There has been debate about how this entire misguided financial experiment/episode is going to end, will it be inflation or deflation? The deflationists have argued that the worlds’ economies are going to collapse, real estate and many commodities will collapse along with the stock markets and credit markets. I don’t entirely disagree. IF they are using Gold as a measuring stick or ruler, I believe they are correct, most everything will go down in value versus REAL money, Gold. It only makes sense, “deflation” is when the “money supply” contracts and basically this is what is happening. Gold production only increases above ground supply by little more than 1% per year at the same time investors are gobbling up all new supply and then some! “Gold on the streets” is becoming more and more scarce so most everything else is “deflating” versus Gold..
On the other hand, paper money supplies have been and are expanding faster than 10% per year and will have to explode much further as the economies and sovereign budgets implode. The “deflationists” have done all the logic and have been correct except for one minor detail, the Dollar is not even a shadow of it’s former self, no longer good as Gold and not the “savior” of the system. No, quite the contrary, it IS at the heart of problem! They explain that a “currency crisis” will follow the deflation but that hyperinflation cannot happen. I’m sorry but a “currency crisis” not only including but FOCUSING on the reserve currency is the DEFINITION of hyperinflation. I might add that because the reserve currency is what the crisis will surround, rather than a regional hyperinflation, the upcoming event will be global and all paper currencies will hyper-inflate. Martin Armstrong can take the fact that the Dollar is backed by nothing and stuff it in his pipe because whatever he is currently smoking is seriously messing with the logic lobe in his brain!
Jim Sinclair has explained until he’s blue in the face that what is coming is NOT an economic event, it is a currency event. The deflationists say that as defaults cascade, money supply will contract and thus there is your deflation. Yes, maybe for a week, 2 weeks, maybe even a month, but, and this is a huge “but”, the Fed will supply the Treasury (and whatever other “important” foreign entities in need) with whatever amount of cash that they need. Normally, the issuer of “the reserve currency” is not a fiscally bankrupt entity, this time it is. Normally, the issuer of the reserve currency does so against Gold or Silver reserves, not this time. This time, holders of Dollars will spend them on anything and everything not nailed down out of fear of holding onto something that will end up valueless. Dumping Dollars for real stuff is not really an economic decision, it is a currency decision and it is this getting out of fiat and into something real that will be the “face” of hyperinflation. This “velocity” of paper money is about to explode. Think “hot potato” and you’ve got it.
So you buy barrels of oil, copper tubing, lumber, guns, artwork, gems or whatever, and they become “worth more Dollars” as others do the same thing and “bid” the price up. These things do not “morph” into better quality and become “more valuable”, no, the value (perceived or real) of the Dollar has declined and it takes more and more of them to “trade” for the same item. Deflation cannot be the final outcome, because if the government isn’t (they are) broke enough already, what will happen to tax revenues and the budget when the proposed deflation takes more and more over the edge? Bottom line is that the Treasury will go over the edge along with everything else and bankrupt, default or just outright print. In any instance, the Dollar cannot become more valuable when it’s issuer is going through bankruptcy. This is such a simple concept, “you don’t lend money to a deadbeat OR to someone who pays back with a cheaper currency”, I can’t believe that the “deflationists” who pride themselves as the intellectual elite of the planet cannot grasp the concept. Simple 2+2 math tells you that when everything is collapsing in default, capital will not accrue to the currency of the BIGGEST bankrupt.
I have just one question (OK, maybe several) to ask the “deflationists” which will probably cause all sorts of short circuiting and smoke billowing from their ears, “why exactly did the Dollar perform so well back during the Great Depression?”. Come on, you can say it…because…because the Dollar was backed by what? ….Gold? Which made what? Gold as good as the Dollar…or the Dollar as good as Gold? …and the saying “as good as Gold” is used why? Yes, go on, SAY IT! Because Gold, is THE BEST MONEY THERE IS and ever has been throughout history! So…Martin, in case you get a chance to read this piece…do you get it now or do you need more help?
Good article.
Anyone that thinks little pieces of paper are somehow going to go up in value when the sheeple start to grasp what is happening is off their rocker.
Exactly
Hi Bill,
Thank you very much for this article. This settles the debt once and for all.
My pleasure Jack.
I’m sorry, but you ignore the firewall problem. Most of the printing is going to make the banks appear solvent, but that money is not being loaned into the real economy. The major source of inflation in the money supply is the $1.5 trillion deficit. A lot, but not enough to tip into hyperinflation.
Quite a US centric view, Europe has created well over another Trillion Euros over the last 12 months. How much more will be needed as more and more debt, (private, corporate (finance) and sovereign) blows up? Where will it come from…other than thin air? You say $1.5 Trillion is “a lot but not enough to tip into hyperinflation”, how much is “a lot” or “needed” to cause hyperinflation? At current Gold prices, our supposed Gold reserve is valued at $400 Billion, a $1.5 Trillion deficit alone (not to mention the past accumulated debt) means that we borrowed/overspent in 1 year, 4 times the amount of Gold that we say we have that we probably don’t have. So…what exactly are you telling me? Firewall? Dream on!
I have been thinking over the exit -1 as I name it- what comes after during/after 2016:
May be will provoke some discussion:) – Warning- its long.
Everyone (or many) talk about the end of fiat and perhaps even current elites due to hyperinflation of USD and perhaps even to imminent move of power center in monetary things from USA and WEST to China in near ( few years?) future.
I 100% DISAGREE with such views as they are unrealistic, they do not take into account that rulers are clever, cunning, cruel and without remorse or humanitarian streak inside. That is why they are rulers. The real ones, not democratically elected politicians which basically play circus funded by money of the same rulers (democracy is rule by wealth, as is well known) to distract the people and keep the rulers at the steering wheel.
My conclusion is just the opposite- if there is no other way to save elites than through deflation, it will be done. Because hyperinflation does not save them- ALL DEBTS in USD will be inflated away, mess, social unrest.And that is the majority of worlds loans owned by..BANKERS. In Weimar, the WEALTHIEST lost most of its wealth percentage wise- up to 80%! (Dalio) . Anyone of them wants a repetition of that? And, if there is a possibility to scoop up worlds gold in the process, the more so it will be done. We need to adress the problems of the elites and bankers and how they might solve them. Not problems of politicians , politicians are dispensable. Its elites that place them in place, more so in democracy.
See, there is about 1600000-200000 tons of gold above ground. Annual production over last years have been 2500 tons. While its always said its not a lot, over 40 years it gives 100 000 tons of gold.
So , lest assume (I do not know the exact production number) 70 years ago, when Bretton woods started, there were 160 000 -100000 = 60000 tonnes of gold above the ground.
of them, almost 40 000 or 60 % were held by central banks. They controlled the gold, they could issue gold backed money as there was not enough competing gold outside the CB system.
Today, Central banks etc still hold Worldwide about 40 000 tons of gold. But now its only 25% of world gold. 75% or 120 0o0 tons are in private hands. No gold based monetary system will work if elites via CBs or in some other way can not control at least half of the total gold= 80 000 tons.
I suppose they need about 100 000 tons.
IF FIAT IS SUPPOSED TO BE done with, how in hell CBs or other governmental institutions ( controlled by the elite) come into possession of the needed 60 000 tons of gold?? if gold will mean wealth again, most of it MUST end in the hands of institutions controlled by elite. Let US be REAL. That is the way world works, in all times, rulers control the money, the wealth. If they do not, they are not the rulers. They can not even wage a war without wealth, assets.Especially when debt is over the limit already in peace time.
That is the question everyone thinking has to answer. Otherwise all this talk about gold as money and return to sound money makes no sense. No one in his real senses would believe that if gold is supreme asset in next 20 years or more, it will not be taken by elite. The question is just how? I think it will be as usually stick and carrot, but that can be created by cancelling US debt to FED after gold prices has risen and withdrawing QE. QE is on a balance sheet of FED. Some of it trickle into economy. When the trickle will start to threaten with inflation , it will be the last possible moment to clean up FED balance sheet-gradually . And have a handy war running that improves consumption by utilizing capacity of non-consumable goods like bombs etc- pure destruction of capacity- but salaries will be paid and enter the consumer side.
The money supply will shrink. Deflation will ensure, but BANKS and Fed will be happy as they will be getting gold public will be selling as crazy as prices will fall. Add to this some tax laws, maximum holding laws etc and gold will just flow into banks and via them, into CB until enough gold will be there to back- USD, EUR, may be something else. It will be race for gold. Current buying of 1000 tons/year pales with the needs and speed 60000 tons of gold will be sucked into banking system within a few years or so.
Now, when FED will get instead of bank reserves which will be wasted on gold ( buying gold does not create inflation, believe me, even if I am not educated in these fields) , the gold banks will have bought at virtually no cost, as QE is coming from thin air and sitting in their reserves, the FED will swap the gold from its liability side to asset side- BUY it from banks with new gold backed USD at any price it wishes- lets say at 42 USD/Oz. Or 4500 USD/oz. Whatever seems convenient.
Now, public will be left with hordes of old USD after selling gold to banks as price falls from e.g 10000 USD/.oz to 3500 USD/Oz as FED starts to cancel its liability side -digital fiat- due to defaults of USG on the FED asset side . Fine. A monetary reform will take care of that. The exchange rate NEW USD- old USD will be set, and time will be given to exchange fiat to gold backed money, may be with quantity limits.
Now what will the China and other holders of USD denominated assets will do? They will get the same treatment. There will be no default on them- they will receive gold backed USD for their FIAT at new exchange rate, and there loans to the USA in form of treasuries will be honestly recalculated. Of course, China by then may be will have amassed 8000 tons of gold. OK. That still would not allow them to back remnibi with gold. EUR coutries I guess will be able to pull the same trick as FED , but on a smaller scale- they need to have ECB and centralized government debt to pull this off. But , there is still ongoing fight over the future control of EUR gold, so they are behind the USA and they know it, but..Europe is europe, they can not agree on anything, and if the time will be short, Germany etc. will pull the rug. On other hand, under German control, Germany of course is interested in having more members in Eurozone as that will give gold backed EUR currency approximately the same share of worlds reserves as today. So they would wish to solve the question of control fast, without letting anyone of the hook. If they get the control over future gold, they will QE like the USA. They need may be 30 000 tons if USA needs 70 000 tons, so their task is simpler if they can agree, as they already have 15000 tons in Europe.
After that, world can return to sound money. Gold backed world reserve currency – USD. I think it will happen in 2016-2017. As soon as inflation will make a circle via emerging economies and let itself known in the USA despite deflationary economy.
There are more details I have clarified a bit but I prefer to come up with the whole scenario once again after some time I have learned more/heard more arguments for/against/other versions of future. Right now I am reading Bernays 2 small books on Propaganda and Crystallizing Public Opinion. Spectacularly clear thinking, that guy had. Essential part of any future plans is to control thinking via Internet’s informal part. Like our joint here. Or comments sections on anything. Facebook ( I just delisted from it) . As well as gather data from the Internet what are the results, what the public is thinking about, how, who, why- that technology is being deployed fast as its number one priority in population control – which will be needed very soon.
Everyone is entitled to their own opinion, my opinion is that you are dreaming as evidenced by this piece and your e-mail address. Too many flaws in your logic to cover but your main premise of “deflation” is impossible. It is impossible because the “Dollar” itself would go “poof” in a deflation because its issuer would bankrupt. Deflation in the fixed terms of Gold? Absolutely. In Dollar terms? You are dreaming.
Looks like I am winning this argument. Deflation is all around us sir and my scenario which took me a long time to put into words and you so haphazardly marginalized is coming to fruition more and more each passing day.
Like the title implies………………….