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horgad
1000+ Penny Miser Member
USA
1641 Posts |
 Posted - 10/06/2008 : 08:59:15
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It is hard deny right now that we are deflating...just about everything is acting like a classic deflation (including unfortunately copper), but I am still not convinced that it will last long. I think the current deflation will quickly reverse and the FIAT hoarders will soon be hit hard and forced to run to hard assets. If I am wrong and deflation continues, commodities will get beat down to unbelievable lows. Anyhow here is an interesting article on the subject that details a possible place to hide.
Note the divergence in the official gold price vs. the street price and note the collapse of commodities while gold stays strong. Sound familiar? Classic deflation...
The Behavior of Gold Under Deflation
"Our historical review clearly shows that whenever deteriorating credit conditions undermined the credit quality of issuers of paper currency, gold was preferred to paper currency as a hoarding vehicle. The black market price of gold traded at a premium to its official convertibility ratio during these periods."
"In early 1932, ... American $20 gold eagle coins reached as much as $30 on the street, a 50% black market premium (Armstrong p. 399)."
"On the streets, U.S. gold coin began to command a premium over and above paper currency. While gold was rising in street value, other commodities continued to decline. Sugar fell to 1 cent per pound, a record low. Copper was bringing 6 7/8 cents per pound for export and 6 1/4 cents for domestic delivery . . . Rubber fell through its old historic low, dropping to 4 cents in February. (Armstrong, p. 399)"
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OH and why I think the deflation won't last long...
"Deflations typically end after crisis conditions force policymakers to enact large-scale inflationary policies designed to counteract deflationary conditions."
Jeez, I think we are seeing that now after only, what, maybe 6 months of deflation?
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Edited by - horgad on 10/06/2008 09:07:22 |
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swusc
Penny Hoarding Member
USA
553 Posts |
Posted - 10/06/2008 : 13:57:03
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Two points. Gold in the 1930s isn't a good indicator. It was the currency, so it wasn't a commodity. In deflation... Cash is King. In the early 30s, Cash and Gold were the same thing. Then after the gold ownership ban and the revaluing gold got a huge bump vs cash.
$700 billion bailout is not inflationary compared to the current deflation. It isn't a drop in the bucket. The current asset deflation is massive just the stock market took off twice that last week. That isn't counting today or any other market... just major U.S. equities.
In the 1930s... you saw FDR do everything he could think of as inflationary fight vs. deflation. He lost. The 10 year average was like -1 to -2%. That was after all the government handouts and price fix of almost doubling the value of Gold (or 100% inflation).
We are in trouble and it wasn't inflation that is caused the problems. It is deflation.
Commodities dropping check
Real Estate dropping check
Corporate Bonds dropping check
Treasuries increasing check (flight to safety)
Stocks dropping check
Unemployment rising check
and the list could go on....
-SWUSC |
`Everybody is ignorant. Only on different subjects.' Will Rogers
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." Alan Greenspan, 1966. |
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horgad
1000+ Penny Miser Member
USA
1641 Posts |
Posted - 10/07/2008 : 08:09:24
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quote:
We are in trouble and it wasn't inflation that has caused the problems. It is deflation.
Commodities dropping check
Real Estate dropping check
Corporate Bonds dropping check
Treasuries increasing check (flight to safety)
Stocks dropping check
Unemployment rising check
and the list could go on....
-SWUSC
So you think that that we are only at the start of a prolonged multi-year deflationary period? I have followed inflation/deflation/stagflation arguments for years and have twisted my guts in knots trying to puzzle out the answer.
At one time, I was firmly in the deflation camp. The credit bubble was going to implode, huge amounts of wealth would be destroyed, cash would be in short supply, and we would have the great depression all over again.
Then a few key points put me into the stagflation camp with a possible hyper-inflation looming out in the woods:
1. Money was backed by gold and silver in 1929, but it is now pure FIAT.
2. Historically, multi-year deflation does not occur in countries with FIAT currencies. (They always inflate.)
3. The powers that be in the country continue to try to print the country out of every problem.
4. If foreigners start to panic out of the dollar, it won't matter how much wealth has been destroyed in the credit bubble. Our currency will collapse.
Now, the current swift and massive deflation has taken me by surprise and forced me to once again reevaluate my position, but still I can find no convincing argument that this deflation can or will last long.
There seems to be no limit to the printing powers of the current government...I don't think this was the case in the 30s. It is just a matter of whether or not the current government is willing to print enough to cover all of the destroyed wealth and I think that they are.
Of course the market has humbled me before and no doubt it will continue do so in the future... |
Edited by - horgad on 10/07/2008 08:11:18 |
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swusc
Penny Hoarding Member
USA
553 Posts |
Posted - 10/07/2008 : 11:41:48
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1. Everyone keeps saying the currency is backed by nothing, but that isn't true. It is backed by debt. Why does it matter if it is Gold or Debt as long as it does its function? It is true they have build in a 2-3% inflation target, but that is covered by interest earned. The net effect is money is a means of commerce...not a store of value. If you want a store of value, then buy assets.
2. In the long term...there will be inflation. That is true. That said, it could be very mild. Gold peak in 1980 at $800 an oz and almost 30 years latter it is still around $800 an oz. Over that time frame it generate no income and lost a lot of purchasing power.
3. They are printing a lot of money, but it can be removed from the system too...if needed. They are trying to replace lost leverage. Leverage is inflationary, so they can print to replace to cancel out private sector's lost of leverage.
4. They can't get out. They don't hold cash (at least not much of it). They hold assets. If they rush to sell those assets the price drops, which creates a higher return for the next investor. Someone will step in to support that. If they run to the exits in the foreign currency markets then interest rate arb players will eat them for breakfast. So if they want out, then they are going to take it on the chin twice and hard. I highly doubt they are going to want to get hit that hard investment wise.
4a. Eurozone and Japan would not let the currency get to far outside a normal range without selling Euro/Yen to stop the rise. They want to be able to export goods or their economies will tank.
5. The U.S. dollar is the world currency for two reasons. One we have the strongest government and economy. No matter how bad it looks here, it usually looks worse there. How much do you really trust the Yen? How much do you trust the Euro after 8 years? You trust the peso?
6. I don't think we will get a depression, but the chance is there. I doubt we get much inflation until the deleveraging stops. I highly doubt banks will leverage up to these levels for years to come. They will not forget so soon.
I collect coins (silver). I don't view them as investments though. They can't be eaten and they don't generate income. They might increase in price, but if you sell them-- you are back to cash. If you buy ownership in businesses, then you get income from that ownership. Sure the price of that ownership changes, but you still own the same share of the business (assume they don't raise capital).
If the world goes into the crapper...what good is $100 face in silver? What good is a few oz of gold? Do you really think people are going to start trading usable goods for metals they don't need to survive? They are going to want something they need. If you were in the middle of the ocean (no boat, in the water) with a life jacket on, then how much gold would you want for it? You need the life jacket and the gold is just extra weight.
The spot vs store price could be a lot of different things. It doesn't have to be part of some master plan by the government.
Silver and Cooper are used by the economy...so the economy tanks so does their price. Silver does have investment demand, but film industry is using a lot less now too.
Gold is different. It doesn't really react to other elements. It has other properties that are useful as well. It is view as a safe haven for some reason. I am not sure why, bc it isn't all that rare compared to other things. Yet it is useful for things.
I am sure the picture will change again... to people fearing stagflation or hyperinflation. The markets move fast at times and when they put the breaks on leveraging and reversed course...it hit a lot of people hard.
-SWUSC |
`Everybody is ignorant. Only on different subjects.' Will Rogers
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." Alan Greenspan, 1966. |
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 10/07/2008 : 13:55:32
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deflation is the shrinking of the money supply. you can't always measure the money supply so prices are a proxy. but falling or rising prices is not the same as deflation/inflation.
from all appearances, they are printing money faster than ever today.
some hedgies may be bust and liquidating everything; that does not mean we have inflation but only falling prices.
the deleveraging of financial institutions may be shrinking the money supply of the shadow banking system, but that is not a foregone conclusion.
yes, our money (federal reserve notes) is backed by debt. 2 big differences with that compared to gold. first, its difficult to debase gold. but in contrast, as the govt incurs more debt, the value of all debt - teh new debt and outstanding debt - dimdinishes. Also, the fed has traded half of its treasuries for troubled assets. so the quality of the debt backing our dollars is very suspect. |
Buying:
Peace/Morgan G+ at $15.00
copper cents at 1.3X
wheat pennies at 3X
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 10/07/2008 : 14:02:05
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deflation is the shrinking of the money supply. you can't always measure the money supply so prices are a proxy. but falling or rising prices is not the same as deflation/inflation.
from all appearances, they are printing money faster than ever today.
some hedgies may be bust and liquidating everything; that does not mean we have inflation but only falling prices.
the deleveraging of financial institutions may be shrinking the money supply of the shadow banking system, but that is not a foregone conclusion.
yes, our money (federal reserve notes) is backed by debt. 2 big differences with that compared to gold. first, its difficult to debase gold. but in contrast, as the govt incurs more debt, the value of all debt - teh new debt and outstanding debt - dimdinishes. Also, the fed has traded half of its treasuries for troubled assets. so the quality of the debt backing our dollars is very suspect. |
Buying:
Peace/Morgan G+ at $15.00
copper cents at 1.3X
wheat pennies at 3X
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swusc
Penny Hoarding Member
USA
553 Posts |
Posted - 10/07/2008 : 14:19:44
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That is not what deflation means in economic terms.
Deflation is the decreasing of prices of comparable goods over a period of time.
SWUSC |
`Everybody is ignorant. Only on different subjects.' Will Rogers
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." Alan Greenspan, 1966. |
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 10/08/2008 : 05:26:49
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quote:
Originally posted by swusc
That is not what deflation means in economic terms.
Deflation is the decreasing of prices of comparable goods over a period of time.
SWUSC
that is what the government wants you to think.
actually, deflation and inflation refer to the money supply.
when prices of computers go down, or bicycles formerly made in the U.S. which are now made in China, that is not deflation. The general price level goes down due to manufacturing or labor efficiencies. Inflation and deflation are getting at the effect of changes in the money supply on prices. |
Buying:
Peace/Morgan G+ at $15.00
copper cents at 1.3X
wheat pennies at 3X
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Nickelless
Administrator
USA
5580 Posts |
Posted - 10/08/2008 : 06:33:50
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To paraphrase James Carville (who hasn't??): It's the fiat economy, stupid.
And the printing presses are getting faster.
We're heading for the crapper very soon because the amount of fiat dollars around the world both exceed the U.S. government's ability to redeem and our REAL budget deficit accordint to GAAP outstrips the U.S. GDP by a huge margin. Some of you have probably read this article already, but I think it's well worth reposting:
You must be logged in to see this link.
Horgad, you and I are on the same page. I don't think the current deflationary period will last very long either.
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Edited by - Nickelless on 10/08/2008 06:39:46 |
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Nickelless
Administrator
USA
5580 Posts |
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swusc
Penny Hoarding Member
USA
553 Posts |
Posted - 10/08/2008 : 08:52:24
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quote:
Originally posted by Lemon Thrower
quote:
Originally posted by swusc
That is not what deflation means in economic terms.
Deflation is the decreasing of prices of comparable goods over a period of time.
SWUSC
that is what the government wants you to think.
actually, deflation and inflation refer to the money supply.
when prices of computers go down, or bicycles formerly made in the U.S. which are now made in China, that is not deflation. The general price level goes down due to manufacturing or labor efficiencies. Inflation and deflation are getting at the effect of changes in the money supply on prices.
You can call it what you want, but when you talk to someone educated in economics...that isn't what the term means. Labor efficiencies and population growth is why economics are naturally deflationary.
That is why the money supply grows to mute the natural deflation and to produce a target inflation rate. You don't want deflation. You don't want hyper inflation. The goal is low inflation to get people to not hold cash, but to invest or spend it. You don't want everyone to just hold all the cash or no transaction can occur.
Cash should not be a store of value. It would be if their was no inflation or deflation. Look at the world economy when we were on a gold standard. It wasn't that great. Yea we have problems now, but we had problems then. We left the gold standard because it sucked.
-SWUSC |
`Everybody is ignorant. Only on different subjects.' Will Rogers
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." Alan Greenspan, 1966. |
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horgad
1000+ Penny Miser Member
USA
1641 Posts |
Posted - 10/08/2008 : 09:39:33
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I don't want to get too wrapped up in this thread, but I have to jump in again here.
"We left the gold standard because it sucked."
I strongly disagree; the hard truth is that we left the gold standard so the rich and powerful could more easily steal wealth from the workers. This is has proven true time and time again throughout the history of FIAT currencies.
A well managed FIAT currency may indeed by better than a gold backed currency, but there is no such thing as a "well managed FIAT" currency. At best it is a pipe dream that leads to a constantly diminishing standard of living for the average Joe. At worst it is crime consciously perpetrated on us by the rich to rob us working slobs of our hard earned wealth.
People are seeing their life saving disappear overnight in Iceland thanks to a FIAT currency and the gold stadard sucks?
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swusc
Penny Hoarding Member
USA
553 Posts |
Posted - 10/08/2008 : 10:20:54
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That isn't true though. The average joe is better off now than they were. Look at the average wage in the early 1900s vs prices for goods like bread, milk, and etc. Look at the average wage vs. prices now? The average person can buy more now than they could then. The standard of living as greatly increased.
I understand that part of that increase was due to developments outside of the currency, but the currency change provided the liquidity to make those investments. The gold standard allowed commerce to occur, but their wasn't extra liquidity to make investments. Look at the world before paper money. The old wild west was mostly a barter economy as money was rare.
The gold standard had bust too. So this isn't just a FIAT currency problem. Maybe we forget our Great Depression that was under gold standard at that time. There was a ton of bust in the 1800s and then Europe had bust too. I guess no one had their savings disappear in the 1930s.
Both systems have major problems. You are right that a well managed FIAT currency is best, but their isn't one. The question is what system has more problems... the current FIAT system or the Gold Standard. The current FIAT system of dollars hasn't had a bust yet, but gold had a ton. So I would say the cucrrent system is still winning. If it blows up, then we might go back to an asset backed currency.
Also, asset backed currencies are very bad use of that resource. You have to trap goods (in this case gold) as an exchange medium. How much gold is used now? Well we hurt that part of the economy by sucking up their raw materials to use as money.
-SWUSC |
`Everybody is ignorant. Only on different subjects.' Will Rogers
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." Alan Greenspan, 1966. |
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 10/08/2008 : 15:47:13
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quote:
Originally posted by swusc
quote:
Originally posted by Lemon Thrower
quote:
Originally posted by swusc
That is not what deflation means in economic terms.
Deflation is the decreasing of prices of comparable goods over a period of time.
SWUSC
that is what the government wants you to think.
actually, deflation and inflation refer to the money supply.
when prices of computers go down, or bicycles formerly made in the U.S. which are now made in China, that is not deflation. The general price level goes down due to manufacturing or labor efficiencies. Inflation and deflation are getting at the effect of changes in the money supply on prices.
You can call it what you want, but when you talk to someone educated in economics...that isn't what the term means. Labor efficiencies and population growth is why economics are naturally deflationary.
That is why the money supply grows to mute the natural deflation and to produce a target inflation rate. You don't want deflation. You don't want hyper inflation. The goal is low inflation to get people to not hold cash, but to invest or spend it. You don't want everyone to just hold all the cash or no transaction can occur.
Cash should not be a store of value. It would be if their was no inflation or deflation. Look at the world economy when we were on a gold standard. It wasn't that great. Yea we have problems now, but we had problems then. We left the gold standard because it sucked.
-SWUSC
deflation and inflation are monetary phenomena.
price levels move for a variety of reasons.
for example, house prices are moving down because there is a glut of houses and a shortage of fools to buy them.
so you have to be careful in making a conclusion that we have deflation based on your observation of prices.
my observation of prices is that that the following are still going up:
food
gas
dry cleaning
automobiles
rydales
coin shop premiums
bicycles at walmart
lunch at a food court
shoes
legal fees
canned goods - vegetables, fruit
airline tickets
hotel rooms
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Buying:
Peace/Morgan G+ at $15.00
copper cents at 1.3X
wheat pennies at 3X
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Deflation
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