Inflation or Deflation?

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Worldwide bailouts in excess of $3.75 trillion...and counting...

Post  Shelby on Fri Nov 28, 2008 7:26 pm

http://www.kitco.com/ind/Barisheff/nov282008.html


And here is the inflation logic in a nutshell:

http://www.kitco.com/ind/katz/nov242008.html

UPDATE: Fedis being sued by Bloomberg News under the Freedom of Information Act, for refusing to identify the recipients of almost $2 TRILLION dollars of emergency loans...refusing to identify the nature of the “troubled assets” they are accepting as collateral.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aatlky_cH.tY&refer=home


Last edited by Shelby on Sat Nov 29, 2008 5:20 am; edited 1 time in total

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Max Keiser on the "deflation hoax"

Post  Shelby on Sat Nov 29, 2008 3:59 am


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How to destroy a currency

Post  silberruecken on Tue Dec 02, 2008 6:39 pm

From the Midas 01.12. - Bill H.:

How to destroy a currency

To all; so much has happened in the last 90 days that it is mind boggling. Since Sept. 1st we have watched Fannie and Freddie fail, AIG, WAMU, Lehman, Wachovia, Merrill Lynch, and Citigroup [all household names] have all either failed, been merged or bailed out. During this period the government has announced the bulk of its' $8.5 trillion in bailouts, buyouts, and sellouts. Just last week alone the Fed and Treasury came out with $1.1 trillion of candy for the banks and credit markets. The media reported it "matter of factly" and everyone just yawned. Back in late Sept. when the Treasury announced the $700 billion TARP, the public was seething and Congress was told if they didn't pass it, martial law would commence. Today it is nothing but yawns from the frogs about to get boiled.

So much has occurred over the last 90 days that "numb" is how I would describe investors. The information overload of bad news, bankruptcies, failures, bailouts, Fed and Treasury giveaways have come so fast and in such quantity that the average investor can't even process 2+2 anymore. What we have witnessed has been the complete and total looting of the Treasury. The ingredients for this cake took over thirty years in the making, we watched for the last 15 months as the ingredients were mixed together while only during the last 90 days did we protest mildly as it was being placed in the oven.

I firmly believe that the bulk of the Treasury Gold has been leased and sold over the last 10 years at least. Based on the reports of "coin melt" Gold that has surfaced around the world recently, I also believe we are very close to "THE END". I am sure that the people "pulling the strings" are not stupid by any stretch of the imagination, what I can't get my mind around is why? How could they let this happen, or did they make this happen? The end result is so obvious and the government responses so stupid that I just don't get it. Any thinking person knew/knows where this goes, maybe it's the only way to get the sheep scared enough to run toward the New World Order?

Back in 1996 the logical direction for the Dollar at the time was down. Instead, the Dollar turned up and Gold mysteriously started down, this was the beginning of the end. What originally started out as "buying some time" by Treasury sec. Rubin has turned into outright fraud. I think that the U.S. Gold hoard that once was by far the largest on the planet has been systematically dispersed almost completely. What started out as a reluctance to take some painful medicine that would have resulted in the loss of U.S. supremacy has morphed into the destruction of the global monetary system. Don't get me wrong, this had to happen anyway since the currencies were untethered from Gold back in 1971, however it would have happened sooner and been much less destructive had the decision not been made to "cover up" the Achilles heel.

Now, here we are after the biggest debt orgy, the greatest Treasury bilking, the greatest deflation, and the biggest con job in history. Where to now? For well over a year now, I've been harping on the deflationary forces in play. They have hit with a vengeance and will continue with more and more force as the credit system unwinds. BUT, now we can expect the second act to rear it's ugly head at any moment. Hyperinflation. Hyperinflation will take out the conservative ones that feel "lucky" because they didn't get hit by the deflation wave. This piece is very similar to what I wrote just 2-3 days ago but it is very important to understand that hyperinflation is a very different animal than deflation.

While deflation is like a 5,000 lb elephant that moves very slowly and sits on you while squeezing the air, life, and money out of you, hyperinflations can happen very fast. In fact, a hyperinflation is the result of "over issuance" of money and credit [does $8.5 trillion qualify?] and the resulting loss of confidence in the money results in a panic out of and a devaluation of that money. Those who have saved their entire lifetimes and never borrowed nor invested in stocks probably feel vindicated that those "risky" investors have finally gotten their comeuppance. They are missing the point. The point is that this was a flawed system that mathematically ALWAYS will result in failure. It must result in failure because a fiat system MUST inflate or die, that is the mathematical law.

If you thought the last 90 days was difficult, a currency crises resulting in the collapse of monies will be more horrific and almost surely much faster in its' movement. I think that once the dam breaks, the devaluations we will witness will be breathtaking. This 30+ year cake we have been baking will explode in hyperinflation taking even the most prudent out to the woodshed. Please review the attached chart of "100 years of monetary expansion". This, in a nut shell is HOW TO DESTROY A CURRENCY!
Regards, Bill H

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Why Gold & Silver will go *UP* in value in this deflation / credit collapse

Post  Shelby on Wed Dec 03, 2008 6:39 am

Why Gold & Silver will go *UP* in value in this deflation / credit collapse

silberruecken, your prior post inspired me to write some thoughts...

Credit Deflation = More Credit Inflation = Hyperinflation Depression

Shelby wrote:Magicians can steal from your pocket unnoticed, by creating an illusion.

Gold & silver will go UP in value in this deflationary credit collapse, inflationary credit reflation, because collapsing the credit of the broad population, debasing them by giving credit to other fewer elite bankers, forces the broad population to defend themselves.

Experts are predicting mixtures (oscillating bouts) of deflation and inflation, ending with a big deflation and world wide implosion of the financial system...

Marc Faber (Boom, Gloom & Doom report guy), at 5:50 min point forward:

http://www.youtube.com/watch?v=Th4yIW521M8&feature=related

HSDent.com (who in 2006 was predicting Dow 20,000 - 40,000...I bought his book in 2005, Next Great Bubble Boom):

http://www.youtube.com/watch?v=r9A_bIEfM1g&feature=related (<-- says stay in cash to buy firesale assets in deflation)
http://www.youtube.com/watch?v=8sMdpuYbjBY&feature=related (<-- says commodities will crash after a 2009 rebound)


Apparently HS Dent does not seem to realize, that when credit dies, then gold becomes more valuable. They misunderstand that inflation and deflation are the same thing when credit is the circulating money (due to Gresham's Law). Credit economy dies (deflation) while money debasement increases to bail it out (inflation). Gold (real capital) wins when credit dies. Read on...

Marc Faber seems to understand:

http://arabianmoney.net/2008/12/01/marc-faber-bloomberg-interview-on-gold-and-stocks/

HSDent says to "be in cash", but cash will be debased (losing value) as the govt+Central Banks (out of thin air) have in the last 3 months have created new credit (and some claim $8.5 trillion) of $1000 for every living human on earth, or $50,000 per working person in USA (in just 3 months!). Annualized that and then account for the snowball effect, and you can see that working Americans are be diluted by hundreds of $1000s each per year, meaning the dollar is worthless now. Remember the mathematical implications I explained before that fiat money is just credit, never is it capital. So as this worthlessness of fiat propogates out into the financial system, then what can people do with their worthless dollars as they all race to not be the last to dump them?? Of course, people have no choice but to buy real things they need, i.e. food and gas or to store excess in gold. Although Marc Faber may be correct that for industrial metals (as contrasted with food & gas & precious metals) capital spending could continue to decline (although I think the future's markets for industrial metals may have already priced this in).

As people are forced to flee the fiat due to massive debasement/dilution, then as commodities prices and shortages become unbearable, then the production of the world economy slows down. This forces the govt+Central Banks to print even more money to bailout failure, which thus forces people to flee even more the fiats, but when there are no more commodities to buy, or the price of them just doesn't make sense (e.g. $10 for gas, loaf of bread, gallon of milk), then what will people buy in order to dump their fiat?? Of course, precious metals.

Please read what I wrote before:

Shelby wrote:...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...

...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...

...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...

...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... ...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...

But there are other additional factors, which will drive precious metals even higher than commodities in general.

The govt+Central Banks will be forced into a difficult situation, because as the prices of commodities are going ballastic, this causes social angst, so the Central Banks will either be forced to raise interest rates and/or the govt will be forced to socialist, totalitarian fascism, so they can regulate the movement of capital (so people will not be allowed to stockpile commodities). If interest rates are raised, then world financial system will implode with defaults, thus it just pours more fuel on the fire, because the Central Bank will create more money/credit (out of thin air) and more debasement. Thus I am nearly certain the govt will resort to fascist capital controls, and this is incredibly bullish for gold. If the higher interest rates is chosen, then this will prime the system for even more defaults, debasement, and be even more bullish for gold (on a lag).

The developing world will see it's value rise as commodoties rise, although this will only improve the wealth of the saver in the developing world, as a the person who spends a large % of income on the basic necessities of life, wlll be squeezed by rising commodity prices. But this can be coupled with rising job opportunities, as most commodities are produced in the developing world. This depends to what degree the developing world is free market and not fascist, socialist, and totalitarian. It seems to me that China will manage the production of the developing world to a large extent, and will thus sacrific the maximum prosperity, for the socialist well being of all (meaning a centrally managed, non-optimal prosperity). And there is danger of social disintegration, that would require heavy handed treatment by govts in developing countries, or anarchy.

All of those implications in developing world, favor precious metals over general commodities.

Silver is both a commodity and a precious metal, which makes it exponentially more bullish than gold. Silver is up to 5x more rare than gold, in terms of above ground supply that can come to market. Silver is at near all time lows in price ratio to gold (80 versus natural production ratio of about 7; and historically about 10 - 15, when silver was circulating money). So when people flee fiat, and they see silver is 50 or 80x cheaper than gold, with gold into the $2000 - $5000 range, then they have no choice but to buy silver. Then with silver more rare than gold, the price rise will be much steeper than for gold, thus people being trend followers, will pile on silver, sending it to perhaps even parity to the gold price. Unlike in 1980 (when there was massive oversupply of 90% coin from the 1965 worldwide de-monetization of silver coin), silver won't be in a bubble and won't come rapidly back down in price, because it simply is that rare and the mines are shutting down. It will take many years to ramp up silver production. Also the 1980 bubble was caused because the Hunts went long on silver using paper future's, not entirely physical metal purchases. This time around, the lopsided future's position is short, and the longs are digging in the heels buying physical!

The silver spot price has been able to be pushed down by the alleged large USA bank's manipulation of the future's market price. But please realize that the open interest in the future's market is dying, and thus it is suspected that in 2009 that large bank will lose this manipulative power and the reality of the silver shortage will take control of the market price. You can track the demise of the Comex for gold & silver.

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Re: Inflation or Deflation?

Post  silberruecken on Wed Dec 03, 2008 10:44 am

Very, very good post, shelby!!! Thanks. I absolutely agree with you.

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Credit Deflation = More Credit Inflation = Hyperinflation+Depression

Post  Shelby on Wed Dec 03, 2008 8:58 pm

Thank you. The post was improved and published as an article today:

http://financialsense.com/fsu/editorials/2008/1203.html

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Credit Deflation = More Credit Inflation = Hyperinflation+Depression

Post  Shelby on Thu Dec 04, 2008 5:56 am

Gold-Eagle.com also published it (but deleted one of the links at the bottom):

http://www.gold-eagle.com/editorials_08/moore120308.html

I have given some additional thought to the distribution of the $8.5 trillion (so far) credit re-inflation, and it seems the govt programs may be designed to forgive (writeoff) homeowner/credit-card debt, rather than provide funds for paying debt. This would be a way of minimizing the price inflationary effects, stealing from developing world, and funneling the benefits of the inflation directly to the banks. In other words, there appears to be strategic effort to make sure the re-inflation does not end up too much in the broad population, in order to minimize broad price hyperinflation. However, this encourages decreasing production, which will lead to shortages and price inflation any way.

In general, the are only two ways to channel a credit re-flation of this magnitude:


  1. Price inflation, which leads ultimately to shortages as people hoard
  2. Shortages caused by channeling reduction in production, which ultimately leads to price inflation and/or capital controls


As I alluded to in my article, I think the govt+Central Banks are going to combine some shortages and controls, with some price inflation. The price inflation will mostly come from the devaluation of the dollar in 2009, as the developing world is more productive and will be valued upwards with rising commodity prices in 2009. Western countries will see much higher prices for food & gas by late 2009, but asset prices (e.g. stocks and real estate) will be held roughly flat (or maybe a 20% up or down from current levels in stocks), by deploying increasing levels of socialization and capital controls.

So I think the runaway price hyperinflation scenario in assets is unlikely in west; whereas, in food and gas, shortages and controls will be used to combat the price hyperinflation.

These controls will enable interest rates to be held low (quantitative easing) for a while, but eventually will fall apart with an epic bond bubble unwinding, both the former and the latter are also incredibly bullish for precious metals.

In short, the west will move to a "you get your fair share" society. Crisises will be dealt with by "to each according to his/her need, from each according to his/her ability to pay".

Eventually that will lead to massive capital flight (even internal to countries by burying gold & silver).

So what happens to all that credit re-flation created? Well since the westerners are not producing any thing, then it means the capital is wasted on sustaining unproductive activity, which is of course stealing capital from the productive developing world. The large banks (& Warren Buffet) will be able to cherry pick the best assets/businesses in the world. Although the prices won't be too much lower (maybe -20% from current, on avg, some assets/locations will do worse), the $8.5 trillion (surely to double or 4x) is a lot of money. So the "firesale" prices will not be so much a further reduction in price (on avg, exceptions caveat), as an dilution of value, which is why holding straight fiat cash is not wise. But will the developing world do nothing about this robbery by the old-world bankers? As I said in my article, it depends to what extent the developing world is already top-down controlled (by members of the bankopoly-oligarghy). We see the riots in the Thailand airport this past week.

Thus the coming hyperinflation won't be a clear Weimer Germany or Zimbabwe type. It will be more muddled, with landmines of controls, shortages, and chaos. But eventually the interest rates have to move higher, and the bond bubble unwinding will rip to shreds the current attempts at "status quo peace", probably towards 2010-11. The controllers may be able to hold together a "muddle through" strategy until then.

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DANGER: food & energy sunami coming in 2009?

Post  Shelby on Fri Dec 05, 2008 8:06 am


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Deflation (& backwardation) will spiral into dollar death, if the controllers do not let Gold & Silver rise in price

Post  Shelby on Sat Dec 06, 2008 7:31 am

Here is why China (and Middle East and all countries) can not de-hitch from dollar willingly

http://financialsense.com/fsu/editorials/laird/2008/1204.html

The GWC (govt without compass) must let gold & silver price float free without manipulation, else their zero-interest rate policy will lead to more deflation:

http://financialsense.com/fsu/editorials/brawn/2008/1205.html

...Economic models predict that zero interest rates will pump up home prices, pump up equity prices, and lower interest rates. These are potent populist political fodder. The assumption, however, is that this action does not cause savings/capital creation to fade. Without capital creation to raise wages and cover losses, the scheme creates its own deflationary forces...

...For those interested in the inflation/deflation/gold revaluation questions, a graph in the (Koenig and Dolmas – Dallas FED 2003) paper explains clear that the FED must embark on a mission to create inflation. The graph shows the authors view of how Roosevelt used gold revaluation to create the inflation needed to end the Great Depression...

If the FED action is to buy long Treasuries (and not let gold & silver rise), it will lead to an even greater bond bubble, and then finally insolvency of the FED (death of the dollar system):

http://www.dallasfed.org/research/indepth/2003/id0304.pdf

page 9 wrote:...This leads us to a third point: the Fed is almost guaranteed to take a capital loss on its
portfolio. If the strategy works, the economy picks up, interest rates go up, bond prices go
down, and the value of the Fed’s holdings of longer-term Treasuries falls...

In short, no way out of our deflation if they don't let gold & silver rise. Which is what the backwardation of gold is signaling (first time in history of the dollar):

http://goldwetrust.up-with.com/precious-metals-f6/silver-as-an-investment-t33.htm#518

The bailed out banks are indeed buying Treasuries, while it is already widely reported that they are also manipulating down the price of silver and gold in the corrupt future's markets.

The world wants to continue towards serfdom, instead of take the losses and let the free market move on:

http://financialsense.com/stormwatch/geo/pastanalysis/2008/1205.html

...The only way the economy can heal is through the market. However painful the healing process, only the market can bring about full recovery...if you do not trust the market, then you no longer believe in freedom or capitalism. In that event you are a socialist on the road to serfdom.

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Deflation Caused By Low Gold Price

Post  Shelby on Sat Dec 06, 2008 9:22 am

I re-wrote the prior post for publishing to fiancialsense.com and gold-eagle.com:

Side walks don't cause falling rain drops to hit them, analogously deflation does not cause low gold prices. Rather vice versa.

No country can de-hitch from the dollar willingly:

...China is very afraid of one thing and one thing only, and that is if millions of migrant workers in the big cities...will riot...

...If China allows the Yuan to rise then their manufacturers are really punished...because they have razor thin profit margins...

If the widely reported downward manipulation of the gold & silver prices continues, then the FED's zero-interest rate policy will lead to spiraling, falling dominos deflation:

...Economic models predict that zero interest rates will pump up home prices, pump up equity prices, and lower interest rates...The assumption, however, is that this action does not cause savings/capital creation to fade. Without capital creation to raise wages and cover losses, the scheme creates its own deflationary forces...

...a graph in the (Koenig and Dolmas – Dallas FED 2003) paper explains clear that the FED must embark on a mission to create inflation...how Roosevelt used gold (upward) revaluation to create the inflation needed to end the Great Depression...

If the FED action is to buy long Tbonds as suggested above, while gold & silver prices are fixed too low by manipulated futures market, an even greater bond bubble will result, then finally insolvency of the FED (i.e. death of the dollar system):

page 9:
...This leads us to a third point: the Fed is almost guaranteed to take a capital loss on its portfolio. If the strategy works, the economy picks up, interest rates go up, bond prices go down, and the value of the Fed’s holdings of longer-term Treasuries falls...

In short, deflation can not end until gold & silver are allowed to rise in price, because even the FED has no model with which to start capital formation without a rising gold price. The backwardation of gold is signaling, for the first time in history of the dollar, that the dollar FED is trapped.

Backwardion means the spot price is higher than the future months' prices. People no longer trust future delivery, and are willing to pay more for delivery now than to use margin to make paper profits in futures arbitrage. This can also be because it is increasingly obvious the casino is rigged.

If backwardation is not reversed, world trade could grind to a halt, as more people do not trust to deliver their side of transaction first, a domino spread effect, then nothing can be traded. Backwardation means disintegration of the value of promises to pay. Remember the dollar (and every currency in world) is merely a promise to pay. The paper or electronic digits, have no intrinsic value.

Perhaps the only way backwardation can be reversed, is to let the gold & silver price rise enough and fast enough, to nip the growing disintegration of trust before it becomes too pervasive and engrained. I tend to agree with Fekete, that it is too late, because by this point it is clear the emperor is wearing no clothes and a rising gold & silver price will only mean even more ferocious demand for immediate delivery.

The bailed out banks are indeed buying Tbonds, while it is widely reported that they are also manipulating down the price of silver and gold in the alleged corrupt future's markets. So it appears the FED and it's member banks are indeed trapped and are in a rapacious "eat my own" deflationary death spiral, which will send gold & silver to the moon at the end of the bond bubble. But by that time, the world will be so broken/unsafe/socialistic/fascist/totalitarian that those who hold gold, will be afraid to invest it and restart the wheels of capitalism and world trade. The Dark Ages after Rome were caused by people being so afraid, they buried their gold. Contemplate the following. Gresham's Law is really just a mathematical statement of mankind's nsatiable inability to resist interest rates which are higher than the growth rate of production.

Disclaimer: The above are my personal opinions. I seek safe harbor. I am not a professional advisor. I am not responsible for anything anyone does after reading this. Seek your own counsel on all matters.

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Simplest example of simultaneous Inflation and Deflation

Post  Shelby on Sat Dec 06, 2008 4:25 pm

See also the prior post I made today above.

Let's say you have 3 people total in an entire economy:


  1. Loaded with cash guy, who works for Supplier
  2. Manufacturer
  3. Supplier


So normally #1 spends at #2, #2 spends at #3, then #3 pays #1.

Now suppose that #3 wises up and says he will no longer take cash, only gold. This creates a huge demand for gold, so the price of gold goes up. So #2 has to raise his prices to buy gold to pay #3, so #1 has to spend more, so #1 then asks for higher pay from #3. That is inflation. But if the cash money supply is not increased at the same rate as #3's impact on demand and price of gold, then there is no way for #3 and #1 to spend enough cash, which means some business is lost. This is deflation.

So there you have it. As the demand and price for gold increases, if the cash money supply is increased, but not enough, then the result can be both inflation and deflation at same time.

Now what happens if the demand for gold increases, but the price of gold is not allowed to rise. This means rationing of gold, which thus leads to rationing of spending (because #2 can not get enough gold to pay #3), no matter how much cash money supply increases. This is deflation, because some business is lost. This is (part of) the current situation in our economy, which I covered in detail in my prior post.

Our current economy also has the dynamic of increase in demand for credit, while the Fed is increasing the supply of credit for Tbonds, but not supply of credit in general. So this is a bit like the situation with the gold price being up 300% since 2001, but the cash/credit supply is not increasing fast enough to keep up with the gold demand rise. So we have mix of two phenomena. But just imagine when all that credit stored in Tbonds peaks, and is withdrawn. Then where does it go? It is likely that is when we see HYPERINFLATION, unless the govt can create martial law and capital controls to keep that money trapped and unable to be spent freely.

I will refine this and publish it to financialsense.com and gold-eagle.com, after the prior post article is published.

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The Crack Up Boom, Part XIII

Post  silberruecken on Sun Dec 07, 2008 4:22 pm

To put this amount of spending into perspective, let’s examine a recent missive from James Bianco at Bianco Research in Chicago:
“Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures – combined:

* Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
* Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
* Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
* S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
* Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
* The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
* Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
* Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
* NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion (data courtesy of Bianco Research)

That is $686 billion less than the cost of the credit crisis thus far.

The only single American event in history that even comes close to matching the cost of the credit crisis is World War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion
The $4.6165 trillion dollars committed so far is about a trillion dollars ($979 billion dollars) greater than the entire cost of World War II borne by the United States: $3.6 trillion, adjusted for inflation (original cost was $288 billion).” http://www.financialsense.com/fsu/editorials/andros/2008/1203.html

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re: Backwardation

Post  dz20854 on Mon Dec 08, 2008 4:41 am

Backwardion means the spot price is higher than the future months' prices. People no longer trust future delivery, and are willing to pay more for delivery now than to use margin to make paper profits in futures arbitrage. This can also be because it is increasingly obvious the casino is rigged.
Backwardation can arise when people fear deflation could lower prices for further out contracts. For example, the S&P 500 ES futures contract is in backwardation, even though the Fed. is trying mightily to support stock prices. Prices at Friday's close: Dec. 2008-- 872.5; Mar. 2009-- 871.5; Jun. 2009-- 871.0; Sep. 2009-- 869.0; Dec. 2009-- 869.0; Mar. 2010-- 864.75. http://futuresource.quote.com/quotes/quotes.jsp?s=es

In contrast, comparing the contract months for gold shows no backwardation: http://futuresource.quote.com/quotes/quotes.jsp?s=gc
Also, no backwardation in silver: http://futuresource.quote.com/quotes/quotes.jsp?s=si

So if there is/ was any backwardation between the spot prices for gold and silver, and their near term futures prices, it may simply reflect near term fear of further deflation. Going out further, the futures clearly expect higher prices for gold and silver.


Last edited by Shelby on Mon Dec 08, 2008 8:47 am; edited 1 time in total (Reason for editing : provided the missing Subject, did not edit your post content at all)

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Monetary Backwardation is different than Industrial Commodity Backwardation

Post  Shelby on Mon Dec 08, 2008 7:37 am

dz20854 wrote:
Backwardion means the spot price is higher than the future months' prices. People no longer trust future delivery, and are willing to pay more for delivery now than to use margin to make paper profits in futures arbitrage. This can also be because it is increasingly obvious the casino is rigged.
Backwardation can arise when people fear deflation could lower prices for further out contracts. For example, the S&P 500 ES futures contract is in backwardation, even though the Fed. is trying mightily to support stock prices. Prices at Friday's close: Dec. 2008-- 872.5; Mar. 2009-- 871.5; Jun. 2009-- 871.0; Sep. 2009-- 869.0; Dec. 2009-- 869.0; Mar. 2010-- 864.75. http://futuresource.quote.com/quotes/quotes.jsp?s=es

In contrast, comparing the contract months for gold shows no backwardation: http://futuresource.quote.com/quotes/quotes.jsp?s=gc
Also, no backwardation in silver: http://futuresource.quote.com/quotes/quotes.jsp?s=si

So if there is/ was any backwardation between the spot prices for gold and silver, and their near term futures prices, it may simply reflect near term fear of further deflation. Going out further, the futures clearly expect higher prices for gold and silver.

Gold and silver do not behave as industrial commodities, as they are primarily monetary in nature. Thus, they would not go into backwardation when predicting future industrial deflation. In that case, there will be no rush own gold now, as gold is not consumed interim time. They go into backwardation because the predict that the future's market will not deliver in future. We would need to see the backwardation become permanent in order to say the fear being expressed by the current backwardation, is going to be an accurate prediction.

And you can't compare contract months, because again the open interest is declining in all contract months, because the monetary market is predicting a Comex default in gold and silver. The contracts are losing relevance, as less and less people are willing to participate. You must factor open interest into your analysis.

See also this reply I made in other thread:

http://goldwetrust.up-with.com/precious-metals-f6/silver-as-an-investment-t33.htm#534


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Demographics, Deflation, & Inflation

Post  Shelby on Mon Dec 08, 2008 7:38 am

See also my prior post, as I clarified that monetary backwardation with declining open interest (in the contract months), is not the same as industrial commodity backwardation with it's non-declining open interest.


All the recent confusion about divergent volatility of various money supply aggregates, TARPs, etc, motivated me to go back to the well of indisputable demographics trend analysis, and here is all the proof you need that gold & silver are merely taking a breather (in dollars, they been going up in other currencies) while everyone shows up to their bond funeral. I had been studying demographics back in 2006:

http://www.coolpage.com/commentary/economic/shelby/Inflating%20Deflation.html

US Census data shows that housing spending peaks at age 37 and falls off a cliff after age 42, that cliff corresponds to 2003 for boomers peak birth year 1961. The govt+FED extended that bubble through 2005 using sub-prime & liar loans. General income and spending (implying productivity?) peak at age 50, which is 2011 (1961 + 50).

Population peaks can be viewed for all countries:

http://www.census.gov/ipc/www/idb/pyramids.html

Major population countries of northern Europe, i.e. Germany, Russia, and UK peak about 5 years after USA, I assume because they took longer to recover from WW2. Compared to USA, they more dramatically fall off a cliff before 2020. France is an exception, which I assume based on the male skew, is being in-filled by male African worker immigration. Generally the warmer the climate, then the less peaky the population pyramid.

China's age 42 housing cliff starts 2010 and fall will accelerate dramatically more than USA by 2015. China's spending will fall off a dramatic cliff by 2023. China male skew is more severe in the 10-14 age bracket as of year 2000, so will be a problem at age 26 or starting 2012.

To quantify the effect of these falloffs, we need to look not only at the percentage decline after the peak, but also at the total size of non-productive demographics and level of accumulated debt that have to be supported by the work force age brackets.

However, there is no such peak, nor male skew, for the world in aggregate:

http://www.un.org/esa/population/publications/aging99/a99cht3.htm

So this means there can be no deflation in income and spending for the world as a whole, because population trends can NOT be denied (the basic habits of people at different ages, determine economics). But there must be deflation of income and spending in the more developed regions, with the USA first in line. If the developed world's spending is consuming a great portion of the less developed world's production, then how can the less developed world not deflate?

The answer of course is that either there must be war that kills off the normal human patterns in the developing regions, else the commodities and housing that the less developed world purchases must rise in price, as the incomes and spending in the less developed regions must rise.

In other words, assuming we do not get the WW3 scenario, then energy and food must rise in price globally, housing will rise in the less developed regions, while the less developed countries incomes rise. Whereas, the housing and high-valued consumer items purchased by western boomers, will decline in relative value. I stress "relative value" as opposed to price, because it is possible to raise the prices of devalued assets, by devaluing the currency. Devaluing the currency also shrinks the value of debts, so this outcome is assured in the developed regions that have unsustainable debt loads, with the USA (and UK on 4 - 5 year spending peak demographic lag) being acute examples. And note that this transition from the world overproducing high-valued goods, to producing more basic goods demanded by the less developed regions, will not likely be instantaneous nor smooth, and we could see deflation in all goods while less developed regions suffer demand destruction for their high-valued goods exports. However, realize that the margins earned by China are miniscule on high-valued goods, thus once transitioned to earning the same miniscule margins on the much higher volume basic goods will be a boom. I can see anecdotal evidence of this transistion in Asia now, with China's factories looking for opportunities to sell goods in higher volume emerging markets they had not yet tapped.

Remember this about stocks, all four of the great crashes in the past 80 years, the 1919 Auto, 1929 Great Depression, 1990 Nikkei (if viewed in real terms), and 2000 Nasdaq had lost -40% in the initial 3 to 9 months (with an interim +40% bounce, i.e. -15% from peak), had lost an additional -30% (-60% from peak) by 13 months, and lost another -50% (-80% from peak) by 30 months. That information comes from one of HSDent.com books. Also see this historical P/E chart:

http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e080204

The eventual assured devaluation of the developed world currencies, is the reason to not invest in Tbonds and to invest in gold and silver during this developed world deflation to be followed by inflation in the less developed regions. It is useless to get even 10% fixed return, if the dollar declines by 10% or more. Everyone has been moving to Tbonds, even the FED's own member banks, which has caused the dollar to rally, but there they will be buried, because when they try to come out of Tbonds, then the dollar will decline. How can the FED keep everyone in Tbonds indefinitely when the interest rate can not go below 0%?

We can just ignore the various money supply aggregates. The bottom line is that Tbond interest rates can not go below 0%, and thus eventually Tbonds have to peak, and the exodus from the peak will send the dollar falling off a cliff. And where will all that money go? Basic commodities, less developed regions, gold, and silver. Of course no major trend will move continuously forward, without taking a few steps backward along the way. The trend is based in demographics, and thus due to Law of Large Numbers, it is undeniable and unstoppable (no matter what the govts+FED do). Also I do expect the govt+FED to try to stop that flow of capital from bonds, and that is why I expect capital controls by late 2009 or 2010. Of course, once the govt+FED resort to obvious desperation, like the Central Banks selling of gold in late 1970s, this doesn't cap the price of gold, but rather causes people to wake up and sends the price to the moon. The govt+FED can not fight demographics.

However, note that the eventual Tbond exodus (funeral) will not actually put more cash into the economy. It will be getting some people out of Tbonds, and the buyers into Tbonds. But presumably, the seller of the Tbond wants a new asset class. So my point can be rephrased, to what asset class do they want to trade into? Again my answer will be same as prior paragraph. Remember Exter's Pyramid, shows that Tbonds are the last thing the masses move to, before the final move to gold. Also, I think the FED will be forced to monetize that exodus, in order to keep interest rates from skyrocketing. If the FED does not cap interest rates, then we could see Tbonds go almost "no bid" with interest rates higher than I could possibly fathom. But that would quickly disintegrate the world financial system, as cost of capital would become prohibitive for the less developed (developing) regions. In short, no matter how you slice and dice what the govt+FED may try to do, the world has to revalue gold and silver to the moon. And that folks, is why they've been capping the gold & silver price, but only for as long as they have gold & silver to sacrifice for delivery at these low prices at the futures markets. They are trapped and fighting for their lives against a demographic time bomb which they can not stop.

Let me summarize this entire article in one sentence. The transition of spending and investment from the developed world to the developing (less developed) world, which is dictated by unstoppable demographics, will be tumultuous and will force gold & silver to perform their historical function as a unit of account and a unit of exchange.


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UPDATE: Demographics, Deflation, & Inflation

Post  Shelby on Mon Dec 08, 2008 5:57 pm

Some others published articles today that concur with my prior post today regarding the bond bubble and the coming devaluation of the dollar:

http://www.gold-eagle.com/editorials_08/sobolev120708.html

Sobolev wrote:...Huge increases in the Fed's balance sheet have not led to a reflationary effect, since the Fed is still using a "sterilization" mechanism...

...Additionally, Bernanke has openly stated that the Fed stands ready to buy long-term government bonds in order to decrease mortgage rates and the cost of servicing US government debt. The results are evident: a bond market bubble...

...Conclusion: If the Fed continues, as declared, to support interest rates at artificially low levels by the way of debt monetization, a major down-leg in the US dollar is inevitable...

http://www.safehaven.com/article-12032.htm

Fekete wrote:...Comex can no longer attract sufficient quantities of gold from investors to its warehouses which, in consequence, get more and more depleted. Such a gold flow is the lifeblood not only of Comex, but of the irredeemable dollar as well. There is a world of a difference between the irredeemable dollar with the gold window of Comex open, and the irredeemable dollar with the gold window of Comex closed. The institute of the gold futures market is the prop keeping the global game of musical chairs of fiat money going. The music stops when Comex closes its gold window...

...When that happens, it will be not only "gold is not for sale at any price" but also "oil is for sale only against payment in gold"...

...once Comex is forced to close the gold window, the dollar will lose its main prop and bearings and, with them, its purchasing power...

He also explains the backwardation similarly to how I explained it yesterday (see 2 posts before this one):

Fekete wrote:...Unfortunately, this option is no longer available because the trust in the irredeemable dollar has been fatally undermined by the backwardation in gold. No longer will people be coaxed out of their physical gold by the promise of risk-free profits, however large, payable in paper...

...the clearing members of Comex, who could have prevented it from happening by allowing gold to break out on the upside, have changed tactics and decided to step aside and let backwardation do the job. They hoped that it would pull in gold from the moon. The risk-free profits that backwardation promises to yield would tempt holders to swap cash gold for paper gold.

Well, so far it is not happening. Fewer than 10,000 ounces of new gold was registered at the warehouses during this episode of backwardation so far...

...Such a measure, however, would betray the utter helplessness of the clearing members. It would be oil on the fire...

He also sees the capital controls coming:

Fekete wrote:...What I see coming is that gold will be declared 'extralegal' by the U.S. government to prevent gold from becoming a world currency, by withholding legal protection from contracts made in terms of gold...

However, I disagree somewhat with something else that Fekete wrote:

Fekete wrote:...gold confiscation in America in 1933 only made things worse, in particular, it was the direct cause of the decline in interest rates that, in its turn, was the chief cause of the widespread destruction of capital and bankruptcies...

...Right now the backwardation in gold also means another drastic drop in the velocity of gold circulation, and it will also cause a tragic contraction in world trade. It will also be catastrophic to employment and economic health in general...

True that if gold is confiscated (or chased by fear into hiding), then world trade will plummet. But if the gold price will be allowed to rise freely, then world trade can boom. And besides the demographics of developing nations will FORCE gold price to rise, whether it come peacefully or by wrecking ball force (war, Tbond war with China, etc). The confiscation of 1933 was sort of necessary in order to free the dollar from gold so that the dollar could be devalued relative to gold (price was doubled after the confiscation), which is always necessary to counteract deflation that gold go up in value (in order to coax it out of vaults back into capital investment...remember credit/fiat is not capital). The problem was the govt didn't do it in a free market way, instead the govt stole that doubling of price from those who held gold before the confiscation.

=========
This following graph shows how impossible it is to discern the direction of the economy from the stock market, because it has become like a yoyo since the gold backing was removed from the dollar in 1971:

http://www.gold-eagle.com/editorials_08/lundeen120608.html

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re: Backwardation

Post  Shelby on Tue Dec 09, 2008 3:21 am

Afaik, Mish Shedlock is not an economist? Let me try to answer his question:

http://globaleconomicanalysis.blogspot.com/2008/12/nonsense-about-gold-backwardation.html

Mish wrote:...There is nothing special about backwardations. Period. OK they are rare in gold. So what?...

Not just rare, but this is the first backwardation in gold EVER. And the backwardation in a monetary metal with declining open interest in future contract months, is not the same as the more frequent backwardations in an industrial metals with non-declining futures open interest. Read:

http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-30.htm#530
http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-30.htm#536

Mish wrote:...Gold No Longer For Sale At Any Price?

That is simply a ridiculous claim...

It means that precious metals holders will not be selling for any where near the current fiat price. It means most of them won't sell for anything less than $5000 per oz. And if gold moves to that price, then they will change their mind and not sell for $5000, because it will mean the dollar financial system is disintegrating and there will be mayhem every where around us. Folks this is the BIG one! The time is upon us!

Maybe you will be able to buy gold at some price, but only trickles and the price will rise every minute so fast, it will make you dizzy. Or there might just be some declaration by the govt, that makes gold go into instant hiding (at least in the USA)... some form of restriction...

Mish wrote:...I simply do not understand paying absurd premiums for gold or silver coins.

Note that GoldMoney is physical gold, not paper gold. Turk takes delivery, and stores it. The vaults are audited. If you want to own physical gold, this is one of the best ways to do so....

Because gold in some vault controlled by the same crooks who are shorting the gold price on Comex and LMBA, is not gold in your hands. Duh!

Also GoldMoney.com has very high minimums for withdrawal in bullion, you end up with huge bars which are very hard to sell (anonymously, who has that much cash in their hand?) if you remove them from the crooks-approved vaults. Instead you must cash out in fiat, which is recorded by the crooks as a transaction to your bank. Yuo entirely lose the anonymity feature of gold, which is going to be critical with coming capital controls. See my prior post.

Also Turk is avoiding paying the VAT up front, so then when you take delivery in Europe, you pay the VAT later at the fully inflated value of the silver!! Much cheaper to buy from repietila in Finland or LibertySilver.com in Sweden, pay the VAT upfront, then all future capital gains are untaxed on silver in Europe (at least that is what repietilla told me).


Take it from me, a guy who posted in Hommel forum in 2007, that 401(k)s were a scam (see the confiscation in Argentina and proposals to do same in USA once Obama is in charge). Take it from me, a guy who wrote "38% in cash" in Oct 2007 and said we should move to cash or bullion. Then I said "sell 50%" when silver bullion was at $21 in March and I said "sell all stocks" in March (although I did cling on to SEG.TO personally). I said buy silver like mad in Aug 2007 < $12. I said average down starting at $16 in late March/April 2008. I was buying 90% coin at spot-$0.50, now it is sell at spot+33%. Have I been wrong??

Note, I predicted several months ago, that the mania in mining stocks would be re-ignited by the crooks themselves, once it became necessary as a way to take pressure off the physical precious metals market:

http://goldwetrust.up-with.com/stocks-f2/junior-mining-companies-t15.htm#539

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re: Backwardation

Post  Shelby on Mon Dec 15, 2008 6:28 pm

I have to refute another guy (this is getting tiring!):

http://www.24hgold.com/news-gold-silver-Backwardation-Update.aspx?langue=en&articleid=353679_Tom_Szabo

Tom Tzabo of SilverAxis.com wrote:...gold and silver contango, and thus backwardation, are highly sensitive to interest rates, much more so than any commodity. If somehow short-term interest rates were to go into significant backwardation, it should be no surprise that gold and silver may also go into significant backwardation. THIS WOULD NOT BE A SIGN OF IMMINENT MONETARY COLLAPSE...

Negative real interest rates (interest rate - inflation) can cause backwardation, because people don't want to keep their money in cash (future's are bought on margin thus increase cash availability). But it is not correct to say that interest rates only cause this, because if people perceive that the future's profits are risk free, it would be a no brainer to take them and bring back contango, and just use all their cash in margin for larger positions. So backwardation always also signals some other phenomenon of fear about future delivery (fear about the promises of the system), and one of those fears may be of increasing margin requirements coming and thus the inability to leverage all the cash one has (get caught insufficient in cash in a rising margin requirement call and be liquidated).

Tom Tzabo of SilverAxis.com wrote:...a pretty strong argument can be made for the opposite–that the negative interest rate is a sign of excessive (in relation to demand for capital goods and investments) monetary demand...

Absolutely not! It is a sign that the FED is forcing the banks to take Tbonds for their toasted assets. This is not monetary demand, it is bubble mania for many and a forced jail that others are trying to figure out how to jump off of. But no one has yet offered a competitive currency (financial system) that can scale:

http://goldwetrust.up-with.com/precious-metals-f6/how-will-we-physically-trade-gold-silver-at-5000-500-t61-15.htm#602

Tom Tzabo of SilverAxis.com wrote:...It is incorrect to claim that gold and silver could be in true backwardation without at least some inversion of the futures price curve where the nearer contracts are trading at a higher price than the further out contracts. Not every contract needs to be in backwardation, but there should be at least one pair in backwardation...

I covered that already in a prior post in this thread. The declining open interest makes the future's curve increasingly irrelevant.

Tom Tzabo of SilverAxis.com wrote:...I have no idea where Professor Fekete is getting his numbers as he did not check with me, and I did not expect him to check with me, before publishing his commentaries. I am reporting on what I see and what I know and couldn’t care less about presenting a “unified front” or ”getting our stories straight”.



Thus, I cannot comment quantitatively on the Professor’s latest article There Is No Fever Like Gold Fever other than to state my basis data says something else...

Dr. Fekete has answered already:

http://www.gold-eagle.com/gold_digest_08/fekete121408.html

Dr. Fekete wrote:...On Friday, December 12, backwardation on gold was still in force at an annualized discount rate hovering around 2% in the December contract, and 0.3% in February contract. Many readers have asked me how it is that so many other observers fail to see the backwardation. The discrepancy is due to differences in methodology. Most analysts calculate the basis as the difference between February and December futures prices which gives them a positive reading. They use the December futures price as proxy for the spot price. This is clearly wrong. The December futures price is not the same as the spot price, even though we are in December.

My methodology is to calculate the basis as the difference between the asked price for the December futures and the bid price for spot gold. The logic behind this is that if you wanted to transfer your costs of carrying gold to the futures market, then you would have to sell physical at the bid price of spot gold and buy it back at the asked price of the December futures.

The opportunity cost of carrying physical gold is known as the carrying charge. It covers interest, insurance, cost of storage, and all other incidental costs including taxes and fees, if any. The carrying charge is the upper bound of the range within which the gold basis can vary. Arbitrageurs would never allow the basis to exceed the carrying charge. If it did, they would keep buying cash gold and selling the futures until their arbitrage would eliminate excess contango...

And more to refute:

Tom Tzabo of SilverAxis.com wrote:...I don’t see things evolving in the same catastrophic manner that he does. For example, I believe there will always be willing buyers and sellers of gold in some quantity if the price is right such that there won’t really be universal hoarding that leads to a cessation in gold mining, loss of segregated metal deposits, and institutionalized theft of ETF holdings. I also don’t believe that the gold futures markets will go away–they will merely be marginalized. Or perhaps they will become either cash settled or an outright cash market...

Cash future's markets? Oxymoronic. Would serve no purpose whatsoever. Open interest is declining on the futures months, because cash futures markets (no delivery) have no purpose (no demand).

If the futures markets cease to function, then price can no longer suppressed. You watch how quickly everything disintegrates from there, and how quickly people wise up and stop selling. For example, one point I keep beating on, but no one seems to understand, is that the dealers all hedge to the Comex (directly or indirectly), and so thus they would not longer be able to function.

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re: Backwardation

Post  Shelby on Sun Dec 21, 2008 6:44 pm

Shelby wrote:I have to refute another guy (this is getting tiring!):

http://www.24hgold.com/news-gold-silver-Backwardation-Update.aspx?langue=en&articleid=353679_Tom_Szabo

Tom Tzabo of SilverAxis.com wrote:...gold and silver contango, and thus backwardation, are highly sensitive to interest rates, much more so than any commodity. If somehow short-term interest rates were to go into significant backwardation, it should be no surprise that gold and silver may also go into significant backwardation. THIS WOULD NOT BE A SIGN OF IMMINENT MONETARY COLLAPSE...

Negative real interest rates (interest rate - inflation) can cause backwardation, because people don't want to keep their money in cash (future's are bought on margin thus increase cash availability). But it is not correct to say that interest rates only cause this, because if people perceive that the future's profits are risk free, it would be a no brainer to take them and bring back contango, and just use all their cash in margin for larger positions. So backwardation always also signals some other phenomenon of fear about future delivery (fear about the promises of the system), and one of those fears may be of increasing margin requirements coming and thus the inability to leverage all the cash one has (get caught insufficient in cash in a rising margin requirement call and be liquidated).

Tom Tzabo of SilverAxis.com wrote:...a pretty strong argument can be made for the opposite–that the negative interest rate is a sign of excessive (in relation to demand for capital goods and investments) monetary demand...

Absolutely not! It is a sign that the FED is forcing the banks to take Tbonds for their toasted assets. This is not monetary demand, it is bubble mania for many and a forced jail that others are trying to figure out how to jump off of. But no one has yet offered a competitive currency (financial system) that can scale:

http://goldwetrust.up-with.com/precious-metals-f6/how-will-we-physically-trade-gold-silver-at-5000-500-t61-15.htm#602

Tom Tzabo of SilverAxis.com wrote:...It is incorrect to claim that gold and silver could be in true backwardation without at least some inversion of the futures price curve where the nearer contracts are trading at a higher price than the further out contracts. Not every contract needs to be in backwardation, but there should be at least one pair in backwardation...

I covered that already in a prior post in this thread. The declining open interest makes the future's curve increasingly irrelevant.

...

And more to refute:

Tom Tzabo of SilverAxis.com wrote:...I don’t see things evolving in the same catastrophic manner that he does. For example, I believe there will always be willing buyers and sellers of gold in some quantity if the price is right such that there won’t really be universal hoarding that leads to a cessation in gold mining, loss of segregated metal deposits, and institutionalized theft of ETF holdings. I also don’t believe that the gold futures markets will go away–they will merely be marginalized. Or perhaps they will become either cash settled or an outright cash market...

Cash future's markets? Oxymoronic. Would serve no purpose whatsoever. Open interest is declining on the futures months, because cash futures markets (no delivery) have no purpose (no demand).

If the futures markets cease to function, then price can no longer suppressed. You watch how quickly everything disintegrates from there, and how quickly people wise up and stop selling. For example, one point I keep beating on, but no one seems to understand, is that the dealers all hedge to the Comex (directly or indirectly), and so thus they would not longer be able to function.

Dr. Fekete responds and validates what I wrote above:

http://www.gold-eagle.com/gold_digest_08/fekete122008.html

Dr. Fekete wrote:...In the first case confidence in fiat money is high; in the second, it is low and waning fast. In the first case paper gold is an effective substitute for physical gold in most applications; in the second, paper gold has been unmasked as a fraud, and discredited beyond repair. In the first case the economy works pretty well the same way as under a gold standard; in the second, all hell is turned loose as the exchange of goods and services is on the decline and autarky on the rise...

...cost of carrying gold is as follows (all percentages are annualized)

for 11 days: 1.005%
for 69 days: 0.9%
for 190 days: 0.07%

That is pathological without any need of further explanation! It costs more to carry gold for shorter periods of time than for a longer period - according to the futures market. That puts a hole in the zero interest-rate argument, and explodes the explanation that the extra-low contango or outright backwardation in gold is nothing more than "normal backwardation"...

Hommel had written:

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

Hommel wrote:Backwardation should be Normal...

...Gold in backwardation appears also to be a function of just below zero interest rates on the near term T-Bill...

...Backwardation is seen as normal when people begin to see the difference between gold and paper promises...

Again Hommel is clueless about the critical aspect of the Velocity of Money. Backwardation means that real bills are not trusted and it means gold does not trade, gets buried, and the global economy does not trade. It means a Dark Ages. It means production collapses. This is why Hommel has the wrong proposal for a solution "The Silver Coin" proposal. Hommel does not understand what is happening, which is why has severely mislead people, even I tried to warn him in Oct (sell stocks near peak) and again in March (sell silver & stocks near peak).

Dr. Fekete wrote:...Tom thinks that I am an alarmist in believing that the permanent closing of the gold window at the Comex will mean a cessation in gold mining, loss of segregated metal deposits, and institutionalized theft of ETF holdings.

To answer this I have to go back to the collapse of the Western Roman Empire after the abdication of the emperor Romulus Augustus on September 4, 476 A.D. It was followed by the Dark Ages when the rule of law, personal security, trade of goods against payment in gold and silver could no longer be taken for granted. Gold and silver went into hiding, never to re-emerge during the lifetime of the original holders...

...The history of the monetary system of the United States shows an ominous parallel to that of the Western Roman Empire. As long as gold and silver was still used in trade at least to some extent, the Western Roman Empire was limping along. The modern equivalent of the disappearance of gold and silver is epitomized by the progressive vanishing of the gold basis.

There is simply no continuous transition from the paper dollar cum contango to the paper dollar cum gold backwardation, Tom's prayer notwithstanding. The transition will necessarily involve a sudden and fatal weakening of the legal system...

I had written about this also:

http://goldwetrust.up-with.com/precious-metals-f6/how-will-we-physically-trade-gold-silver-at-5000-500-t61-45.htm#653

Shelby wrote:...the precise mathematical definition of "usury", which I have recently formulated, "perpetual sin of humans to borrow money faster than (and thus at higher interest rates than) the growth percentage rate of production of goods and services"...

...never has Gresham's Law been reversed. The history of man is one of a continual movement towards more liquid forms of money. In Dark Ages, when men tried to move back to physical silver & gold as money, much of it got buried in ground (idle hiding) and commerce ground to a halt (idle capital), the Roman road system went into decay, etc.. So net effect, the borrowing still exceeded production, because the hard money forced a lower production and lower borrowing (because society refuses to invest first and borrow less than growth of production). This was because the masses must always been given an illusionary money, that enables their usurious liquidity desires, otherwise a hard money discipline forces theft, chaos, and money goes into hiding and production stops.

So the ONLY WAY that any one can expect gold & silver to be useful as we go forward in this crisis, is for someone to provide a technology to break Gresham's Law. In my estimation, anonymous peer-to-peer trading of physically backed digital gold & silver, might do it, because then the usurious society can not force it into *IDLE* hiding...

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GET OUT OF DEBT ASAP!

Post  Shelby on Tue Dec 23, 2008 4:23 pm

Remember the discussions since 2006 at the Hommel forum about using debt (e.g. 2nd mortgage) to buy precious metals. I had written that was not going to work out:

http://www.gold-eagle.com/editorials_05/moore031107.html (March 11, 2007)

Shelby wrote:...do you really think the banks are going to design a transition to the Amero that favors giving debtors a way out?...

...I see by government decree one (1) dollar of debt converted to one (1) Amero of debt, with Amero convertible at perhaps one (1) oz of gold...

...So now imagine the gold investor who is taking out a 2nd mortgage to buy gold. He ends up too rich to escape bankruptcy, unable to find a buyer for his house, and unable to pay the debt without losing all his gold. Fiats are debt servitude futures contracts. Caveat emptor
.

Above I was correctly predicting deflation.

http://www.gold-eagle.com/editorials_08/baltin122208.html

...In a credit contraction, being in debt is terrible. In a credit deflation - which is stalking the world today - being in debt can be down right deadly. As credit deflates, it also contracts the total volume of credit money in circulation. That sends the deeply indebted or overleveraged into a near frenzy to re-gain liquidity; selling everything in sight including Gold to gain cash in their desperate attempt to stay solvent...

More simply, $600+ trillion of derivative credit will be destroyed, a lot of it will be monetized and given to the bankers (insiders), very little will reach the common man, except when the insiders buy at firesale prices. At the end of this, the insiders own nearly everything in the world (anything that was bought with debt or which requires sustaining cash flow to hold on to).

Prices of survival goods (e.g. food and fuel) will skyrocket because the credit implosion will cause (on a lag) a supply implosion, but people can only cut back so much on food and fuel. We will have hyperinflation in the sense that fiats all around the world will be worth less relative to food, fuel, and gold/silver.

Use any Obama bounce in early 2009 to get out of debt. Or get prepared to walk away from the debt financial system. Good credit will eventually be worthless. I am working on 999cash.com as way for people to walk away from their debt system and still have way to pay and get paid.

I think it is very risky to try to invest to make money on this deflation+hyperinflation, because the nature of it is such that all fiat-based business will get swallowed. The only way to prosper in this crisis over next decade or so, will be to get lean, store up nonperishables, and look for a way to protect your gold & silver, yet still have a way to pay and get paid in gold & silver while you provide needed services in the economy (there will many desperate people, so many opportunities to pay people and get paid in return).

You have two angles of attack in your arsenal:

1. Local -> Barter, small silver coins business
2. Global -> 999cash.com internet reach business

Wise up before it is too late.

Shelby
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Japan 1990s versus USA now

Post  Shelby on Fri Dec 26, 2008 11:58 pm

Some are comparing Japan's experience with asset price bubble deflation in 1990s (peak was 1990):

http://www.csis.org/media/csis/events/081029_japan_koo.pdf

Look what happened to gold priced in Yen:

http://goldprice.org/30-year-gold-price-history.html

Imho, this comparison is erroneous, because Japan had a super high savings rate:

http://neweconomist.blogs.com/photos/uncategorized/20050407_net_national_savings_rates_econ.gif


Japan's savings rate fell, which means private sector was stimulating the economy also. Whereas we are likely to see savings rate go up in USA, as gold & silver go into hiding and people hunker down. The USA experience will be very different, because the savings rate can not go any lower.

Whereas the USA has gone negative:

http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/personal_savings_rate_1.jpg

Also remember Japan was basically kept afloat by exploiting the rapid growth of Asia. And the people are very frugal/simple. The wife controls the money, the husband spends his evenings with co-workers subsidized by the company to drink the night away ("salary man").

Thus Japan govt was able to run huge stimulus by spending the private sector savings. The money was spent on the people who were saving (for the most part). The USA does not have this option. The USA is spending the Asian savings. This was working as long as the spending was feeding back to Asian factories. Now that social contract is broken.

Thus I see no workable social contract. And we see the large banks are stealing $trillions.

Asia will become preoccupied with it's own social crisis (exploding populations, unemployment leads to unrest).

The parallels to Japan don't seem to make complete sense. The USA can borrow only from the printing of money out of thin air. This means hyperinflation, in order to mitigate deflation. It is a very brutal situation we are entering.

Shelby
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Re: Inflation or Deflation?

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