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speedybure (< 20)

THE GREAT ESCAPE: GOLD AND SILVER

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September 05, 2009 – Comments (3) | RELATED TICKERS: GLD , SLV

Although many people don't realize the true meanining of inflation, it is not important as long as we stay consistent. Okay let's assume inflation is an unneccessary increase in the price of goods and services. Well let's get this deflation non-sense out of the way as credit doesn;t dissappear should it be malinvested. The argument for deflation presupposes somehow there is a destruction of "monies" due to malinvestment and or credit defaults. 

Well I'm not eintstein but things don't just dissappear into thin air as the masses are claiming. Don't you find it odd that one of the shining characterstics of the prosperous 19th century was a constant existence of deflation. This is because productivity increased faster than the money supply ( which can be attributed to a 20%+ reserve requirement which the banks were responsible to maintain as well as having outstanding credit backed partly by gold. This was also during the "free banking era when Andrew Jackson abolished what is similiar to a central bank but with a slighly different dicatomy). Deflation IS part of a free market as it actually increases the purchasing power of the currency and thus the overall standard of living. But doesn;t anyone find it odd that since the establishment of the FED in 1913, the USD has depreciated 96% (lost 96% of its purchasing power). If that wasn;t bad enough, we have slowly but surely ensured the collapse of the USD in the next decade. This didn't come about from Greenspan or Bernanke, although they put several nails in the coffin, but started 40 years ago.

Post Bretton Woods (It was a terrible system by the way), the USD became the reserve currency. This like welfare or fractional reserve banking is nothing more than a moral hazard waiting to happen. Having paper money, unbacked by real assets or in other words , the government monopoly of the mint is a politicians wet dream. As opposed to a monarchy, who hands down his reign to his son or family, a politician has a short time to accomplish his personal goals as opposed to the peoples. A monarch has to be on his toes and treat the people right so A) he can pass down his kingdom with support from his people to future generations and B) not to abuse his powers as he is solely responsible for the failings of his policies i.e taxation thus upsetting society puts his life in danger. This is not a promotion for monarchy was meant to point out the nature of US politics. Perhaps it is better to think of it as such: "Would you treat a house you leased or a house you bought with more care assuming you would in no way be responsible for any damages?" Moving on..

The USD being the reserve currency has allowed up to squander nearly 12 trillion from selling interest bearing debt to the public and foreigners. Instead of investing that money prodcutively we sqandered it and now have nothing left. As interest rates (ON LONG BOND) have nearly doubled in 2009, so has a susbstancial portion of the interest of the aforementioned debt. Current conditions are reminiscent of the late 1970's but about 100x worse. That being, lets assume mid and long term rates average 10% going forward. That means we will have to pay out 1.2 trillion out annually to service our debt. We also are spending somewhere in the neighborhood of 800 billion a year on defense (which is now in Afghanistan), 950 Billion (unfunded of course) on medicare and medicaid. This doesn;t seem to outrageous but lets go out 5 years... Interest to service the public debt 1.5 Trillion + 800 Billion on defense + 1.4 Trillion ( unfunded liabailities increase nearly every year) = 3.7 Trillion just on these three things. Add in government programs i.e postal service, Amtrak, HUD, etc and the number start to become very outrageous. Tax revenues will never be able to come close to paying for this and the government will have to print the difference. Deficit spending in FY 2009 using accrual accounting tops 5 trillion dollars excluding nearly another 4 trillion for bailouts. In other words if GAAP accounting were used 2009 would show a deficit of 8 to 9 TRILLION DOLLARS. If that isn't enough....

The practice of fractional reserve banking is such.. A customer comes in to take out a loan and pay a specified rate of interest plus principal. But the banks do not draw from retained earnings, instead they make a fractional deposit with the central bank which creates the rest out of thin air. For example if John Doe wanted to borrow 1m dollars, the transaction would go as follows... After the terms of the loans are agree upon and John has made the down payment (which has been 0 in some cases), the bank then makes a 100k deposit with the FED in return for an additional 900k creation of fiduciary media out of thin air by the FED. People tend to pay off most loans but when the fed manipulates interest rates causing an intemporal missallocation of resources , investments that originally seemed to be profitable turn out to be malinvestments. This is all well and good of course and long as John can repay the bank through his savings or something of that nature. But what happens when an economies savings rate is negative while there is a housing bubble augmented by no money down loans given to anyone who has a face? DEFAULTS! Defaults have enormous consequnces when done on a large scale- Remember the money the FED created out of thin air? Well now 90% is pure inflation (assuming nothing has been paid back for simplifications reasons). 

 Now when you combine that with easy money policies i,e the nearly immediate availability of credit (a 150%+ increase in the monetary base - the narrowest measure of the money supply), you have a problem similiar to that of Zimbabwe, Argentina, Mexico, Weimar, etc on your hands.) This isn't the great depression when we had a strong economic foundation i.e high savings and being the largest creditor nation instead of the largest debotor nation in history. We didn't have trillions of unfunded liabilities and a trillion dollar a year military empire. We had a good manufacturing base which we have exported and become completely reliant on the service economy.

Lets add this up- Fiscal Irresponsiility to the highest degree(deficit spending that is unprecendeted in terms of dollar amount), trillions of unfunded liabilities, a 12 trillion dollar debt burden to the public and our trade partners, reckless lending (which is almost forced upon a bank who wished to remain competitive when central banking as opposed to private banking is in play), Trillions worth of bailouts which will be followed by trillions more worth of bailouts as thie fiat money system like every one before it comes crashing down. Well I guess cash for clunkers may just get us out of this mess!

Protection lies real assets: Gold, Silver or anything real.

GLD, SLV 

3 Comments – Post Your Own

#1) On September 05, 2009 at 10:53 AM, ChrisGraley (29.66) wrote:

Good post speedy! For deflation to occurr, we would need to be taking money out of the system, not putting even more in.

I'm sure someone is going to post about the velocity of money next, and a slower velocity of money will only slow the rate of inflation and not reverse it. Even the impossible velocity of zero does not take the money out of the system.

The government has a few options to actually take money out of the system, but the negative side effects of those options would create an economy worse than we have now, if we don't have some kind of job creation before we remove the money.

There is not any possible way to remove enough money out of the system to reverse decades worth of poor fiscal policy. Even if we had a job surplus in this country, the amount of money that we would need to remove from the system is close to the global GDP. 

Removing even the smallest amount of money from the system still doesn't stop our debt obligations.

At some point we are going to have to default on our debt, and our only hope is to catch the rest of the world off guard when we do. If the rest of the world shuns our debt even before we default, they will cause the default for us. We at least have a chance to lesson the effects of default if we have a plan in place.

 

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#2) On September 05, 2009 at 11:41 AM, TigerPack1 (86.69) wrote:

Great effort here.  I wish there was more debate about what's really happening in the credit creation game in the U.S. and elsewhere on CAPS.

Eventually, in two to three years, we are likely going to see much higher rates of inflation than most investors are prepared for. 

While I do agree that "credit" creation is skyhigh right now, the actual money supply (either M-1 or M-2 measure) is not showing significant growth rates beyond a normal recession/early expansion cycle, at least versus the numbers I am exposed to.  Without a significant increase in the actual supply of paper money in circulation, I don't think you can mathematically argue that high rates of inflatoin are here.  Other third-world countries see a huge RISE in paper money in circulation just before and coinciding with skyhigh rates of general price inflation.

The 'free' reserves in the banking system remain quite high the last few weeks, if not at records, which bodes well for both the economy and the stock market, and credit/loan creation.

What bothers me and others like Warren Buffett is that borrowing trillions at near zero percent interest rates is very easy, especially when $1.5 trillion in government debt supply has been accumulated by the FED directly and foreign government entities the past 12 months.  The U.S. investing public and foreign investors have actually ponied up very little money to buy bonds yet, and will not until yields rise off the near zero setting in early 2009.  The question is: how high will interest rates need to go to attract enough demand for debt issuance, so that the FED and foreign governments can cut back their buying? 

In my opinion, we will see markedly higher short and intermediate-term interest rates over the next year in the bond market to meet a more realistic supply/demand balance, which will put the brakes on consumer spending in the middle of next year, and slow the recovery to a trickle of new growth in the second half of next year.  This situation, which may create another stock market selloff in 2010, will also slow the necessary ingredients for hyperinflation.  What the government does to combat the still weak economy in mid to late-2010 will determine if we have serious inflation in 2011.  Today, I cannot accurately figure out exactly what the choices or final decisions will be in this regard.

At this stage, disinflation trends remain, and higher interest rates will not help the idea of skyrocketing inflation.

That's why I am NOT a believer in the gold and silver rally the last few weeks and think most investors would be smart to wait for a better buy point in the precious metals next year, to get ready for what appears to be an inevitable inflation from all the "credit" creation schemes out there.

-Tiger's Two Cents

 

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#3) On September 11, 2009 at 2:30 PM, peachberrytea (65.51) wrote:

hmm this isn't really related but for SLW, are the miners that sell silver to SLW contractually obligated to produce a certain amount of silver per year?

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