Inflation, deflation, gold and currencies

[The Grey Badger]

A little OT, but if I were buying precious metals to use as money in times of crisis, I'd buy silver coinage, preferably "junk silver" of little or no collectable value beyond the fact that it's silver, and old.

[at99sy]

Just a thought. Would continued high oil costs keep deflation in check or at least under control for quite a while?
It seems to me that since everything in our country and most others depends on fossil fuels for their existence and
for their delivery; wouldn't the added cost of high oil$$ keep prices from collapsing quickly? At some point
the break would occur and consumption beyond necessary items will disintegrate anyway. That being said, since the Fed seems to fear deflation and will do anything to prevent it, is it reasonable to suggest that they/others would use their "influence" to keep oil at high/er $$levels to keep the prices of everything else
inflated as well. I'm not an economist, because you know that stuff is "really hard" to understand, but I have seen enough to have stopped being surprised by anything that "they" do anymore. Any insight or critique would be welcomed.

[John]

Dear Sy,

> Just a thought. Would continued high oil costs keep deflation in
> check or at least under control for quite a while?

Commodities are also in a big bubble. Here's a recent MarketWatch
article that discusses this:

Commodity ETFs: Toxic, deadly, evil
http://www.marketwatch.com/story/commod ... 2010-08-03


John

[vincecate]

Commodity ETFs: Toxic, deadly, evil
http://www.marketwatch.com/story/commod ... 2010-08-03

The wallstreet people making the ETFs are not very honerable. An oil ETF that says it "tries to approximate the price of oil" by buying 1 month futures is going to do a really bad job and traders who understand how it works can take advantage of it.

There is either a bubble in the US dollar or in gold/silver/commodities. Time will tell, but I think it is the dollar that is going to pop. I think the reason the Chinese are buying so many commodities is they also think the value of the dollar is going to drop.

[vincecate]

I think this article, "Debunking Deflation" is worth reading:

http://dailyreckoning.com/debunking-deflation/

[John]

Dear Vince.

> I think this article, "Debunking Deflation" is worth reading:
> http://dailyreckoning.com/debunking-deflation/

It's wishful thinking, Vince. The author sets up two straw man
arguments and knocks them down, while ignoring the most important
arguments, including the following:

• The continuing collapse of the real estate market, probably
  amounting to another $5 trillion or so.
• The tens (or perhaps hundreds) of trillions of dollars of toxic
  assets that still haven't been marked to market, sitting in portfolios
  around the world.
• The increasing risk-aversion of consumers and businesses, who have
  been burned and don't want to borrow or spend money, resulting in a
  historic drop inthe velocity of money.
• The political impossibility of the enormous stimulus and bailout
  programs of the last year, and the implementation of austerity
  programs, especially in Europe.
• The likelihood of panic.

Here's a graph that I posted a few months ago:

Money multiplier (destroyer) and velocity of money



The people who are talking about inflation are the same people who say
that stocks are underpriced when the P/E ratio 18.

The talk about inflation is insanity. Believe what you want, or
believe anyone who makes you feel good, but if you don't plan for
deflation then you're facing a great deal of pain.

John

[vincecate]

John, in the Great Depression there was around 30% deflation in about 3 years, then the deflation ended. Has there ever been anything like this with pure fiat money?

[vincecate]

It's wishful thinking, Vince. The author sets up two straw man
arguments and knocks them down, while ignoring the most important
arguments, including the following:

• The continuing collapse of the real estate market, probably
  amounting to another $5 trillion or so.
• The tens (or perhaps hundreds) of trillions of dollars of toxic
  assets that still haven't been marked to market, sitting in portfolios
  around the world.
• The increasing risk-aversion of consumers and businesses, who have
  been burned and don't want to borrow or spend money, resulting in a
  historic drop inthe velocity of money.
• The political impossibility of the enormous stimulus and bailout
  programs of the last year, and the implementation of austerity
  programs, especially in Europe.
• The likelihood of panic.

Here's a graph that I posted a few months ago:

Money multiplier (destroyer) and velocity of money

The real estate, mark to market, aversion to borrowing money, and velocity of money could all change on a dime. If people decide that borrowing money for 30 years at 4% fixed and buying land is a good idea, because of inflation of much more than 4%, then all those things go away. Given how fast money has been printed over the last 30 years, I really think borrowing money at 4% now will look like a fantastic move in a few years.

All of the deflation things are limited, but the government's appetite for borrowing, spending, and printing money has no limit. So it is only a matter of time before inflation wins out. In the 30s that time was about 3 years. We are almost at about 3 years now. The government shortfall of about $1.7 trillion per year will dominate within a few years.

[at99sy]

[quote="vincecate"]The real estate, mark to market, aversion to borrowing money, and velocity of money could all change on a dime. If people decide that borrowing money for 30 years at 4% fixed and buying land is a good idea, because of inflation of much more than 4%, then all those things go away. Given how fast money has been printed over the last 30 years, I really think borrowing money at 4% now will look like a fantastic move in a few years.

Vince
Things could change on a dime certainly. However I see it changing for the worse. 30 year mort. at 4% sounds like champ of a deal. Good luck getting a bank to loan it to you without a huge down payment. With 20-30 million un/under employed right now I don't see this rush to buy a house materializing on a dimes turn any time soon.
Further more, with the impending tax increases shooting to stratospheric level and small businesses being led to the slaughter by govt bureaucracy, jobs will not be turning on a dime either; except worsening. Inflation/deflation it won't matter. if you have no money you're not buying anything any way. People are starting to hoard essentials and are dumping extra items cluttering up the house.Just check out "craigslist" the listings volume is enormous. Just in my area of NH I have seen a huge increase in materials, collectibles, and farm- garden categories. I have been able to grab some really good deals from people just wanting to generate some cash flow.

Inflation in the form of simply higher food prices is very possible as natural or man made shortages occur in the near term and not too distant future. Farmers could just stop growing as much if it becomes cost prohibitive to get it to market or to produce it at all. Deflationary pricing could also occur for the very same reason couldn't it. People are only going to pay what they are able and willing to pay. Bartering might become much more mainstream. In Argentina it is still very popular; with some markets printing their own currency due to shortages and lack of trust in the govt. go figure! My friend in B.A. trades photography and English lessons for many of the things he needs. Tax free consumption. The higher taxes and business penalties get the more black-market and under the table transactions will be taking place; which reduces Fed. revenues even more. The govt is borrowing money from themselves right now, if I give you $1000.00 and then borrow it from you, have I inflated the money supply? When I have no intention of ever paying it back? Prices on just about everything in my area have been dropping with the exception of FOOD. Everything else is cheaper than it was a year ago. EVERY store has sale signs up. 25-50% off signs every day.
I for one don't buy any non-food item if it isn't at least 40% off. Just got two pair of shoes at sierratradingpost.com (shameless plug) for 65% off and free shipping. Also a great Primus propane camp stove for 60% off and free shipping.

People can argue the Inflate/deflate issue until their heads explode. The facts as I see it is we are in a world of hurt and things are going to start sucking real bad real soon and what might be turning on a dime is the extent to which our personal freedoms are going to be infringed upon or straight out stolen from us by the regime that is controlling things right now. Unless something happens or someone comes along to stop this cascade of misery from unfolding, I'm with John. Batten down the hatches and get prepared in whatever way you feel you need to to weather the storm. China is rattling their sabers along with Iran, Turkey, Pakistan and seemingly everyone else with an anti-American agenda. America is in the crosshairs of many enemies, foreign and domestic. Things could get ugly real fast for sure. As a country I am confident Americans can over come any obstacle in our path, it's the political factors that are strangling us that I fear will do the most harm and prevent us from succeeding.

[Higgenbotham]

Good article on natural limits to stimulus (in the mortgage market).

http://www.housingwire.com/2010/08/10/s ... of-a-rumor