollar will collapse. It is only due to the fact the dollar is the reserve currency of the world that the US has been able to dupe the rest of the world into accepting its worthless currency and financing its enormous debts. But this will not last much longer.

There will be hyperinflation. A deflationary implosion of credit and assets financed by a credit bubble is the necessary precondition to hyperinflation. In order to counteract these deflationary factors, the government will be printing unlimited amounts of money. It is the fall of the currency that causes hyperinflation and the US will be no exception. The fall of the dollar will lead to a hyperinflationary depression in the US.

There will be major social and political consequences. The economic devastation caused by the mismanagement of the economy will not only create poverty and famine but also social unrest. There will be major changes in the political system and leadership.

Protection

This report has mainly discussed the United States since what happens there has major consequences for the rest of the world. But what is likely to happen in the US is just as likely to happen in the UK and many other countries.

Many investors now feel that the worst is over with stockmarkets recovering. In our January 2009 Newsletter we forecast that the stockmarket could have a 50% recovery. We have now had that recovery, mainly fuelled by massive liquidity injection by the government and cost savings in corporations. In our view the resumption of the downtrend could start at any time.

It is not our purpose to frighten investors or to be sensational in our views and reports. Our purpose is to warn investors of the major dangers which make asset protection absolutely vital for financial survival in the next few years.

“THERE IS NO MEANS OF AVOIDING THE FINAL COLLAPSE OF A BOOM BROUGHT ABOUT BY CREDIT EXPANSION. THE ALTERNATIVE IS ONLY WHETHER THE CRISIS SHOULD COME SOONER AS THE RESULT OF A VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION OR LATER AS A FINAL AND TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED.”

Ludwig von Mises – Austrian Economist (1881- 1973)

7th December

 

Egon von Greyerz

matterhornassetmanagement.com

goldswitzerland.com

 

 

 

file:///User

 

 

Wed, 05/19/2010 - 13:01 | 361018 Whizbang
Whizbang's picture

Sure, a 600% price increase within two years isn't a bubble. The real gold boom is on the way, which is why we're selling all of ours instead of hoarding it... YEAH RIGHT.

Call me a troll if you want. Due to the 0% CPI Print, gold is down 2% today, with almost 1% of that in the last hour. Hopefully the bubble didn't just start to pop, or else there are going to be a lot of sad zh'ers.

Wed, 05/19/2010 - 13:20 | 361078 mephisto
mephisto's picture

Gold is tracking stocks today, which means the market is treating it as an asset today.

Most ZH'ers will say thats nonsense, its a durable form of money.

Months and months of disinflation with rising gold prices suggest that in the medium term, the ZH'ers are right.

Wed, 05/19/2010 - 13:22 | 361080 cossack55
cossack55's picture

No matter.  I sleep well knowing I have 2 years food, best water filtration system with unlimited water, sufficient guns and ammo and PMs buried and spoofed.  It can go to ZERO and I don't care.  The young ones will inherit all anyway.  Jewelry is more attractive made from PMs than paper.

Wed, 05/19/2010 - 14:37 | 361255 mtguy
mtguy's picture

No alcohol? Good for wounds, good for colds, good pain killer, better than a sleeping pill, great barter material, and makes your wife look better (ha-hope she doesn't read this!)

I think I actually shoot straighter after a beer.

Wed, 05/19/2010 - 16:18 | 361515 Moneygrove
Moneygrove's picture

+ 1,000 long jim beam !!!!!!!

Wed, 05/19/2010 - 15:56 | 361503 DoChenRollingBearing
DoChenRollingBearing's picture

+ $1180

I will just buy more if gold goes down and income comes in.

My kid gets the PMs and my guns & ammo too.

Wed, 05/19/2010 - 13:38 | 361119 GoldSilverDoc
GoldSilverDoc's picture

Man, I wonder if you have some unique brain disorder that prevents you from rational thought, Whizbang.  Are you unable to comprehend, that gold has NOT had a "600% price increase within two years", but that a paper (i.e., fake) currency has had a devaluation of the same magnitude instead?  

What has happened?  The dollar has lost its value.  One ounce of gold two years ago = one ounce of gold today.  It just buys more of the paper (i.e. fake) dollars than before, because people are losing confidence in the paper.  As this loss of confidence spreads, all other "real" things will be priced accordingly, i.e., more of the fake money will be required to purchase them.

Get a clue.

Wed, 05/19/2010 - 13:48 | 361139 Whizbang
Whizbang's picture

I guess I must have a unique brain disease, because I seem to be the only one that knows that gold, silver, platinum are commodities,  whereas paper currencies are currencies. Currencies are used to pay tax liabilities to the governments of various countries. That is the foundation of the dollar, and other currencies, you can't pay your taxes in gold or silver. Commodities are used to create things of value like jewelry and computer chips, and sometimes to exchange in a barter system. And great, an oz of gold is worth an oz of gold, a block of wood is worth a block of wood. a barrel of oil is worth a barrel of oil. Whats your point? Go ahead, buy your gold.

Wed, 05/19/2010 - 14:53 | 361309 ConfederateH
ConfederateH's picture

Lets see, gold peak in: 2008=$1000/oz.  Gold today:  $1200.  I count 20% increase in 2 years...

Even if we take the 2008 low of about $720, we are still worlds away from 600%. Whizbang must have been studying that new Al Gore "seas will rise 26' in 5 years" math.
Wed, 05/19/2010 - 14:58 | 361334 kohoutek
kohoutek's picture

"Currencies are used to pay tax liabilities to the governments of various countries. That is the foundation of the dollar"

That's funny, because I thought the foundation of the dollar was oil. And before that, it was gold.


Wed, 05/19/2010 - 15:37 | 361440 akak
akak's picture

Gold is a commodity which also happens to be money.  The fact that every major government currently effectively forbids its citizens from using gold as a means of exchange takes nothing away from that fact.

Gold's market value has little to do with its purely physical applications, and everything to do with its value as money and a store of value.

6000 years of history, and the continued holding of gold by world central banks, negate the thesis that gold is "just another commodity".

Wed, 05/19/2010 - 14:08 | 361171 DosZap
DosZap's picture

Whiz,

While that's true, in the SHORT term, where do you see this going in the next 24/36 months?

Every other week, we have a major crisis, and no one, has any answers to where we are ultimately headed, if Immediate action is not taken.

It can go down 50%, and I will hold..........because we have a shithole Event Horizon to contend with, and NO ONE can stop it..........NO one.

It can only be slowed down...............and that's if we started today.

We know the USD is going to really gain in value,right?.

Leave Gld,PM's out of the discussion...............WHERE/WHAT do you stockpile, that is insurance against your economic, and physical demise?.

Wed, 05/19/2010 - 14:52 | 361295 Whizbang
Whizbang's picture

I have no problem with sophisticated investors using gold as a speculative play. I don't like seeing the average joe cashing out his 401k to buy gold without understanding the tax implications, or economic influences involved.

I generally don't trade for the 24/36 month window, over the next week we could see a squeeze in the euro which will cause a short term crash in the dollar, equities and precious metals, before we see renewed downward pressure on the euro. If this does not occur, the euro is going to par sooner than anyone thinks, as the bailouts flood europe with free euros. In that case, I want to be in european manufacturing stocks, as china and u.s. mfgs get killed by the cheap euro. Longer term, equities will probably continue to decline caused by renewed fear driving people back into the security of precious metals and USTs.

 

For your last question, I have Springfield arm. 1911 handguns, a 30.06, and a mossberg shotgun, along with a closet full of ammo. I keep some canned food in the pantry, which will last me over a week. I keep booze as a bartering tool, and backpack frequently, so I have dried food, micro water purifyer, and iodine tablets. I don't expect a collapse any time soon. I think we are looking 10-20 yrs down the road before we have to start monetizing our social services.

Wed, 05/19/2010 - 15:31 | 361437 dondonsurvelo
dondonsurvelo's picture

I doubt many people are cashing out of their 401ks to buy gold.  Please show me where cashing out to buy gold is a trend of the average joe.  The average joe lost most of his 401k two years ago and has hopefully gotten some of it back.  The average joe doesn't own any gold and is having a hard time paying the mortgage and staying employed.  Most people that own physical gold as opposed to the etf are not the average joe so please don't lose any sleep over them buying gold and silver.

 

 

Wed, 05/19/2010 - 15:51 | 361488 Whizbang
Whizbang's picture

The average joe is broke. I mean the average employed and somewhat educated joe starting to buy gold. You'd be suprised.

Wed, 05/19/2010 - 14:52 | 361310 akak
akak's picture

"Sure, a 600% price increase within two years isn't a bubble. The real gold boom is on the way, which is why we're selling all of ours instead of hoarding it... YEAH RIGHT."

Whizbang, to just what precisely are you referring as having had a 600% price increase in two years?  Because it certainly has not been gold!  (Nor anything else I can think of offhand.)

If you are referring to projections of the gold price going forward, then your number may have some validity --- if it were to occur in an economically and monetarily stable environment.  Do you really think that we are in such an environment today, and most likely will be in the same over the next several years?

Wed, 05/19/2010 - 15:02 | 361345 Whizbang
Whizbang's picture

In text right from the attached article:

"The fourfold increase in gold since 1999 has taken place without the participation of most investors. It has so far been a stealth market. But this will soon change and there is likely to be a major “gold rush” in the next couple of years."

 

Except going from 253-1200 is more than 4 fold, it's closer to 6 fold.

 

Wed, 05/19/2010 - 15:10 | 361365 akak
akak's picture

An increase in the price of gold from $253 to $1200 reflects a 374% increase in its price, or a 4.74 multiplication therein.

Wed, 05/19/2010 - 13:16 | 361068 Slewburger
Slewburger's picture

Check RP's End the FED. He has a graph showing GLD against currencies past and present. Much easier to visualize than some abstract %.

Wed, 05/19/2010 - 13:26 | 361085 Whizbang
Whizbang's picture

I am aware of the issues involved with fiat currencies, and the shocking devaluation of our currency since the founding of the Fed. Gold however, has proven inadequate at protecting against inflation. Inflation adjusted funds provide better protection against inflation than priceless metals. It is being used as a speculative play by hedge funds and major banks, who are using the inflation argument to bamboozle you. If you are concerned about currency collapse, gold ownership is largely pointless, as it is the concept of Credit (debt) expansion and compound interest that lead to collapse, not the actual monetary unit. Why not buy some wampum, it's cheaper, and will provide the same peace of mind. Note: I consider myself a zh'er, and ex gold bug. It's too expensive for me to justify more buying now.

Wed, 05/19/2010 - 13:31 | 361104 economicmorphine
economicmorphine's picture

You may be right.  Sound a lot smarter than me, that's for sure.  That said, I can see a day where somebody might take a Morgan dollar for a bag of groceries.  Maybe it's just me.  

Wed, 05/19/2010 - 13:35 | 361113 DiverCity
DiverCity's picture

But the monetary unit is debt, is it not? 

Wed, 05/19/2010 - 14:05 | 361164 Whizbang
Whizbang's picture

The monetary unit, the dollar is a show of faith in the ability of the u.s. government to raise revenue through taxation and payoff /roll over its debt. The last time we closed any brackets by paying off debt, we almost blew up the world because of the resulting dollar squeeze (because when you pay off debt, that money disappears from the system). That is why debt is almost never paid off, and to roll it over requires a further expansion of debt to pay off the principal, plus the interest. Eventually (in theory), it becomes unfeasible to roll over the debt, as nobody can lend you the money without borrowing more themselves, and there is a collapse. This has nothing to do with currency, it is the means of control exerted by the power brokers around the world. If gold is exchanged for government debt, the requirement to expand money supply to finance interest payments will eventually lead to collapse as well. This discussion is pointless, I am using my paper to pay off all my debts, you can use yours to buy your gold. Either way is fine.

Wed, 05/19/2010 - 14:56 | 361322 DiverCity
DiverCity's picture

It really was just a question -- FWIW, I'm hedging with dollars, equities and more substantive assets because it could go either way.  This is an indication that I don't have the answer.  With apologies to FOFOA, would the following sum up the competing views between deflationists and hyperinflationists, the latter of whom would posit that unprincipled printing ultimately causes loss of faith in fiat?

 

The world is full of debt. The dollar is backed by this debt, and is therefore balanced by it. As long as the debt remains, it must be serviced with dollars which drives up the demand for dollars, and therefore the value of dollars. If the service of the debt starts to fail then the dollar will start to fall making the service of the debt easier (with cheaper dollars) and the service will then resume, raising the dollar back up.  Hence, it's true, as you say, that debt is the very essence of fiat, and that as debt defaults fiat is destroyed.

 

-VS-

 

The problem is, you see, the biggest debtor of all is the very printer of the currency all that debt is denominated in. And this debtor is now picking up ALL of the slack left behind by everyone else. Only his debt service will never fail, because he can print that service with the click of a mouse. And since he doesn't have to seek dollars on the open market, his debt has the OPPOSITE effect of all other debt. Instead of driving up demand for the dollar, it drives it down (and drives up supply at the same time)!

Normal debt = dollar demand up, dollar supply down.
US Fed Gov't debt = dollar demand down, dollar supply way up!

As the dollar starts to fall in value, this has no effect whatsoever on the ability of the world's biggest debtor's ability to service it, and therefore has no see-saw-leverage effect that raises the value of the dollar back up. Instead, it has the exact OPPOSITE effect... once again. Because now this biggest debtor must print even MORE dollars to suck in the same SUBSTANTIAL AMOUNT of the real economy at ZERO cost.

http://fofoa.blogspot.com/2010/05/hair-of-dog.html

Wed, 05/19/2010 - 15:14 | 361388 JuicyTheAnimal
JuicyTheAnimal's picture

What if you have no debt?  I defaulted on mine.  According to you I want to hold cash in a savings account?

Wed, 05/19/2010 - 15:48 | 361476 Whizbang
Whizbang's picture

I would advise you to buy tacos, pay your rent, or do whatever else makes you happy, including purchasing gold.

Wed, 05/19/2010 - 12:50 | 360987 ratava
ratava's picture

You can anticipate that these state governments will introduce price controls as well as potentially fixing exchange rates worsening the situation.

 

For better, for worse.

Wed, 05/19/2010 - 12:53 | 360994 Paul Bogdanich
Paul Bogdanich's picture

All these illusory places to hide after the next collapse.  Keep promulgating the myth that you will be alright extracting a profit from the misery of others.  More porpaganda.  Unless you plan on following your money to China and living there this makes no sense.  These people imgaine that in their imaginary world everything will collapse and the rules won't change at all.  Amidst all the misery theuir trading account will still work.  What a load.   

Wed, 05/19/2010 - 13:02 | 361023 RicktheDick
RicktheDick's picture

I partially agree. In many ways it's akin to buying insurance for the end of the world... Whether we choose to recognize it or not, we are all beholden to the whims of government. Just ask GM debt holders. 

Wed, 05/19/2010 - 13:45 | 361133 Phil
Phil's picture

Well said

Wed, 05/19/2010 - 12:54 | 360999 cognitis
cognitis's picture

Rosenberg probably should have used "client" instead of "vassal", and clear to most literate people is the US' status as client state to imperial China: both China and Japan exert far more influence in US through lobbyists and other agents such as hedge funds than any US agents exert in either China or Japan, both Japan and China de facto if not yet de iure define the US' money supply and interest rates, Japan and China both export manufactured goods to US while importing raw materials from US; thus the relationship between China and Japan on one hand and US on the other is normally described as an imperial one with US as developing colony and Japan or China as developed imperial state.

Wed, 05/19/2010 - 12:55 | 361001 Whizbang
Whizbang's picture

I suppose this was just timed poorly. Precious metals are falling off a cliff today. Silver down over 4%.

Wed, 05/19/2010 - 13:23 | 361086 cossack55
cossack55's picture

I hope it drops 40%. I'm ready to buy.

Wed, 05/19/2010 - 13:40 | 361123 chumbawamba
chumbawamba's picture

No, you're right!  You're actually right!!  THE GOLD BUBBLE IS BURSTING!!!

Oh NOES!!  Sell all your gold!  SELL! SELL! SELLLLLLLLLL!!!!!

The next bubble to pop will be any drag on your personal satisfaction, which means children and nagging wives.

SELL ALL YOUR CHILDREN AND WIVES!!!

Get into cash, the dollar specifically.  It's your only chance of hope for a better future.

DOLLARS BITCHES!!!

I am Chumbawamba.

Wed, 05/19/2010 - 13:52 | 361152 Whizbang
Whizbang's picture

Apparently the going rate for a child is 2 40 oz'rs of mickys or schlitz. That is a little low for me.

http://news.oneindia.in/2010/05/19/usman-offers-to-swap-his-child-forbee...

Wed, 05/19/2010 - 14:44 | 361278 aurum
aurum's picture

Options expiration is in a few days..jpm always shorts it down to save the hopeless comex from potential default

Wed, 05/19/2010 - 15:12 | 361381 Calculated_Risk
Calculated_Risk's picture

Pardon my ignorance... is there a good central location to find options expiration dates?

Wed, 05/19/2010 - 12:59 | 361010 Segestan
Segestan's picture

Another CCP lackey.

Wed, 05/19/2010 - 13:00 | 361014 Popo
Popo's picture

Gold is a great asset right now, but anyone thinking we're going to have another gold-backed currency is fundamentally uneducated about the historic ills of gold-backed currencies.  There are a whole lot of very wacky beliefs running rampant around the web these days that the era of gold backed currencies was more economically stable.  That can't be more historically inaccurate.

Buy gold.  Hold gold.  (I do).  Sell it at multiples from here.  But gold-backed currencies are not the answer.

Wed, 05/19/2010 - 13:02 | 361021 mephisto
mephisto's picture

Agree.

Excellent letter, don't think he's missing much.

It makes me think a little deflation is good for gold, as Bearnanke et al will just keep printing, and the end effect will be even bigger. Today's CPI figure must have Bearnanke sweating, but in fact its just the cap on a year's disinflation.

Am buying this dip.

Wed, 05/19/2010 - 13:35 | 361102 Whizbang
Whizbang's picture

According to the Economist, 47 trillion dollars evaporated worldwide back in 2008. Bernanke is going to have to print a lot more than he currently is to fill that void. That is why we are seeing the first collapse in "credit" in the last 80 years. I'm not opposed to savy investors making a gold play, but the fear-selling of gold to people is immoral and unethical. I don't like explaining to my mom and dad why they should keep their paid for home instead of selling it to buy gold "before it all goes to hell"

Wed, 05/19/2010 - 13:39 | 361122 tmosley
tmosley's picture

Gold backed currencies are in fact an answer, though not the best one.  

Instability in gold backed currencies has historically come about as governments did nasty things like suspending redeemability, printing more paper than there was gold, and so on.  Gold backed currency is great in a functioning society, but you need to keep your savings in physical gold in your possession, or in a bank that has been run in a consistent and honorable manner for more than, say, 400 years (where it is stored as actual bullion, not paper).

Wed, 05/19/2010 - 14:15 | 361190 DosZap
DosZap's picture

Popo,

Well said, and true............elimination of DEBT is the answer.

Problem: We have created so much, there's no way to get rid of it.

Short of a Jubilee, and a Reset..............we're screwed.

Wed, 05/19/2010 - 14:34 | 361248 Dr. Richard Head
Dr. Richard Head's picture

Good stuff here.  I used physical gold as my own Jubilee.  I was fortunate (pure luck as the gold purchase was indeed fear based) at the $740 an oz mark.  I sold at $1180, so took in roughly a 50% profit that was used to pay off my unsecured.  (Still stiffed JP Morgan on lack of a signed contract between two parties, lack of full disclosure, and lack of financial consideration in the card memeber agreement).

Next stop will be advanced payments of the mortgage.  Buying gold was good for me for what I needed it to be. A golden jubilee instead of the golden shower of wall street and unsecured debt.

Wed, 05/19/2010 - 14:31 | 361239 nikku
nikku's picture

Popo (abaove): "anyone thinking we're going to have another gold-backed currency is fundamentally uneducated about the historic ills of gold-backed currencies"

It's not the hisotry of gold-backed currencies, it's the history of the problem with all currencies--government control.  The problem with a future gold currency is not that it would not be better, but that it would be set at the wrong price initially and that the politicians would eventually debase it, even if they get the pricing right.

Gold is not a hedge against inflation (primarily)--there are better "inflation plays," but it is a hedge against the second oldest profession, self-interested politicians.

The most informed currency would be tied to gold and (possibly) other hard money PMs as a constraint on politicians.  But how do you enforce following the law?  U.S law already makes it an act of treason to debase the currency, and yet here we go!

Odds are there will always be some currency used that is less honest than gold or silver, which can't be printed.  But there will always be gold and silver as a superior store of value.

"There are a whole lot of very wacky beliefs running rampant around the web these days that the era of gold backed currencies was more economically stable.  That can't be more historically inaccurate."

There are some, but you're overstating the instability of gold-backed currencies by missing the political misbehaviors that led to the instability. 

It's like saying, "Look at how screwed up Capitalism is."  There are some who think we have free markets when the Fed has actual price controls in place on the cost of money.  What we have does not equal Capitalism.  What historical gold standards that were in place during times of "instability" had was not freely traded gold markets (without political manipulation in relationship to other currencies).

I think Martin Armstrong has it right.  Gold is a hedge against ineffective government.  Unless you see a bull market coming in effective government anytime soon, buy on the dips, friends, and hold as a long-term store of value. 

Insurance against hyperinflation? Yes. Asset without a liability attached? Yes.

Wed, 05/19/2010 - 15:10 | 361375 mtguy
mtguy's picture

"Gold is a hedge against ineffective government.  Unless you see a bull market coming in effective government anytime soon, buy on the dips, friends, and hold as a long-term store of value. "

Absolutely correct. As well, there is no "perfect" -no perfect currency, no perfect gov't (understatement of the year), no perfect investment, but, I'd certainly prefer a currency backed by gold than the current fiat mess we've gotten ourselves into. As soon as we went off the gold standard it gave our gov't and the Fed permission to start printing money as they needed it, with nothing physical to back it. We don't have to have hyperinflation to have gold continue to rise, it will rise becasue eventually our currency will crash if we don't get a handle on the debt. If the dollar callapses and you only have dollars to buy stuff, isn't that the same as inflation as it costs more dollars to buy each item. Most people think of inflation as prices rising while the dollar is stagnant.

Many of us hold our physical gold/silver as "insurance". If we want to "trade" it, we buy an ETF. Like all insurance, we buy it for peace of mind, so we can sleep at night. So, who is right? Well, who is getting a good night's sleep and who is not. Got 7 full hours last night myself. -ahh.

Wed, 05/19/2010 - 15:37 | 361451 Menelaus
Menelaus's picture

Why does no one know that the US $ is backed by the global oil supply?

Try to buy or sell a substantial amount of crude without dollar reserves and tell me how it goes.

It's quite a scam, but quite effective.

Wed, 05/19/2010 - 14:34 | 361246 akak
akak's picture

"... anyone thinking we're going to have another gold-backed currency is fundamentally uneducated about the historic ills of gold-backed currencies"

Yes, of course, because EVERY experiment with fiat currencies throughout history have been such a stellar success!

I suggest that it is you who is historically ignorant.  What are these supposed "ills" of gold-backed currencies, from which unbacked fiat currencies have been immune?  Please, do enlighten us.  The attempt should be most amusing.

Wed, 05/19/2010 - 13:03 | 361024 Henry Chinaski
Henry Chinaski's picture

The developed economies have huge fiscal deficits with no state assets to sell.

Again, the logical conclusion ends up at outright wealth confiscation.  And maybe auction off the national parks.

Figure out how to fly under the radar, folks. 

 

Wed, 05/19/2010 - 13:34 | 361112 economicmorphine
economicmorphine's picture

Good advice.  I can see it now.  Yellowstone is now Roundup Ready, thanks to your friends at Monsanto.   

Wed, 05/19/2010 - 13:48 | 361141 RichardENixon
RichardENixon's picture

I'm guessing you'll eventually have to file a personal financial statement with your income tax return and you'll be taxed on your net worth.

Wed, 05/19/2010 - 14:20 | 361207 DosZap
DosZap's picture

Henry,
Never happen SOON G.I.,  the American people will never stand for it...........Civil War, Anarchy, ( maybe it would in another 15-20yrs), when the sheeple have been led to slaughter of their  historical ancestry, and traditions.

 

Wed, 05/19/2010 - 15:04 | 361356 Henry Chinaski
Henry Chinaski's picture

DosZap:  A lot of people think it will come down to war, anarchy and mayhem in many areas including the US.

I agree that it will take some time.  It will be done incrementally.  At some point, the debts become too large and cannot be paid off.   Govts will confiscate via taxes, nationalization, penalties/fines, etc, before defaulting on the public debt.  It will be unavoidable no matter who is in charge.

As you have probably observed, that the pace of change is accelerating and such events are already underway.  15-20 years may be optimistic.

Those flying under the radar, and off the grid, will fare better.

Wed, 05/19/2010 - 13:05 | 361027 Mako
Mako's picture

Currencies are just a portion of the global financial credit system.

The credit system is unable to produce the needed amount of new credit to service the prior, system is collapsing in on itself.

Eventually the system will completely collapse, and production will go down from today's levels down to what will seem like zero.  Without new credit coming on people will be living on what they need and not what they want.   After many many decades or possibly a generation or two, most probably humans will rinse and repeat the same system over expecting a different outcome.

The fun really hasn't even started yet, the liquidation process is where the fireworks begin.   Trust me billions of unfunded liabilities are not going to want to go.

Wed, 05/19/2010 - 13:17 | 361073 Slash
Slash's picture

no big deal, banks don't have to take any actual losses ever! all their assets are actually worth 120 cents on the dollar!

Wed, 05/19/2010 - 13:28 | 361099 Mako
Mako's picture

Most of discussions on asset evaluations or mark to market will be mostly irrelevant at the end of this cycle. 

Wed, 05/19/2010 - 13:41 | 361128 economicmorphine
economicmorphine's picture

Great perspective.  Thank you.

Wed, 05/19/2010 - 13:05 | 361031 Slewburger
Slewburger's picture

Lets be honest. Most of us are already there. The question becomes when will the rest of the populous wake up to ponzi FRN. Thats the tipping point.

Wed, 05/19/2010 - 13:09 | 361040 Mako
Mako's picture

The ponzi scheme has always been there, you don't need FRNs to make a ponzi scheme. 

When will people wake up to the real lie, well if they all did that this second the system would collapse right now.   However, when humans don't want to be liquidated at the end of the scheme, they put off the liquidation process as long as possible.

The purpose of the system was never not to collapse, the purpose of the system is to run as long as possible before it collapses.  Nobody likes a good party to end, but they always do.

Wed, 05/19/2010 - 13:11 | 361057 Goods
Goods's picture

It`s not hyperinflation; it`s called a bull market! 

Tell then Leo,

calm will be restored when the trillion dollars starts being felt in the financial system.

Wed, 05/19/2010 - 13:16 | 361065 youngandhealthy
youngandhealthy's picture

Mr Rosenberg is spot on. All ZH followers who constantly fall in to the trap of comunism/socialism v.s. capitalism are so wrong. What we have people is one of the worlds fastest growing capitalist communist country honking and desperately want to overtake.

Forget about the "Left-Right" shit...what we see is naked capitalism whether you like it or not.

Wed, 05/19/2010 - 13:16 | 361067 SheepDog-One
SheepDog-One's picture

Whew! Well thank God we have a great manufacturing and export base to fall back on...oh wait, scratch that.

Wed, 05/19/2010 - 13:19 | 361075 LoneStarHog
LoneStarHog's picture

UNIQUE PERSPECTIVE??? How many goddamn times have I and other posters described hyperinflation as opposed to inflation in the EXACT SAME MANNER, both here and at Douchingers, et.al.? UNIQUE PERSPECTIVE my ass!

Wed, 05/19/2010 - 13:32 | 361105 K.Grabner
K.Grabner's picture

Yes, this is by no means "a unique perspective".

Jim Sinclair over at JSmineset.com and the incarcerated Martin Armstrong have been advocating this "unique perspective" for years.

It was not the overall productive economy that was disintegrating during the 70ies in South America but foremost the currency.This was even true during the Weimar hyperinflation and the Asian crisis. 

Wed, 05/19/2010 - 15:46 | 361263 akak
akak's picture

Indeed, I have to laugh at all the blinkered Keynesian fools (sorry for the triple redundancy) who insist that the US economy is "immune" to hyperinflation due to lack of sufficient aggregate demand!  Where was that demand necessary during all the hyperinflations in Latin America in the 1960s, 70s, 80s and 90s, or in Russia, or in Zimbabwe?

I think a new terminology needs to be invented here, as there are at least two fundamentally different kinds of hyperinflation, the one caused by excessive governmental monetization and/or currency printing, and the other caused by the sudden lack of confidence in the currency. Not every case of the former results in the latter, nor ironically does every case of the latter result in the former, although it does tend to do so.

Wed, 05/19/2010 - 13:24 | 361082 jkruffin
jkruffin's picture

Repost, I posted this in the wrong thread a min ago, my bad.

 

Just keep in mind, as hyperinflationary depression hits home(no way around it now),  DOW will reverse and hit Tyler's infamous 36,000 mark, as gold/silver run through the roof as well.  I say within 2-3 months we will start seeing the ugly "H" word in play.  FED does QE 3.0 and the dominos game begins.  Credit is getting squeezed bad again and in worse shape as of today.

 

Here is a must read:

http://www.ibtimes.com/articles/21693/20100430/gold-silver-currencies-hy...

Wed, 05/19/2010 - 13:27 | 361095 Dreamwalker420
Dreamwalker420's picture

I might add the following:

Within the paradigm of the inflation question, people innately calculate the valuation of goods on a day-to-day basis.  The concepts of capital management require one to be concerned about the future.  However, in American society, the mantra has become "eat, drink and be merry ... for tomorrow we die."

A total lack of concern about the implications of a debt ridden society have been eliminated from public education.  The very idea that the Federal Reserve System is a cancer on society is treated with disdain and derided at the mere mention of it.  The expectation has become inflation is the only means by which a society can prosper.

This constant expectation of inflationary policy is then reinforced in political decisions as leaders dread the idea of deflation (or negative inflation).  However, for the middle class and the working poor ... deflation is their best friend!  Our society has  broken into two classes, with one clearly the master of puppets.

In this age of socialism, people have come to expect the government to price fix things.  Or worse, they have come to expect government to provide services as well.  So many false expectations exist within the entire economy that it is unlikely to produce a workable solution until there has been greater capitulation of power in the relationships that define American society.

Federal Reserve banknotes vs. the taxpayer.

Multi-national corporations vs. the foreign exchange rates.

Baby booming Republicans that think Medicare isn't socialism versus Gen X and their desperate need for $12 coffee.

Genuine disabled people needing Social Security to function while it is being drained by angry lazy emotional failures collecting checks for having tempertantrums.

Migrant workers being paid illegal wages by corporations versus legal residents with college debt burdens and no capital for small business growth.

------------------------

Getting an education is a good thing.  Working hard is a good thing.  Unfortunately, these morals cannot find themselves in a society of people all looking for the easy fix.  Like drug addicts, they treat the system as something to be gamed and manipulated with no moral concern for lying, cheating, and stealing.

Indeed, the masses have caught on that the best opportunity is a guaranteed income stream from the government.  And as long as the dollar functions as a medium of exchange, the desire to maximize that opportunity through fraudulent means will only become more pervasive.

Most Americans are not concerned with how to solve the fiscal problems of our country.  Those who have money will not take the medicine of deflation.  Those without money seek only to copy the banking indsutry's plan of getting free dollars for nothing.

I pose this question:  Does a man have the right to choose slavery?

Wed, 05/19/2010 - 13:37 | 361115 jkruffin
jkruffin's picture

Isn't this what Obama promised when he ran for office and was elected?

 

What effects do hyperinflations have? One effect with serious consequences is the reallocation of wealth.

Wed, 05/19/2010 - 13:40 | 361125 Joe Sixpack
Joe Sixpack's picture

For reference, you may want to read this article:

http://www.gold-silver.us/what_silver_gold_buys.html

What Does Silver and Gold Buy?

By John Q. Public

Introduction

OK. So you have some silver and gold or you want to buy some [more], and you are wondering- what would I barter it for in a currency collapse scenario?

How much would I expect to pay for things? How much would I expect to need to take care of my family? Of course this is a very difficult question, but

one thing we can do is to look back to a time where silver and gold were treated as money, and see how much it cost to live. We could then try and see

how things have changed since then, and see if we can put that into perspective. This is what I attempt to do in this article...

Wed, 05/19/2010 - 13:47 | 361138 Nonconformist
Nonconformist's picture

Long term, I would bet on Germany rather than China.  In the end it comes down to which societies are the most cohesive Germany, Japan, Britain and other countries that have the capacity to pull together will survive.  China may have coal and minerals but it has hundreds of millions of extremely poor people who barely survive.  It is an unstable empire much like the USSR.

Wed, 05/19/2010 - 13:48 | 361142 SDRII
SDRII's picture

Novogratz on CNBS (derisking) but talking about the rising cost of capital as a result of capital market intervention. Amazing in the wake of 2 yrs of carnage that the hedge fund crowd (like their PE brethren) still peddle the same old worthless ex anti trope about cost of capital.  No thought of course given to the cost of capital ex post when you include the malinvestment -which of course sees the house gone by the time the loss is manifest. Bloomberg running article this am about the worthless/bad performance of IOPs from the PEs. Yet another manifestation - only in the asset stripping sense. cost of capital has become a  Noms de guerre for ensuring the house remians stacked so the financial disintermediation arb can occur.

http://www.bloomberg.com/apps/news?pid=20603037&sid=arh9nevzJwVA

Wed, 05/19/2010 - 13:51 | 361149 EQ
EQ's picture

The US has substantially abused its privilege as the world's reserve currency.  But to even consider China is one of the most asinine statements anyone can make.  It completely removes credibility from any other statements that person may make no matter how credible they are.  There are many dynamics that involve driving the requirements for a world's reserve currency and first among them are transparency.  As corrupt as our current federal government has become, it is nothing compared to a country that exterminates tens of millions of its people and requires the remainder to live in fear or disappear in the night.  The world doesn't need a reserve currency in today's environment.  Trade can be done point to point using exchange rates negotiated between differing countries.  The dollar could be replaced by something else but it will never be replaced by another reserve currency.  Especially China. 

Wed, 05/19/2010 - 14:58 | 361332 nikku
nikku's picture

China does not want to be transparent, and they don't want to be the world's reserve currency either--it tends to overvalue your money and they like being the low-cost producer and being the reserve currency could hinder their "flexibility."  This is why they are interested in the SDR, or some other manufactured supranational reserve currency.

Wed, 05/19/2010 - 15:14 | 361389 twotraps
twotraps's picture

+100, the first line is all anyone needs to know!  How the US could have blown the best game Ever put on the rest of the planet....think about it.  Its never been done, had a chance to go on and on but now its a silly game.

Wed, 05/19/2010 - 13:54 | 361156 AnAnonymous
AnAnonymous's picture

Guy big on delusion. Sign of an affluent society when people can make money selling their delusion.

Funds moving to China. How? Anyone not looking at history partially can figure the troubles. When a third party gets recourse of an extortioner to increase competitiveness, the third party turns tied to the extortioner.

Part of the wealth accumulated in the west was done by screwing China. China has lived through this and know it is operational. The western world people are in need of the US as an extortioner  in order to prevent China from using the same ways.

Of course, people fooling themselves that the rise of the west was only the result of hard work and innovation cant bring this reality on the stage.

 

Loss of faith in USD. Once again, how? Loss of faith in a currency happens when people at the bottom refuse to sell, when that currency fails to buy anything.

How this could happen to the USD? The USD is to be the entry point of the commodity world market. As long as commodities rich countries do not reject the USD (and the US bases are the best incentive they wont), a loss of confidence must be laughed at as one of  the stupidest misconceptions ever.

 

Short term vs long term. What is long term?  The man needs to get his puzzle together. A successful person is always more successful through a short term approach than a long term approach.

The failure comes when people are no longer successful in their short term moves, not because long term approach is better.

Wed, 05/19/2010 - 14:16 | 361186 jkruffin
jkruffin's picture

Loss of faith in the USD happens when they have to keep QE going again and again and again.  Sound familiar?  As we go down this road QE will be needed more and more and faster and faster.  As this happens, you will see the stock market fantasy ride all the way up to unfounded numbers, probably north of 30k,  but then stock trading will be halted, then comes the collapse.  If you see it coming in advance, you have enough time to transfer your stock dollars to metals if you jump ship early enough, although you should be buying metals now while they are still cheap and you can still ride stocks, otherwise all the stock dollars(which are really worthless to begin with) will be in fact toilet paper.

Wed, 05/19/2010 - 13:57 | 361161 curbyourrisk
curbyourrisk's picture

So does this mean all the GOLD BUGS pushing gold a store of value.......are in effect pushing the hyperinflation spiral without realizing it????

 

I for one agree...Gold is not an investment, but a store of value...but I disagree with the premise that hyper inflation is on our doorstep.  I see deep asset deflation coming with the only inflationary measures showing up in fees, taxes and tolls.  The Government services economy will ruin this country.

Wed, 05/19/2010 - 14:05 | 361168 Cheeky Bastard
Cheeky Bastard's picture

facepalm at all of you

just learn that what you see listed as gold price is 10 [or maybe more] different CUSIPs of the same fucking gold bar trading on the market. Its a price of, what is basically a CLO/Interest Rate Swap hybrid; not Gold price. Dumb fucking paper bugs. Learn something FFS, and then lament about how gold is worthless. Thats why i buy my gold from the gypsies. The market is basically a series of GOFO rollovers and cost hedging without any, well maybe some, physical stuff being traded. The closest to a physical trade is a primary, miner-LBMA, forward/futures contract.

Gypsies>shit>LBMA>LPMCL

Wed, 05/19/2010 - 14:50 | 361296 youngandhealthy
youngandhealthy's picture

@CB:...you one of the few that see through the shit....the rest are just buying(eating) shit.

Thu, 05/20/2010 - 05:29 | 362462 i.knoknot
i.knoknot's picture

+10

so,i'm screwed into having to pay their damned manipulated, overleveraged, none-of-it's-really-there prices...

but i'll be damned, once i get it, if i'll sell it to anyone for less than $3K and rising.

so, unless i'm *really* hungry, that's how much gold is really worth. and i *do* have enough food.

and the good news is, i know a lot of people who are really getting interested in gold. lots of people talking about it. lots of advertising. what a great way to turn a commodity back into a currency.

bite-me Central-Banks and Governments of the world. bite-me hard.

how long term am i thinking? i hope to give it all to my kids.

(it's going down, sell sell sell sell!!! )

please do. for a while longer. thanks jpm shakeouts. too bad i don't have more to invest. dam

Wed, 05/19/2010 - 14:18 | 361199 AlexanderKZ
AlexanderKZ's picture

Please read the lates article published by Antal.E. Fekete. Here is the excerpt: "Hyperinflation is not the same as the ultimate inflation of the money supply. It is the ultimate depreciation of the currency unit. The two concepts are far from being the same, Quantity Theory of Money notwithstanding".

Wed, 05/19/2010 - 14:46 | 361284 Econophile
Econophile's picture

Fekete never understood the concept of inflation and marginal utility. He's a crank.

Wed, 05/19/2010 - 15:17 | 361348 akak
akak's picture

Econophile, can you elaborate on your statement regarding Fekete?

I have read all of his articles and releases over the last couple of years, and although he seems a very intelligent and erudite scholar, certain aspects of his theories strike me on a gut level as simply wrong, particularly his assertion that the liquidation value of total debt rises in direct proportion with falling interest rates, a concept which I admit I can simply not wrap my head around, even after personal correspondence on the subject with Fekete himself.

Wed, 05/19/2010 - 16:15 | 361509 mtguy
mtguy's picture

..."value of total debt rises in direct proportion with falling interest rates, a concept which I admit I can simply not wrap my head around"

I haven't read him (but will), but isn't he simply saying that if interest rates drop, bond (ie., debt) prices go up?

Wed, 05/19/2010 - 16:48 | 361577 mtguy
mtguy's picture

..."value of total debt rises in direct proportion with falling interest rates, a concept which I admit I can simply not wrap my head around"

I haven't read him (but will), but isn't he simply saying that if interest rates drop, bond (ie., debt) prices go up?

Wed, 05/19/2010 - 14:58 | 361333 AlexanderKZ
AlexanderKZ's picture

then how comes his forecast for deflation is coming true?

Wed, 05/19/2010 - 15:02 | 361344 AlexanderKZ
AlexanderKZ's picture

Just a coincidence, yeah?

Wed, 05/19/2010 - 15:06 | 361360 AlexanderKZ
AlexanderKZ's picture

the liquidation value of total debt rises directly with falling interest rates

Wed, 05/19/2010 - 15:15 | 361390 akak
akak's picture

.

Wed, 05/19/2010 - 15:12 | 361382 AlexanderKZ
AlexanderKZ's picture

Guys from Mises.org don't like him just because he criticises several concepts asserted by L.Mises.

Wed, 05/19/2010 - 15:23 | 361408 akak
akak's picture

I will say that I found Fekete's theories and expositions on the historical role of real bills to be quite interesting, as I had never fully understood nor appreciated their importance in the pre-WWI era.

I also tend to agree with him in his assertion that under any restored sound money system, gold (and possibly silver) coin must constitute a significant percentage of the total money supply, and must routinely circulate, if the people are ever to have a permanent and meaningful ability to register their disapproval or distrust in abusive monetary policy by withdrawing that gold (and silver) from circulation.

Wed, 05/19/2010 - 15:36 | 361448 AlexanderKZ
AlexanderKZ's picture

oh, that's enough to be labeled "crank", sir:)

Wed, 05/19/2010 - 15:30 | 361433 Menelaus
Menelaus's picture

Did you learn Japanese during the '80s?  Russian during the '50s?

The only Chinese I know is FXP...

(inverse Xinhua China 25 ETF)

Deflation = no good to China.

Wed, 05/19/2010 - 15:44 | 361462 AlexanderKZ
AlexanderKZ's picture

There are only four person i know who saw deflation is coming well in advance. They are Fekete, A.Gary Shilling, Robert Prechter and Ian Gordon.

Wed, 05/19/2010 - 19:35 | 361857 Matto
Matto's picture

Dont have time to read the hole missive but Martin Armstrong had a recent note from the hole on hyperinflation in germany and austria that went over all of this, at first prices were rising more slowly then they were printing as people held the money, then as people eventually lost faith in the currency and would spend it as soon as they received it, it kicked velocity into overdrive and multiplied the number of transactions each unit of currency took. Hence: supermegahyperinflation.

Wed, 05/19/2010 - 21:39 | 362066 wang
wang's picture

 

“I don’t know if you remember but we worked together at Merrill. I ran emerging markets from 1985 to 1996. I’ve always been a loyal fan and kept up with your writings...Obviously, I’m very negative right now. What am I missing?”

PS - are there any openings at G&S?

Thu, 05/20/2010 - 04:39 | 362438 scepticus
scepticus's picture

are there any  examples of hyperinflations which were not the result of prior destruction of economic output capacity? Certainly weimar and zimbabwe hyperinflations were preceeded by either war, civil war and/or appropriation of sovereign territory. In weimar the hyperinflaton happened after the french had occupied the ruhr, responsible for some 50% of german industrial output and coal output. In zim the hyperinflation happened after mugabe had destroyed most of that nations agriculture.

I guess Argentina might be one such case however I believe that the hyperinflation there was preceeded by 20 plus years of rampant inflation (we are talking over 10-15% a year here).

 

 

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