Inflation, deflation, gold and currencies

[vincecate]

I've written on this subject probably well over 100 times, including many times in the Financial Topics thread, and I really have no idea what I could add that I haven't said before.
John

I could well imagine you are tired of it. I am new and have just read this thread today and will look through the Financial Topics thread next. I think this deflation vs inflation is about the most important debate today and also the most important area where people disagree with you, so I think it is still worth more of your time.

One question if I could. All the total valuation for all the stock markets in the whole world in Sept 2008 was $40 trillion. How can there be hundreds of trillions of dollars in derivatives? I strongly suspect those valuations on the derivatives are not correct.

I mean, if there were $200 trillion of derivatives in the US you can bet congress would pass a 5% tax and nearly wipe out the national debt. Everyone hates whoever it is that has this $200 trillion.

-- Vince

http://en.wikipedia.org/wiki/Market_capitalization

[vincecate]

How can there be hundreds of trillions of dollars in derivatives?

With a little help from Google, the answer is the value of the underlying that the options are on is hundreds of trillions, not the value of the options/derivatives themselves.

Counted one way it is $596 trillion but the net real value is only $3.3 trillion.

So John, your big argument for deflation was that as the $600 trillion went down it was so deflationary that the Fed making $1 trillion per year could not counter it. But if it is only $3.3 trillion then the Fed has no trouble at all. So will you be moving over to the inflation camp?

http://www.slate.com/id/2202263
http://www.minyanville.com/businessmark ... 0/id/27330

-- Vince

[John]

Dear Vince,

> Lets flesh this out a bit. You have 10% down payment for a
> house. The bank gets the other 90% from the Fed and pays for the
> house. You can not make the payments, leave the house, and someone
> burns down the house while it was not insured. You think the money
> supply goes down? The guy that sold the house still has the money
> and now the Fed is never getting their money back so the money
> supply will stay inflated. Not paying back loans to banks who get
> their money from the Fed is inflation not deflation.

The mortgage note is a form of "money," an asset carried on the bank's
balance sheet, and it disappears in the scenario you describe. The
same is true of synthetic securities, but they're even worse because
there are no real assets behind them. Credit bubbles occur because of
abuse of debt and securitization, and when the credit bubble bursts,
then deflation occurs because the synthetic securities, which are a
form of money, disappear.

John

[richard5za]

End of current bull run for gold in sight

In the last 10 years gold has enjoyed a bull run from $ 252 an ounze to current levels, roughly a 5 fold increase. Throughout this time whenever investment in gold has been suggested a consistent chorus of loud negative voices were to be heard from financial experts and pundits alike.

However, things are changing: Some experts, even pundits, are now saying that in uncertain times an investment in gold can be a good thing!

So to a gold bull such as myself this probably spells the end of the long term bull run; first the bubble will probably grow more, and then burst, as bubbles always do eventually. The timing? Don't know, my guess is 2 to 3 years, but anything from 6 months to 6 years. Final gold peak price? Don't know, anything from a bit above current peak to $ 6000.

Richard

[John]

End of current bull run for gold in sight

In the last 10 years gold has enjoyed a bull run from $ 252 an ounze to current levels, roughly a 5 fold increase. Throughout this time whenever investment in gold has been suggested a consistent chorus of loud negative voices were to be heard from financial experts and pundits alike.

However, things are changing: Some experts, even pundits, are now saying that in uncertain times an investment in gold can be a good thing!

So to a gold bull such as myself this probably spells the end of the long term bull run; first the bubble will probably grow more, and then burst, as bubbles always do eventually. The timing? Don't know, my guess is 2 to 3 years, but anything from 6 months to 6 years. Final gold peak price? Don't know, anything from a bit above current peak to $ 6000.

Richard

You're predicting the end of the gold bull run, but then you say that the price might
go up to $6000? That doesn't sound right at all.

John

[richard5za]

re: End of God run in sight

Dear John,

Once a bull market enters bubble phase a shrewd investor can see the end of the bull run.

Lets take a market you have analysed i.e. the Dow

It doesn't take a genius to see the bubble phase start from around 1995. This was clear to all by 1997. What blinds us to seeing the bubble phase is greed, greed and more greed. Or we are told we are very stupid for thinking like that by the greedy people. We want more and more growth eternally.

So at 1997 it was possible for an impartial soul to predict that the end of the Dow bull run was in sight, but the timing and amplitude was uncertain. However, on the balance of probability the peak would be higher than 1997; and it was.

It doesn't mean that you sell all your equities in 1997, but you start thinking and working in that direction, whilst watching the market trends closely e.g. you have a share in your portfolio that shoots a peak on great results, you sell and gratefully accept the high price you got.

In the case of gold we have an additional circumstance which could easily drive prices to $ 6000, before the gold price crash happens, namely, anticipated panic! Plus lots more greed, of course. But as I said the peak may not be much above the current peak. Lets see what happens.

The steady growth in the gold price in the last ten years is another predictor of stock market woes to come - namely the "smart money" sort other lucrative investment avenues for a period of time. And on stock market woes, my prediction is that not in my life time will we see another bull run as we saw early 80's to 2000. I am 63 years old.

Best regards
Richard

[The Grey Badger]

I wish I'd bought an ounce of gold - divided up into auragram-sized pieces - in 2001! I'd have had me a nice little profit if I'd sold any of the pieces today. Alas, I'd seen the price of gold act like a yo-yo so many times I'd stopped noticing.

[ridgel]

Chinese wage increases may drive world inflation:

http://finance.yahoo.com/news/Changes-i ... 81566.html

[vincecate]

I had my paper money vs gold cycle going all the way back to the first central bank in England and thought I would never go further back. However, there was an earlier currency vs gold episode under King Charles II in 1671. This is about 33 years before the first central bank trouble. At this time wooden tally sticks were used as bonds or currency and became worthless. So my paper money vs gold cycle goes all the way back to before paper money, when sticks were money. Kind of wild.

http://pair.offshore.ai/38yearcycle/#1671

[Higgenbotham]

How can there be hundreds of trillions of dollars in derivatives?

With a little help from Google, the answer is the value of the underlying that the options are on is hundreds of trillions, not the value of the options/derivatives themselves.

Counted one way it is $596 trillion but the net real value is only $3.3 trillion.

So John, your big argument for deflation was that as the $600 trillion went down it was so deflationary that the Fed making $1 trillion per year could not counter it. But if it is only $3.3 trillion then the Fed has no trouble at all. So will you be moving over to the inflation camp?

http://www.slate.com/id/2202263
http://www.minyanville.com/businessmark ... 0/id/27330

-- Vince

http://generationaldynamics.com/forum/v ... rt=30#p121

http://generationaldynamics.com/forum/v ... rt=40#p127

If the underlying is 1 quadrillion and markets move an average of 10% in 8 minutes during a flash crash, then values have shifted over 100 trillion in 8 minutes (the same percentage for futures and more than that for options). Under such a scenario, some option values will shift by multiples of their net real values in seconds (for example strikes on nearby puts that are far from the market), or become completely illiquid. Once Mr Margin gets to work, the dominoes can tumble. A financial institution can be scrambling behind the scenes to make margin calls while the clearing system can freeze up due to liquidity fears.

How much snow does it take to start an avalanche. It doesn't have to happen and a smaller amount of "snow" next time could result in a counter party being unable to pay if they were weakened the first time around.

Also, the more opaque OTC derivative pile is the $596 trillion figure. Exchange traded derivatives are a similar amount. It's probably better to study the more transparent exchange traded derivative pile where all the option contract notional values, strikes, and open interest are listed on the exchange web site.