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research24
7th December 2008, 21:34
I don't particularly like to make open refutations of other people opinions, but when they are so patently false and misleading to investors, they should be confronted and disputed. This one of the things that give gold bugs a lousy reputation. Today Sinclair was beating on his inflation drum again, with this false statement:

"Therefore the final answer is that $8.5 trillion that is unspecialized has been injected into the US monetary system."

I will refute his claim by means of two different arguments.

I've seen numerous itemizations of "direct" money injections by very credible sources, none of which exceed $1.2 trillion, yet Sinclair is claiming $8.5 trillion. The difference between his number and everyone else's (8.5 minus 1.2) are in the form of loan guarantees. Guarantees are not loans and certainly not injections, so his is a bogus claim and he is much too smart and well educated not to know this. Therefore I have to suspect a devious bias.

But, for the sake of argument, lets assume JS is correct; we have at least $30 trillion and counting of vaporized asset valuation against which to offset the $8.5 trillion in "new" money. But it is NOT new since it is replacing only 1/4th of what has already been lost, of which there is much, much more to come. Moreover, very little of the actual bail out money is being lent, specifically only that used to bail fanny and fred, less than $200 bn. Most of it, $600+ bn has been parked back at the Fed.

I still keep an open mind on the inflation/deflation argument, but the door is rapidly slamming shut on inflation. For a more rational and thorough analysis of this discussion, see John Mauldin's piece on deflation over at Safehaven.com which includes possibilities of inflation at a much later date.

ascentient
7th December 2008, 21:47
When I read that article in context, I got the feeling he used the term "unspecialized" when he meant to write "unsterilized" (as he had done earlier in the piece).

Jim's accounting makes assumptions that the guarantees will be drawn against (which I agree is likely, although can't predict the future having put my crystal ball away a few weeks back). The biggest thing of note is that the $8.5 trillion is likely to add to M2 whereas much of the $30 trillion you mention is being lost from M3 (valuations of assets that were unrealized).

I think the inflation/deflation argument is extremely strong - deflation first, inflation/hyperinflation later, and Mauldin's piece was well written also. I expect the deflation to last until near the end of next year (9-12 months) whilst the new money starts to filter through the system in that time period. Right now, anything goes, but I'm stocking up on silver and gold like it's going out of fashion (with my fingers crossed I keep my job through the entire period).

research24
7th December 2008, 22:03
The net effect of loan guarantees is zero! Only unless the guarantees are activated is there any effect.

My argument is that based upon what the Fed has done so far has done nothing to cause inflation. Nothing. Even if the banks started lending again they couldn't offset what has been lost.

Now, if you want to go out on a limb and speculate what the government might do in the future is a different matter. What if there is a $1 T stimulus, will that have any effect? Probably about as much as the last one did. Most will pay debt with it while the poor will go buy new cell phones and beer.

We need to understand how powerful the dynamics of excessive debt deflation really is. Ours is an economy that likely will NEVER recover from this in our lifetimes. The downard spiral of job loss now occurring virtually guarantees a depression, as over leveraged corporations cut payroll by the millions. This is no longer a process that can even be slowed, yet alone reversed.

Inflation has to proceed from lending and lending takes place only in reasonably healthy economies. Ours is deathly ill and lending is rapidly heading toward zero. The only options left are for gvt to devalue (instant inflation) or to start giving money away. If Obama repeats the New Deal, devaluation becomes the only option further down the depressionary road.

MY BEST GUESS: Volker is no pansy and will strongly recommend devaluation because it is the best option, bar none. Whether obama agrees remains to be seen.

skijake
7th December 2008, 22:32
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Quote Research24
Inflation has to proceed from lending and lending takes place only in reasonably healthy economies. Ours is deathly ill and lending is rapidly heading toward zero. The only options left are for gvt to devalue (instant inflation) or to start giving money away. If Obama repeats the New Deal, devaluation becomes the only option further down the depressionary road.


Just to play devil's advocate here as I am overwhelmed by this argument and your knowledge. Zimbabwe is the freshed hyper-inflationary economy to come to mind. Their inflationary pressures did not grow from a healthy economy or one where there was heavy lending. I'm not comparing the 2 nations head to head just asking why no deflation in their situation.:confused:

ascentient
7th December 2008, 22:36
Except for the loan guarantee point, aren't we in total agreement then? Both devaluation and a New Deal style scenario are both inflationary/hyperinflationary.

The loan guarantees are guarantees against high risk/low return assets. Eventually they'll be needed, unless high inflation kicks in first. Effectively it's a race to see whether extremely loose fiscal policy or extremely loose monetary policy kill the economy first.

I contend that the $1T in guarantees can be considered to have been added into the money supply in one form or another, either because they are exercised, or because an equivalent level of financial risk is now added to the economy (which will likely result in an equal or similar amount of financial stimulus).

I liken government guarantees to a casino offering players $1T worth of chips total chips that can be used in the casino with no money down, provided they are used in the casino. Eventually the players will gamble the chips, and the odds are such that the money will eventually be either won by the players and taken from the casino, or the house will keep the chips but have created new gambling addicts who will have destroyed their lives in the process by creating increased risk affinity in all aspects of their lives.

research24
7th December 2008, 22:36
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Quote Research24
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Just to play devil's advocate here as I am overwhelmed by this argument and your knowledge. Zimbabwe is the freshed hyper-inflationary economy to come to mind. Their inflationary pressures did not grow from a healthy economy or one where there was heavy lending. I'm not comparing the 2 nations head to head just asking why no deflation in their situation.:confused:

While we don't know how that country achieved that amazing result, we do know that it did not occur by means of a vibrant banking system simply because Zimbawe does not have one, nor a credit economy, so it didn't have debt deflation. Most likely gvt just printed up the cash and handed it out to cronies. That's basically what Argentina did.

Our banking system is dying just like it did in the 1930's and four prior depressions. Once you rack up debt that is 10X GDP there is no escape from the deflationary collapse. To overcome this the government would have to put out at least $30 trillion cash pronto. Can you see that happening?

ascentient
7th December 2008, 22:42
Skijake - prices for commodities in Zimbabwe weren't governed by the Zimbabwean economy (is my guess) as their economy is too small to affect the entire world noticeably by their reduced demand. For the most part, prices are dictated by the rest of the world, so Zimbabweans might reduce their demand for goods, but the goods price isn't affected much by it, so they went straight to inflation then hyperinflation.

America is the epicenter of world consumer demand. When demand goes down here, it deflates the commodities worldwide, until the price equilibrium meets support at the level the rest of the world is willing to pay for such commodities (after they've deleveraged their capital and diverted resources from producing goods for America). After that point, the USD will fall and commodity prices in America will rise accordingly.

research24
7th December 2008, 22:43
By the way, many people are good at beating inflation. Almost no one is good at beating deflation and therefore we are biased in favor of inflation. We all want to see it and that colors our thinking. I've been victim of that bias also, but as you can see wishful thinking kills portfolios.

Even Warren Buffet is getting creamed. Trump is going bust . . . . again!

research24
7th December 2008, 22:47
I agree on the commodity prices, if only for the reason that the pendulum has swung too far, particularly for oil. The oil price is killing production faster than demand, and the same is true for many other commodities.

Oh, and I keep forgetting about those trillions of foreign dollars and what will happen to them when the dollar starts to collapse. Any ideas?

skijake
7th December 2008, 22:54
Skijake - prices for commodities in Zimbabwe weren't governed by the Zimbabwean economy (is my guess) as their economy is too small to affect the entire world noticeably by their reduced demand. For the most part, prices are dictated by the rest of the world, so Zimbabweans might reduce their demand for goods, but the goods price isn't affected much by it, so they went straight to inflation then hyperinflation.

America is the epicenter of world consumer demand. When demand goes down here, it deflates the commodities worldwide, until the price equilibrium meets support at the level the rest of the world is willing to pay for such commodities (after they've deleveraged their capital and diverted resources from producing goods for America). After that point, the USD will fall and commodity prices in America will rise accordingly.




This is the 64,000 ounces of silver question that is so hard to answer. While this deflationary period runs its course I have believed that there would be inflation cooked into the cake for the backside of the program. Can we keep devaluing to zero and if not ,how long to see significant inflationary signs?

Argentum
7th December 2008, 22:54
The thing is, NO one knows how or what to do. It's all new, it's never happened before. The scope is massive. And we are not anywhere close to and end. The ONLY thing that is a known factor is that Gold and Silver are money. In your hand gold/silver. Everything else is just watching a massive ant hill get hit by a rainy day.

skijake
7th December 2008, 22:58
I agree on the commodity prices, if only for the reason that the pendulum has swung too far, particularly for oil. The oil price is killing production faster than demand, and the same is true for many other commodities.

Oh, and I keep forgetting about those trillions of foreign dollars and what will happen to them when the dollar starts to collapse. Any ideas?

If just 1/4 make it back you would think the boat gets swamped. Wouldn't that set off inflationary pressures immediatley?

research24
7th December 2008, 23:00
Devalue to zero? No, of course not. If gvt would stop f-ing everything up this could be over in five years. Instead, among other things they are causing massive markets dislocations and even more malinvestment that is likely to put us into a long downward slide for decades. Remember, it took WWII to end the Great Depression which lasted twenty years. It wasn't all downhill either as there were big rallies followed by more crashes.

skijake
7th December 2008, 23:02
The thing is, NO one knows how or what to do. It's all new, it's never happened before. The scope is massive. And we are not anywhere close to and end. The ONLY thing that is a known factor is that Gold and Silver are money. In your hand gold/silver. Everything else is just watching a massive ant hill get hit by a rainy day.

Got to go with historical precedence there. Gold and Silver have always prevailed before, why wouldn't they again? And isn't that the basis for CBs fear of an alternative to their otherwise monopoly?:rolleyes:

ascentient
7th December 2008, 23:10
My suggestions are that the foreign dollar holders will start exchanging bonds for gold/silver (probably gold) at an increased rate. This would lower the bond price and as the US government starts to lose its credit rating the demand on the bonds will not be replaced.

Sure in dollar terms, the Chinese and other holders will take a paper loss, but that's a massive political card that they'll then hold (and they'll have the gold which is the only real money anyway). This is a long term strategy playing itself out - China has moved from an agrarian to a psuedo-capitalistic secondary producer par excellence which will retain them a huge competitive advantage once they hold the real capital. They'll become what America was many decades ago.

Add to that, that America's greatest competitive advantage is intellectual property (imaginary property) which can only be enforced within their jurisdictional bounds (China only "complies" at present due to it being easier to do so) and soon that advantage would be lost too (which is a good thing in my opinion as once the world stops believing in the false scarcity of
intellectual property, humanity will take great leaps forward).

I expect China to further a program of imperialism - perhaps aiding Pakistan (nominally in their defence) against India. I'd also imagine them to annex some African countries, either economically or militarily as the world's new peacekeeper (American style) - this will increase their control over raw materials. Russia will likely sit on the sidelines for the most part whilst they resolidify their countrys social base - they are resource rich and won't be interested in going to war with China as it's a war neither side would profit from.

I'll stop there, as I've made WAY too many assumptions, but in the long run (50 years) I think America will be better off, as will the rest of the world. America will probably go through massive social upheaval, but I imagine it to return to the founding principles of liberty and self-reliance that are the ultimate economic and social structure (and the one's detailed in its Constitution). Without the burden of maintaining superpower status (which it never learnt to deal with effectively) the society here will likely prosper.

OK, enough of my rant.

skijake
7th December 2008, 23:10
Devalue to zero? No, of course not. If gvt would stop f-ing everything up this could be over in five years. Instead, among other things they are causing massive markets dislocations and even more malinvestment that is likely to put us into a long downward slide for decades. Remember, it took WWII to end the Great Depression which lasted twenty years. It wasn't all downhill either as there were big rallies followed by more crashes.

5 years? That's basically 3 election cycles. Herding cats with that one! If the bleeping goverment would have had our backs we wouldn't be in this mess but now we have to take the roller coaster ride, no seat belts, no brakes and the tracks disappear over the cliff.:rolleyes:

research24
7th December 2008, 23:11
From what I am reading the CBs seem to be getting a lot friendlier to gold. Both Greenspan and Bernanke were once favorable to it. The truth about CBs and fiat money is being laid bare. I wouldn't rule out a gold based system in the near future as the talk of same is gaining momentum. Keep in mind that a gold based system is not quite the same as gold standard convertability, which will never happen again.

skijake
7th December 2008, 23:17
From what I am reading the CBs seem to be getting a lot friendlier to gold. Both Greenspan and Bernanke were once favorable to it. The truth about CBs and fiat money is being laid bare. I wouldn't rule out a gold based system in the near future as the talk of same is gaining momentum.

It may be all that can save them! What a turn of events that would be. By the way that is what Sinclaire believes will prompt gold to 1600 or more if I dicepher him correctly.

fredrock
7th December 2008, 23:21
Remember, it took WWII to end the Great Depression which lasted twenty years. It wasn't all downhill either as there were big rallies followed by more crashes.

Research, There are some who would take exception with you on the affect WII had on the Great Depression.

The Myth of War Prosperity (Athony Gregory)
http://www.lewrockwell.com/gregory/gregory132.html

The Myth of War Prosperity (Dr. ron Paul)
http://www.lewrockwell.com/paul/paul81.html

Fred

ascentient
7th December 2008, 23:22
Skijake - the timing to switch from deflation to inflation/hyperinflation is difficult to predict. If I knew the answer to that I'd either save my money to buy more silver in the future or borrow heaps and buy now. My estimation is that deflation will last about 9-12 months, although I doubt silver/gold slipping much more in that period (I don't foresee them going much more than 20% lower for another decade). Rather, I wake up every day expecting them to have skyrocketted - that's my biggest fear, that they go up so fast I won't be able to afford to buy more.

Personally, I believe that current prices are below fair market equilibrium so I buy now (on interest free credit if necessary). If prices fall and it turns out I could have bought more by waiting, so be it. I've never bought silver ABOVE what I believe to be fair market value - which means that if my estimation of value is accurate I'll make my profit eventually.

The longer that takes to occur, the more silver I'll own and the more profit I'll make (as a total sum). The quicker it occurs, the more profit I'll make as an annualized percentage. I only spend money on silver I DON'T need to survive - that's the bottom line. If it went to zero I wouldn't care - I'd just buy more.

I'll keep buying until either the gold/silver ratio returns to values I'll accept as valid (about 20:1 or lower) and then I'll switch a portion of my silver to gold and buy gold.

Alternatively, I'll stop buying when no one else is willing to sell at a price I can afford. If that occurs, I'll already be rich based on my current holdings. Then I'll buy another asset class that is undervalued by the market - be it oil, foreign equities, real estate etc.

There is always a way to increase your worth if you have a goal in mind as that means you know what you want and how much it is worth (or valued) to you. Most people don't know value when it stares them in the face, as they have no goal but immediate gratification. I'm 27 now - I'll probably be alive for another 50 years or more and I've been working for 6. That means that there is plenty of value to accumulate before I can retire and plenty of time to do it.

research24
7th December 2008, 23:34
At 27 I'd say that you can't possibly loose if you hang on. It is entirely possible that a sound money movement will develop and a gold/silver backed monetary system implemented. This may not be as far out as most people think as there is already a great deal of disgust over fiat money within the establishment since huge amounts of wealth are being lost. The OECD nations will be resistant but the Asians are eager for it and just might be able to force our hand. Were that to happen it would would put PMs at a much higher value, say 3-4X as rough estimate of necessary dollar devaluation.

This would be a system in which every nations money would have to be backed by a ratio of metals probably set by a world central bank.

skijake
7th December 2008, 23:35
Skijake - the timing to switch from deflation to inflation/hyperinflation is difficult to predict. If I knew the answer to that I'd either save my money to buy more silver in the future or borrow heaps and buy now. My estimation is that deflation will last about 9-12 months, although I doubt silver/gold slipping much more in that period (I don't foresee them going much more than 20% lower for another decade). Rather, I wake up every day expecting them to have skyrocketted - that's my biggest fear, that they go up so fast I won't be able to afford to buy more.

Personally, I believe that current prices are below fair market equilibrium so I buy now (on interest free credit if necessary). If prices fall and it turns out I could have bought more by waiting, so be it. I've never bought silver ABOVE what I believe to be fair market value - which means that if my estimation of value is accurate I'll make my profit eventually.

The longer that takes to occur, the more silver I'll own and the more profit I'll make (as a total sum). The quicker it occurs, the more profit I'll make as an annualized percentage. I only spend money on silver I DON'T need to survive - that's the bottom line. If it went to zero I wouldn't care - I'd just buy more.

I'll keep buying until either the gold/silver ratio returns to values I'll accept as valid (about 20:1 or lower) and then I'll switch a portion of my silver to gold and buy gold.

Alternatively, I'll stop buying when no one else is willing to sell at a price I can afford. If that occurs, I'll already be rich based on my current holdings. Then I'll buy another asset class that is undervalued by the market - be it oil, foreign equities, real estate etc.

There is always a way to increase your worth if you have a goal in mind as that means you know what you want and how much it is worth (or valued) to you. Most people don't know value when it stares them in the face, as they have no goal but immediate gratification. I'm 27 now - I'll probably be alive for another 50 years or more and I've been working for 6. That means that there is plenty of value to accumulate before I can retire and plenty of time to do it.


The switch from what seemed very inflationary earlier this year to deflationary seems to have occured very rapidly. My fear is that the next change in direction will happen as fast or faster and I/we wont get all our ducks in a row in time. Such is life! Your plan sounds solid and I bet you will do just fine!:)