This one's for you, cyph:
Inflation or Hyperinflation?The post being is incredibly important for the concept behind the
budget deficit to
trade deficit ratio. Unless Ron Paul is elected, hyperinflation is more than guaranteed: it's already begun.
this was an interesting read from FOFOA; and long. so much so i had to read it twice over several hours. the last time i read him being in the Fall when i gave you an extensive response to his writings.
the way i summarize his points are as follows:
1. One day there will be an abrupt, overnight dollar devaluation resulting in HI.
2. There is decreasing foreign CB buying of UST's at the margin which will soon create this end game plunge in the USD.
3. there is political support worldwide for a new one world currency.
4. the US gov't will never cut its spending deficit thus facilitating the demise of the USD. in fact, it will increase its deficit at the same rate as a general price level increase, never to be outbid. this will just make it worse for the USD devaluation as a result.
5. The US is helpless to stop this plunge in the USD now that it's lost both political and structural support.
6. paper gold is for fools; physical is for Kings.
while these types of theoretical articles are interesting, i find them way too imaginative bordering on psychotic. if readers find my bias towards deflation as being dour, they should find the hyperinflationists view of the world as Armageddon. i don't see it quite so severe and i find FOFOA's thinking to be quite linear. he assumes ppl/gov'ts will keep doing the same wrong thing over and over again and that the market will never apply discipline. while its tempting to say markets can and are manipulated, and i often say so, its dangerous to always assume so.
as for #1, i find this to be fear mongering. gold bugs have an affinity for this but i don't see such large and complex markets reacting so quickly. turns in markets take time. and sometimes they never come.
#2: certainly it appears China has cut back dramatically in the buying of UST's and has been replaced by the Fed who is the main buyer currently. this is concerning but in the opposite direction; its deflationary. most ppl view low interest rates as inflationary as they supposedly will create negative real interest rates when factoring in a supposedly high CPI and encourage reckless borrowing and the throwing of ever depreciating USD's at all assets, esp. gold and silver. i see it differently. i see very little loan demand worldwide. who wants to earn 2.5% on a long term UST? most investors/speculators buy debt for price appreciation of the bonds, not for yield. its too dangerous right now to loan money b/c there are truly very few credit worthy projects to invest in. we are in the Age of Deleveraging. This deleveraging will decrease the total # of circulating debt dollars and force up the value of the remaining. We just saw Greece bond holders take a 70% haircut on their bonds as well as the Iceland and Ireland bond holders and the upcoming Spain, Italy, etc. bondholders. all that deleveraging of either USD denominated debt or USD reserve based foreign debt is going to drive UP the remaining USDs. You can see it in the chart of the $DXY.
#3: i don't see this anywhere. what's happening with the Euro says that this can't happen. all govt's worldwide would have to agree to turn over their fiscal sovereignty to some mythical central gov't who then will have a mythical CB that will have the ability to print like crazy forever just for the benefit of their elite bankers. i will buy 10 AK 47's or move to Mars before i let that happen.
#4: what i see are foreign gov'ts being attacked by the bond vigilantes resulting in higher interest rates. they are being forced to trim down via austerity measures which is good. will it come here? probably. when? i don't know. i do see the gov't cutting back on certain programs like Medicare pmts to doctors and hospitals and Social Security pmts. Extended unemployment benefits are scheduled to come to an end this month. the Student Loan bubble is being reigned in and JPM is cutting back in this arena b/c they see a bubble. i think that as the stock mkt collapses, gov't will also be forced to cut back. there just is no money and the Fed will NOT go hog wild in printing to fill in the gap. they didn't announce any QE this past FOMC as they want to preserve their "credibility" against inflation acc. to Ben. yes, i laughed too but what if he is for real? maybe he thinks the price of gold is way too high and is actually using it as a temperature for inflation as once was done decades ago. to presume he is a linear thinker and stupid is dangerous. i don't think the Fed wants to give up its pre-eminent position as THE central bank of the world. and why destroy the USD when all their wealth is denominated in it? does Ben want to go down in history as the sole central banker who destroyed the USA?
#5: on the contrary, the Fed could change direction on a dime if it wants to and the gov't would be helpless to stop it. they yelled and screamed back in 1980 when Volcker went as far as to increase rates but in the end they went along with him b/c they knew it was the right thing to do. i'm not saying Ben is going to raise rates but just like FOFOA claims decreased buying of UST's at the margin can or will cause a change in the USD value to the downside, so can a decrease in QE cause a ramp in the USD to the upside.
#6: i agree that physical would be the way to go if you're a gold bug. but for all the reasons i've said before i think gold is in a bubble that has burst and the loss in value since last August is reflecting a world of deleveraging and deflation. the miners suggest this very starkly.
and now for specifics:
FOFOA: "Now that the Euro block is passing a point where the Euro currency is viable; this same past dollar support that built America's illusion wealth will now fall away. In its place we will see the beginnings of a currency war like no other in our time."
ME: This part i don't understand. i thought FOFOA is arguing that the political parties involved in this mysterious "structural support" wanted a one world currency to take the USD's place? if so, why would they then engage in currency war's after the USD's demise?
FOFOA: "It is also a myth that QE is sterile money creation because (as they like to say) it is all just sitting on the banks' balance sheets as excess reserves held at the Fed rather than circulating in the economy. In fact, it is ALL circulating in the economy because the USG spends that money into the economy."
ME: This would argue against FOFOA's claim:
what i think happens is that yes, the US gov't spends those USD's gotten from UST sales into the US economy but then it stops after one pass/iteration. i am a shining example. my business derives probably 55% of its income from gov't spending. what do i do with those USD's? hoard them aka SAVE. why? b/c i don't see any productive investments out there encouraging me to circulate those USD's. so the velocity stops dead with me. except for Bitcoin that is
unfortunately FOFOA is correct that the never ending buying of UST's is worrisome but i think its a sign of deflation or of flushing money down a big black hole. all those potentially useful debt dollars that could be going to private industry are now going to unproductive spending for the most part (except those paid to me of course
). this is terrible for the private economy and will cause stock prices to go down right about now which is deflationary yet again.
ok, i'm exhausted. not used to pumping out such long tomes. but you had to ask me...
.
