Saturday, November 21, 2009

Inflation vs. Deflation (Again)

Let's ignore the fact that deflation has already dominated all markets (including precious metals, sans gold which has been driven sideways for the past 20 months), and look at the two flations a little different way.

It strikes me that holding one of the two viewpoints boils down to a single fundamental stance: socialist vs free marketeer.

The socialist believes that markets are easily engineered, thus, governments or central banks will simply print cash altruistically, thus all prices will rise. Socialists see no need for, and no effect of, human emotion or self interest, so policy alone drives prices.

The free marketeer believes that people usually act in their own self interest creating inescapable market forces, and in the end market forces dominant policy.

So the flation points of view are adopted by these camps in the following two ways:

  • Socialists believe when the politicians say lend, banks lend and all prices rise.
  • Free Marketeers believe when politicians say lend, no one listens to politicians so prices do what prices will do.

I'm sure a lot of people will say, hey, I'm no socialist, but I know when central banks print money. To that I respond in advance, if one truly believes policy is the ultimate driver of markets, then whether you acknowledge it or not, you are, in fact, a Kool-aid drinking socialist. I know that's inflammatory, I want it to be. I'm genuinely disturbed by a 97% "gold bull" reading when governments "tell people" they are going to inflate prices.

I hope a lot of people reflect, instead of simply react.

The truth has already ravaged all markets: real estate, stocks, bonds, businesses, precious metals, commodities. But the worst has yet to be imagined at the punch bowl. Until the 97% majority chuckles at inept policy makers, who've never produced a dime, claiming to have total power over global capitalism, the USSA will continue to tumble and crumble.


  1. Of course, this isn't necessarily a black and white thing.

    That is, the actions of the central bank can, and almost certainly do, have an effect on the rest of the market. Whether or not it is the primary influence is certainly a matter of debate, and almost certainly varies over time and with circumstances.

    I, for one, don't view this as an ideological question. Rather, I view it as a matter of observation and logic, just as I view all other things involving the real world. The individual actors in the market can, of course, base their actions on ideology, and they will, of course, have an effect on the market. But it is the actions, not the ideologies, which drive the market in that case.

    What good does it do to pin one's beliefs on one thing or another, and then defend those beliefs even in the face of evidence to the contrary, when one has the option of simply observing and drawing conclusions from that?

    May the most accurate hypothesis win...

  2. I would agree, but perhaps the fast decline of the ussa is causing gold prices to rise and will keep them high until a new comfort level is found in the world?

  3. "decline of the ussa is causing gold prices to rise"

    What happened to supply and demand?

    If the US declines, there is no demand. The rest of the world is insignificant, from an economic perspective. California alone is (was?) a bigger economy than China.

    Sure, now that Red Communist China is a free'er market than CA, both will crumble and the less-free will crumble faster. But my point remains, the old-style, capitalist, Constitutional Republic that created our vibrant economy dwarfed all others, in the not too distant past. Don't count on much demand, at least nothing like existed during the USA's boom years, from the rest of the world's population.

    As I've said before, commodities rise in value as their price falls. This principle is due to a fundamentally inverse relationship between the popularity of carrying paper instruments, vs. the popularity of carrying hard money.

    The more people trust paper, the more paper gets generated and circulated to price-up commodity money, thus commodity prices rise. And vice versa.

    Most people mistake high commodity prices for high value. In fact, when commodities carry high price tags, because paper cash is popular instead, they trade for a lot less "stuff."

    Thus, commodities' value (what they command in trade) and commodities' price (how much paper is in circulation) is an inverse relationship.

    Once more, a different way...

    No one will kill you for your gold wedding band at the top of the paper boom, when unfounded credit flows like wine, and gold prices soar causing gold value to tank. That is because the ring doesn't command much in trade, it is actually "worth-less."

    For example, at the orthodox peak of our paper boom, the year 2000, it took 44 one ounce gold rings to buy a single share of the Dow.

    At the rock bottom of the pit of despair, when a sucking lack of paper causes the price of the same ring to plunge, you better watch your back when you wear it. Why? Because that few-dollar ring is "worth" a fortune.

    So if you believe gold will become more valuable than paper in the future, you should short its paper price. That is why precious metals as a group have been plunging in price, gold is part of that group, currently the one with the highest short potential.

  4. Al Gore's Energy BillNovember 21, 2009 at 9:14 AM


    Following along with your "global warming is a scam" theory, have you heard the latest news of hackers downloading 156 mb of data and emails from a university climate research unit? The information is all over the blogosphere (Mish, MT, Real Climate, etc.) and contains numerous examples of scientists apparently colluding to hide data declines in global temperature, etc. Oh, and a lot of money from grants was involved (surprise surprise).

    You will certainly get a kick out of it.

  5. Another refining plant goes idle, making that two, in about one month

    One would think that this is pointing the price of oil down, you would think ?

  6. Empirically, 2009 is one of the coldest years on record. I don't think anyone is hiding it.

    No one is hiding that green plants need as much carbon in the atmosphere as possible, either.

    Some people just want to be socially accepted. They'll happily destroy the earth to "save it" if that's what big business instructs them to do. Even if that profitable advice runs directly counter to all the science classes they ever slept through.

  7. "One would think that this is pointing the price of oil down, you would think ?"

    Gas prices are an excellent, mostly ignored, very transparent indicator of economic stress.

    Remember the boom? When oil first breached $75/br, gasoline was selling for $4-6/gallon nationwide. There was a public outcry, "Why, oh why, are we paying so much for gas?"

    Answer: ...because you have the cash to pay.

    Deflation has shaved 40% off the market price of gasoline, even with the same or higher production costs.

  8. I can't help thinking of supply and demand whenever I consider the behaviour of commodity prices. At the moment, just about every metric used to measure economic health and performance is still considerably off its pre-October 2007 highs. While a technical bounce has occurred it seems almost nonsensical in the context of overall (still) falling demand and rising unemployment. Something that diverges so far from my fundamental view of reality simply cannot be trusted with my money. And I guess I too am one of the few folks strangely immune to the siren song of gold. Conversely I am growing quite interested in its potential to displace oil circa July 2008 as short sell candidate of the decade.

    Just guessing FDR but might well read copies of Wealth of Nations, Human Action and Atlas Shrugged be found in your library?

  9. "At the moment, just about every metric used to measure economic health and performance is still considerably off its pre-October 2007 highs."

    Right, and the only prices backed by significant transaction volume are the lows.

    Bottom line: an individual can reap these high prices without spiraling them lower, but institutions cannot.

    (Yes, to your book list)

  10. I came across this article in my Saturday reading which might prove of interest to those with a contrarian view of gold:

    Mr. Hulbert, who can hardly be accused of being a gold bear, previously noted a distinct lack of bullishness among newsletter writers just before gold's recent run. Now he says newsletter bullishness is four percentage points higher than it was just before gold embarked on a 25% correction in July 2008. I guess only time will tell if Mr. Hulbert's contrarian views and strategy continue to have merit. Personally I don't think we will have long to wait for an answer.

  11. Your points above are well taken. One thing to consider, however, is that we essentially no longer live in a free market economy. In other words, it is not a matter of viewing things as a socialist or a free marketeer, it is that the US has already become a socialist or fascist state. With that in mind, we are at the whim of the state's wishes. Currently the state's wishes are to prop up asset values at all costs, low transactional volume notwithstanding. Certainly their are limits to this, but I suspect that the bill for this mess will be paid for by "cap and trade" or "universal health care" rather than by a "financial bailout tax", which of course would be politically unacceptable. The "plan", therefore, is to debase the currency to whatever limit is acceptable to the foreign debtholders and foreign export driven countries, and to attempt to create another bubble under the "green" scam. The "deal" with emerging economies is likely that we will repay you back on the backs of our middle class that will bear the brunt of the inflation caused by the "green" initiative. Of course, I don't think the "plan" will work, as I suspect that oil will be a mitigating factor, and we won't be able to get tto the point where people can afford 50K electric cars from government motors fast enough. In the meantime, the "price" of gold is actually a vote of zero confidence in the current US and global monetary and fiscal policy. I wouldn't buy gold at this price (beyond hedging with some physical in case armageddon happended), but the PM bubble is what it is, and frankly I would rather own gold then a non-dividend paying equity that which the value of is at least partially based on the current accounting control fraud in the US financial factor and elsewhere.

  12. FDR, I'm somewhat confused. So the the price of gold will collapse in the hyperdeflation that is to come, but the value will rise. So high that somebody might kill you over a $50 gold Eagle. You mentioned some time ago about a family, in the 30's that ripped their home apart to find a silver coin they ignored for years.

    Are you saying that though holding cash and shorting GLD would be a better play, holding actual metals in the coming deflation won't be a disasterous financial move?

    To put it differently, right now $1,000 or a gold coin will buy a set of tires. After deflation hits, that coin will still buy a set of tires, but the cash might buy 20 sets. Am I getting this right?

    Do you think there is any possibility however that gold price could move with dollar strength in the future?

  13. "To put it differently, right now $1,000 or a gold coin will buy a set of tires. After deflation hits, that coin will still buy a set of tires, but the cash might buy 20 sets. Am I getting this right?"

    Yes, though the gold will tend to trade for more things when it is priced lower.

    In 1932 gold cost $21/oz and it bought 1/2 the Dow. Today it is $1150/oz and buys 1/9th of the Dow.

    I know the 1932 Dow is largely bankrupt and gone but for GE, but in terms of Dow companies still standing today, gold trades for a lot less at inflated prices than at depressed prices.

  14. FDR,

    How does the Dow divisor play into the relationship here:

    "In 1932 gold cost $21/oz and it bought 1/2 the Dow. Today it is $1150/oz and buys 1/9th of the Dow."

    After all, the actual cumulative cash price of each stock in the Dow today is about $1400, so 1 ounce of gold will buy about 90%. In 1932, the Dow was at about 40, but the divisor was 15, so the actual cumulative cash price would have been about $600, meaning an ounce of gold would have only purchased roughly 3% of the index.



The USA's political-economc system is best described as:

On Nov 2, 2010, I plan to vote (FOR or AGAINST) my incumbent congressman

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