Inflation or Deflation?

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Inflation or Deflation?

Post  Shelby on Thu Oct 23, 2008 1:37 pm

Also with prices so volatile, zinc, capex, and input costs, it might not make sense to formulate the final feasibility economics for large capex mines. Overall I see the coming hyperinflation as a real killer for any kind of long-term planning. The nimble mines or just drilling out the precious metals and waiting, may be the wisest way to deal with all the uncertainty. We could have a hyperinflationary depression (stagflation or depflation) in the west, and have a boom in credit in Asia, and that could come with a flip of a switch by the powers-that-be which control the currency exchange rates (we all know Yuan is artificially pegged).

Real savings is what determines investment. I think the Asian stock markets are possibly less of a gage of their decoupling, because their savings rates are so much higher than in West, unlike the West whose illiquid net worth is intimately tied to the financial markets. I think the developing world could rapidly decouple if they revalue their currencies upward again the West. And I think this is what gold and silver will be signaling.

Then again, markets are so nationalized and socialized by now, I am never confident that the free market concepts are winning in any given short time frame.

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It is crystal clear to me now

Post  Shelby on Thu Oct 23, 2008 11:51 pm

I pointed out that gold merely tracks inflation (when inflation is not successfully obscured from the general public):

http://goldwetrust.up-with.com/general-f1/stocks-vs-precious-metals-vs-bonds-vs-real-estate-t11.htm

Starting in August 2007, gold rocketed up to $1000+ by March 2008, because there was an expectation that the Fed was hyperinflating. But the Fed was merely spending it's existing savings of TBonds from it's balance sheet. The premature goldbugs wave into gold & silver, which was encouraged on by the media and price fixers, peaked in March and all those who bought at the March peak, paid 125% too much ($21 / $9.30) short-term. Not until October 2008 did the Fed exhaust it's balance sheet savings and start up the helicopters to drop money, and boy they appear to have really slammed on the accelerator:

http://nowandfutures.com/key_stats.html#all

So now the the media and price fixers are trying to convince the wider public of "deflation" when in fact the hyperinflation has finally begun.

I want to be early on this wave.

Note I was mostly buying 90% silver at $16s, and I see it is very hard to find now and often selling at about $4.70 over spot, or roughly $14. So on that, I am only down -12% (if I measure in fiat) as of today.


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Re: Inflation or Deflation?

Post  Shelby on Fri Oct 24, 2008 3:37 am

I like how this article explains that gold & silver have been largely disconnected from M3 and $600 trillion expansion in credit swaps, so why would the implosion of those bring gold down:

http://financialsense.com/fsu/editorials/galakoutis/2008/1023.html

It is the implosion of those other forms of investment/finance, that were competing with gold, that will cause gold to rise. See my two March 2007 articles about how these Derivatives are competing with gold:

http://www.gold-eagle.com/research/moorendx.html

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one of the best articles I have ever read (thanks SRSrocco for posting it at Hommel forum)

Post  Shelby on Sat Oct 25, 2008 11:12 am

http://market-ticker.denninger.net/archives/622-Fiscal-Cat-5-Hurricane-Warning.html

...Now sure, The Fed can start printing money like mad and buy all these Ts, making their balance sheet expand like a balloon - or a bubble. And Bernanke, yesterday in his testimony, claimed that this didn't constitute "printing money" or "inflating the money supply."...

...The problem is that this is only monetarily neutral if the asset is actually worth a dollar (shelby notes, i.e. "is liquid"). If it is in fact worth 50 cents then he printed the other 50 cents, and devalued every other dollar in the world by the same amount...

...An asset is worth only what an uncoerced buyer and seller will transact at. This is first-semester economics...

I had been making this point about liquidity also:

http://siliconinvestor.advfn.com/readmsg.aspx?msgid=25092655

...I think it key to say that money supply aggregates (e.g. M3) are not liquid capital. So as long as most people do not jump off the Titantic (dollar), then the system can hyperinflate the M3 as has been the case since 2006, without it manifesting into hyperinflation of prices (that matter to those public...food is only a small portion of American's expenses...housing/stocks/bonds is a huge component of their net worth). But once the public starts to cash out of dollars, then hyperinflation results...

http://siliconinvestor.advfn.com/readmsg.aspx?msgid=25098652

...unlike the West whose illiquid net worth is intimately tied to the financial markets...

http://siliconinvestor.advfn.com/readmsg.aspx?msgid=25102515

...I was saying this a long time ago, remembering how many NPLs in Asia during the 1997 crisis, and noting that China had grown way too fast on redundant export industries, for it to be consistent with a sustainable development. But the wildcard is higher savings rates and low penetration of personal credit, at least in come of the asian countries. But I am not convinced that there really are higher savings rates-- that may be stored in illiquid things like houses and condos?...

Now back to the article, to see the Fed will make Tbonds illiquid:

http://market-ticker.denninger.net/archives/622-Fiscal-Cat-5-Hurricane-Warning.html

...inversion disappeared from LIBOR but moved over into the intermediate area of the US Treasury Curve, where it is far more dangerous.

China, Japan and Saudi Arabia should bring the curtain down on this farce right damn now, because Treasuries are rapidly becoming no more secure than ordinary corporate debt and the buyers sure as hell aren't being compensated for that risk.

Treasury buyers are being robbed blind along with US investors who think they're "fleeing to safety."....

And we very near the point where new debt is pushing on a string, everything in fiat economy becomes illiquid!, this is the end point that NZ Andy and I had theorized in the Hommel forum back in late 2006 or early 2007:

...There is a very real risk that this Treasury Issue could force GDP return on new debt below zero. If that happens then the stability of the monetary system disappears immediately and you will see instantaneous and very large fails in the Treasury marketplace...

...Everyone is screaming about "increasing credit growth" - including Nouriel Roubini this morning on CNBC. What Nouriel and the rest who are calling for this sort of "tonic" are missing is that you can't increase credit growth into the market until the existing bad debt has been defaulted as the GDP contribution from additional debt load is dangerously close to going negative, and as it approaches zero you get no economic benefit from doing so...

...If that ratio goes negative then you are forced to issue new credit (debt) just to cover interest payments, at which point you no longer can get out of the mess without what amounts to a monetary and economic system collapse...

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Time is running out to "do something"

Post  Shelby on Sat Oct 25, 2008 8:55 pm

Disclaimer: consult your own expert, these are only my opinions.

We only have about 6 - 8 months to convert as many 1000oz bars into silver coins as possible and into the public's hands:

http://www.leap2020.eu/GEAB-N-28-is-available%21-Global-systemic-crisis-Alert-Summer-2009-The-US-government-defaults-on-its-debt_a2250.html

...our researchers anticipate that, before next summer 2009, the US government will default and be prevented to pay back its creditors (holders of US Treasury Bonds, of Fanny May and Freddy Mac shares, etc.). Of course such a bankruptcy will provoke some very negative outcome for all USD-denominated asset holders. According to our team, the period that will then begin should be conducive to the setting up of a « new Dollar » to remedy the problem of default and of induced massive capital drain from the US...

...which means for our researchers that, at the end of this semester, the world enters the « decanting phase » of the crisis, i.e. a phase when the outcome of the shock settles down. This phase is the longest (from 3 to 10 years, according to the country) and the one affecting the largest number of people and countries. It is also the phase when the components of new global equilibriums will start to appear...

Gold and silver in your hands will be the way to navigate this coming "martial law"-like shift:

http://financialsense.com/fsu/editorials/gorton/2008/1024.html

This shift will be a "mother of all depressions", but it will also be hyperinflationary for "real goods", because the system has misallocated capital so perversely that we have redundant factories in China for junk we don't need, and underinvestment in basic things like food production, with the wild swings in food/commodity prices breaking the backs of farmers/producers who take on debt to expand and are now bankrupted:

http://financialsense.com/editorials/petrov/2008/1024.html

Butler also explains this from 7 - 9 minute point of interview:

http://www.netcastdaily.com/broadcast/fsn2008-1025-3b.mp3

Note I am implying that the prices of commodities will skyrocket again, but that means input costs will as well, but capital will be rare, because all we have is perversely mis-allocated credit (promises) on the net balance sheet, as I had warned in 2007:

http://www.gold-eagle.com/editorials_05/moore031407.html

...I contend that at the end, there will be only dollar debt remaining on net balance sheet (net worth will have moved out of fiat). The debtors (holding no gold or silver) will be happy to have their debt revalued lower relative to gold, the gold holders will be happy to receive some gold instead defaulted dollar debt, and the indebted gold holders may lose their gold via means-tested bankruptcy laws. The Amero will likely be fractionally backed by gold, with the fractional nature insidiously hidden to appease the majority who want to continue to use debt...

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Excellent conference call

Post  Shelby on Mon Oct 27, 2008 12:36 am

http://events.startcast.com/events/199/B0003/code/eventframe.asp

On the 50 - 52 min, I think he is too optimistic in the sense that I think we will get another 1970s-like complete "I hate general stocks" capitulation. I will wait to buy general stocks. But I agree with him, we may get a reversal on commodity stocks within 2 years, especially gold & silver because of the hyperinflation baked into the cake. But I think it may be still too early to buy commodity stocks (at least waiting for tax selling season), which is painful for me to say because I own some such stocks (ouch!). And remember from my prior posts I think hyperinflation does not begin in earnest until people dump dollars, which must happen for the developing world to not be dragged down by the dollar derivatives credit implosion. Problem is that I don't know if developing world can decouple their currencies (to a commodity currency?), as their financial systems may spagetti intertwinded into these imploding derivatives, which are imho much, much larger ($quadrillion?) than I think he cautioning. So again, I think he has the theme correction, but it will be more extreme than he expects (he got it wrong up to this point, admits he didn't see it coming in TED spreads), in that we will have massive stagflation (depflation), unemployment, high commodity prices, meaning NO ONE MAKES MONEY EXCEPT FOR THE GOVERNMENT, CENTRAL BANKS, AND THEIR FAVORED PARTIES.

It seems people are having a hard time adjusting to the reality of the extremism of the orgy in debt and derivatives that has accumulated since we left the gold & silver standard at end of 1960s. Imo, pay back is going to be consumerate.

Interest rates will have to go up in order to compete with gold due to hyperinflationary spiral coming (gold pays no interest so excels in negative real/inflation-adjusted interest), but interest rates can not go up without causing massive defaults in (quadrillion?) derivatives, thus I see the only way out is a default of the dollar financial system. So the interest rates in the dollar system goes to negative infinity, near vertical hyperinflation, and probably a martial law type transistion to a new gold & silver basket (at least in west, and maybe also in developing world to the extent their financial systems are intertwined in the derivative "weapons of mass destruction"). In other words, interest rates can not go up, because gold & silver must win this time. To the extent of the delay that the move of the masses into gold & silver is held back (by numerous factors, mostly disinformation, price fixing, etc), then the depflation crisis will worsen. The relief only comes when the dollar dies, dollar debt is wiped off the balance sheet, and we start over again with gold & silver money. There is no other possibility. There is no way to not have complete default. The fiat, credit, fractional reserve Ponzi has reached it limit (in this incarnation), as explained in a prior post in this thread that GDP growth per unit debt growth is going negative. So the current dollar strength can be seen as the big inhale to service prior defaults, to be followed by a massive exhale of increasing levels defaults. This cycle will repeat until the dollar financial system is completely broken. The only unknown for me is whether the developing world decouples their financial systems, which I assert can not happen without a gold & silver backing, for the reasons so stated herein.

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Lurking "exogenous events"

Post  Shelby on Tue Oct 28, 2008 4:48 am

The post Subject is a Warren Buffet quote.

The reason I stated in prior post of this thread, that I expected worse outcomes yet, is because of the likelihood of massive amount of derivatives still waiting to explode, especially on any increase in interest rates, yet (as I explained in prior post in this thread) gold goes to moon in negative interest rates (if interest rates don't rise)-- a "catch 22" conundrum.

http://financialsense.com/fsu/editorials/deepcaster/2008/1024.html
http://goldwetrust.up-with.com/general-f1/derivatives-what-are-they-what-do-they-do-open-discussion-t4.htm#7

And per prior post, it is impossible for the Fed to stimulate credit beyond the current dollar-credit paradigm cliff, because credit growth now results in negative REAL (inflation adjusted) GDP growth, which is hyper-inflationary by definition (more credit = less real production = higher prices given credit is money, every dollar is created as a fractional reserve debt). The only way out is to let the defaulted paradigm default. There are only 2 ways to do this:

  1. Allow the defaults, do not bail out, strengthen the value of the dollar. This would be a deflationary recession that would last maybe 3 years at most before bottoming.
  2. Bailout defaults, trash the dollar with hyperinflation due to negative REAL GDP growth per stimulus bailout credit created. This will be a hyper-inflationary catastrophic DEPRESSION (dep-flation, depflation), which will last 10 - 15 or more years and generate massive world upheaval.


Whether certain stocks benefit and/or bottom before the general economy does is not the point of this post.

The mathematician famous for Mandelbrot Set, Chaos theory, and his work on affine transformations (i.e. fractals), together with the author of the "Black Swan", discuss what could be lurking out there that we do not know:

http://www.youtube.com/watch?v=H3zZ6qNWeGw


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Roubini and Friedberg

Post  explore on Tue Oct 28, 2008 8:10 pm

I just listened to two presentations. One, Nouriel Roubini, argues that we will be experiencing deflation http://www.bloomberg.com/avp/avp.htm?N=av&T=Roubini%20Sees%20%60Significant%20Downside%20Risk%27%20for%20Equities&clipSRC=mms://media2.bloomberg.com/cache/vycr2Mqgo39U.asf

The other, Albert Friedberg, expects to see inflation http://www.niagaracapital.ca/pganalysis2.htm (download the 10/28/08 conference call).

Friedberg runs a hedge fund that was up over 35% for the year ending at the end of this past September, so he has been doing something right. Similarly, Roubini’s predictions have been quite successful of late.

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re: Roubini and Friedberg

Post  Shelby on Wed Oct 29, 2008 5:13 am

Both have same mistake, they think credit = capital.

Having two so called "experts" argue two faces of the same misunderstanding, keeps our eyes on the ball, and not on the 800lb gorilla.

And the 800 lb gorilla is:

hyperinflation of value of real non-credit-based assets combined with broad deflation of value of overvalued credit-based assets

explore wrote:I just listened to two presentations. One, Nouriel Roubini, argues that we will be experiencing deflation http://www.bloomberg.com/avp/avp.htm?N=av&T=Roubini%20Sees%20%60Significant%20Downside%20Risk%27%20for%20Equities&clipSRC=mms://media2.bloomberg.com/cache/vycr2Mqgo39U.asf


Imo, I agree with most of the events Roubini sees coming, including further equity declines (maybe after a dead cat bounce) and lower Tbond interest rates at least on the short-end of curve. However, the key point I think he misses is the one I have been explaining in my prior posts in this thread, which stems from his wrong credit = capital thesis, and is essentially that the govts+Central Banks are determined to increase the monetary base to try to stop the deleveraging (precisely what Roubini is calling for), and this will cause hyperinflation because increasing stimulus/credit can stimulate positive nominal GDP, but it is simultaneously stimulating negative real GDP. It is critical the reader understand the distinction between nominal and real GDP. Essentially the fiat system is already dead, but society (collectively, or at least who directs policy) does not wants to face that reality and deleverage, thus they "pour gasoline of the fire" so to speak, which is to increase that (credit) which is dead and no one wants to own because it is no longer productive in a real sense for individuals. The hyperinflation must manifest in a move out of credit and into real things which are rare. Some commodities are truely rare and getting more rare with price reductions that are killing more supply than demand is being reduced. With the hyper increases in stimulus/credit being poured on now, then the seepage into rare things, especially those with very small market cap (e.g. silver is the most extreme example), should be exponential until astronomic once the reality of the physical shortages overcome the price fixing being done by the policy makers who are trying to hold the public into Roubini's incorrect thesis for stimulus/re-capitalization with credit. A massive exodus from fiat/credit is inevitable, it is only matter of how long the "system" (media, CFR, politicians, Roubini, etc) can keep the wool pulled over the public's eyes.

Maybe this chart will help convince you, and it is not even based on the physical gold price, which has been moving up more than the paper gold price of this chart:


source: http://financialsense.com/editorials/casey/2008/1028.html

You might also review my past articles:

http://www.gold-eagle.com/research/moorendx.html

explore wrote:The other, Albert Friedberg, expects to see inflation http://www.niagaracapital.ca/pganalysis2.htm (download the 10/28/08 conference call).

Friedberg runs a hedge fund that was up over 35% for the year ending at the end of this past September, so he has been doing something right. Similarly, Roubini’s predictions have been quite successful of late.

He is correct the monetary base / balance sheet increases have been enormous. He is correct hyperinflation is coming, if this continues, as I explained above and in my prior posts. Yet, at same time we will have negative REAL GDP growth, as I have already explained. Again he makes essentially the same mistake as Roubini, in that he equates credit with capital. This is the fallacy of all the mainstream economists, because they are not economists at all (they are just preachers for the fiat system).

Go back into this thread, and focus on the word "liquidity" and remember what capital is.

Even Katz doesn't seem to get it entirely. A "recession" means real growth reduction. Katz is apparently focused on nominal growth:

http://www.gold-eagle.com/editorials_08/katz102708.html


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Re: Inflation or Deflation?

Post  Jeremy on Wed Oct 29, 2008 5:23 am

explore wrote:I just listened to two presentations. One, Nouriel Roubini, argues that we will be experiencing deflation http://www.bloomberg.com/avp/avp.htm?N=av&T=Roubini%20Sees%20%60Significant%20Downside%20Risk%27%20for%20Equities&clipSRC=mms://media2.bloomberg.com/cache/vycr2Mqgo39U.asf

The other, Albert Friedberg, expects to see inflation http://www.niagaracapital.ca/pganalysis2.htm (download the 10/28/08 conference call).

Friedberg runs a hedge fund that was up over 35% for the year ending at the end of this past September, so he has been doing something right. Similarly, Roubini’s predictions have been quite successful of late.

Explore-
Keep the Cox updates coming. I catch most of them...hit and miss.

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We have not reached bottom in DJIA (Dow) relative to gold & silver

Post  Shelby on Wed Oct 29, 2008 10:42 am

Sometimes a chart can speak better than the perhaps 1000 words I already used in this thread:


source: http://www.kitco.com/ind/turk/turk.html

Turk also explains, in context of gold, Warren Buffet's recent call to buy stocks. We should not fail to note that Buffet can't buy gold (especially not silver), even if he wanted to, because there isn't enough physical for his $billions. He tried with silver before and purportedly was threaten with cancellation of his insurance business licenses.

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TIPs versus TBond spread, is not a predictor of inflation (when investment community can't see the 800 lb gorilla)

Post  Shelby on Thu Oct 30, 2008 12:02 am

The spread between TIPS and Tbonds, is an indicator of inflation "expectations" of the investment community. But this is NOT and I repeat NOT, an indicator of actual future inflation, because people are suffering from the myopia caused by disinformation as I explain in this prior post:

re: Roubini and Friedberg

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We are just a Banana Republic now.......

Post  neveroldami on Sun Nov 02, 2008 8:10 pm

Problem is, we are not a Rebublic and we have no Banana's.

not any younger either
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Credit != Capital, Tangibles Usury Can Not Exceed Production Growth Rate

Post  Shelby on Fri Nov 07, 2008 8:11 am

(!= means "does not equal")

This may be one of the most important things I will ever write.

This post tells you everything you need to know about whether we are in Inflation or Deflation (we have both, and it is very clear what is inflating in value and what is imploding in value).

http://goldwetrust.up-with.com/general-f1/inflation-or-deflation-t9.htm#66

Shelby wrote:...Both (Roubini and Friedberg) have same mistake, they think credit = capital...

...the 800 lb gorilla is:

hyperinflation of value of real non-credit-based assets (TANGIBLES) combined with broad deflation of value of overvalued credit-based assets (INTANGIBLE PROMISES)...

Here is a cartoon that explains this:

http://www.takelifeback.com/hegawid/

Unfortunately, the author Irwin Schiff is in jail for teaching such truths:

http://www.garynorth.com/public/692.cfm
(see also: http://goldwetrust.up-with.com/general-f1/bullion-coin-designs-t12.htm#128 )

Specifically the cartoon explains that Tangibles Interest Rates Can Not Exceed Production Growth Rate:

http://www.takelifeback.com/hegawid/25.gif
http://www.takelifeback.com/hegawid/24.gif
http://www.takelifeback.com/hegawid/17.gif
http://www.takelifeback.com/hegawid/14.gif

And that loaning intangible promises has no limit, other than the limit of gullible foolishness/idolatry of those who participate:

http://www.takelifeback.com/hegawid/25.gif
http://www.takelifeback.com/hegawid/24.gif

And such foolishness empowers the social meddling machine (aka government):

http://www.takelifeback.com/hegawid/22.gif


======================
And this brings me full circle to refute and clarify something that has been bothering me for about 2 years, specifically the allegation of immorality/non-prosperity of usury and the definition of "excessive interest":

http://silverstockreport.com/2008/fekete2.html

Hommel wrote:...a mere 2.5% rate of interest, from 1 ounce of gold invested 6000 years ago, could compound its way to becoming all the atoms of the universe, all of it would have to be gold, and all of it would belong to one person. Clearly, that is absolutely impossible...

http://silverstockreport.com/email/growth.html

Hommel wrote:...If you invested 1 oz. of gold 6000 years ago, and compounded it at ¼ of 1% per year, then you’d own more gold than has been mined in the history of the world, over 6 billion ounces, which is obviously impossible...

http://silverstockreport.com/reports/silverstockreport52.htm

Hommel wrote:...Over 2000 years, one dollar at 6% interest will grow to $385,855,472,630,337,000,000,000,000,000,000,000,000,000,000,000,000! (or one ounce of gold will grow to that many ounces at 6% in 2000 years!) See why usury is forbidden?...

Now I realize that Hommel has partially conflated TANGIBLES and PROMISES. The only natural law is that one can not loan TANGIBLES at a higher rate of interest than their net supply growth rate, i.e. "excessive interest" is a function of production or productivity. The higher the productivity, then the higher the interest rate than can be tolerated indefinitely. For example, I think the annual mine production of gold is about 1 - 2% of the above ground supply, thus a non-excessive interest rate for loaning gold is < 1%.

What is correct that "excessive interest" (meaning unsustainable, resulting in failure) is the charging of interest rates on PROMISES to deliver TANGIBLES (e.g. future's markets), which exceed the net supply growth rate of those TANGIBLES.

And that folks is the delimma the world is in now, after having increased derivatives (PROMISES) to estimates of a $quadrillion ($1000 trillion), up from a few $billion in 1990s.

I had this understanding correct (and seems Hommel was also close, if he didn't conflate above), in that is the desire of people to consume or "use" up tangible things (usury) at higher rates than they produce, which is "excessive":

http://www.gold-eagle.com/editorials_05/moore031407.html

Shelby wrote:...There has never been a 100% gold standard, and there will never be as long as some people want to use debt, because debt is impossible on a 100% gold standard. Proof: 1 oz of gold compounded at 3% since 0 A.D. is orders-of-magnitude more gold than exists on earth...

http://silverstockreport.com/2008/shortagefeedback.html

Hommel wrote:...basic math that shows that paper usury systems must fail due to the inescapable conclusion that you cannot compound your way to owning every atom in the universe...

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Eureka! Perhaps I have realized the wisdom that made King Solomon & his society so wealthy!

Post  Shelby on Sun Nov 09, 2008 11:27 am

First I defined precisely what is "usurious" and what is not. Even the dictionary is not precise.

http://goldwetrust.up-with.com/general-f1/inflation-or-deflation-t9.htm#279

Shelby wrote:Credit != Capital, Tangibles Usury Can Not Exceed Production Growth Rate

(!= means "does not equal")

This may be one of the most important things I will ever write......

......Specifically the cartoon explains that Tangibles Interest Rates Can Not Exceed Production Growth Rate:

http://www.takelifeback.com/hegawid/25.gif
http://www.takelifeback.com/hegawid/24.gif
http://www.takelifeback.com/hegawid/17.gif
http://www.takelifeback.com/hegawid/14.gif

And that loaning intangible promises has no limit, other than the limit of gullible foolishness/idolatry of those who participate:

http://www.takelifeback.com/hegawid/25.gif
http://www.takelifeback.com/hegawid/24.gif

And such foolishness empowers the social meddling machine (aka government):

http://www.takelifeback.com/hegawid/22.gif


======================
And this brings me full circle to refute and clarify something that has been bothering me for about 2 years, specifically the allegation of immorality/non-prosperity of usury and the definition of "excessive interest"......

......The only natural law is that one can not loan TANGIBLES at a higher rate of interest than their net supply growth rate, i.e. "excessive interest" is a function of production or productivity. The higher the productivity, then the higher the interest rate than can be tolerated indefinitely. For example, I think the annual mine production of gold is about 1 - 2% of the above ground supply, thus a non-excessive interest rate for loaning gold is < 1%.

What is correct that "excessive interest" (meaning unsustainable, resulting in failure) is the charging of interest rates on PROMISES to deliver TANGIBLES (e.g. future's markets), which exceed the net supply growth rate of those TANGIBLES.

And that folks is the delimma the world is in now, after having increased derivatives (PROMISES) to estimates of a $quadrillion ($1000 trillion), up from a few $billion in 1990s......

Then the key insight is that loaning gold at an interest % rate of less than the annual % increase above ground gold, leads to increasing wealth for society and thus is not usurious.

Thus loaning gold and charging say 1% interest rate (1% of ounces, not of fiat value), would still leave up to 0.87% per annum increase in society's wealth (as measured in gold, unit of account) relative to my own:

http://goldwetrust.up-with.com/general-f1/changing-world-order-t32.htm#303

Shelby wrote:...looks like the rate of increase of world above ground supply of gold peaked in 1999 at 1.87%, with worldwide 2570 tonnes produced with 137,290 tonnes of above ground supply at start of 1999 (or 1.91% in 1990 with 2180 produced on 114,110 tonnes):

http://minerals.usgs.gov/ds/2005/140/gold.pdf
http://www.lewrockwell.com/blumen/blumen14.html

...According to the WGC, this quantity was around 155,500 tonnes at the end of 2005...

Very interestingly, only 1.23% in 1980 with 1220 produced on 98,730 tonnes, down from 1.73% in 1970 with 1480 produced on 85,770 tonnes. In 1940, 2.48% with 1310 produced on 52,909 tonnes.

So by loaning gold at a 1% interest rate (% in ounces), I would be diluting my share of the worlds wealth by 0.87% per annum, while increasing my wealth in gold by 1% and society's by 1.87% per annum

And realize my 1% per annum increase in wealth, would be protected against the inflation rate of fiat and fiat prices, because the interest rate is measured in ounces. I could careless what fiat does (if I have long-term view).

And society benefits more than 0.87% per annum, because that 0.87% is just the wealth expressed in gold, but by loaning that capital, society can create new capital, e.g. in fish...see the fish story I like above. So society's capital in real goods other than gold, might be increasing at very, very high rates (due to me and others loaning gold at non-usurious interest rates), and I would benefit from this, because my gold would be buy more of those real goods. Think about it like this, say there are X real goods and Y gold in world, so Y gold buys X goods (assuming only gold is money). Now if there is X+Z real golds, and Y gold, then Y gold buys X+Z real goods.

So it is false to say that loans are evil. If you study the fish story linked above, you see clearly that loans and capital investment are the same, except when fiat promises are introduced, which then allows usurious interest rates. When loaning in gold, it is impossible to set usurious interest rates, because society quickly runs out of gold. The interest rate that can be paid by society on gold is inherently limited by the annual above ground supply increase.

And so I bet this is what King Solomon knew.


P.S. I note that in 1980 (and in 1950 and before 1930) gold production shrank, while in 1940 (WW2 over monetary crisis that lead to trade/resource war) it peaked at 2.48%. Thus I expect we are entering a period in about 10 years (from 1999?) where gold value will skyrocket (and so will world war) and thus mine production will skyrocket after first contracting during the current 10 year period (starting when?). Thus I will soon be wise to mint gold coins and loan them at up to 2% per annum (payable in ounces). This will lead to prosperity for the world, and for myself.


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What Effect Will Hyperinflation Have?

Post  Shelby on Tue Nov 11, 2008 1:50 pm

http://seekingalpha.com/article/96723-what-effect-will-hyperinflation-have

Beginning?
http://financialsense.com/fsu/editorials/tanashian/2008/1103.html
http://financialsense.com/fsu/editorials/tanashian/2008/1110.html

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Inflation Deflation Red-flation Blue-flation

Post  silberruecken on Wed Nov 12, 2008 10:39 pm

http://mises.org/story/3040

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re: Inflation Deflation Red-flation Blue-flation

Post  Shelby on Thu Nov 13, 2008 2:10 pm

Thanks for posting this...

silberruecken wrote:http://mises.org/story/3040

...an increase in the money supply.[1] Accordingly, I will adopt that simple definition. Deflation will be defined conversely as a decrease in the money supply...

That is wrong, because it only looks at the supply side. One must also consider the demand for money, e.g. when the population (and thus production) increases by the same rate the money supply, then there is no inflation.

...What Is Money?...Complications arise in applying this definition, however, due to practices such as fractional-reserve banking...

Go back and read my posts in this thread again. Credit != capital. Money is only as meaningful as the foolish demand for false idols and usurious parasitic interest rates (which are only possible when money is intangible promises, not capital), because money is no longer fixed to real capital.

What we have now is the majority of the world lost at sea, being flung around by 10,000 foot waves, because they all worship imaginary money called credit. Therefor it will be almost impossible to make sense of anything in the markets, and especially not make any sense to talk about what is money. At this time, (what the world uses for) money is meaningless and the world is in the process of going crazy as a result. We won't have meaningful money, until people get back in touch with "money=capital down, before panties down", see the following explanation of that intentionally repulsive statement:

http://goldwetrust.up-with.com/goldwetrustcom-f1/bulliondirectcom-bd-vs-goldwetrustcom-gwt-vs-seekbullioncom-sb-vs-goldandsilvernowcom-gsn-vs-apmexcom-vs-nwtmintcom-nwt-t21-15.htm#342

The fiat money supply is definitely being inflated, but I am not sure that total credit (derivatives writedowns, etc) is not being deflated. Since fiat money is just another form of credit, the effects boil down to what kinds of credit money people demand. Derivates don't put food on people's table, but greenbacks and credit cards still do.

The bottom line is that the Bretton Woods fiat system is broken and is in the rape & pillage & chaotic stage of death.

So the more important question is what does the world demand next?

In my view, the world (including China & Russia) will resist a hard money standard for as long as possible, as it is not in any one's interest. And thus there will be a dearth of hard assets (resources), by the time the world finally goes kicking and screaming to hard capital money.

So the relevant question is not inflation or deflation, as these are relative terms that can never have precise meanings when on a rubberband credit system.

The relevant question is, how far will the world go in malinvestment before it returns to hard money?

The longer the delay, the more astronomical the value of hard assets will be in the end. And thus the more dangerous it will be to hold/own them.

It ain't a pretty future. Indeed we might be entering the Tribulations. I am not sure yet.


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Re: Inflation or Deflation?

Post  silberruecken on Thu Nov 13, 2008 6:40 pm

"The relevant question is, how far will the world go in malinvestment before it returns to hard money?

The longer the delay, the more astronomical the value of hard assets will be in the end. And thus the more dangerous it will be to hold/own them.
"

Exactly! And because the FED is bankrupt (they increased their balance in the last weeks > 120%)http://news.goldseek.com/GoldSeek/1223400153.php we will see very soon (9-18 months) inflation rates > 25%. An that will be the time for hard assets - in particular for silver.

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The deflation-inflation two-step: Too complex for deflationsts to grasp?

Post  silberruecken on Thu Nov 13, 2008 6:42 pm

http://www.itulip.com/forums/showthread.php?p=60311#post60311

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What Is Money?

Post  Shelby on Sun Nov 16, 2008 8:28 am


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FED assets jumped by $1 trillion

Post  silberruecken on Mon Nov 17, 2008 10:36 am

from Casey Research:

Under Bernanke’s direction, the Federal Reserve has completely rewritten its mission. Many articles in the International Speculator and The Casey Report have reported the strange growth in the loans they have made and explained that Bernanke has, for a long time, espoused unconventional actions to avert deflation and to expand the economy. So the charts below tell that story, and it is truly amazing.

The Federal Reserve was never envisioned to be lender of last resort to a whole slew of investment banks, money market mutual funds and commercial paper issuers.

The situation is not easy to sort out, for the simple reason that the extent of their actions is not presented by the Fed via clear and concise data. Instead, the data is complex and hard to analyze, partly because of the piecemeal way the actions were taken, but also probably due to a desire by the Fed to avoid public scrutiny and criticism.

Digging into the details of the Fed’s balance sheet reveals, however, the complete change of composition and direction of the Fed. The most obvious change is that they have doubled the size of their assets and liabilities. A year ago, the Fed’s assets consisted almost entirely of government Treasuries and a little gold. That is a clean, safe balance sheet. The only important liability was the currency they issued (our paper dollars). They also had a small reserve of deposits from all the banks. When Greenspan wanted to give the economy a boost by lowering short-term interest rates, he would create some money and buy Treasuries. He could also do the reverse.

Bernanke has turned this upside down. Initially he made focused loans to big banks. But then the loans became bigger than the reserve deposits, leaving the banks in total as net borrowers. The concept of a fractional reserve no longer applies when the reserve is net negative.

To fund yet more loans, Bernanke then sold off half of the Fed’s Treasuries. And he traded Treasuries for toxic waste of poor-quality mortgage-backed securities. And he encumbered half of the remaining Treasuries with “off balance sheet” swaps of about $220 billion. (Does this sound like Enron accounting?) The balance sheet started with $800 billion of mostly reliable assets and now has about $250 billion of unencumbered Treasuries.

The biggest source of funding is from the Treasury. Banks are leaving deposits in the Fed now that the Fed is paying interest.

The important conclusion is that the paper dollars are now issued by a far less soundly structured Fed, an organization that is more interested in bailing out the financial community than defending the dollar.

This chart below compares last year’s assets, which were mostly Treasuries, to this year’s twice-as-large and far more questionable mix:


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Re: Inflation or Deflation?

Post  explore on Thu Nov 20, 2008 1:03 am

Inflation or deflation?

* by Martin Hutchinson
* November 17, 2008

There is a considerable argument between commentators at present as to whether, apart from a pretty painful recession, we are in for a bout of inflation or deflation. Both sides have apparently cogent arguments, and maintain their positions with considerable vigor. Robert Samuelson, having recently published a book “The Great Inflation” that suggested another burst of inflation was inevitable, has now produced an op-ed in the Washington Post warning of the rapidly approaching dangers of deflation – such are the dangers of publishing schedules! Having in the past suggested that inflation was inevitable, I thought it worth looking at the deflationist case.

Money supply data, first, do not suggest that deflation is imminent, although to some extent they contradict each other. M2, the broadest money supply measure now published by the Federal Reserve, was up 7.4% in the 12 months to November 3 (suggesting a potential inflation rate of 6-7% since Gross Domestic Product growth was around 1% in real terms.) The St. Louis Fed’s Money of Zero Maturity, the closest we can now get to the old M3, discontinued by the Fed in 2006, is up 10.0% in the last 12 months, suggesting a somewhat faster rate of inflation, perhaps 8-9%. More recently however the two measures have diverged; in the eight weeks to November 4 M2 was up at a 19.9% annual rate while MZM rose at a 0.7% annual rate – a huge disparity that has yet to be explained.

Nevertheless, the “gold bugs” who would normally expect to profit substantially from an upsurge in inflation have had a terrible year, indicating that their thesis has in some respects gone horribly wrong. According to Mark Hulbert on CBS Marketwatch, Harry Schultz, Howard Ruff and Jim Dines, the three leading gold-bugs and prognosticators of economic doom, have each lost between 64% and 70% on their investment newsletters during 2008. Since this was the year in which their prognostications of doom finally appear to have come true, one can reasonably ask what went wrong!

Equally the majority view, that the principal danger facing the United States is a Japanese-style stagnation lasting a decade or more with prices declining slightly making real interest rates too high, also seems misguided. Japan was close to deflation even in the early 1990s, and then followed a poisonous mix of policies that failed to recognize the loan losses in its banks while attempting to spend its way out of trouble through the public sector.

The United States is doing the latter but not the former, which it is prevented from doing by “mark-to-market” accounting. While mark to market accounting has major defects in prolonging a bubble, since it allows bankers to enter into foolish deals in the hope of short-term profits and bonuses, it is highly salutary in a downturn, preventing any semblance of wishful thinking in assessing value-impaired assets such as mortgage bonds. That’s why the entire US banking system has been forced to turn to Uncle Sam for succor; it is also why that system is now entirely unable to carry on as if nothing had gone wrong as the Japanese banking system did in 1991-98. Thus with a banking system forced into realism and interest rates that are sharply negative in real terms, deflation seems an unlikely possibility, in spite of Treasury Secretary Hank Paulson’s determination to invest every spare nickel in the economy into its most unproductive and valueless assets.

The difference between the United States and 1990s Japan is further indicated by the credit crunch: Japan didn’t really have one, in the sense of a sudden constipation in normal lending that caused the economy to seize up. That suggests again that the US trajectory going forward is unlikely to resemble 1990s Japan (for good or evil – Japan avoided a really deep recession, though it suffered an appallingly long albeit shallow one.)

The recent spate of truly terrible economic numbers, such as the 2.8% retail sales decline in October (4.5% down on the previous year) and the 32% decline in automobile sales, suggests that wherever the bottom of the recession is located, we will get there quickly. The US savings rate and the balance of payments both need to be improved by about 5% of Gross Domestic Product, so a top-to-bottom decline in GDP of at least 5% is likely,. However there is little reason for GDP to decline more than 5% top-to-bottom, or maybe 7% to allow for a little overshoot. Once GDP gets to its new equilibrium level powerful factors stabilize it and produce renewed growth – after all, at that new level of GDP the United States is once again internationally competitive, selling goods and services to customers worldwide in a way that has been impossible for a decade.

We are thus not looking at Great Depression II, in which GDP would decline 25%. To reach such an unpleasant re-run we would need a major outbreak of global protectionism, a final withdrawal of confidence by depositors in the US banking system and a swingeing increase in taxes, more than doubling the top marginal rate. President-elect Obama isn’t going to do that. Is he? If he doesn’t, and we avoid a Smoot-Hawley-style attack on world trade, then we will also avoid Great Depression – the Sequel. After all, the Depression was a primarily US phenomenon, caused and prolonged by egregious US policy errors –it was nothing like so bad in Britain, where economic policy under Chancellor of the Exchequer Neville Chamberlain was highly competent and basically the opposite of US failures.

However, if the recession is to be limited to a drop of 5-7% in GDP (itself somewhat worse than the 1974 and 1979-82 recessions, both around 3.5% of GDP) then at the present rate of decline we will reach bottom pretty quickly, in no more than 9-12 months. That tallies also with the housing price decline; house prices have already declined more than 20% nationwide, and from valuation considerations probably have no more than 10% or at most 15% to go. The banking system has already been bailed out by the Feds and probably won’t have to be bailed out again, but will see a gradual containment of losses in the next few quarters (with one or more huge incompetents finally slithering into bankruptcy.) The stock market has nearly reached its equilibrium of around 7,800 on the Dow (based on its early 1995 level of 4,000, inflated by nominal GDP growth since then). Although the market will doubtless overshoot on the downside, the dollar loss from a further decline to say Dow 5,000 is less than we have already experienced in the decline from 14,165 to below 9.000.

While US GDP is still declining sharply inflation will remain quiescent. Oil, minerals and agricultural prices will be on a generally downward trend, as the rest of the world, in particular the high-population growth centers of China and India, find their growth restricted by declining US demand. However, China has already indicated that it will not allow a US recession to stall its own growth; instead it has announced a 2-year stimulus program of $580 billion, about 15% of GDP. Thus commodity prices will remain supported by the continuous surge in Chinese and to a lesser extent Indian demand. US inflation will slow somewhat from its summer peak of close to 6%, but will not go into reverse, even while output continues its sharp decline. A renewed decline in the dollar, inevitable once US savings rates begin to recover and the tsunami of foreign capital into US bonds lessens, will cause the recent decline in import price inflation to reverse. Meanwhile cost increases already present in the system will work their way through to prices, causing continued modest upward momentum.

Even if inflation is declining gradually as output declines, it will not have time to become deflation in the 9-12 months before output reaches bottom – if we were about to experience Great Depression II the decline would be more prolonged, but we’re not. Once output has bottomed out, the inflationary picture changes radically. Budget deficits in the United States, the EU, China, India and Japan will be enormous, causing sharp rises in interest rates as government bonds “crowd out” the private sector. Money supply, which will have been increasing because of the very low nominal interest rates, will now be grossly excessive for the shrunken GDP.

Costs, which were held down by the wave of bankruptcies in the contraction, will once again increase as supply comes once again to balance demand. For one thing, higher interest rates and capital costs (through lower equity prices) will themselves produce a sharp upward ratchet effect on corporate break-evens, both in the US and more especially in emerging markets where capital will be scarce. Lower production volumes against which fixed costs can be amortized will also increase unit costs. The overall effect will be sharp upward pressure on prices -- those continuing to sell at a loss to keep the factory at its most efficient output level and workers employed will be rapidly driven out of business.

Inflation will thus resurge, both domestically and internationally, and will quickly reach the double-digit level at which central bank action to restrain it becomes unavoidable (amusingly, unexpectedly awful inflation figures are likely to appear before the January 2010 end of Fed Chairman Ben Bernanke’s term, forcing him to admit while still in office that his “deflation” warnings were hogwash.) Interest rates will gradually be forced upwards to inflation-plus-4% levels in the last months of 2009 and throughout 2010, producing a second “dip” of recession in 2011 and a non-inflationary recovery in 2012-13. The turn from economic decline (but not truly deflation) to inflation will be well indicated by the gold market, which can expect to surge as the economic bottom is approached.

As often happens, the “gold bugs” will turn out to be right in the end, even if their performance during 2008 has been dreadful – for those that survive, 2009 is likely to be a banner year. Deflationists will proclaim each slowing inflation figure in the early months of 2009 to be evidence for their case, though in reality those months will see not true deflation but simply slowing inflation accompanied by sharp descent into recession. However in the long run, monetarists will prove to have been right – and the decade of excessive money supply expansion from 1995-2008 will impose its final penalties on the unfortunate US and global public. Monetarists will also have the satisfaction of knowing that higher real interest rates will have become inescapable, and that overexpansion of money supply will never happen again – until some future generation of idiots has forgotten the economic history of these decades.



(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
http://prudentbear.com/index.php/commentary/bearslair?art_id=10152

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Hyperinflation is Guaranteed

Post  Shelby on Mon Nov 24, 2008 1:08 am

Hyperinflation is Guaranteed, when the money supply is not constricted to a precious metal standard.

Go back in history, and study every currency which was not backed 100% by precious metal, and try to find one of them that did not end in hyperinflation. Examples from of all the non-precious metal currencies I am aware of (and all of them ended with hyperinflation), and also in all cases the paper-backed money was used as hidden tax to force the cost of war on to the society:

http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation (<-- click for many more examples)

1775USA Continental Dollarfinanced the Revolutionary War
1789France Assignats and Mandatsfinanced debt from colonial wars
1861USA Confederate Dollarfinanced the Civil War
1920German Weimer Markfinanced debt from WW1, i.e. reparations
1944Japan Yenfinanced debt from WWII

Coming soon:

1971USA dollarfinanced Cold War and War on Terrorism


Deflation of prices is only possible when the money of circulation is, or is a bill exchangeable for, precious metal (gold and/or silver standard). Deflation of prices occurs when the money supply can not be increased faster (than the mines can produce) than the supply of goods. Deflation encourages saving, which is in the long-run is good for sustaineable capital investment.

http://finance.yahoo.com/banking-budgeting/article/106198/A-Depression-Coming;_ylt=Ag.bdMdfgIVVi8IK.RyCKNtO7sMF?-Not-Likely

...Deflation last occurred in the early 1930s, because (SHELBY REMOVED THE WRONG REASONING)...it was aggravated by the Federal Reserve's foolish contraction of the money supply. In the three years after the market crash of 1929, the Fed apparently shrank the money supply by nearly one-third -- precisely the wrong medicine for a fearful and credit-starved economy...

In 1930, the government was powerless to increase the money supply, because the USA was on a gold standard. FDR's New Deal was not possible until he had removed the constriction of the gold standard (domestically) with the 1933 confiscation.

In 1930, the "non-gold backed" credit was imploding, because of malinvestment that accrues with usurious interest rates, which (deflation of credit and credit induced price inflation) was a good thing. The govt was powerless to apply a hidden fiat tax on the population, until FDR removed the gold standard (domestically) in 1933.

Since 1971, the USA dollar is not backed by gold internationally as well as domestically. This has enabled a massive hidden tax on the society in order to finance american dominance globally. The tax was paid as poverty in developing world, and as accumulated fiat debt in west.

It appears that the world since beginning of time, has been continuously moving towards increasing debasement of circulating money away from intrinsic value (e.g. precious metals) towards symbolic money. This is known as Gresham's Law. I say continuously, because each hyperinflation (runaway debasement death of a currency) over history, has lead to society turning towards the least debased circulating currency, but other than the Dark Ages, the world economy has grown only when the circulating money has increasingly become debased. This is because humans refuse to invest, then consume-- they prefer to consume at usurious interest rates, and are thus only able to have jobs during the boom phase (up leg) of the usurious business cycle. I have defined usurious interest rates precisely (click the link).

Isaac Newton appears to have been aware of this fact, and by overvaluing gold, was trying to disincentivize the coining (for export to China) of silverware plates into money, which would have accelerated the debasement forces in Europe (Europe was usuriously over-consuming products from China):

http://www.pierre-marteau.com/editions/1701-25-mint-reports/report-1717-09-25.html

Isaac Newton wrote:...In China and Japan one pound weight of fine gold is worth but nine or ten pounds weight of fine silver, & in East India it may be worth twelve. And this low price of gold in proportion to silver carries away the silver from all Europe.

So then by the course of trade & exchange between nation & nation in all Europe, fine gold is to fine silver as 14 4/5 or 15 to on...

...It may be said that there are great quantities of silver in Plate, & if the Plate were coyned there would be no want of Silver money. But I reccon that silver is safer from exportation in the form of plate then in the form of money, because of the greater value of the Silver & fashion together. And therefore I am not for coyning the Plate till the temptation to export the silver money (wch has a profit of 2d. or 3d. an ounce) be diminished. For as often as men are necessitated to send away money for answering debts abroad, there will be a temptation to send away Silver rather then Gold...


The Central Banks of the world are trying to hide, in a veil of imploding credit, their money supply inflation:

http://nowandfutures.com/key_stats.html#all


http://www.shadowstats.com/
...Flash Update Subscruption required November 23rd, 2008
• Monetary Base Annual Growth Now at 75.5% • Systemic Solvency Crisis Intensifies Anew...

This is because they have no choice but to hyperflate, due to Gresham's Law, all fiat currencies end with hyperinflation. It is as guaranteed as is the sun rising each day. The big question is how long does it take to occur.

The hyperinflation will manifest as soon as the world's bond holders become aware that they are being debased at double-digit negative real interest rates (see the money base inflation chart above, note M3 inflation is still in double digits as well). It seems that bond holders are currently focused on the imploding credit, not on the money supply. It is going to be whiplash in the bond markets sometime in 2009 or 2010. Then all hell will break lose.

In order to keep the developing nations in the world financial system, without moving to a 100% gold/silver standard (which is impossible due to Gresham's Law and usurious interest rates), some sort of layered financial system will have to be put in place like the 1933 Bretton Woods on a global scale, wherein domestically (or regionally) countries will be on fiats (with usurious interest rates), but international exchange rates will be set in gold. Who ever controls these exchange rates, will control where capital is incentivized to flight or haven.

This regional reformation of Bretton Woods (i.e. Amero for NAU, Asian Union, EU) will be last step to prepare for the world to eventually move to a single world fiat currency (aka "666"). Isaac Newton used the Bible to calculate the date of the END of the world currency as no earlier than 2060. So the world currency can begin some years before that.

http://esr.ibiblio.org/?p=455#more-455

...Raising taxes can delay this, but not prevent it. And might, actually, trigger it sooner; the historical evidence suggests that current tax rates may already be at above the minimum level where, by suppressing and unhealthily redirecting economic activity, they actually reduce total revenue. (One reason to believe this is that the much-derided “Bush tax cuts” actually increased revenues despite the effects of the dot.com bust.) But even if this isn’t true yet, diminishing returns will set in at some point as rates go up.

The only alternative to raising taxes (or deliberately inflating the currency, which in this context has similar effects) is to buy debt and pay entitlements out of that, pushing the unsustainability problem into the future.

The fundamental problem is that income-transfer programs (and the interest service on the debt purchased to keep them running) are spending wealth in higher volumes than the economy can actually generate, and demand for that spending is rising faster than the economy is growing. Thus, raising tax rates is no longer a way out, if it ever was.

At some point, the U.S. government is going to lose both the ability to increase revenues and the ability to sell bonds. At that point the entitlements system will crash. Transfer checks will either stop issuing or become meaningless because the government has, like some banana republic, hyperinflated the currency in order to get out from under its debt obligations.

Unlike the oncoming European demographic crash, the entitlements crash will be survivable in that there will still be people around to make things and trade things with. But it’s going to be ugly. probably rioting-in-the-streets ugly. People dependent on income transfers will starve or die of preventable diseases in large numbers, unless they can find work or private charity. Since many of those people will be old, work will be unlikely unless they are exceptionally capable at something. Families will have to re-assume the burden of caring for their elderly; retirees without children will be in especially severe jeopardy.

Violent revolutions have been fought over less wrenching economic changes than this one promises to be.

The next questions to ask are (a) when will it happen?, and (b) how can the pain be minimized?

There are good reasons to believe the crash could happen as early as 2012, with the trigger being the mass retirement of the Baby-Boom demographic bulge. That is, it will happen that soon if we are lucky.

If we are unlucky, the Federal government will concoct some sort of accounting flimflam (like Al Gore’s infamous lockbox full of IOUs from one part of the government to another) that will push back the day of reckoning out past 2020 — making the numbers and demographic profile of the stranded dependents worse every year it’s delayed. I think this is the most likely scenario, though I’d love to be wrong.

In the rest of this essay I am going to make, against my best judgment, the optimistic choice of a near-term crash; bear in mind that if I’m actually correct in my pessimism the devastation will be worse…


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The Fed Is Out of Ammunition

Post  silberruecken on Tue Nov 25, 2008 8:59 am

http://online.wsj.com/article/SB122748912533552007.html

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