Financial topics

[jdcpapa]

Yes, commodities is "my game" and clearly a bubble is forming / has formed in commodities.
[...]
My advice to everyone who reads this blog is "don't get in front of this market". Its just too dangerous.

Either there is a bubble in gold and commodities or the dollar is headed for serious inflation. Making the right investment decisions and protecting yourself depends on getting this correct. So figuring this out is very important.

The "coming inflation case" seems very strong to me.
1) Bernanke is printing money at amazing rates.
2) The deficit is so bad there is really no way the government could function if he stopped.
3) If bond sales slow the Fed will print faster.
4) The huge printing already done has not caused inflation only because the velocity of money is down because interest rates were so low, but as interest rate go up the velocity of money and prices will go up.
5) As interest rates go up bond values go down, so Bernanke could not "withdraw the liquidity he injected" even if he wanted to. His bonds are not worth what he paid for them so could not take out as much money as he put in. Back when people understood central banking they would only buy highest quality short term debt. Never long term or "toxic assets" where the central bank would not be able to take out the money it put in.
6) All historical cases of a government creating money fast when they had debt over 80% of GNP and deficit over 40% of spending resulted in hyperinflation

I have no idea how this situation is going to play out in the end. Here at "ground zero":

On the local level, government officials are bracing for some serious "austerity" measures. I am "volunteering" professional services to support the vaccuum.

The real estate and construction industries are shredded. As a result, an entire employment base is being pushed out of middle class status. Their dream for a comfortable life in retirment is disappearing before their eyes. They are afraid.

Homeowners are finding that they are upside down in their mortgages and are trapped because they have nowhere to go with no equity and drawing down on their retirement (tied up in the rebounding market) not only creates a potential taxable event but they also cannot rid themselves of the "buy and hold mentality". If they are still working, they are "afraid" to retire. If they are not working they are digging into their saving and they are "afraid" of the unknown.

Housing values are declinig in spite of the inverse relationship they hold in tandum with bonds as relates to interest rates. It's not likely that an increase in interest rates will have any impact on depressed housing values.

The fed and market are "building up" up the discount rate and thereby increasing the market yield all the while keeping the fed rate low arguendo to help the banks get their balance sheets in order. Let's not forget the shadow real estate inventory that remains on the banks books that will further drive down price up release.

The 90% of the population that does not pay taxes (of consequence)or is on assistance or is retired, etc. will start eating "peanut butter sandwiches" while the 10% that pay the taxes and have all the wealth will likely suffer the hyperinflation supporting their affluent lifestyles. The 90%, however are the "demand" of the "supply and demand" theory.

Greenspan called the dollar a "conundrum". I ask myself: Why would the world, in this present weakened financial state, risk a switch to another form of currency? The dollar appears to be the best alternative on the short term. If the dollar goes,is it not possible that there goes the world?

[vincecate]

Greenspan called the dollar a "conundrum". I ask myself: Why would the world, in this present weakened financial state, risk a switch to another form of currency? The dollar appears to be the best alternative on the short term. If the dollar goes,is it not possible that there goes the world?

It is really as if world commodities are already priced in gold. Given the stability of gold relative to commodities and the rate at which they are printing paper money, gold makes a better reserve currency or commodity pricing currency. If China's reserves were gold over the last 10 years they would be much more valuable today. They could have a policy of everytime they get some dollars to buy some gold with them. If Saudi Arabia makes a contract for some oil at $95/barrel 1 year from now but by that time paper dollars are worth far less, then they lose.

http://howfiatdies.blogspot.com/2011/02 ... -gold.html

Still, when the dollar goes the world will be in pain. However, the first to leave will have the least pain. In this situation leaving could happen fast.

[jdcpapa]

Still, when the dollar goes the world will be in pain. However, the first to leave will have the least pain. In this situation leaving could happen fast.

Therefore, when the dollar goes there is no escaping the pain. The degree of pain is relative and unpredictable. That is the incentive to keep the dollar in place.

[OLD1953]

What country has ever gone from slow/no inflation to hyperinflation in a single bound? I've read the histories of several of the hyperinflated curriencies, and they always had a gradual increase in inflation until they went ballistic. If we had inflation of 10-15% per year, I'd be worried.

[vincecate]

What country has ever gone from slow/no inflation to hyperinflation in a single bound? I've read the histories of several of the hyperinflated curriencies, and they always had a gradual increase in inflation until they went ballistic. If we had inflation of 10-15% per year, I'd be worried.

Many cases of hyperinflation were preceded by deflation.

http://www.marketskeptics.com/2008/12/h ... ation.html

[OLD1953]

After I posted that, I figured you'd bring in the Wiemar. The only way you get deflation in 1920 in Germany is to look at the price of their money vs gold or the way they manipulated the dollar/franc etc., NOT in terms of the real deal, which is spendable money. So if anything, you've got the exact opposite condition in the US now, the price of gold vs the dollar is very high, but the spendable money is dropping. In terms of spendable money, Germany had inflation, they had something like a 40% increase in the cost of living in 1920. Apart from food (worldwide shortage) and fuel (similar to food with some differences) there isn't any cost of living increase in the US now. And that's why you shouldn't denominate inflation in terms of anything but spendable money, any other measure messes you up. Production/cost of production of items goes into it too, but production doesn't change that much year over year.

Besides that, I honestly believe the Wiemar intentionally destroyed their money as a means of getting rid of the war debts. Why else would they essentially dare the world to let them collapse? They tapped off the surplus funds of the entire planet, and used them to build actual buildings and so forth in Germany, and when the money collapsed, the buildings and factories were still there, so Germany, instead of being mired in economic hell for an extended period, was the first country with a rebounding economy after the depression began.

Either they planned that or they were very lucky. Given the legacy of Bismarck, I'd say it was planned.

[vincecate]

After I posted that, I figured you'd bring in the Wiemar. The only way you get deflation in 1920 in Germany is to look at the price of their money vs gold or the way they manipulated the dollar/franc etc., NOT in terms of the real deal, which is spendable money.

The point of that URL was to explain why deflation happens before hyperinflation, not just to show one example in Wiemar.

Back in 1920 gold was "the real deal" and "spendable money".

I think Hussman explains things well too. When the government injects lots of money to lower interest rates a side effect is lower velocity of money. If interest rates are 0.2% then people are more willing to hold cash than when they are 6%. So at first the lower velocity of money compensates for the increased quantity of money and prices do not go up. In fact, if you had deflation you can keep having deflation. But after awhile interest rates will go back up and then the velocity of money will go up and prices will go up.

http://www.hussmanfunds.com/wmc/wmc110124.htm
http://www.fxstreet.com/rates-charts/bond-yield/
http://pair.offshore.ai/38yearcycle/#hyperinflationmath
http://pair.offshore.ai/38yearcycle/#delay

[OLD1953]

The problem with that idea is that inflation would have to precede borrowing. That is, the velocity of money would have to rise without borrowing taking place.

If inflation already exists, then borrowing will happen if interest rates are lower than the inflation rate. If interest rates are higher than inflation, especially if there is an uncertain future facing consumers, then borrowing will be low or nonexistant.

While economic patterns can shift in a nearly chaotic fashion, currently, we are in the latter pattern. A shift to the borrowing pattern seems unlikely at this time.

[OLD1953]

From the NY Fed. Looks to me like ppl are about down to credit for food. This hardly makes me think they are ready to go out and spend, spend, spend.

http://www.newyorkfed.org/research/nati ... Q42010.pdf

Household Debt and Credit Developments in 2010Q41
Aggregate consumer debt continued to decline in the fourth quarter, continuing its trend of the previous two
years. As of December 31, 2010, total consumer indebtedness was $11.4 trillion, a reduction of $1.08 trillion
(8.6%) from its peak level at the close of 2008Q3, and $155 billion (1.3%) below its September 30, 2010 level.2
Household mortgage indebtedness has declined 9.1%, and home equity lines of credit (HELOCs) have fallen
6.5% since their respective peaks in 2008Q3 and 2009Q1. For the first time since 2008Q4, consumer indebtedness
excluding mortgage and HELOC balances did not fall, but rose slightly ($7.3 billion or 0.3%) in the quarter.
Consumers’ non-real estate indebtedness now stands at $2.31 trillion, the same level as in 2010Q2, 8.4% below its
2008Q4 peak.

[jdcpapa]

From the NY Fed. Looks to me like ppl are about down to credit for food. This hardly makes me think they are ready to go out and spend, spend, spend.

I do volunteer work for the elderly and people on disability. It is mind boggling how many are hungry. I also do surveys in the local community to gauge the reality at "ground zero". I might have mentioned this in a previous post, but I surveyed an X'er (professional with family) and he said: "I'm scared, things are getting worse". I also surveyed a woman in her 80's (working at K-Mart and cutting her own grass) she said: "We will all be eating peanut butter sandwiches before long". The list goes on.

I am a baby boomer. When I started my career 30 years ago, I could not have "imagined in a million years" that this scenario would be staring me in the face. I have transitioned my thought process and prepared for the worst (thanks in part to this great site). I am hoping for the best. My intuition is telling me to brace myself. Thanks for the post.