Inflation, deflation, gold and currencies

[vincecate]

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.

I fully agree that it is time to batten down the hatches. Things are going to get really bad, taxes will be going up, personal freedoms down, wars, etc. Getting prepared is very important. Food and weapons are clear wins. Decisions about paying down debt or taking on new debt, buying treasuries, holding cash, gold, or silver depend on the inflation/deflation question. If you put your savings in treasuries and the hyperinflationist turn out to be right, you could lose your savings.

Deflation seems to happen when you go from gold and silver to just gold, or gold and paper money to just gold. But under pure fiat money I think the big danger is hyperinflation not deflation. If anyone knows of any double digit yearly deflation in pure fiat money, please post. I think there are on the order of 100 cases of double digit monthly inflation in pure fiat money. America alone has had hyperinflation twice already.

Has there every been a case of deflation of a pure fiat money during/after a war?

[vincecate]

It seems more and more people are either expecting inflation or deflation. So even though the average expected inflation rate looks stable, the standard deviation is growing and things probably are not stable:

http://www.businessinsider.com/morgan-s ... C3%971V8Bz

I will ask again, has there ever been double digit deflation in a pure fiat money? Or anything like the 30% drop in the early 30s?

[vincecate]

Along with John, two other deflationists that I highly respect are Hugh Hendry and Mish. Hendry is now saying that hyperinflation is the endgame, but there will be a few twists and turns to go still. Mish is saying, "In general, I side with Hendry.". This puts at least Hendry, and maybe Mish, rather close to my own thinking. So John, can you see hyperinflation further down the road too?

http://globaleconomicanalysis.blogspot. ... -bill.html
http://www.zerohedge.com/article/hugh-h ... ion-politi

[xakzen]

Along with John, two other deflationists that I highly respect are Hugh Hendry and Mish. Hendry is now saying that hyperinflation is the endgame, but there will be a few twists and turns to go still. Mish is saying, "In general, I side with Hendry.". This puts at least Hendry, and maybe Mish, rather close to my own thinking. So John, can you see hyperinflation further down the road too?

http://globaleconomicanalysis.blogspot. ... -bill.html
http://www.zerohedge.com/article/hugh-h ... ion-politi

I saw Hendry on TV this week and he also said that anyone betting on hyperinflation in an investment portfolio would probably not be able to hold on to it long enough the profit because of the more emanate deflationary spiral.

[vincecate]

I saw Hendry on TV this week and he also said that anyone betting on hyperinflation in an investment portfolio would probably not be able to hold on to it long enough the profit because of the more emanate deflationary spiral.

Ya, I saw that. It is strange to me that Hendry thinks gold will do well and also thinks you would have trouble holding onto a hyperinflation type investment. To me gold and silver are the natural hyperinflation type investments. I see no trouble holding on to these. The closer the hyperinflation gets, even if it is still a couple years away, the more people are going to see it and want gold and silver. Hendry might think of shorting bonds or some other thing as a hyperinflation bet. Not sure.

[xakzen]

Ya, I saw that. It is strange to me that Hendry thinks gold will do well and also thinks you would have trouble holding onto a hyperinflation type investment. To me gold and silver are the natural hyperinflation type investments. I see no trouble holding on to these. The closer the hyperinflation gets, even if it is still a couple years away, the more people are going to see it and want gold and silver. Hendry might think of shorting bonds or some other thing as a hyperinflation bet. Not sure.

My take is he's saying be prepared to see some painful reversals in short time periods. So don't go in debt (margin) to bet the farm on hyperinflation. Or perhaps he thinks governments will confiscate previous metals in the near future. The experience of many of us on this forum tells the same story for those of us on the deflationary side as well. I'm not a Soros fan, but he was right when he said last year it would be extremely difficult to even retain wealth going forward. I think that is still very much true today. Good luck to all.

[vincecate]

The dollar is dropping fast (like 13% in a few months), commodities are going up fast, and gold and silver are going up fast. It may take a few months for the bulk commodity prices to feed through the system to consumer prices. Oil price changes get to gas prices faster, so people see those and will blame the Arabs for the US dollar being worth less than it used to be. Some will understand that printing a trillion new dollars each year hurt the value. But I think it will only be a few months till inflation is visible to all.

Oh, I have started my own blog!
It is:
http://howfiatdies.blogspot.com/

http://quotes.ino.com/chart/index.html? ... &w=&v=dmax

http://www.crbtrader.com/data.asp?page= ... &sym=CRY00

[vincecate]

As a result, investors have been selling dollars, and going after emerging markets, leading to a weakening of the US dollar. However, everyone wants a weak currency, so that their exports will improve, and so Japan, China, Brazil, and Europe are all taking steps to weaken their own currencies.

As the dollar gets weaker, all commodities, metals, energy, food, will get more expensive. This will feed into general inflation with a few months delay. Since nobody is printing gold and silver, these are the only currencies safe from printing. As things get worse and worse, gold and silver will do better and better. I think the printing is going to get really bad.

John, I'm still on topic. I think it is the most important thing going on in the world today. The dollar printing is so much that people are not happy with it as a reserve currency any more. This is going to be a major change and it impacts everything.

[John]

> As the dollar gets weaker, all commodities, metals, energy, food,
> will get more expensive. This will feed into general inflation
> with a few months delay. Since nobody is printing gold and
> silver, these are the only currencies safe from printing. As
> things get worse and worse, gold and silver will do better and
> better. I think the printing is going to get really bad.

> John, I'm still on topic. I think it is the most important thing
> going on in the world today. The dollar printing is so much that
> people are not happy with it as a reserve currency any more. This
> is going to be a major change and it impacts everything.

Vince, you're talking your book, and it gives me a headache. If what
you're saying were remotely true, then we would have had
hyperinflation long before now -- when the credit bubble created tens
of trillions of dollars in structured securities, or when the previous
trillions of dollars in bailouts and stimulus were pumped into the
economy. But instead of all that money feeding into product prices,
we still have deflation. A few hundred billion dollars more of
QE will not change that.

What's far more likely is a financial crisis that will kill demand
for those commodities, forcing prices down sharply.

John

[vincecate]

John, the book "This Time Is Different: Eight Centuries of Financial Folly" shows that the normal pattern is during a crisis the government bails out banks and companies by printing new money and then a couple years later has a sovereign debt and currency crisis. From Bernholz book, "Monetary Regimes And Inflation: History, Economic And Political Relationships" we can predict if the currency crisis leads to hyperinflation or not. I think that if the US holds its position as reserve currency it will be ok, but if it loses that the dollar is toast. If you just look at the last 10 years, central banks would have been lots better buying gold than the dollar. They basically all stopped selling gold and some started buying gold. And "diversifying their reserves" is becoming the plan. So to me it looks like they are moving away from the dollar.

The reason it has not happened already is that there has been some credit contraction. But however much there is, it is a finite amount. There is no limit to the amount of money they can print. So the only question is how long the deflationary pressure can last. In the Great Depression it was 3 years. We have not seen prices go down 30% like they did then, because then they were limited by law to having 2.5 paper dollars for every dollars worth of gold the Fed held. As people took out gold they had to reduce the number of dollars, which is deflationary. Now they are printing dollars like crazy.

I sure don't think I am "talking my book". This is the one area where I think you are wrong. I think for making the right investments now this is the most important issue. Time will tell who is right.