December 22, 2008
– Comments (36)
An indispensibe 3-minute dose of reality
I hope the deflation nuts are reading this...
Still looking for some reading material in the above content. Simply looks like a bunch of economists speculating. With Alstrynomics....focusing on the current facts seems much more reasonable.
I am not sure how people are talking inflation when wages are going down everywhere?????
SAN FRANCISCO (MarketWatch) -- Caterpillar Inc said Monday it will cut pay and institute a hiring freeze in 2009 because of the weakened economy. The company said it will cut executive pay by up to 50%, senior managers pay by 5% to 35%, and management and support staff pay by up to 15%.
Lower wages, higher health premiums and credit contraction.
On a personal note, my health premiums went up 13% for next year.
I am going with deflation here.
Hyper inflation??? The motor is reving up, but it is not in gear.
All I see is an acorn, I swear that's it. No trees....... nope. Just the seed for a massive tree later. Why worry about that?
Where's the rule stating you can't have wages dropping in an inflationary environment? That's why we call it stagflation. You have a broadly weakening economy and prices for many goods will only get weaker as the situation deteriorates, BUT ... I think you continue to view the situation in a theoretical vaccum with respect to the USD. Commodities are traded globally, so every action to devalue the dollar is an action, consequently, to raise the value of commodities as traded in USD.
Was that meant in jest? :) By the time you see trees it will be FAR too late to protect yourself. These acorns germinate quickly, as any historical case study will attest.
there will be deflation until the depression ends, then massive inflation to pay for the sins of zero-interest rate policy. At $500/oz gold, you want to load the boat cause it will then go for a rocketride.
Pick any commodity you want relative to the dollar.
Oil, Gold, Grain, Transport costs.....they are all falling relative to the dollar.
Do the same thing with the dollar since the peak in the early 80s.
Actually, in case you missed it, gold and silver are on the rise! After holding just above the $700 mark mid-October, the price has gold has since risen 19% to today's range near $850.
Be careful to bring only well-researched facts my way, man. :)
Oh... you mean this one? :) The dollar's long-term chart is NOT a pretty picture.
I admit I do not know a whole lot about the monetary policies of the fed, but lets just say this bailout works. Say, two years from now we are beginning to see a healthy economy and new jobs are being created. Couldnt the government begin to decrease monetary supply? Therefore, atleast cushioning the impact of inflation a little bit?
That is the line they are feeding us, yes. I certainly don't believe that's a likely scenario.
Your comparison to Germany is a big stretch. They were already hyperinflating before the so-called "deflation" period you pointed out. The price of gold went up 7x in 18 months--here it went up 4x in 72 months, big difference. Gold was also too cheap at $250/oz and too expensive at $1,000/oz, so the price rise of 4x is generous.
Just to clarify... you still think gold is a good investment, but you're expecting it to fall towards the $500/oz area first? And part two of my two part question (I reserve the right to add more "parts" if necessary), if so, what do you believe the time frame for that is, as well as the destination price once it takes off?
I love it... you're on the record, man. :)
Anyone sitting on Treasuries and waiting for the $500 mark before converting to gold, I hope you have a comfy seat cushion and a solid bill of health ... it could be a while!
Perhaps you're interested in a friendly wager? I'll wager we hit $1,200 before we hit $500 (which, for the record, I maintain we will never hit until after this massive economic crisis has completely run its course).Of course, with the level of manipulation of al these markets from the gov't and their friends at the investment banks, anything is possible in the near-term! Since government intervention is the sole uknowable factor, though, I can't fathom where you're deriving such a target from.
Alstry, Yes, pick any commodity, but in real value, the dollar is eroding while gold is increasing. I picked a long timeframe to exagerate and simplify the thinking.
But what's today's dollar worth compared to one in 1900? - One Cent?
What's an ounce of gold worth today? (we'll aim low $800), and in 1900? (about $25?)
So the dollar lost 99% of it's value, and gold increased 32x. But in dollars the 32x is worth $0.32 So would you rather have $0.01, or $0.32? It's that .01 versus .32 that shows Golds store of value/wealth. Over the long haul.
But it's interesting to look from 1950 to 2007 Dollar lost 88% of its value, gold gained 20x
From 1980 to 2007 Dollar lost 60% of its value Gold only gained 6.3% (and this was when gold was expensive to start)
So any way you slice it Dollar is the perennial value looser, gold on the other hand has increased and done much better than the dollar.
If you stuck a dollar in a CD in 1900, what do you think it would be worth today. If you stuck one dollar worth of gold in a bank safety deposit box in 1900, what do you think it would be worth today.
You are comparing one dollar to $30 dollars. Not fair kimosabe.
Now do the correct math. You are obviously not familiar of with the parable of the talants. Do you keep all your cash under your bed?
The beauty of a dollar is that it collects interest while you hold it if you stick it in the bank, gold simply sits there.....but giving gold as a gift occasionally has helped me to get lucky. I have yet to try the same with cash yet:)
It is not that I think I am right on this one, I know I am.
So the irony is, now would be a good time to buy some real-estate at a low fixed 30-year rate (assuming you've got a time horizon to hold through an further market to bottoming) since the advent of hyperinflation will make the dollars you spend today virtually worthless in the future.
I'm so giddy I may just run out and do a refinance.... :P
but in real value, the dollar is eroding while gold is increasing
In real value, all curriencies are deflating. The dollar index is up again today, btw. The trillions lost in hedge funds aren't back in the system by any stretch. We're going to continue to see evaporation for a while, which requires injection of dollars, at least until we start to see inflation again. A strong dollar is a good rallying point for a recovery, and I hope Obama can get the timing right.
If you can get a loan, indeed it is a good time to refinance. About that hyperinflation, however; that's a big risk, since we may not see any inflation at all for years and years. There's a good chance we will never see hyperinflation. We're still dealing with a rapidly shrinking money supply and close to zero velocity.
We certainly do not have a shrinking money supply. :)
Kdakota, gold is a good store of value, that is why it occasionally is a good investment. However, holding commodities during depressions is a recipe for disaster. My targets are $7/oz Silver and $500/oz gold. Once we hit these points, the risk of continued deflation/depression will be overwhelmed by the risk of inflation as the economy begins to recover. I'm expecting a double-dip depression where we hit ~5,000 on the dow, $500/oz gold, $7/oz silver, we then recover, it looks good, dow regains 10,000, gold gets back to $1,000/oz, maybe even a ways over that, then we crash back down, dow to 3,500 gold back to $500/oz and so on. The first $500/oz hit will be a good buy, the second one will go down in history. Once we finally pull out of this mess for good-- 2015-17 I'm guessing, I'm expecting gold to run to $2,000/oz+. However, I've got better things to do with my money while I wait for gold to sink to my buy price.
That would translate into a retained ratio of about 10 between the Dow and gold as we have today at around $8,500 / $850. Unfortunately, GMX, the trend is clearly not your friend, as this post of mine from back in June makes the continued devaluation of the Dow in gold visibly obvious. I predict the ratio will reach 3:1 or even less before all this is over, and consider eventual Dow parity with an ounce of gold somewhere near gold's ultimate peak a distinct possibility.
A sinking dow further stresses the dollar by undermining its previously-perceived low default risk.
TMFSinchura, do you have any idea how much has been lost in hedge funds alone? The unwinding of these funds, plus CDO/CDS unwinding, is causing money to evaporate much, much faster than we can pour it back in. We're not even close to break-even. I hear this a lot, the fear of money being devalued, but we're trillions away from that point.
I'm familiar with that one, yes. I still think that if your boss said, "don't lose this- Its mine", giving it to someone else is not what you were told- But that misses the point of the parable. Imagine if you put your Boss's money in the market 6 months ago. Do you think he'd be happy with you when he got back?
I'm just trying to illustrate the declining value of the dollar, with reference to hyperinflation. Again simplified numbers and thinking. Yes with your good pal compounding, money does grow in banks. but I'm going to ignore that for now. Now I'm only talking about protection from inflation.
So gold versus dollar dollar loses. Gold versus Dollar and his sidekick compounding, gold would lose (1900-2007). Timeframe makes all the difference. With an immediate short term inflation threat, compounding will not be strong enough to assist.
Oh.. and If.....IF I put $1 of gold in a deposit box in 1900, it would be worth nothing, since the Govt would have snatched it from me. :)
The national debt is not exactly a harmless bystander in this issue. :)
Another way to look at most of those derivatives and CDO instruments, though, is that they never actually existed in the sense that would impact currency. Their value was as theoretical ones and zeros in an accountant's spreadsheet, and they were listed as assets on corporate filings, but they never truly existed as dollars. Some money was made in the transferrance of these instruments between parties, but their quadrillion-plus total value never represented part of the money supply, by my understanding. That's the illusion .. they were simply packages of debt ... I-owe-yous ... not really money nor assets in a traditional sense.
Aside from the derivatives, there were indeed massive capital losses in 2008 among U.S. investors and especially hedge funds, but I consider it likely that the $8.6 trillion intervention (and the larger ones to come) by the Fed and Treasury will rival its scope entirely.
But the thing about the money supply, most of it has been leveraged in the last several years. This is still money, however. Debt based on leveraged assets is money that's mostly gone now. We're experiencing a massive deleveraging.
Here's a snippet from an article in the Economist from Sep., before the crash:
Many hedge funds have already cut positions since the credit crunch started in the summer of 2007, and banks have tightened the terms on which they will do business with them. This has been particularly true for those that sought funding through the prime-brokerage arms of Bear Stearns and Lehman Brothers before they were wiped out.
The volatility of financial markets may intensify the pain, since both brokers and hedge funds use models which lead them to sell assets when prices move down sharply. Some hedge funds may have to give up altogether. Around 15% more were liquidated in the first half of 2008 than in the first half of 2007, according to Hedge Fund Research, a consultancy.
What hurts finance affects the rest of the economy in spades. Tim Bond, of Barclays Capital, reckons that, thanks to the gearing effect, a shortfall of bank capital of around $170 billion may reduce the potential supply of credit by $1.7 trillion.
A cut in overall lending would be a complete reversal of trend. Morgan Stanley reckons that total American debt (ie, the gross debt of households, companies and the government) has risen inexorably since 1980 to more than 300% of GDP (see chart), higher than it was in the Depression. Consumers, in particular, were encouraged to borrow by low unemployment and interest rates and (until last year) rising asset prices. Their debt jumped from 71% of GDP in 2000 to 100% in 2007, a bigger increase in seven years than had occurred in the previous 20.
If consumers start to save more or borrow less, spending suffers. In the last three months, America has seen the weakest car sales since 1993, according to Bloomberg. A general decline in demand will cause businesses to shed jobs, creating further falls in demand and more bad debts.
Once started, the process is hard to stop. “What the financial and household sectors are doing is unwinding more than ten years of a credit boom,” says George Magnus, an economist at UBS. “The idea that they can rid themselves of this problem in a matter of months is pie in the sky.”
but I'm going to ignore that for now.
Isn't that a bit like saying one is going to ignore the fact the woman has a penis and scrotum when a heterosexual male is comtemplating conjugal relations with the other and the other is not a hermaphrodite?
All I am saying is that since 1900, sticking $1 in the bank has given you better protection against inflation than holding onto $1 worth of gold....no matter where you stuck it. That takes us through a couple world wars, a depression, a number of recessions, and a president that took us off the gold standard.
Let's try not to make this too complicated. I do find it amazing for the propensity of people with advanced degrees to complicate the simple. I am not sure whether you have an advanced degree........but niether one of us can predict the future....just analyze the present and apply the relevance of the past.
Their value was as theoretical ones and zeros in an accountant's spreadsheet
They were used to back loans, for one thing. Also as insurance for bad debt, which is currently being paid, and will continue to be paid well into next year. The whole reason we had such massive liquidity in the real estate market for the last few years was due to these instruments. They all have to be deleveraged now.
Gold is like storing energy with hydrogen. It can be a place to hold wealth when the monetary unit gets devalued, but it's not so good at creating it.
insurance for bad debt is currently being paid by the Fed. :)
Now how is that contracting the money supply?? :P
And as for the closest post above: gold is only as good at creating value as the dollar is skilled at losing it.
Merry Christmas! :P
Not all of it. But the reason for that is to provide the liquidity which has been lost. The money (or instruments representing money) backing the debts is gone, however, and that can be levered several times.
And Merry Xmas to you!
Actually, that's a good way of putting it.
Everytime I try to discuss something someones gotta throw a hermaphrodite in. Geez, can't get a break.
Yes alstry, over 107 year you'd a been better off. By a whole lot, yes. That we agree.
If I had 107 year to invest it would be simple. but alas I don't (unless I get one of those cryo-tubes next to Walt Disney)
But over the next 3-6 you might not be better off. Because There's going to be some wicked spikes that 107 years had to smooth out. Again, only my thoughts, so they might be worth less than the zimbabwe'esqe notes we might be holding in the near future. But then again if the rest of the world is printing Hareare style, ours might not be so noticable.
By the way, what do we have like three converstations going on here? I'm going to reduce the chatter and go finish my shopping.
Merry Christmas, Happy Hannuka, and enjoy any time off this week.