04 September 2009

Peter Schiff on the Surge in Gold; Jesse Weighs in on Inflation and Deflation

Peter Schiff has not always been correct, most notably on the decoupling theory of foreign markets with the US, and the desirability of their equity markets, at least so far.

It is the case, of course, that the US lagged emergence from the Great Depression as compared to a number of overseas economies, for a variety of reasons on which we have speculated in the past.

Will this happen again? Perhaps, we cannot know. But the US is 'ground zero' for the Wall Street debt fraud and bubble economy based on the dollar reserves, and seems utterly incapable of taking action except to print more money and give it to Wall Street.

The decline in the value of the dollar does seem like a very high probability, as well as the rather severe stagflation which this may eventually produce. On this point Mr. Schiff seems most insightful, especially compared to the commentators on financial television.

The discussion which Peter has towards the end is particularly interesting about inflation and deflation. We tend to diverge again a bit from his analysis there however. He references monetary inflation. But this is not the only cause of price change.

There are definite and easily observable deflationary forces at work in the economy today in the form of slack demand, unemployment, and net credit contraction. This is putting severe downward pressure on prices as one would expect.

This will become worse as people realize that our current 'recovery' is a public relations event, and it may even result in a 'credit crunch' once again as it did last year. This is the 'dollar short' phenomenon that we have described, which particularly impacted European banks holding dollar assets.

At the same time, Bernanke has the printing presses running from the Adjusted Monetary Base up, and is pushing on the monetary inflation button, monetizing bad debts of non-traditional sorts, and weakening the dollar.

Foreign holders of US debt are starting to make their first moves in this game of prisoner's dilemma. At some point if confidence breaks, things might start moving much more quickly. Until then it will be a slow grind, an erosion of value and wealth.

The general American public is, in a sense, caught in the middle, with a lack of jobs and income for the working classes, but higher prices in imports and essentials. This is the stagflation outcome which we had feared. One bright spot is that it might be good for exports, if the Asian countries can generate domestic consumption and decide to free up access to their markets.

See Price Demand and Money Supply As They Relate to Inflation and Deflation You might also take a look at Some Common Fallacies About Inflation and Deflation.

Inflation and Deflation are not linear, that is, not straightforward and simple economic functions with a few variables, except at the tails of probability where the power of the extreme crushes the equation into simplicity by overwhelming other factors into insignificance. You print enough dollars, and consumer demand matters much less as an input to inflation.

Approaching the future with one dimensional game plans can be quite risky. But for some reason gold, and to a less extent silver, always appear to work to some degree in the solution mix, hence their continuing rally despite the best efforts of the powers that be to talk them down. As Bernard Baruch famously observed, "Gold has 'worked' down from Alexander's time... When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory."

The lack of coherent financial reform from the Obama Administration, and their ludicrous proposal to create a 'super-regulator' in the privately owned Federal Reserve, after a landslide victory in an election based on change and reform, is an outcome almost too bizarre to be believable. Unless, that is, you accept that Obama and those around him are either incredibly naive or corrupt. We suspect that as in all things it is some of both.

By the way, in case you missed it, Charlie Rangel, in charge of Ways and Means and the major proponent of a new military draft, is being investigated as another tax cheat among the Democratic leadership.

Do these people take us for imbeciles? Do they think that the world does not see their corruption, their greedy, devious nature when it is not masked by a captive media, and is not repelled by it?

In 2005 we forecast this very outcome, that Wall Street and their cronies would push their schemes beyond all reason, like drunk drivers or addicts who cannot quit, until they create a cathartic, catastrophic event which will cause someone to finally take away their keys at the last.

That time is approaching. No one can predict exactly when, but it is there. Make sure you are wearing your seat belts.

"There is precious treasure and oil in the house of the wise, but a fool consumes all that he has and saves none." Proverbs 21:20

(hat tip to Denver Dave for the link)