Tag Archives: fiat

Look both ways before crossing the street

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I received an email from a friend and here is my response.  You ought to be able to decipher what the questions were about.  These are my opinions of the present situation, and are by no means recommendations.  

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1) Voting for McCain…

I really don’t think voting for A or B is going to matter.  I’m voting for Ron Paul because I believe that change has to come from going against the herd.  I refuse to be partially responsible for either of them being in office.

The odds are in favor of the democrats getting into office and taking over Congress.  I’m actually a bit frightened by this, but either situation is grim. Hopefully it will be better than the last 8 years.

2) Deflation / Inflation
This is tricky and something I’ve been trying to better understand.  There are many many many factors at work here.  We are headed into a MAJOR recession… thus your cutting spending was a wonderful idea.  A recession is a drag on the stock market.  Many think that after a brief rally it is going to drop much further.  I know you are invested at the moment.  One way to hedge against a drop is to invest in a inverse ETF fund such as SDS, QID, DXD, or TWM (these are leveraged 2x FYI).  These ETFs have saved me much pain.  The overall trend in the market is down.  Bear market rallies tend to be severe and swift to the upside, while the markets overall continue to decline.

As for Deflation and Inflation what this means is a decrease or increase in the money supply.  Generally during inflation when the Fed is creating money prices of everything goes up because there is a surplus of money that has to go somewhere.  When the money supply contracts either by the Fed reducing the money supply or debt is paid off.  Then prices decrease.  However, under a fiat monetary system credit and continued inflation are essential to keep it up.  At the moment with the Fed creating TONS of money we are looking at the potential for hyperinflation in the future, which nobody wants.  So, the Fed is walking a tightrope between deflation and inflation.  I imagine they will lean towards inflation over deflation ultimately.  At the moment we are primarily seeing deflation as prices are coming down everywhere (commodities, housing, stocks).

During deflation the market will come down as will all prices.  I think that regardless the markets will continue their descent due to the upcoming recession, decrease in consumer spending, decrease in imports and exports, and increase in unemployment.  Once the recession takes hold and the effects of the monetary inflation occurring now start to be felt we will probably start to see increases in commodity prices across the board.b  With companies facing difficult times I don’t foresee the created money moving into equity markets.

3) War with Iran
The conflict between Iran and Israel is heating up.  I received a report that said Israel won’t be doing anything until after the election, but who knows.  In this case we would see the value of gold skyrocket, oil go through the roof, and the dollar go through the floor.  This is slowly moving from a remote to more plausible reality.  I hope this doesn’t happen as the US can’t afford to be involved in another conflict.  We are already spread so thin.  Because of this and the enormous debt load the US government (its citizens) now carries I fear for the support and longevity of the dollar.  At this point I think it important to own some gold and have some money invested in foreign currencies.  <Thank you Gary North and Chris Martenson>  These are for the long-term and may lose significantly in the short term.  There are many uncertainties at the moment.

Oh and least I forget… At this juncture in the Republicans and Democrats are but different sides of the same coin.

Why Gold?

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I agree that we are probably going to see a continued decline in commodity prices especially PMs.  However, given the increases in the monetary supply I forsee this trend reversing.  When the trend reverses, which isn’t going to happen immediately because we are headed towards a major recession, with unemployment rising, and more likely interest rates as well, inflation will be severe.

The Money Supply graphs are frightening.  Once that money goes into the system I wouldn’t be surprised if we start to see hyperinflation.   For all of our sakes I don’t want that to happen.

As for investing in PMs I think there are two types of people who purchase them.  The first is the speculator, and the other the long term purchaser regardless of price. (I’m leaving out purchasers for industry and jewelry).  As much as I don’t like to see the value in relation to fiat currency of my PMs decline my intent on owning them is for more of the oh shit situation.   Throughout time gold, and silver to a lesser degree have held up as a store of value.  They aren’t going to be worthless as can a paper currency backed by nothing. Politicians and those involved in the government don’t like PMs as they aren’t easily created.  Having a currency backed by a scarce resource means that they have to control spending as they can’t print money to pay for various expenditures.

So, why gold and silver?  What happens if the fiat currency fails?  All of a sudden you and I have a bunch of roman numerals in our bank accounts.  Sure we can go get paper currency, but it is better to use as heat.  If this happens chaos will ensue until another solution is created or we go back to a currency backed by PMs.  I doubt the latter case would occur as bureaucrats aren’t going to want that option. 

My other concern is war with Iran, which is looking more and more likely.  In this scenario gold and oil will skyrocket.  Oil will also be much harder to obtain and the government will probably institute a rationing scheme instead of letting the price rise.   I’d rather pay $50.00 a gallon for gas then not be able to get it or to have to wait in line for days.  I presume many of you don’t agree, but gas or no gas you pick!  Would I drive much NO… however, if I needed to go somewhere I could get the fuel I needed.   

Lastely, beyond Gold and Oil we all need food and water.  Don’t forget food.

 

-T 

Look at the Fed Goooooooooooooooooooooo

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I found this on www.chrismartenson.com and couldn’t resist posting it here especially after my post about the dollar.  How the dollar is going to survive after this much cash is pushed into the system I really don’t know.  A inflationary depression seems to be looking more and more likely.  It would explain why gold is so scarce on the physical market.  People are losing faith in fiat currency and want hard currency that has some store of value.  Paper is easily printed, and as Voltaire said

“Paper money eventually returns to its intrinsic value – zero”

Is it just me or is that line going almost STRAIGHT up.  If that isn’t a sign of complete and utter panic well I don’t know what is.  They are going to put as much liquidity into the system as possible.  Will this mean that you house will go back up in value?  Perhaps, but your purchasing power will decline severely.  Jim Rogers said the US currency is doomed, and I agree.  It is only a matter of when, and not if.

 

The US Dollar gaining? What?

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Hyperinflation, inflation, deflation, depression, recession, stagflation… well which is it? I have no clue, but there is a massive monetary inflation occurring, and a looming recession.  Hmmm so does this mean a inflationary depression?  Yikes.

Last week I took a break from overwhelming myself about the markets and the state of the economy. The timing wasn’t perfect, but I had personal reasons.

Before I start on the quest of exploring our present situation of the potententional…”ion”s I want to make sure we are on the same page. Therefore lets have a defining moment:

Money: Easily exchangeable, is relatively scarce, and is a store of value.

Inflation: An increase in the money supply
Deflation: A decrease in the money supply
Hyperinflation: A self-perpetuating unstoppable (more or less) state of inflation
Recession: A significant decline in business activity, mainly a contraction in the economy or slowing of growth
Depression: A long-term economic state characterized by unemployment and low prices and low levels of trade and investment
Stagflation: A period of time characterized by high inflation and recessionary conditions.

I’ve been looking at calls for the vaious scenarios and needed some clarification as to what happens in the various situations.  For the most part it seems obvious, but I’ve been struggling with the increase in the value of the United States dollar.  Our national debt is above 10 trillion and rising rapidly as the recent bailouts continue, and the most recent increase in military spending added another $612 billion that we have to pay for.

Why is the risk of deflation so frightening that the Fed, Treasury, governments, and foreign central banks will do anything to stave it off?  Deflation is like the grim reaper knocking on your door for a fiat currency.  A fiat currency survives on debt and inflation (credit expansion).  Too much inflation and it can become worthless, and negative inflation (deflation) and it gains value.  That sounds like a good thing but it isn’t.  As the currency gains in value debt becomes more expensive, and thus more difficult to pay off.  Imagine taking out a $100,000.00 loan with todays dollars and paying it off with dollars from 1930.  Good luck! During deflation prices also fall due to the decrease in the money supply and as there is no longer credit being handed out for people to use to consume and invest.  The whole system comes tumbling down and the reaper walks in the door to say hello!

When credit is created (a loan) that is an increase in the money supply, and when it is paid off that is a decrease in the money supply.  Say the loan is $100.00.  That is $100.00 of money put into existance with a very small percentage actually backing it.  Now I repay my $100.00 loan and that credit is erased and the money supply contracts.  This is the normal situation that occurs daily.  However, if people don’t want to lend or borrow then we have a problem.

No credit means no ability to borrow, which means no abilty to purchase goods and services.  Everything is based on debt today.  The change began in 1913 with the Fed, and the ultimate shift to fiat money was in 1972 during the Nixon presidency when we abandoned the gold standard and thus savers were punished from that day forward.

Okay this leads to me to the strengthening of the United States Dollar…  Why I ask is it getting stronger.  Many argue that it is because Europe is weakening, which may be part of the picture.  However, I read something that made a clear point that because European banks are required to hold dollars for various toxic debt they hold denominated in dollars they normally use the interbank markets based on the LIBOR rate.  However, that market is seized up and nobody wants to lend so they start using the EUR / USD credit swap market.  As they purchase dollars its value goes up.  Notice today that the Euro gained against the dollar when the Fed decided to start purchasing short-term commercial paper.  They are stepping in and becoming the new mainstay for that market: which one?  EVERY MARKET <Interesting…>

And tomorrow is a new day!

Fed inflating with no restraint – Hyperinflation?

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A picture is worth a trillion words…

 

Money Supply 09/25/2008

Money Supply 09/25/2008

Frankly I’m not surprise to see what the Fed is doing and can only imagine what this is going to look like if this bailout goes through.  There is a precedent throughout time that inflating the monetary supply only prolongs the inevitable.  This is a sad state of affairs and I see only troubled times ahead for the once mighty dollar.  Like the Romans who clipped their gold and silver coins the United States is creating more and more money from nothing.  Why do we need a bailout package when we can just print money?  It isn’t actually printed anymore, but issued through treasuries between the Fed, the Treasury, and private banks.  

We are headed towards a recession if we aren’t already in one.  Inflating the money supply while in a recession presumably means higher prices.  The contraction in prices we recently saw was perhaps a byproduct of the Fed contracting the money supply, which it has now reversed course.  During the Great Depression of 1929 many banks tried using their depositor’s money to help keep the market afloat just as the Fed is now doing… The outcome?  You know what happened…  

Now we are taking the opposite position and inflating.  What happened to Rome… and thanks to Mike Hewitt at dollardaze.org he lists many countries plagued by hyperinflation. 

  • Angola (1991-1999)
  • Argentina (1975-1991)
  • Austria (1921-1922)
  • Belarus (1994-2002)
  • Bolivia (1984-1986)
  • Brazil (1986-1994)
  • Bosnia-Herzegovina (1993)
  • Bulgaria (1991-1997)
  • Chile (1971-1973)
  • China (1939-1950)
  • Free City of Danzig (1923)
  • Ecuador (2000)
  • England
  • Greece (1944-1953)
  • France (1789-1797)
  • Georgia (1995)
  • Germany (1923-1924, 1945-1948)
  • Greece (1944-1953)
  • Hungary (1922-1924, 1944-1946)
  • Israel (1979-1985)
  • Japan (1944-1948)
  • Krajina (1993)
  • Madagascar (2004)
  • Mexico (2004)
  • Nicaragua (1987-1990)
  • Persian Empire (1294)
  • Peru (1984-1990)
  • Poland (1922-1924, 1990-1993)
  • Romania (2000-2005)
  • Ancient Rome
  • Russia (1921-1922, 1992-1994)
  • Taiwan (late-1940′s)
  • Turkey (1990′s)
  • Ukraine (1993-1995)
  • United States (1812-1814, 1861-1865)
  • Yap (late 1800′s)
  • Yugoslavia (1989-1994)
  • Zaire (1989-1996)
  • Zimbabwe (1999 – present)

The fiat money system that we presently have, which in its present form has only been in existence since 1971 when we went off the gold standard.  To say that we have a precedent for what may or may not happen is incorrect.  We are now in uncharted territory, however history has its lessons.

Ron Paul clearly states the situation…

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Fox News did a ten minute interview with Ron Paul and actually gave him the time to clearly state what is going on.  If the anchors were actually listening I don’t know, and frankly they need to.  The present situation is dire and people are only barely starting to take it seriously.  Given that Bernake is a student of the Great Depression he thinks the only way out is government intervention through bailouts and inflation.  The issue with that is we have a problem: Excess has built up in the system and it needs to be corrected.  By easing the debt burden on the banks the problem doesn’t go away, but only gets pushed further out into time.  

According to Austrian Economics whenever a bubble forms due to excess credit it must be deflated.  During the deflation excess inventory is bought at cheap prices, and the economy then moves forward.  This allows the economy to go though a minor correction and then move on.  The mortages need to be sold off and housing prices need to come down.  Our fiat monetary system only survives on debt and credit, which we are finding out has its limits.  

Instead of letting the system correct the taxpayer might be on the hook for other people’s mistakes.  Why is it imperative that house prices go back up?  Let them readjust to a point where people can afford them.  We will survive, and in the short-term it might be rough.  The dollar is at the brink of destruction.  A bailout will necessarily ensure that the dollar will be dumped because nobody wants to hold worthless paper.  

Warning:  If you see interest rates rising and the dollar falling this is a sign that major players are getting out of the dollar.  This is cause for concern.

Bernake, Paulson, and Bush are selling this proposal as a way to avoid a catastrophe. A necessary evil that if not enacted immediately will be the downfall of the United States and its citizens will suffer. Bush in his address to the nation did comment on the credit problem, but then went for the jugular and instilled fear just as Bernake and Paulson have been doing. He said that he believed in the free-market, but tough times call for decisive action. If he truly believed in the free market the Fed would not exist, there wouldn’t be sugar tariffs and corn subsidies, and I could go on and on. If you believe that we went into Iraq because of WMDs (Weapons of Mass Destruction) then go ahead and believe him on this one.

I find it quite convenient that we have major swings in the stock market and then this proposal comes to light. The banking crisis isn’t something new. Its been going on for over a year, and why now must it be passed right before Congress goes to recess. Fear will induce irrationality and it is imperative that this bill does NOT pass. I would rather face major banks failing then have the government try to sort this out.

Watch this video it is right to the point!