Financial topics

[vincecate]

Where you see hyperinflation is when a crisis war, ends badly, either because you lose or it's so destructive that you may as well have lost.

America had hyperinflation in the Revolutionary War, which they won. There have been more than 50 case of hyperinflation where there was no war anytime near the hyperinflation.

[Carl Lieberman]

Here is why I believe in an inflationary cycle. Let me start by saying that all of the current indicators are pointing towards deflation. I do not think that an extended period of deflation is possible in an advanced democratic system. Japan is not equivalent to the U.S. They are a military protectorate of ours and have limited defense responsibilities. In addition, Japan was an insulated economy before its crash and had exorbitantly high prices. Much of their deflation is a normal correction to more sustainable levels. Currently we are meeting 40% of our daily operating expenses with borrowed money. Would our citizens ever vote for a party that promised to cut their benefits by 40%? Never going to happen. We will fill the gap by creating that 40% by any means necessary. Rogoff and Reinhart show that small countries default on their debts, but large countries default on their debts through serial inflationary crises. I don't think of the coming inflation in the normal manner of "too many dollars chasing too few goods". I think of it more as a result of a collapse of our currency. We are currently insulated because the dollar is the world's reserve currency. We were victorious in World War 2 and created the Bretton Woods standards, we were dominant in 1971 when those standards were revised to completely detach the value of the dollar from any physical restraints. In the future we will have neither the money nor the political will to force the world to accept our fiat currency as the world standard. In brief, I expect the dollar to appreciate for awhile as the rest of the world collapses, this in and of itself will be deflationary. But the scale of our debts is so huge that there will come a tipping moment when the world loses faith in our dollar. This will usher in an era of sequential dollar collapses, making all necessities more expensive. This could also usher in significant wars. These are always inflationary. In this environment, credit will be very restricted and it will be harder and harder to sell large assets. Investments will be deflating as the costs of living will be inflating. In this scenario, I would advise using the coming deflation as a time to take physical possession of precious metals. They are an asset that will hold their value in any scenario. Don't bet the farm on gold and silver. MF Global has once again revealed how untrustworthy all of our financial institution are. Do you really want all of your wealth stored on their servers? Those in power will never allow a complete deflationary collapse to occur without taking all available options to stop it. Who knows what the world will look like after the coming crises wars. In all of my travels I have frequently come across old currencies that have had multiple zeros lopped off of their value. Just seems like the way of the world.

[jcsok]

With the market decline across the board in equities and commodities, and the increased risk of defaults related to the MF Global scam, I withdrew 25% of my trading capital today after closing several positions (not closing entirely, just smaller size) in the futures markets. I have been short S&P, Euro, silver (out entirely), crude and cattle; picked up a little equity, and decided that I'd rather have it in the bank or buy more physical cattle. I am waiting to sell S&P in the event there is another kick the can rally from Europe, which could correlate to a Santa Claus rally also. After reading the Ann Barnhardt interview related to the Merc, I have also bought puts on the CME.

[Higgenbotham]

I feel just the opposite. Inflation rewards all of the behaviors that are anti social and penalizes all of the behaviors associated with virtue. It is completely destructive of the social fabric. Personally I believe that a deflation is coming, followed by a massive inflation. We could get the worst of both worlds.

Agree and agree. QE2 and other delaying tactics have guaranteed future economic, social and political chaos and disequilibrium. All systems will swing wildly, unable to find a steady state. Deflation may predominate in certain geographical areas while inflation predominates in others. People may not know whether there is inflation or deflation except for what they are experiencing at the moment.

A chain of stores may be forced to lower prices today in order to move product, only to disappear overnight for lack of profit due to high overheads. A vendor may temporarily appear on a street corner selling New Zealand kiwis for 18 cents apiece, then disappear, then reappear selling Washington apples for 50 cents per pound. After he leaves a kiwi may cost $1 if you can even find one and the apples may be $4 per pound.

The existing economy will only be affordable for about 10 or 20 percent of the population. The loss of economy of scale will cause costs to rise as a percentage of income and selection to fall for the shadow of the old economy that remains. The rest of the population will scratch out an existence, relying on self production, black markets, and crime to procure the necessities of life, which will be the full time job of the unemployed members of the household. It will be a substandard lifestyle. An example of this, in a message I just received tonight: "She and her husband went to look at campers and the guy asked her if they planned to live in it."

[biffbifford]

Let me start by saying that all of the current indicators are pointing towards deflation.

What indicators are you speaking of? I happen to agree with you, but what is your rationale for oil prices?

Currently we are meeting 40% of our daily operating expenses with borrowed money. Would our citizens ever vote for a party that promised to cut their benefits by 40%?

There is no need to cut "our" benefits by 40%; there is a need to operate the government efficiently. The average salary of a federal employee is 72k per year not including all the benefits that come with the job.

In the future we will have neither the money nor the political will to force the world to accept our fiat currency as the world standard.

This may be true, and is the reason we support such a large military complex. As a matter of our survival, the dollar [must] retain its dominance as the reserve currency to the world. The next world war could possibly be fought over this hegemony. China and Russia have been questioning our financial leadership of the world, fortunately we have managed to stave off all challenges to our currency of the world.

I would advise using the coming deflation as a time to take physical possession of precious metals. They are an asset that will hold their value in any scenario.

There are a lot of people who believe that gold is a hedge against inflation. The so called professionals on television that believe this usually sell gold, and are looking to increase their customer base. It is true that gold is a temporary hedge against inflation, but very temporary. You never hear these same professionals discuss gold prices in 1979 - 1980, when gold reached 800+ per ounce, only to fall to a low of around 230 dollars per ounce, some 12 to 15 years later. It did not protect those who purchased gold then from the averse effects of inflation. It really is important to understand in what way gold does protect you. It protects your purchasing power, and that's about it. Other than trading gold during times of high volitility ( the likes we have seen the last few years); you would have had better ROI, had you just bought treasuries for that same period of time. Gold bugs are getting the satisfaction of being right for once in the last 30 years, so they are riding a nice high. Gold is nothing more than a fear trade - a temporary place to park your cash to preserve your purchasing power, and if properly invested, make some nice short term returns. I would caution all those looking to by gold as an investment, or as a "hedge" against inflation. I have 24 years of experience trading stocks, commodities, and specialize in option's trading. I get tired of hearing the retail trader try and explain the case for gold as a hedge against inflation. In most cases I don't even entertain the conversation. I have done quite well in this market trading currency, gold and volitility.

If there is a complete loss of faith in the U.S. dollar, gold will no doubt run, but right now the U.S. is the safe haven to the world, and will stay this way as long as the uncertainty in Europe continues. When I began in this business back in the late 1980's, countries tried to hide the fact that they manipulated their currency. Today, they announce it to the world. These PIIG nations have no currency to manipulate and, therfore, are at the mercy of the EU. If they could have a structured default, which is inevitable, they could manipulate their currency and export their way out of the problem like everyone else is trying to do. When, and if this happens, no one will want to own gold - you had better make sure you had profited handsomely from the gold trade, because gold will return to levels never thought possible. It is also important to understand that our military protects and defends the U.S. dollar. If any country comes out against the dollar as the worlds reserve currency, they will no doubt be accused of being state sponsors of terrorism, or their government will somehow collaspe, via a coup. Until we lose our status as the most powerful country in the world, our currency will reign supreme. I don't see us losing that position for another 50+ years. All wars fought in the future will most likely be proxy wars over natural resources and/or currency manipulation. I think the prudent investor should hold no more than 15% of their portfolio in gold.

If you want to play with the metals -- silver has yet to reveil itself for its true value. Unfortuantely normal market forces ( if there is such a thing anymore ), are not influencing the price of silver. Silver has been manipulated by external forces for years. China is among the largest buyer of silver to date. Silver is definetely one to take a look at, especially if you just use a simple gold/silver ratio to determine how undervalued it is. But I will leave this for another discussion.

[richard5za]

If there is a complete loss of faith in the U.S. dollar, gold will no doubt run, but right now the U.S. is the safe haven to the world, and will stay this way as long as the uncertainty in Europe continues.

You posted an extremely interesting article, but the one point you don't comment upon is America's massive debts. I can't see America dealing with this in any politically acceptable way except by printing dollars. It needs to reduce debt through inflation, and I suspect that the Fed will be targetting a controlled inflation of 8% to 18% per annum for a few years to reduce the debt to manageable levels in real terms. That would be good for gold for a period of time. High inflation also equals low PE ratios so someone who took a ride up with gold could then convert to cash and could buy quality stocks (general equities) very cheeply.

Where I totally agree with you is that gold has little value in a scenario of a good economic growth and price stability scenario such as the 80's and 90's.
Richard

[OLD1953]

Well, some points here. First off, hyperinflations are fast fast fast. The start date is never agreed on, but from the time it seriously goes out of control to the collapse is never very long at all, I don't know of any that took longer than a year from that point. May have been a few but they happen quickly. Second point, hyperinflation is very effective at clearing junk out of the system. EVERYONE loses everything EXCEPT real property in hand. Since real property, not derivatives, are the actual denominators of true value, that's a very fast way to get everything reset to honesty in a hurry. So from the national (NOT PERSONAL) perspective, I'm really not that afraid of hyperinflation. It happens so fast that the manufacturing base is still intact, the workers are willing to take lower wages AS LONG AS THEY CAN BUY SOMETHING WITH IT, and so forth. Hyperinflation is the fast track to resetting the economy back to base and starting over.

Germany keeps getting cited as the bad example of hyperinflation but let us look a little past that period for a moment, a few short years later Germany was no longer feeling the effects of the depression, Germany had gone from a crippled nation to the great powerhouse of Europe, and a short time after that they took on all of Europe in a massive war, a war they would have won except for US intervention via the lend lease programs and later on actual physical presence. Countries that did not have hyperinflation were much worse off that Germany, which did.

Why we get Germany cited as the example of "hyperinflation is the end of the world" is beyond my understanding, Germany is the premiere example of how hyperinflation can clean up the economy, undo malinvestment and cause a country to grow very rapidly after the hyperinflation is past and done with.

That said, I don't expect hyperinflation in the USA over the next few years. It is possible, but unlikely, that we'd have hyperinflation due to a massive war and recovery effort, but I sincerely doubt it. I am hedged against such problems, with some metals in hand, but I'm not really expecting them.

We need to keep in mind that the USA is becoming a powerhouse in gas production, and that's going to have a huge effect in the near term as well. Prepare to see a lot of NG powered vehicles. It is very possible that Boone Pickens ideas will become near term reality.

Though in all honesty, it's just as easy to run a couple of hot rails up all the interstates and let cars charge off the rails when they need a pick up. Instead of an HOV lane have a ECC (electric car charging) lane. Cars move over to that lane every 40 miles or so, charge up, then drift back to the usual lanes. Easy to do, easy to maintain, and if you used low voltages you could sleep on em and not get hurt. Plus, as long as you are doing that much, put some heating grids in the road to turn on when there is a snow storm, anything short of a blizzard will not require snow plows or overtime for the road dept, at a vast savings in money and time. Hell, call it the HOT WHEELS solution and get cracking on it. Burn the NG in the power plants and run the cars with no pollution and get California to shut up about pollution for a while.

[Trevor]

I have a question of my own, though: How do we survive the coming crisis? No matter what form we think it'll take, it's a relevant concern.

[jdcpapa]

I have a question of my own, though: How do we survive the coming crisis? No matter what form we think it'll take, it's a relevant concern.

Steve Jobs had a very good view of the life crisis. He often reminded himself that the "worst case scenario" is death. He lived his life accordingly.

[Trevor]

I have a question of my own, though: How do we survive the coming crisis? No matter what form we think it'll take, it's a relevant concern.

Steve Jobs had a very good view of the life crisis. He often reminded himself that the "worst case scenario" is death. He lived his life accordingly.

At the moment, I'm just trying to save as much as possible. I'm in the process of looking for a job, but no luck so far.