Inflation, deflation, gold and currencies

[John]

I've described many times in the web log the nature of the
deflationary spiral we're in. There was a big dot-com bubble in the
1990s, leading to huge real estate and credit bubbles in the 2000s.

Those bubbles are now deflating rapidly. The result is that there is
less money (dollars) in the world every day than there was the day
before. As money becomes scarcer, banks compete for the little
that's left, and deflation sets in.

The consequence is there will be deflation, not inflation.

Furthermore, gold is a very risky investment. Gold is in a bubble
and, at some point, its price will fall to well below $500 per ounce.
It may spike upward for a while, but at some point the Law of Mean
Reversion will push it way down. Thus, anyone who DOES invest in
gold today has to worry about selling at the right time.

Here are some recent articles on the subject:

** Both consumer and commercial credit is disappearing as deflationary spiral accelerates
** http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e080206#e080206

** Will hyper-inflation make the dollar worthless (like the Weimar republic)?
** http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e071221#e071221

** Questions and answers about the 'credit crunch'
** http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e071206#e071206

** Understanding deflation: Why there's less money in the world today than a month ago.
** http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e070910#e070910

** CPI data points to deflation trend
** http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e040717#e040717

I get a lot of criticism for these views, especially from people who
own gold. This is a place for you to post your predictions about the
value of the dollar and the price of gold, next week, next month and
next year.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

[richard5za]

I am expecting gold to rise quite a lot before the bubble bursts; it is after all an historical safe haven and once panic stock market sets in a fair amount of money will be transferred to gold investments. Ultimately everyone will become an expert in gold, as they did at the end of the 70's and there will be a gold crash, once again. The problem with predicting markets is that sooner or later they make a fool of you, so time will tell whether this is a correct view or not.

[Tom Mazanec]

One thing I expect in a fanfic I am setting in 2029 is that gold will crash heavily by then. Water usage goes up (the population is about the same, as growth has canceled out the billion dead in WWIII and is more affluent. We already have water shortages, and natural fresh water is more preserved in my scenario. So desalination is common. Mining the sea using nanotechnology is common as a result. And there is more gold in seawater than in good ore.).
An interesting question is whether we will have pennies much longer. There is already heavy negative seignorage on them (and a little on nickels), and WWIII may produce metal shortages like WWII. We had "steelies" then, we may have nothing this time around. And with nanotech and robotics, God only knows what the economy will be like in 2031, after the Singularity.

[shoshin]

An interesting question is whether we will have pennies much longer. There is already heavy negative seignorage on them (and a little on nickels),

call me nuty, but I have been saving pennies and nickels for quite a while...and yes, I know it is illegal to melt down US coins, but....hmmm...what happened to all those silver coins???...do you think there will be a market for pennies and nickels, at a premium over their face value?

[MnMark]

While there's some emotional satisfaction in saving pennies for their copper content, I don't think that realistically it will ever really be worth your time. As our currency's value falls to zero, copper pennies will nominally be worth a lot more than a penny but their buying power will probably never be more than the buying power of that amount of copper in normal times. That's just not very much copper. My opinion is that it's fine to do as a sort of symbolic activity but in terms of how much possibility it has for actually protecting you it's kind of a waste of time.

I understand and agree with the "deflationistas" to the extent that we are indeed in a credit contraction and a lot of money is disappearing from the system. And if we were still operating on a gold standard, the case of deflation would be a slam dunk. However the government, as is being demonstrated this week, can and will bring into existence as much new money as they want as quickly as they want. Yes, there is a modest time lag between when the contraction in money supply from the credit crunch is apparent and when the government's bailouts and handouts and stimulus plans kick in.

But every government in history that operated on a fiat money basis drove the value of the money to zero, and ours will be no exception. They simply can't resist. They don't WANT to drive it to zero, but the time for fiscal restraint never quite seems to arrive and the "emergencies" of the minute always seem to warrant even more government spending. And the government WILL spend.

We are approaching the time when the interest due on the government debt will be greater than the total amount of tax money collected. We're still a ways off from that, but by the time the national debt has been doubled or more by the latest bailouts and the crash in tax receipts and the skyrocketing interest rates that are coming, we will reach a point where the government has to borrow money just to pay the interest on the money it borrows. Soon after that the mathematics of compounding interest rates will ensure that we have a hyperinflation. We have never had a hyperinflation in memory, so we are vulnerable to it.

[Matt1989]

While there's some emotional satisfaction in saving pennies for their copper content, I don't think that realistically it will ever really be worth your time. As our currency's value falls to zero, copper pennies will nominally be worth a lot more than a penny but their buying power will probably never be more than the buying power of that amount of copper in normal times. That's just not very much copper. My opinion is that it's fine to do as a sort of symbolic activity but in terms of how much possibility it has for actually protecting you it's kind of a waste of time.

I understand and agree with the "deflationistas" to the extent that we are indeed in a credit contraction and a lot of money is disappearing from the system. And if we were still operating on a gold standard, the case of deflation would be a slam dunk. However the government, as is being demonstrated this week, can and will bring into existence as much new money as they want as quickly as they want. Yes, there is a modest time lag between when the contraction in money supply from the credit crunch is apparent and when the government's bailouts and handouts and stimulus plans kick in.

But every government in history that operated on a fiat money basis drove the value of the money to zero, and ours will be no exception. They simply can't resist. They don't WANT to drive it to zero, but the time for fiscal restraint never quite seems to arrive and the "emergencies" of the minute always seem to warrant even more government spending. And the government WILL spend.

We are approaching the time when the interest due on the government debt will be greater than the total amount of tax money collected. We're still a ways off from that, but by the time the national debt has been doubled or more by the latest bailouts and the crash in tax receipts and the skyrocketing interest rates that are coming, we will reach a point where the government has to borrow money just to pay the interest on the money it borrows. Soon after that the mathematics of compounding interest rates will ensure that we have a hyperinflation. We have never had a hyperinflation in memory, so we are vulnerable to it.

This is pretty good. As noted on this website, we are in a "deflationary spiral" as a contraction in the money supply eventually leads to less consumer spending.

The hyperinflation argument stems from simple expediency. Politicians will do whatever they can to cover their own asses, and hyperinflation solves quite a few problems before things REALLY spiral out of control. A completely fiat currency is even more conducive to this suicidal approach. Of course, it's ultimately going to come down to whether the personalities at the top are going to take the steps to trigger the hyperinflationary spiral. It would be incredibly dumb as hyperinflation is extremely destabilizing (moreso than deflation), and considering the generational lineup, it would probably lead to the fall of the U.S. government, but I wouldn't hold it past any of them.

So I'm not going to place all my chips on either side. Fortunately, things will become apparent soon enough..

[Rafaelloello]

I have no idea about the long time prospects for Gold, but I'm sure the dollar will get crushed this week and Oil will hold up over $100/barrel if not rise significantly. I was double short the Nasdaq 100 for several months until last Monday and Tuesday at which time I transitioned into foreign currencies, crude oil, and oil companies. That has worked out very well for me. This week I'm thinking that the weakening dollar, rising oil, and the inability of Hedge funds to short financials will cause new prey to be hunted: Airlines. I expect the hedge funds will start shorting the Airline carriers who are already under huge pressure before the events of last week.

[richard5za]

On oil I agree with Rafaelloello. Oil was very over sold and my charts indicate a bounce back. Currently I am looking at Brent Crude reaching $ 118. Lets see what happens

[colbert]

For what it is worth my two cents is this: fractional reserve banking turns credit into money - therefore an increase in credit leads to increase the money supply, right? A massive credit contraction should therefore lead to deleveraging of speculative positions by investment banks and hedge-funds which is what we have witnessed during this most recent and severe commodity correction. Fine. This massive credit contraction should also result in a decrease in the money supply in the near-term along with a fall in leveraged asset prices (housing). Okay. This is all happening while M3 money creation by the fed is near all-time highs. The tide has already gone out. At some point the tsunami of dollars will arrive and drown us all. I'll give this deflationary period about 12 months tops and then TSHTF. I am planning on getting the rest of my metal over the next ten months and then will buy one mini silver futures contract next august if gold isn't above $1000 by then. Long-term peak oil and our massive national debt (along with 70 trillion in unfunded liabilities) will just exponentially exacerbate the problem. LONG-TERM DEFLATION. NO WAY. . . . . . . . IT WILL BE HYPERINFLATION.

[richard5za]

I can't make up my mind whether it will be serious deflation or hyperinflation. I am playing things short term and reviewing often. Currently I am in gold for the short term since I think it is heading for about $ 1150 this year (simply the count on my charts) I reckon I can get through this coming disaster with short term vigilence