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Posts Tagged ‘Depression’

By Greg Robb
June 20, 2011, 10:19 a.m. EDT
MarketWatch

The Federal Open Market Committee, which on Tuesday starts a two-day meeting, is widely expected to make the formal decision to end the current program of buying $600 billion of Treasury securities on June 30. It is also expected to maintain its existing policy to reinvest principal payments from maturing securities to not let its balance sheet shrink, and to keep the target range for the federal funds rate at between 0% and 0.25%.

That decision, due at 12:30 p.m., should hold few surprises, though the accompanying statement will be eyed. But the fireworks will start at 2:15 p.m., when Bernanke holds his second post-rate-decision press conference.

Bernanke’s challenge this week will be to calm financial markets, Corporate America and Main Street, all jittery about what’s in store for the U.S. economy.

A recent soft patch of economic data has only added to existing concerns about the fate of the U.S. once the Fed’s Treasury bond purchase program, frequently called QE2, comes to an end.

A stock market that has slumped for six weeks out of seven, a sky-high unemployment rate of 9.1% and the biggest 12-month inflation rise since Oct. 2008 has provided ammunition of all sorts for the Fed’s many critics.

“What Bernanke needs to do is build confidence in the economy. He has got to be able to step up there and say things are going to get better,” said Robert Brusca, chief economist at FAO Economics.

Bernard Baumohl, managing director of The Economic Outlook Group, said that Bernanke will need solid arguments to convince investors.

“I don’t think he is going to be a cheerleader. I think he’s going to have to be practical and realistic,” Baumohl said.

“He’s got to be straight,” agreed Scott Anderson, senior economist at Wells Fargo.

Baumohl said Bernanke will try to soothe markets by saying there is not going to be any fundamental change to policy in either direction for the foreseeable future.

While the hurdles to a third round of bond purchases are high, the same is true for an exit from the current ultra-low policy stance, Baumohl said.

“He will convey the message that the Fed is going to take a wait-and-see approach, Baumohl said.

But Bernanke will stress that the end of the QE2 program is not the equivalent of pulling the plug on the economy, said Michael Moran, chief economist at Daiwa Securities in New York.

In another step to build confidence, Bernanke will pledge to very closely monitor conditions to see if any of the threats facing the U.S. economy materialize such as a financial crisis in Europe, Baumohl said.

On inflation, Bernanke is likely to be a bit more hawkish than previous meetings, said Maury Harris, chief economist at UBS Securities, in a comment echoed by a number of analysts.

Core consumer price inflation, excluding food and energy prices, rose 0.3% in May, the biggest gain since June 2008. Many see core inflation rising near 2% year-over-year by the end of the year.

“Bernanke will have to acknowledge that,” Harris said.

Mike Englund. chief economist at Action Economics, said the public is so upset about higher energy prices that Bernanke is not likely to “pop the cork” about the recent small drop in gas prices.

“It is hard to be optimistic about $98 per barrel price of oil,” he said.

Ray Stone, economist at the forecasting firm Stone & McCarthy Research Associates, said he was intrigued by some news reports that the Fed might adopt a formal inflation target. Atlanta Fed President Dennis Lockhart this month backed an inflation target, and Bloomberg News reported that Fed officials were seriously discussing it. The Wall Street Journal said action isn’t likely at this meeting.

At the moment, the Fed has an implicit target of roughly 2% inflation.

But with inflation moving higher while Fed policy is accommodative, an inflation target might be one way for the Fed to stress it remains vigilant, said economists at Barclays Capital Research.

Stone said the odds are “less than 50-50” that the Fed would adopt a formal target “but I wouldn’t be knocked out of my chair if they did it,” he said.

The Fed also is expected to cut its economic growth forecast, which currently calls for growth between 3.1% and 3.3% this year.

Read the entire article HERE.

The Silver Institute

Demand

Total fabrication demand grew by 12.8 percent to a 10-year high of 878.8 Moz in 2010; this surge was led by the industrial demand category. Last year, silver’s use in industrial applications grew by 20.7 percent to 487.4 Moz, nearly recovering all the recession-induced losses in 2009, and is now seeing pronounced advances in 2011. Jewelry posted a gain of 5.1 percent, the first substantial rise since 2003, primarily due to strong GDP gains in emerging markets and the industrialized world’s improving economic picture. Photography fell by 6.6 Moz, realizing its smallest loss in nine years, as medical centers deferred conversion to digital systems. Silverware demand fell to 50.3 Moz from 58.2 Moz in 2009, essentially due to lower demand in India.

Supply

Silver mine production rose by 2.5 percent to 735.9 Moz in 2010 aided by new projects in Mexico and Argentina. Gains came from primary silver mines and as a by-product of lead/zinc mining activity, whereas silver volumes produced as a by-product of gold fell 4 percent last year. Mexico eclipsed Peru as the world’s largest silver producing country in 2010, and Peru is followed by China, Australia and Chile. Global primary silver supply recorded a 5 percent increase to account for 30 percent of total mine production in 2010.

Top 20 Silver Producing Countries in 2010 (millions of ounces)
1. Mexico 128.6
2. Peru 116.1
3. China 99.2
4. Australia 59.9
5. Chile 41.0
6. Bolivia 41.0
7. United States 38.6
8. Poland 37.7
9. Russia 36.8
10. Argentina 20.6
11. Canada 18.0
12. Kazakhstan 17.6
13. Turkey 12.3
14. Morocco 9.7
15. India 9.7
16. Sweden 9.2
17. Indonesia 6.9
18. Guatemala 6.3
19. Iran 3.4
20. South Africa 2.8

Primary silver mine cash costs remained relatively flat year-on-year, falling by less than 1 percent to $5.27/oz. from a revised $5.29/oz. in 2009.

Net silver supply from above-ground stocks increased to 142.9 Moz in 2010, primarily due to higher scrap supply, a shift of net-producer hedging to the supply side, and a considerable rise in net-government stock sales. Regarding scrap supply, 2010 witnessed a 14 percent increase over 2009 as gains in industrial and jewelry recycling exceeded an ongoing decline in recovery from photographic sources.

The swing to net-producer hedging of 61.1 Moz ended a four-year run of de-hedging and is attributed to higher silver prices and was limited to a group of by-product, rather than primary silver producers.

Net government sales of silver rose to 44.8 Moz, primarily the result of increased sales from Russia, with China and India remaining relatively silent for the second consecutive year.

Supply from Above-Ground Stocks (Million ounces)
2009 2010
Bullion
Implied Net Disinvestment (-120.7) (-178.0)
Net Producer Hedging (-22.3) (61.1)
Net Government Sales (15.5) (44.8)
Sub-total Bullion (-127.5) (-72.1)
Old Silver Scrap (188.4) (215.0)
Total (60.9) (142.9)

World Silver Supply and Demand

To document these and other market fundamentals, each year the Silver Institute works with GFMS Limited, of London, a leading research company, to prepare and publish an annual report of worldwide silver supply and demand trends, with special emphasis on key markets and regions. This annual survey also includes current information on prices and leasing rates, mine production, investment and fabrication.

To learn more about the general production and uses of silver, please see our Production and Uses pages. For articles related to supply and demand, see the Silver News archives.

Read the entire article HERE.

Jun 10, 2011
The Straits Times

BEIJING – A CHINESE ratings house has accused the United States of defaulting on its massive debt, state media said on Friday, a day after Beijing urged Washington to put its fiscal house in order.

‘In our opinion, the United States has already been defaulting,’ Guan Jianzhong, president of Dagong Global Credit Rating Co Ltd, the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.

Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies – eroding the wealth of creditors including China, Mr Guan said.

Mr Guan did not immediately respond to AFP requests for comment. The US government will run out of room to spend more on August 2 unless Congress bumps up the borrowing limit beyond US$14.29 trillion (S$17.57 trillion) – but Republicans are refusing to support such a move until a deficit cutting deal is reached.

Ratings agency Fitch on Wednesday joined Moody’s and Standard & Poor’s to warn the United States could lose its first-class credit rating if it fails to raise its debt ceiling to avoid defaulting on loans.

A downgrade could sharply raise US borrowing costs, worsening the country’s already dire fiscal position, and send shock waves through the financial world, which has long considered US debt a benchmark among safe-haven investments. — AFP

Read the entire article HERE.

by Randy Ilg
May 2011
U.S. Bureau of Labor Statistics

Each month, the Bureau of Labor Statistics (BLS) publishes duration-of-unemployment measures derived from the Current Population Survey (CPS). These measures include the average and median number of weeks that the jobless have been searching for work, as well as the number of unemployed persons by defined categories ranging from less than 5 weeks to 52 weeks or more. Analysts and news reports have frequently associated the mean or median duration measure with the length of time it takes jobseekers to find employment. However, the published data represent the current duration of unemployment and are not measures of completed periods of job search.

This brief report presents estimates of the length of time someone is unemployed before finding a job or before giving up searching for work. These measures were derived from the CPS labor force status flow data, which capture the extent to which the unemployed find jobs, leave the labor force, or stay unemployed from one month to the next.[1]

Recently, researchers at BLS linked unemployment duration for persons jobless in one month with their labor force status in the following month. In this manner, estimates of unemployment duration were created for the unemployed who became employed in the subsequent month, as well as for the unemployed who quit looking for work and left the labor force.

Labor force status in the CPS is determined for one week each month, usually during the survey reference week that contains the 12th; therefore, it is not possible to obtain information on the precise week between survey reference periods that unemployed individuals became employed or left the labor force. For example, if someone had been unemployed for 10 weeks as of the October reference week and reported they were employed in November, their duration of unemployment would be 10 weeks. However, the actual length of any one individual job search could have been as much as an additional 3 weeks—the number of weeks from the October to November survey reference periods.[2] Therefore, estimates of duration in this report are somewhat understated.[3] Data presented in this paper are not seasonally adjusted and, because they can fluctuate from month to month, a 12-month moving average is used in the charts, with the latest data point representing an average for 2010.

By the end of 2010, the median number of weeks jobseekers had been unemployed in the month prior to finding work was a little more than 10 weeks.[4] In contrast, prior to the start of the recent recession in 2007, the median was 5 weeks. Unemployment duration also increased among those who eventually quit looking and left the labor force. Unemployed individuals were jobless for about 20 weeks in 2010 before giving up their job search and leaving the labor force. Whereas in 2007, those who were not successful in their job search had been unemployed for about 8.5 weeks before leaving the labor force.[5] (See chart 1.)

(Click Image for a Larger View)
Chart 1

The recent recession has had a profound effect on the length of successful job search. The table shows the distribution of transitions from unemployment to employment by duration of unemployment (in weeks). From 1994 through 2008, roughly half of all unemployed jobseekers found jobs within 5 weeks. In 2007, for example, 49 percent of those who were unemployed in the prior month and employed in the subsequent month had been jobless for less than 5 weeks. During the same year, less than 3 percent of the unemployed who found work had been jobless for more than 52 weeks. In stark contrast, 11 percent of transitions from unemployment to employment exceeded a year in 2010, and only 34 percent lasted less than 5 weeks.

The information on unemployment duration from the flow data also provides evidence that the likelihood of becoming employed decreases the longer one is unemployed. For example, the chance that a person who had been unemployed for less than 5 weeks would become employed in a subsequent month was about 30 percent in 2010. For those unemployed 27 weeks or more, that chance in a subsequent month was only 10 percent. (See charts 2 and 3.)

(Click Image for Larger View)
Chart 2

Chart 3

In summary, the length of time it took for the jobless to be successful in their job search increased sharply during the recent recession and in its aftermath. The median number of weeks unemployed doubled—from 5 to 10 weeks—and a far greater share of successful jobseekers spent in excess of a year in their search for employment. At the same time, the median duration for unemployed persons who were unsuccessful in their job search and left the labor force also rose dramatically. Moreover, once unemployed, the likelihood that one would be successful in one’s job search decreased as the length of time spent searching for work increased.

This Issues paper was written by Randy Ilg, an economist in the Division of Labor Force Statistics, Office of Employment and Unemployment Statistics. Email: CPSinfo@bls.gov. Telephone: (202) 691-6378.

Information in this summary will be made available to sensory-impaired individuals upon request. Voice phone: (202) 691-5200. Federal Relay Service: 1 (800) 877-8339. This report is in the public domain and may be reproduced without permission. (Appropriate citation is requested.)

ACKNOWLEDGMENT: The author would like to thank Gregory P. Erkens and Thomas D. Evans in the Office of Employment and Unemployment Statistics at BLS for their input in developing the various duration series and Matthew K. Daigle at Northwood University for his analytical insight.

Read the entire article HERE.

WASHINGTON (MarketWatch)
June 7, 2011, 4:05 p.m. EDT

I would like to thank the organizers for inviting me to participate once again in the International Monetary Conference. I will begin with a brief update on the outlook for the U.S. economy, then discuss recent developments in global commodity markets that are significantly affecting both the U.S. and world economies, and conclude with some thoughts on the prospects for monetary policy.

The Outlook for Growth

U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8% at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. A range of positive and negative forces is currently influencing both household finances and attitudes. On the positive side, household incomes have been boosted by the net improvement in job market conditions since earlier this year as well as from the reduction in payroll taxes that the Congress passed in December. Increases in household wealth–largely reflecting gains in equity values–and lower debt burdens have also increased consumers’ willingness to spend. On the negative side, households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence.

Developments in the labor market will be of particular importance in setting the course for household spending. As you know, the jobs situation remains far from normal. For example, aggregate hours of production workers–a comprehensive measure of labor input that reflects the extent of part-time employment and opportunities for overtime as well as the number of people employed–fell, remarkably, by nearly 10% from the beginning of the recent recession through October 2009. Although hours of work have increased during the expansion, this measure still remains about 6.5% below its pre-recession level. For comparison, the maximum decline in aggregate hours worked in the deep 1981-82 recession was less than 6%. Other indicators, such as total payroll employment, the ratio of employment to population, and the unemployment rate, paint a similar picture. Particularly concerning is the very high level of long-term unemployment–nearly half of the unemployed have been jobless for more than six months. People without work for long periods can find it increasingly difficult to obtain a job comparable to their previous one, as their skills tend to deteriorate over time and as employers are often reluctant to hire the long-term unemployed.

Although the jobs market remains quite weak and progress has been uneven, overall we have seen signs of gradual improvement. For example, private-sector payrolls increased at an average rate of about 180,000 per month over the first five months of this year, compared with less than 140,000 during the last four months of 2010 and less than 80,000 per month in the four months prior to that. As I noted, however, recent indicators suggest some loss of momentum, with last Friday’s jobs market report showing an increase in private payrolls of just 83,000 in May. I expect hiring to pick up from last month’s pace as growth strengthens in the second half of the year, but, again, the recent data highlight the need to continue monitoring the jobs situation carefully.

The business sector generally presents a more upbeat picture. Capital spending on equipment and software has continued to expand, reflecting an improving sales outlook and the need to replace aging capital. Many U.S. firms, notably in manufacturing but also in services, have benefited from the strong growth of demand in foreign markets. Going forward, investment and hiring in the private sector should be facilitated by the ongoing improvement in credit conditions. Larger businesses remain able to finance themselves at historically low interest rates, and corporate balance sheets are strong. Smaller businesses still face difficulties in obtaining credit, but surveys of both banks and borrowers indicate that conditions are slowly improving for those firms as well.

In contrast, virtually all segments of the construction industry remain troubled. In the residential sector, low home prices and mortgage rates imply that housing is quite affordable by historical standards; yet, with underwriting standards for home mortgages having tightened considerably, many potential homebuyers are unable to qualify for loans. Uncertainties about job prospects and the future course of house prices have also deterred potential buyers. Given these constraints on the demand for housing, and with a large inventory of vacant and foreclosed properties overhanging the market, construction of new single-family homes has remained at very low levels, and house prices have continued to fall. The housing sector typically plays an important role in economic recoveries; the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like.

Developments in the public sector also help determine the pace of recovery. Here, too, the picture is one of relative weakness. Fiscally constrained state and local governments continue to cut spending and employment. Moreover, the impetus provided to the growth of final demand by federal fiscal policies continues to wane.

The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation’s fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

The Outlook for Inflation

Let me turn to the outlook for inflation. As you all know, over the past year, prices for many commodities have risen sharply, resulting in significantly higher consumer prices for gasoline and other energy products and, to a somewhat lesser extent, for food. Overall inflation measures reflect these price increases: For example, over the six months through April, the price index for personal consumption expenditures has risen at an annual rate of about 3.5%, compared with an average of less than 1% over the preceding two years.

Although the recent increase in inflation is a concern, the appropriate diagnosis and policy response depend on whether the rise in inflation is likely to persist. So far at least, there is not much evidence that inflation is becoming broad-based or ingrained in our economy; indeed, increases in the price of a single product–gasoline–account for the bulk of the recent increase in consumer price inflation. Of course, gasoline prices are exceptionally important for both family finances and the broader economy; but the fact that gasoline price increases alone account for so much of the overall increase in inflation suggests that developments in the global market for crude oil and related products, as well as in other commodities markets, are the principal factors behind the recent movements in inflation, rather than factors specific to the U.S. economy. An important implication is that if the prices of energy and other commodities stabilize in ranges near current levels, as futures markets and many forecasters predict, the upward impetus to overall price inflation will wane and the recent increase in inflation will prove transitory. Indeed, the declines in many commodity prices seen over the past few weeks may be an indication that such moderation is occurring. I will discuss commodity prices further momentarily.

Besides the prospect of more-stable commodity prices, two other factors suggest that inflation is likely to return to more subdued levels in the medium term. First, the still-substantial slack in U.S. labor and product markets should continue to have a moderating effect on inflationary pressures. Notably, because of the weak demand for labor, wage increases have not kept pace with productivity gains. Thus the level of unit labor costs in the business sector is lower than it was before the recession. Given the large share of labor costs in the production costs of most firms (typically, a share far larger than that of raw materials costs), subdued unit labor costs should remain a restraining influence on inflation. To be clear, I am not arguing that healthy increases in real wages are inconsistent with low inflation; the two are perfectly consistent so long as productivity growth is reasonably strong.

The second additional factor restraining inflation is the stability of longer-term inflation expectations. Despite the recent pickup in overall inflation, measures of households’ longer-term inflation expectations from the Michigan survey, the 10-year inflation projections of professional economists, the 5-year-forward measure of inflation compensation derived from yields on inflation-protected securities, and other measures of longer-term inflation expectations have all remained reasonably stable. As long as longer-term inflation expectations are stable, increases in global commodity prices are unlikely to be built into domestic wage- and price-setting processes, and they should therefore have only transitory effects on the rate of inflation. That said, the stability of inflation expectations is ensured only as long as the commitment of the central bank to low and stable inflation remains credible. Thus, the Federal Reserve will continue to closely monitor the evolution of inflation and inflation expectations and will take whatever actions are necessary to keep inflation well controlled.

Commodity Prices

As I noted earlier, the rise in commodity prices has directly increased the rate of inflation while also adversely affecting consumer confidence and consumer spending. Let’s look at these price increases in closer detail.

The basic facts are familiar. Oil prices CL1N
-0.49% have risen significantly, with the spot
price of West Texas Intermediate crude oil near $100 per barrel as of the end of last week, up nearly 40% from a year ago. Proportionally, prices of corn and wheat have risen even more, roughly doubling over the past year. And prices of industrial metals have increased notably as well, with aluminum and copper prices up about one-third over the past 12 months. When the price of any product moves sharply, the economist’s first instinct is to look for changes in the supply of or demand for that product. And indeed, the recent increase in commodity prices appears largely to be the result of the same factors that drove commodity prices higher throughout much of the past decade: strong gains in global demand that have not been met with commensurate increases in supply.

From 2002 to 2008, a period of sustained increases in commodity prices, world economic activity registered its fastest pace of expansion in decades, rising at an average rate of about 4.5% per year. This impressive performance was led by the emerging and developing economies, where real activity expanded at a remarkable 7% per annum. The emerging market economies have likewise led the way in the recovery from the global financial crisis: From 2008 to 2010, real gross domestic product (GDP) rose cumulatively by about 10% in the emerging market economies even as GDP was essentially unchanged, on net, in the advanced economies.

Naturally, increased economic activity in emerging market economies has increased global demand for raw materials. Moreover, the heavy emphasis on industrial development in many emerging market economies has led their growth to be particularly intensive in the use of commodities, even as the consumption of commodities in advanced economies has stabilized or declined. For example, world oil consumption rose by 14% from 2000 to 2010; underlying this overall trend, however, was a 40% increase in oil use in emerging market economies and an outright decline of 4.5% in the advanced economies. In particular, U.S. oil consumption was about 2.5% lower in 2010 than in 2000, with net imports of oil down nearly 10%, even though U.S. real GDP rose by nearly 20% over that period.

This dramatic shift in the sources of demand for commodities is not unique to oil. If anything, the pattern is even more striking for industrial metals, where double-digit percentage rates of decline in consumption by the advanced economies over the past decade have been overwhelmed by triple-digit percentage increases in consumption by the emerging market economies. Likewise, improving diets in the emerging market economies have significantly increased their demand for agricultural commodities. Importantly, in noting these facts, I intend no criticism of emerging markets; growth in those economies has conferred substantial economic benefits both within those countries and globally, and in any case, the consumption of raw materials relative to population in emerging-market countries remains substantially lower than in the United States and other advanced economies. Nevertheless, it is undeniable that the tremendous growth in emerging market economies has considerably increased global demand for commodities in recent years.

Against this backdrop of extremely robust growth in demand, the supply of many commodities has lagged behind. For example, world oil production has increased less than 1% per year since 2004, compared with nearly 2% per year in the prior decade. In part, the slower increase in the supply of oil reflected disappointing rates of production in countries that are not part of the Organization of the Petroleum Exporting Countries (OPEC). However, OPEC has not shown much willingness to ramp up production, either. Most recently, OPEC production fell 1.3 million barrels per day from January to April of this year, reflecting the disruption to Libyan supplies and the lack of any significant offset from other OPEC producers. Indeed, OPEC’s production of oil today remains about 3 million barrels per day below the peak level of mid-2008. With the demand for oil rising rapidly and the supply of crude stagnant, increases in oil prices are hardly a puzzle.

Production shortfalls have plagued many other commodities as well. Agricultural output has been hard hit by a spate of bad weather around the globe. For example, last summer’s drought in Russia severely reduced that country’s wheat crop. In the United States, high temperatures significantly impaired the U.S. corn crop last fall, and dry conditions are currently hurting the wheat crop in Kansas. Over the past year, droughts have also afflicted Argentina, China, and France. Fortunately, the lag between planting and harvesting for many crops is relatively short; thus, if more-typical weather patterns resume, supplies of agricultural commodities should rebound, thereby reducing the pressure on prices.

Not all commodity prices have increased, illustrating the point that supply and demand conditions can vary across markets. For example, prices for both lumber and natural gas are currently near their levels of the early 2000s. The demand for lumber has been curtailed by weakness in the U.S. construction sector, while the supply of natural gas in the United States has been increased by significant innovations in extraction techniques. Among agricultural commodities, rice prices have remained relatively subdued, reflecting favorable growing conditions.

In all, these cases reinforce the view that the fundamentals of global supply and demand have been playing a central role in recent swings in commodity prices. That said, there is usually significant uncertainty about current and prospective supply and demand. Accordingly, commodity prices, like the prices of financial assets, can be volatile as market participants react to incoming news. Recently, commodity prices seem to have been particularly responsive to news bearing on the prospects for global economic growth as well as geopolitical developments.

As the rapid growth of emerging market economies seems likely to continue, should we therefore expect continued rapid increases in the prices of globally-traded commodities? While it is certainly possible that we will see further increases, there are good reasons to believe that commodity prices will not continue to rise at the rapid rates we have seen recently. In the short run, unexpected shortfalls in the supplies of key commodities result in sharp price increases, as usage patterns and available supplies are difficult to change quickly. Over longer periods, however, high levels of commodity prices curtail demand as households and firms adjust their spending and production patterns. Indeed, as I noted earlier, we have already seen significant reductions in commodity use in the advanced economies. Likewise, over time, high prices should elicit meaningful increases in supply, both as temporary factors, such as adverse weather, abate and as investments in productive capacity come to fruition. Finally, because expectations of higher prices lead financial market participants to bid up the spot prices of commodities, predictable future developments bearing on the demands for and supplies of commodities tend already to be reflected in current prices. For these reasons, although unexpected developments could certainly lead to continued volatility in global commodity prices, it is reasonable to expect the effects of commodity prices on overall inflation to be relatively moderate in the medium term.

While supply and demand fundamentals surely account for most of the recent movements in commodity prices, some observers have attributed a significant portion of the run-up in prices to Federal Reserve policies, over and above the effects of those policies on U.S. economic growth. For example, some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities. Indeed, since February 2009, the trade-weighted dollar has fallen by about 15%. However, since February 2009, oil prices have risen 160% and nonfuel commodity prices are up by about 80%, implying that the dollar’s DXY
+0.04% decline can explain, at most, only a small part of the rise in oil and other
commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world’s major currencies, not just the dollar. But even this calculation overstates the role of monetary policy, as many factors other than monetary policy affect the value of the dollar. For example, the decline in the dollar since February 2009 that I just noted followed a comparable increase in the dollar, which largely reflected flight-to-safety flows triggered by the financial crisis in the latter half of 2008; the dollar’s decline since then in substantial part reflects the reversal of those flows as the crisis eased. Slow growth in the United States and a persistent trade deficit are additional, more fundamental sources of recent declines in the dollar’s value; in particular, as the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around. The best way for the Federal Reserve to support the fundamental value of the dollar in the medium term is to pursue our dual mandate of maximum employment and price stability, and we will certainly do that.

Another argument that has been made is that low interest rates have pushed up commodity prices by reducing the cost of holding inventories, thus boosting commodity demand, or by encouraging speculators to push commodity futures prices above their fundamental levels. In either case, if such forces were driving commodity prices materially and persistently higher, we should see corresponding increases in commodity inventories, as higher prices curtailed consumption and boosted production relative to their fundamental levels. In fact, inventories of most commodities have not shown sizable increases over the past year as prices rose; indeed, increases in prices have often been associated with lower rather than higher levels of inventories, likely reflecting strong demand or weak supply that tends to put pressure on available stocks.

Finally, some have suggested that very low interest rates in the United States and other advanced economies have created risks of economic overheating in emerging market economies and have thus indirectly put upward pressures on commodity prices. In fact, most of the recent rapid economic growth in emerging market economies appears to reflect a bounceback from the previous recession and continuing increases in productive capacity, as their technologies and capital stocks catch up with those in advanced economies, rather than being primarily the result of monetary conditions in those countries. More fundamentally, however, whatever the source of the recent growth in the emerging markets, the authorities in those economies clearly have a range of fiscal, monetary, exchange rate, and other tools that can be used to address any overheating that may occur. As in all countries, the primary objective of monetary policy in the United States should be to promote economic growth and price stability at home, which in turn supports a stable global economic and financial environment.
Monetary Policy

Let me conclude with a few words about the current stance of monetary policy. As I have discussed today, the economic recovery in the United States appears to be proceeding at a moderate pace and–notwithstanding unevenness in the rate of progress and some recent signs of reduced momentum–the labor market has been gradually improving. At the same time, the jobs situation remains far from normal, with unemployment remaining elevated. Inflation has risen lately but should moderate, assuming that commodity prices stabilize and that, as I expect, longer-term inflation expectations remain stable.

Against this backdrop, the Federal Open Market Committee (FOMC) has maintained a highly accommodative monetary policy, keeping its target for the federal funds rate close to zero and further easing monetary conditions through large-scale asset purchases. The FOMC has indicated that it will complete its purchases of $600 billion of Treasury securities by the end of this month while maintaining its existing policy of reinvesting principal payments from its securities holdings. The Committee also continues to anticipate that economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea. Still, the Federal Reserve’s actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.

Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability. As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the Committee would respond as necessary. Under all circumstances, our policy actions will be guided by the objectives of supporting the recovery in output and employment while helping ensure that inflation, over time, is at levels consistent with the Federal Reserve’s mandate.

Read the entire article HERE.

by Paul Ausick
24/7 WallStreet
April 29, 2011 at 10:30 am

One factor driving the price of silver through the roof is its use in industrial products. About half the world’s demand for silver comes from industries such as solar PV makers like Suntech Power Holdings Co. Ltd. (NYSE: STP), film manufacturers like Eastman Kodak Co. (NYSE: EK), and electronics products like plasma TVs. However, demand for silver as an inflation hedge is driving up silver prices for industries that use silver, and those higher costs contribute to slower economic growth.

About 25% of silver demand comes from investors, but they are now driving the bus as they seek a cheaper inflation hedge than gold. The iShares Silver Trust (NYSE: SLV) now holds about 11,000 metric tons of silver in its vaults. Global silver production for 2010 reached nearly 23,000 metric tons, a record high, and about 80% of global demand. The rest comes from recycling.

Global industrial demand for gold is about 10% of total demand. Almost half of gold demand comes from jewellery compared with about 25% of silver demand. Gold demand for investment totals about 40% of the world’s total demand for gold. The SPDR Gold Trust (NYSE: GLD) holds about 1,130 metric tons. Mining contributed about 60% of the world’s gold supply in 2010, with most of the remaining supply coming from recycling.

Because so much more of the silver stock is used for industrial purposes, the price of silver is (or should be) more vulnerable to changes in the business cycle. Currently, however, even as the economy improves only slightly, the price of silver keeps surging.

These price surges result from increased demand from investors, certainly, but because the silver market is so much smaller, and less liquid, than the gold market there is some talk that silver prices are being affected by traders holding massive short positions or attempting to corner the market. These rumors may or may not turn out to be true, but one thing does appear to be happening: the demand for physical silver may overwhelm the supply.

For futures traders that’s not a crisis, but it is very nearly a crisis for industrial users of silver. If they cannot find a substitute for the metal, then they will either have to pay much higher prices and either eat the loss or charge their customers more. Either way, the economic recovery takes a hit.

Kodak reported a first quarter loss of -$246 million, much of it attributable to the silver it uses to manufacture film. Suntech has introduced a solar PV cell that uses copper instead of silver, but so far the substitute accounts for only about 10% of Suntech’s production and sales.

Demand for industrial silver is expected to grow by about 6.5% annually through 2015. If the demand can be met at all it will be at a very high price. Unless of course the bottom falls out of the silver market.

Silver is trading near $49/ounce this morning, and the iShares Silver Trust is up about 1.5%, to $47.91, near the top of its 52-week range of $16.73-$48.35. The SPDR Gold Trust is up about 0.5% after posting a new 52-week high of $150.34. Gold is currently priced at $1,541/ounce.

Paul Ausick

Read the entire article HERE.

by Charles Hugh Smith
Of Two Minds
April 25, 2011

What’s behind the disturbance in the financial Force? QE, ZIRP, the dollar peg and inflation, to name a few factors.

There is a great disturbance in the world’s financial Force. Many sense it as a storm on the horizon, something not yet visible but telegraphed by a rising, swirling wind and a new electric scent in the air.

I don’t claim to have a complete narrative that accounts for all the points of friction wearing down the moving parts, nor do I claim a “solution.” But a few observations might help inform our awareness of the disturbance.

As many of you know, readers provide most of the intelligence on this site (“of two minds, yours and mine”). I am the student and skeptic who learns from you and tries to make sense of a few dynamics, and extend them to some sort of coherent end-state. We share the same project of encouraging critical thinking.

1. There is a rising loss of faith in the conventional (i.e. propaganda) account of the U.S. economy. Readers tell me their local coin store has no silver coinage left, as the public has been buying with a vengeance. This is significant. (Silver has long been called “the poor man’s gold.”)

In the conventional view, the “herd” always gets it wrong: the “retail” “small speculator” investing public buy stocks and real estate at the top just as the “smart money” is distributing/selling. This “dumb money” cycle is certainly evident in manias and bubbles.

But there are also examples of “the public” acting well in advance (perhaps a form of “crowdsourcing”) of the “experts.”

One of the most remarkable trends of the past decade is the steady rise of the classic hedges against inflation and financial disorder: precious metals.

While the Federal government and a veritable army of conventional economists have repeatedly assured us over the past 10 years that the economy and the dollar are both sound, gold has quintupled from under $300 an ounce to over $1,500 an ounce.

Given that official inflation measured 26% for the decade 2001 – 2011, then clearly the public isn’t “buying” the “sound dollar, sound economy” story.

They’re also not buying the “you can’t afford not to own stocks in the New Bull market” story: the public has sold some $350 billion of domestic mutual funds in the past two years.

These are unmistakable signs that the public has lost faith in the Federal Reserve’s account of the dollar, U.S. stocks and the economy.

2. The idea that quantitative easing is benign has lost credibility. Even the MSM is reporting the dismal real-world results of QE2, for example, Stimulus by Fed Is Disappointing (understatement of the year?).

Another conventional view of QE–that it isn’t “injecting liquidity” because it’s simply an asset swap– The end of QE and what it means for the market–misses the point, which is that boosting bank reserves (what QE accomplishes) enables additional leveraged 20-to-1 (or more) lending. QE also keeps U.S. interest rates near-zero, which encourages a carry-trade of dollars flowing around the globe seeking higher returns and offsets to global inflation, which is certainly higher than officially recognized. It’s this flow of cash that’s driving up commodity costs.

A T-Bill sits there earning interest but cash is mobile–it can go anywhere to seek a return. A T-bill cannot. So QE is not just some benign asset swap–it has the pernicious effect of feeding a vast risk trade in stocks, emerging markets and commodities.

If that flow of new cash ceases (QE ends), then the risk trade (and Treasury bonds) both lose a key support.

3. Much of the analysis of U.S. policy is narrowly U.S.-centric. The U.S. has often ignored the international consequence of its parochial concern with domestic politics. Indeed, the U.S. has dropped 5 million tons of bombs and killed 500,000 people (as well as cost its own citizens their lives) overseas in pursuit of domestic policy (“we can’t ‘afford’ to lose Vietnam to the Commies because that would cost me the election.”)

This blindness to the consequences of domestic policy is most striking when it comes to China.

The key dynamic is the linkage of the renminbi (yuan) and the U.S. dollar. When the dollar tanks, oil rises when priced in dollars–and thus it also rises when priced in yuan. Thus the decline of the dollar and the consequent rise in commodities has directly fueled inflation in China, which is more dependent on a per capita basis on materials than the U.S.

Yes, the yuan peg has declined from the 8.5 range down to 6.5 to the USD, but it is still firmly pegged. As the cost of materials priced in dollars soars, it feeds higher input costs in China.

China’s policy-makers have exacerbated inflation by excessive money creation and lending by their own banks, but that alone is not sufficient cause for gasoline/petrol to cost as much in China as it does in the U.S. Oil is the foundation for petrochemicals, fertilizers, transport, plastics, etc., so the rise of oil driven by dollar depreciation is a driver of inflation throughout the Chinese economy.

No wonder the Chinese leadership is unhappy with the Fed’s crush-the-dollar strategy.

Though the cost of soy beans imported from the U.S. remains fixed in terms of currency, the relentless rise in oil is also raising the cost of China’s imports which are heavily dependent on oil, such as soy beans from the U.S.

4. China appears to be in the grip of a classic wage-price spiral inflation. Minimum wages are leaping by 25%, prices of many food items are doubling–this self-reinforcing dynamic is clearly visible in China. That is not the case in the U.S., which is being throttled by stagflation (rising prices and stagnant wages except for the top tier).

As I have noted before, price inflation in essentials hurts the lower income citizenry much harder than the top tier, as essentials make up a much larger percentage of the household expenses. A 30% jump in the cost of gasoline means little to a household in which gasoline accounts for 2% of total net income, but it certainly hurts a household in which gas accounts for 10% of total net income.

As noted in Your Pick, Ben, But One Goes Off the Cliff, the Fed’s ZIRP and QE policies have pared future policy down to a stark fork in the road: end ZIRP and QE, and send the risk trade (stocks and commodities) off the cliff, or keep pushing the dollar down and the rising cost of oil will shove the U.S. economy over the cliff.

That would also feed inflation in China, which already threatens to destabilize its economy. Correspondents within China recall that rising inflation was an important (if conveniently forgotten) dynamic in the 1989 era of dissent and disruption. The heavy-handed repression of domestic dissent and foreign reporting is evidence that the leadership in China has a keen appreciation of the connection between instability and rampant inflation.

So why is the Fed carpet-bombing the global economy? To protect the domestic economy? That makes no sense, for the Fed’s policies are pushing oil up to the point where there is no way to keep the U.S. economy from tipping into recession. It isn’t acting on behalf of the domestic economy, of course; it’s acting on behalf of domestic banking and Wall Street.

The Fed is busily destroying the village, suposedly to save it–only it’s the global village. But the Fed isn’t the only player with a stake in its game, and the other players, notably China, are tipping their hand that they will have to act, and soon, to protect their own domestic economies from the Fed’s destructive policies.

Read the entire blog post HERE.

Chapter 84 – Bond salesmen’s propaganda that “a dollar is a dollar” should be rewritten to say “a dollar is 3¢”

Since most ordinary people, bankers, and company presidents have never studied currency theory, they swallow it hook, line, and sinker when the bond salesmen tell them, “a dollar is a dollar.” That piece of propaganda should be rewritten to say “a dollar is 3¢.” The nominal dollar is officially worth no more than 14¢ of its 1940 value, unofficially only 3¢.

If computed in 1940 constant dollars, not more than $1,380 exists of the US $46,000 per capita gross public and private debt. More than $44,628 has been destroyed by inflation. But sadly, the owners of this debt do not want to hear about it. They do not wish to know that bonds are issued by governments with the sole purpose of debasement.

To my knowledge, no government in history has paid its debts in currency equal to the purchasing power of the currency lent to them. The people always lose their money on bonds.

It angers me. Bond salesmen should be thrown into the East River.

-The above was written in 1985 by Dr. Franz Pick, in the book “The Triumph of Gold” sent to me by one of my readers. The photos are from Time Magazine.

The whole point of the deflation versus hyperinflation debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end. The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY. People of modest net worth, like me, can of course participate in the debate. But then it can become confusing at times when we think about shortages or supply disruptions of necessities like food. Of course you need to look out for life’s necessities first and foremost. But beyond that, there is real value to be gained by truly understanding this debate.

I want to apologize in advance for the length of this post, but I have to be thorough if I want to have any chance of winning Rick Ackerman over to the hyperinflation/Freegold side. And I think there is a chance. While deflation and inflation are practically polar opposites, deflation and hyperinflation look almost identical on the surface, with the main difference being the wheelbarrows of worthless cash. As I wrote in 2009 in The Waterfall Effect:

There is a quote I like that comes from Le Metropole Cafe. It goes, “we will have deflation in everything we own, and inflation in everything we use”. This is partly true. It is true during the run up to the rubber band snapping. It is true until we hit the waterfall. At that point I have my own version of the quote. “We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars.”

My latest post on this subject was called Big Gap in Understanding Weakens Deflationist Argument in response to Rick Ackerman’s “Big Gap in Logic Weakens Hyperinflation Argument”. Rick also received responses from Jim Willie and Gonzalo Lira. Last week, with regard to Lira and Willie, Rick reported to his readers in “Rick’s Picks”:

I’ve concluded there is little to gain arguing on the one hand with a guy who turns rabid whenever someone contradicts him, even in a friendly way; and on the other, with a preening narcissist who comes to argumentation in the same state of sexual arousal that Jeffrey Dahmer must have experienced hovering over the fresh corpses of teenage boys. These guys are bad news, as lacking in civility and manners as buzzards in a scrum, and you’d do well to avoid them both. You might try tuning instead to the hyperinflation arguments of Steve Saville, Peter Schiff and a few others who seem less concerned with trouncing, slicing and dicing opponents than with presenting facts that might better prepare you for the financial crisis ahead. The very best of them, in my opinion, is FOFOA blogspot, where the essays are erudite, the discussion elevated and the arguments as knowledgeable as any you will find on the web.

I would first like to thank Rick Ackerman, and to also acknowledge his perspicacity in this particular regard. And because he has demonstrated such a discerning acumen in his preference for hyperinflationists (among other things), I will try, once again, to help him see the way. As our own Blondie likes to say (and I paraphrase for clarity), “you don’t own your baggage, it owns you.” Here is Rick’s baggage, in his own words:

My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.

Rick repeats what he calls “C.V. Myers’ dictum” quite often in his deflation-oriented posts: “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” I’m going to go out on a limb here and say that this dictum is Rick’s baggage, his foundational deflation premise, in a nutshell. And it leads him to his “bottom line” or his analytical conclusion:

Rick’s Picks Commenter SD1: To my knowledge, no bank has ever made provisions in their lending criteria. So to anyone subscribing to the hyperinflation theory, all I can say is there is nothing I, and millions of other North Americans, would love more than to take $250,000 of worthless, hyperinflated money that we worked a few days to make, to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay.

Rick Ackerman:That’s the bottom line, as far as I’m concerned.

In this post I will explain the flaw in Myers’ dictum. I will go into great detail as to why the missing component in the dictum is the essential (and inevitable) one. I will show how this one flaw in Rick’s premise sends his otherwise excellent analysis careening 180 degrees in the wrong direction (with regard to the subject of this post). And I will explain the proper frame of reference from which to view what I am describing. How’s that for a kick-off?

First Myers’ dictum. “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Rick: “Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit.” Me: Yes, someone will pay. But there is a third option that is missing from Myers’ dictum. “The hit” can be socialized:

“Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets…”

“…hyperinflation is the process of saving debt at all costs, even buying it outright for cash… because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!”

(The quotes are from FOA on Hyperinflation and FOA on Currency Styling, Currency Management, Dollar Hyperinflation and End Game Scenarios respectively.)

As many of you know, I came to this debate, with no baggage and no hard opinion, in 2008. And in the “doom and gloom internet community” where I arrived there was definitely an equal helping of both deflation and inflation/hyperinflation talk. Most of it I found less than convincing (on both sides). The “deflation side” is actually bigger than you might think. Most of the peak this or peak that crowd, the majority of the survivalist community, and the Great American Collapse people are all expecting a sort of grand deflation, whether they understand the arguments or not.

If you want to think of a grand deflation as a deflating—or grand contraction—of economic activity that was previously “energized” by massive trade deficits, massive credit expansion, and the massive structural malinvestment that flows from those easy money expansions, well then I too am expecting a sort of grand deflation, in many of the same ways they are. But one thing I have learned from the writer that made the most sense to me, the writer that I found most convincing from within my “past baggage” vacuum, is that “deflationists” as a group still have a big gap in understanding.

Rick became a deflationist in the 1970s by his own account. And he certainly wasn’t alone. I wasn’t even aware of the existence of such a debate in the 1970s let alone 2007, so I can hardly add the wide perspective necessary in this debate from my own personal experience. What I can do, instead, is to share with you this excerpt from the one that spoke convincingly to me, the one that informed my developing view in 2008.

One point I hope you’ll find curious in this excerpt is that deflationists have always fixated on residential real estate. This is one of Rick Ackerman’s, almost obsessive, objections to the hyperinflation case, and it clearly has roots in his kind. This was written in 2001, just as the housing bubble was developing. My notes in [brackets]:

Somewhere in the 1970s era I was exposed to the thinking of several different deflationists. It seemed that all of their conclusions came to the same end: that dollar deflation would rule the day, no matter what. Mind you now,,,,,, most of them were split on the finer points of the issue, but for all of them; [de]flation would have its day even if prices would rise somewhat. Deflation was always the final outcome.

One of the central themes in these thoughts was concerning how this coming deflation would impact plain old residential real estate. You see, most of these guys advocated selling excess residential property because it was, sooner or later, going down for the count. Mostly because the mortgage markets would be destroyed in the deflation and nobody could buy [prices would collapse to the cash price].

– Note: The reader has to understand that these discussions were directed towards people and investors that had plenty of net worth. And I do mean Plenty! The argument wasn’t about how to survive; rather how to balance a truly conservative estate portfolio. –

As time has passed we can see several major flaws in their thinking. Flaws that cost them a bunch of credibility, if not personal money. [I want to jump in here with a quick quote from Gary North written in 2002:

"I remember in 1975 hearing C. V. Myers tell attendees at a gold conference, 'If you get this one wrong, you'll lose everything.' He was predicting deflation. He got it wrong. He didn't lose everything."

And now back to FOA] One point, that I have touched on here several times, was in understanding just how much ourselves and our economic structure would and did evolve into accepting fiat money use. Even though it was, “god forbid”, separated from gold.

In one area alone, the bond markets, investors reacted far differently than deflationists thought they would. Twenty ++ years ago [again, this was written in 2001], it was expected that just gross increases in money printing alone would be enough to crash the bond markets. Not talking about price inflation here, but money inflation and that should have started a deflationary fall in our credit markets. It almost happened, several times, but never followed through. It seemed that the market function had evolved to accept fiat inflation as a prerequisite to modern economic function. In a like comparison to today’s thinking; investors assumed that as long as we had an expanding economic stance [nominal GDP growth, credibility inflation and financial product appreciation], sourced by inflating fiat supply, price inflation would not impact long bond credibility. We saw confirmation of this over many years. We saw that our credit markets, especially long bonds, were used in spite of the price inflation threat. Indeed, there was a ready [highly liquid] market demand for bond purchases.

In hind sight, long term holders of bonds did do very well if their position was part of a balanced holding and they didn’t need to sell at bad times. Even now, dollar bonds have gained as rates are pushed lower.

Back to the thought:

This whole IMF dollar system has always been based on an expanding fiat theory that swells [nominal] GDP over time. Investors that bet on deflation coming along, after each of our bouts of inflation, were badly burned as deflation was overcome. Economic function returned, essentially because price inflation could not rout the overall market for long credit.

The flaw in all of this was in the reserve structure of our Dollar IMF money system. The fact that the world had to walk, lock step, with our money policy meant that their goods production would almost always be cheaper than ours; keeping local US price inflation under control. In other words; local US-based price inflation could not get out of hand as long as the rest of the world was willing to use their economic production to control it by selling [products cheaper than we could produce them] into our expanding fiat system.

In this, the dollar [and its securities, and their derivatives] could be inflated without end while our credit markets functioned in a non-inflationary environment.

But there is an end.

A money system like this has a definite timeline and that point is reached when the world can move away from keeping price inflation low in the US. That point is reached when Another money system comes along to challenge the dollar and, in the process, offer these other goods-producing countries a chance to buy some “lifestyle” for themselves.

At first, the show is dull as investors keep right on buying into the dollar argument above: that an expanding fiat base builds non-inflationary [nominal] growth [in both GDP and securities]. This is one reason traders still buy US long credit, not to mention chasing rising dollar exchange rates; they expect more of the last several decades of economic theory to keep right on going. It won’t.

The dollar faction saw its match early in the 90s as the Euro was taking shape. To counter this threat, as I have outlined here in several ways, they promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar / IMF system beyond its ability to serve as a real fiat money system, today. [See (my title): Is the Fed selling Hyperinflation Insurance Backed Only by Hyperinflation?]

I mean; that our whole dollar landscape has now become just a trading asset arena: it’s now evolving away from any meaningful currency use to trade for real goods. It can head in no other direction because our local economic structure, the USA economic base, cannot possibly service even a tiny fraction of the buying power currently held in dollars worldwide.

So what does this have to do with Real estate?

Take a look at any broad section of the US; Northeast, SouthWest, etc.. If any of the deflationists were correct, their reasoning back in the late 70s and early 80s should have produced at least an average fall in Residential real estate. Can any of you find an “average” of property today, that is lower than early 80s prices?

Of course I’m not talking about the spikes in Hawaii, New York, Denver or San Francisco; those are just blips on an ever rising inflation scale. Even if they fall some from here, it isn’t part of a deflationary act playing out. Average home prices will rise all across this country no matter what the future economy holds. A super inflationary stance by the Fed means that even unemployed workers can buy a house and pay for it! Watch how this all comes about. The Dow will not be much different when seen ten years from now; a drop to 5,000 then off again, is a real possibility! [Note: The Dow dropped from 11,000 in 2001 down to 7000 and back up to 12,000 in 2011. Again, FOA wrote this ten years ago in 2001]

The same is true for anything perceived as something real: “even silver” (grin).

The difference is in the drastic ups and downs derivatives will place on all asset markets. My point is that we are on an “end time run” in fiat dollar production that will soon produce a spike in real price inflation that crushes hedge vehicles. One item alone, physical gold, because it is the main wealth asset behind the next currency system [See: RPG #1], will outrun everything by a wide margin. No matter the derivative’s hold on it!

As the Euro builds a base [which is happening right now in 2011 – see this, this, this, this, this and this], it will drive an inflationary recognition into our credit markets, then freezing up our derivative markets. That perception will fuel a complete failure of our bond markets and force the Fed to buy up any and all credit; paying in full. [Paying full price for deflating assets? Oh my, would the Fed ever do that? The deflationists never saw it coming!] If needed, Bush and congress will see to it that enough money is printed so we are paid in cash for everything! Don’t laugh, this is where we are headed.

[I must insert here the rest of the famous FOA quote from above. I affectionately call it "the front-lawn dump" and it was coined by FOA a full 18 months before Bernanke's famous "Helicopter drop" speech:

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

Okay, now back to the original excerpt…] In the meantime, whether or not our economy is growing, stalling or failing, will have little or no impact on price inflation.

You see, living with real serious price inflation goes something like this:

—- “Honey, I talked to Fred again, he can’t sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that’s not so bad, we had to jump ours up three times before selling.” —-

Inflation runs crazy when a money system is forced to “print out”. We will “print out” our dollar, too. Getting there just takes time and an alternative system to cause it.

Now I do realize that it takes a certain talent to distill deep wisdom from a 10-year-old internet forum post. And I can almost hear some of you out there screaming, “but but but… house prices DID collapse… d… d… DEFLATION!” Wrong. Sorry. Residential real estate will ultimately crash to its non-leveraged cash price as credit disappears, just like the deflationists think. But that ultimate cash price, once reached, may actually be higher than today’s leveraged prices and be outrunning the availability of cash needed to clear the market! And all the while real estate will keep crashing in real terms (gold).

There is always a shortage of cash during a full-bore, in-your-face hyperinflation, which is why the printer has to keep adding zeros. His press simply cannot keep up with prices at established denominations. It is also why the first to touch the new cash (the “elite”) have a very valuable advantage. Hyperinflation is a grand competition for lifestyle retention in the face of forced austerity, just like a race! Here, look at this from the excerpt:

“Honey, I talked to Fred again, he can’t sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that’s not so bad, we had to jump ours up three times before selling.”

I’ll bet the deflationists were thinking in terms of deposit+loan=price, rather than cash. Wrong paradigm. Sorry. When the hyperinflation hits in a reference point purely-symbolic fiat currency paradigm, the market will try to clear for the rising symbolic cash price while the hard currency price (denominated in gold) continues to drop like a stone. Deflationists do have one thing right. Real estate is not a very good investment when preparing for what’s coming. That doesn’t mean home loan debt won’t be hyperinflated away though. It most likely will be. And if you are lucky enough to catch the bottom in the reference point gold paradigm during the crisis, bless you. But it’s still a poor investment choice right now, even at 5% down, compared to putting that same cash into physical gold. More on this in a moment.

The point of sharing this FOA excerpt was that deflationists, like other groups that have established encampments cluttered with old baggage, tend to miss what is actually unfolding. And for that, you might want to start with my post The Debtors and the Savers. Understanding the balance necessary to keep the peace between these two groups is fundamental to understanding the political will behind the inevitability of both Freegold and dollar hyperinflation.

Rick seems to have a number of hang-ups when it comes to both gold and hyperinflation. His biggest is obviously real estate and the modern home mortgage. He simply cannot seem to fathom how a system designed and managed by The Power Elites could ever deliver a “windfall” to overleveraged, underwater homeowners or shady, uncouth gold bugs. And, frankly, if you don’t make the effort to understand what is actually unfolding, there’s a good chance it won’t.

To the deflationist, “a dollar is a dollar” just like it is to ordinary people, bankers, company presidents and bond salesmen in the quote at the top. And even though the dollar has already lost almost 99% of its original gold purchasing power, Rick believes The Power Elite will make sure it stays strong until you have worked off every last dollar you owe. Because someone has to pay! (He’s right about that.) And it’s not going to be “them”. (He’s mostly right about that too.)

The dollar has a long, storied past. To believe “a dollar is a dollar” is to simply ignore its history. Of course I’m not implying that deflationists are unaware of this chart:

But I am saying that they think the collapse of the dollar’s financial system will strengthen the dollar itself and make prices fall in the end. This is a funny notion when you take the totality of the dollar’s journey into consideration.

The dollar was once worth 1.555 grams of gold. Then it was reduced to .888 grams of gold. Today it is able to purchase .02 grams of gold, but only at the margin. Notice that I said “able to purchase” instead of “is worth,” and I also added “at the margin.” That’s because the dollar is not worth .02 grams of gold today. Around 60 years into its 100-year life, not unlike the human retirement age, the dollar retired to become a purely symbolic, completely worthless token. And in the big scheme of things, this “retirement from value” is not such a bad thing. Someone emailed me a question the other day and this was my reply:

Hello Mark,

I don’t see much wrong with your grasp of the subject, other than those worthless tokens are actually a good thing. What sets us apart from those monkeys is our ability to divide labor in a way that resists the second law of thermodynamics and allows us to organize our environment.

This division of labor requires us to use a medium of exchange in order to avoid the double coincidence of wants.

The question then becomes, what is better as a medium of exchange? Should it be something of value? Or is it more beneficial to the anti-entropic process for it to be something purely symbolic and worthless?

If you answered “something of value” I would ask, Why? Is it because you want to hoard that thing in the case that you produce more than you consume? And what is the net effect on man’s battle against entropy if the circulation of that valuable medium slows due to hoarding? Conversely, with a worthless medium, why not just exchange it for that same valuable thing if, in fact, you do produce more than you consume? Seems simple enough to me.

Sincerely,
FOFOA

You see, this is where we are today. We are using, as a medium of exchange, a purely symbolic, completely worthless token. The logical action, then, is to exchange surplus worthless tokens for something of value. Yet still today, most everyone hoards up purely symbolic, completely worthless tokens in the form of the debt of more tokens to be worked off and paid by someone else. In fact, globally, this debt far exceeds the ability for it to ever be paid (worked off by future labor), at least not at today’s dollar purchasing power of .02 grams of gold. And yet it will be paid by someone, just as the deflationists promise! So the question then becomes, how can an impossible debt be paid?

Answer: if it cannot be worked off by future labor, it will be worked off by past labor, the net surplus of which was erroneously stored in debt and dollars. The icing on the cake is that it is also the past labor of “someone else,” if the profits can be capitalized and the losses socialized. Precisely the process we have witnessed over the past three years, for those with eyes to see.

Rick Ackerman’s somewhat-myopic focus is on home mortgages as the lynch pin that will keep this worthless, symbolic token valuable while you toil on the chain-gang working off your debt of worthless tokens. So let’s take a look at the larger picture to gauge the strength of this pin and the stress it must endure.

Total US mortgage debt is a little over $14 trillion. That number includes you and your neighbors. Of that $14 trillion, about $6 trillion sits on the balance sheets of banks and $9 trillion has been packaged and sold to savers like pension funds. Of that $9 trillion held by savers, about $5 trillion is guaranteed by the US government.

So here’s Rick’s lynchpin that’s going to keep all of you indebted homeowners honest: $14 trillion – $5 trillion guaranteed = $9 trillion. And that $9 trillion lynchpin is so powerful because it is held by politically connected and powerful banksters and pension funds, or so they say. Now in a minute I’ll tell you why these two groups would rather have all that debt printed and the cash handed to them than to watch even 20% of you default on your mortgages. But first, let’s step back and take a wider look at what might be exerting shear stress on this supposed lynch pin.

Total worthless token debt in the US, both public and private, is around $55 trillion, four times as big as that backed by physical real estate. If we add in the government’s unfunded liabilities (which definitely apply shear stress to the dollar’s lynch pin), that number comes in around $168 trillion. And that is simply the promises to deliver worthless, purely symbolic tokens, at some time in the foreseeable future, emanating from within the United States. Meanwhile the US produces enough “goods and services” (loosely defined) every year to be purchased by 14 trillion of these purely symbolic tokens at their present level of purchasing power. And with a trade deficit of around $500 billion per year, it appears the US is consuming roughly 103.5% of what it produces every year, in real terms.

So in real terms, that is, in terms of the dollar’s purchasing power as it stands today, it would take, let’s see… $168T/($14T produced – $14.5T consumed)= x years… hmm… somehow it’s going to take us negative 34 years to deliver those promised dollars at today’s purchasing power. Remember I said this debt would be “worked off” in the past, without the use of a time machine I might add? Well here you go—past surplus labor foolishly stored in dollars and dollar financial instruments and their derivatives will be tendered. Of course the deflationists want you to know that we will be forced to reduce our consumption to below our production in order to pay those off. And once again, they are correct, though not in the way they think.

Reducing consumption means reducing your standard of living. Some call it austerity. But with forced austerity also comes the competition to avoid reducing your standard of living. And herein lies the inevitability of US dollar hyperinflation.

You see, those Power Elites that Rick thinks are going to support the dollar and its $169 trillion burden (excluding derivatives) simply to make sure you’ll work off your $9 trillion dollar mortgage at today’s purchasing power are the same ones that will resist personal austerity measures the most. And as all good deflationists know, you simply cannot resist the irresistible without breaking something. And what they will ultimately break in their competition to maintain lifestyle is the value of the dollar, which will actually break quite easily due to the mountainous (think: landslide) shear stress applied to it right now.

Now let’s go back to those “banksters” that, along with the politically powerful pension funds, are part of the Power Elite that are going to keep the dollar strong enough so that your mortgage isn’t hyperinflated away. Remember, this is roughly $6 trillion, or 3.5% of the dollar’s debt problem, that is still sitting on the balance sheet of banks, yet gradually being absorbed and/or guaranteed by the Fed and/or the US government.

This is simple logic: Do you think they’d rather offload that debt onto the Fed’s book in exchange for full cash value? Or would they prefer to hold onto those notes while you struggle to pay them off in symbolic tokens over the next 25 years? How about this: Is it better for the health of the bank to take possession of the houses (and then have to sell them) that roughly 20% of the troubled homeowners are walking away from? A 2009 jingle mail study showed that close to a fifth of troubled mortgages in the U.S. involved borrowers who were strategically defaulting. That represents roughly a 10% hit to the asset side of the banks’ balance sheets. Yet the banks’ liabilities (deposits created when the loans were originated) remain, fully insured by the FDIC which has no money.

Through the magic of commercial bank double-entry bookkeeping, the banks’ balance sheets are actually not exposed to decreases in the purchasing power, or present value of purely symbolic, completely worthless token dollars. They are, however, exposed to decreases in the value of their assets and to the risk of default that flows from deflation. Deposits are nominal liabilities that remain when assets deflate. So supporting deflation would be, to a bank, like suffering a masochism fetish.

Rick thinks the banks will defend their assets by keeping the dollar strong. But that only keeps their liabilities that much harder to meet while the effects of deflation tend to shrink their assets making it even harder still. Ignoring the dollar for a moment, and the flaw in Myers’ dictum, what happens to a bank’s balance sheet if all of the loans are defaulted at the same time? Or if the asset value of all of their collateral collapsed at the same time? It would have precisely the same impact. So would a mixture of the two. The banks have and are experiencing precisely this type of squeeze. How has their “guardian angel” the Fed responded so far?

Rick Ackerman’s view of the banks’ incentive or preference to prevent (as if they had that control) hyperinflation is exactly bass ackward. A bank’s balance sheet becomes severely damaged in deflation, yet it is made whole through hyperinflation.

As for the pension funds, they hold this debt not for its value to maturity, but for its appreciation in a falling interest-rate environment and its liquidity in trade. Pension funds get in trouble when they cannot perform nominally. They hold nominal assets and make nominal promises (like 8% returns) which simply cannot be met in a deflation. However, as disastrous as hyperinflation is for pensioners (the funds’ clients), it is a Godsend for the politically-connected pension managers who were being crushed by deflation.

So once again, the incentive or preference of those who hold the note on your mortgage to prevent (as if they had that control) hyperinflation is simply not there. In fact, as I will show in a minute, there will be ample incentive for these politically connected Power Elite Giants to actually encourage the kind of printing that will take an Icelandic-style currency collapse into full-blown Zimbabwe-style wheelbarrow hyperinflation. More on this in a moment.

What you see is the result of the perspective you choose

A small-minded ant’s only interaction with Giants may be getting stepped on or sprayed with deadly poison. So from the ant’s limited perspective, this activity of killing ants is what Giants live for, what motivates them, and what they spend their time scheming and planning for. Don’t limit yourself to the ant’s perspective. If you want to find the tasty morsels left by Giants, you’ve got to start thinking like a Giant. You can read more about ants in my post Life in the Ant Farm.

In his latest of several posts on this subject, Rick Ackerman presented two responses that he found “of particular interest.” The second one is so ldo that I won’t spend much time on it. It is a comment that explains the old truism, “you can’t eat your gold.” That’s right, gold is not at its highest and best use being spent (circulated) as a currency during a hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the very best way to shuttle your wealth THROUGH a crisis to the other side. If you are forced to deploy this wealth for food during a crisis, then you apparently planned poorly.

And with a little understanding of how a monetary collapse actually unfolds, flipping the switch on illusions and revealing reality, you’ll find that the actual crisis itself will be relatively short-lived. My best guess is 6 months maximum—for the worst of it—beginning when the normal distribution of food abruptly stops. So transporting your wealth to the other side should be of great importance to those with significant savings. But if you are one of the ants that cannot distinguish between a monetary collapse and the myriad other problems with our civilization (i.e. you think that when the money collapses everything else goes to permanent sh-t as well—it doesn’t by the way, look at history), then you probably think we’ll be in a Mad Max wasteland for a generation or more after the dollar finally goes the way of the peso.

In that case, you should probably buy yourself a Texas ranch, a lot of guns, and a few friends to help you shoot those gunslike the Circle K Cowboys. The way I see it, the monetary collapse is going to reverse and ultimately correct many of those myriad other problems because reality will be uncovered and freed to exert its more balanced supply and demand dynamic.

But that’s enough on the Texas Rancher’s Thunderdome wasteland. The first of the two responses that Rick found “of particular interest” was an email he received from Charles Hugh Smith, the man “Of Two Minds” who is bothered by the “conviction” (or what he perceives as single-mindedness) of others, particularly hyperinflationists. He said as much in the email:

What bothers me is the widespread conviction that hyperinflation is “guaranteed.”

Smith is truly a man of two minds. He likes to stay uncommitted and agile, to trade against the crowd:

I certainly wouldn’t want to debate anyone because my arguments are those of a trader, basically, not an economist. Maybe we will get hyperinflation, I don’t claim to know… This smells like a one-sided trade to me, even if it is more of a meme than a trade.

I am up on a hill with a wide view of the valley. In this post I am attempting to share the framework in which you, too, can see what I see rolling in. It is a tsunami called currency collapse coming in, following a violent financial and economic earthquake, which in our case will end in probably the most devastating hyperinflation the world has ever seen. And the more people that come to see what I see rolling in; the more people that join me safely on higher ground with a view of the valley below, the more the man of two minds likes his contrarian position in the valley below. Did you see that newish video out of Japan? The one I have in mind?

In order to share my view with you, I am going to patiently work my way through Smith’s email, correcting errors and explaining the flaws in his perspective as I go:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation?

I think we can safely define Charles Smith’s “Elites” by his own words as the Financial (Wall Street) Elites, the politically powerful (including politically connected corporations and unions/union pension funds), the “banksters robbing us blind” and “CONgress” along with all the politicians running this country into the ground; basically everyone running the Dollar International Monetary and Financial System (the $IMFS). And he asks how do “they” benefit from hyperinflation? Well, they will benefit, in the same way that those closest to the printer benefit tremendously in all hyperinflations. But more importantly, Smith’s core perspective on “the Elites” is wrong. He makes the same mistake Karl Marx made, which I explained in my post The Debtors and the Savers. [I know, this is the second time I've linked this post. It is intentional. I'll probably do it one more time as well.]

What I described in that post last July is the essential foundation to the framework for understanding why US dollar hyperinflation and Freegold are, simply, unavoidable, or to use Smith’s word, “guaranteed.” I have been accused of overconfidence in my views. But I specifically and actively limit the scope of this blog to only these two topics. I’m certainly not a know-it-all. I only describe the things that can be clearly seen, and how to ascend to that perspective.

Was the Japanese guy shooting that video up on a hill overconfident about his view of the tsunami rolling in while those still down in their houses had a more rational, balanced opinion? Perhaps they were of two minds; on the one hand, there had just been a Richter scale 9 earthquake and they lived in a tsunami warning zone. On the other hand, they were not exactly ocean-front properties and it would have to be a pretty big tsunami to bring the ocean over that levee. Surely they would hear it coming giving them plenty of time to escape. It’s all about perspective. With the proper perspective you can see things more clearly.

In The Debtors and the Savers I wrote:

Today we have many fine, intelligent and exacting analysts all looking at the same economic data and coming up with vastly different analyses of the present global financial crisis. What sets them all apart from each other is not intelligence, or math skills, or even popularity. What sets them apart is the foundational premises on which they operate.

And a false premise can skew a brilliant analysis 180 degrees in the wrong direction. Few analysts fully disclose their premises. But Karl Marx did, and in this we can find the one, key flaw that sent his analysis off in a disastrous direction.

Marx writes, “The history of all hitherto existing society is the history of class struggle.” He got this part right! What he got wrong was his delineation of the classes.

Marx’s classes were:

1. Labour (the proletariat or workers) – anyone who earns their livelihood by selling their labor and being paid a wage for their labor time. They have little choice but to work for capital, since they typically have no independent way to survive.

2. Capital (the bourgeoisie or capitalists) – anyone who gets their income not from labor as much as from the surplus value they appropriate from the workers who create wealth. The income of the capitalists, therefore, is based on their exploitation of the workers.

Simply put, Marx says it’s the rich versus the poor. According to Marx the rich exploit the poor to get themselves a “labor-free income”, which spawns a class struggle.

This is an attractive perspective because it requires only a cursory, superficial judgment to place someone into one of the two camps, the rich or the poor. If someone is driving a Bentley we immediately know which group they are in, right?

[…]

As I said, Marx got one thing right. History does bear out the dramatic story of centuries of class struggle. But if we eliminate his one small flawed premise, we can see it all much more clearly.

The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. “The easy money camp” and “the hard money camp”. History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.

1. Debtors – “The easy money camp” likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.

2. Savers – “The hard money camp” likes to live within their means and save any excess for the future. They prefer hard money (or in some cases “harder” money) because it protects their savings and forces the debtors to work off their debts.

1789, the French Revolution, “the hard money camp” had been in power since 1720 when John Law’s easy money collapsed, and starting in 1789 “the easy money camp” killed “the hard money camp” and took back the power. This is the way “the easy money camp”, the Debtors, usually take power… by revolting against the hard repayment of their spending habits…

Obviously I don’t want to reprint the whole article here, which is why I linked it three times. So please go read it.

But here’s the fatal flaw in this Marxian paradigm; many of we, the modern proletariat, are savers who would prefer hard money like gold to protect our savings. It is we, the savers, that are punished by the current easy money system. That’s why I delineated the groups as the Debtors and the Savers, otherwise known as “the easy money camp” and “the hard money camp.”

And with the proper view of who Smith’s Elite CONspirators really represent—the easy money camp, the debtors, the hungry collective—the answer to his question begins to develop. It is the opposing camp, the savers, that will be most-punished by hyperinflation and it is Smith’s Elite that will profit the most during the race to spend.

If you can start to think of the administrators of the $IMFS, the “banksters”, politicians and Western Capitalists in charge of the system as being firmly entrenched in the Debtor camp, you are well on your way to a very rewarding enlightenment. I realize this is counterintuitive, and counter also to much of the baggage that accumulates while reading other “hard money” writers on the Internet, which is why I spend so much time on it. But once it clicks, you’ll be like, “OMG! WTF was I thinking?” I have conversed via email with many extremely intelligent people that have had this momentous “click”, so I am tempted to consider that I may be on to something.

So call me overconfident if that makes you feel better, but I’m not going to be wishy-washy about what I can see. I’m certainly not of two minds on this.

How will “the Elite” profit from hyperinflation? By being the first to spend the bills with new zeros added and thereby outrunning the rest of us in the race to spend and winning the competition to retain standard of living. Hyperinflation is the end result of the dollar-debt timeline, there is no other way it can end. Only the severity is a variable to be considered.

Rick Ackerman and other deflationists agree with me that the unsustainable, unstable mountain of debt must and will collapse. And they view “the Elite” as the capitalist creditors and the rest of us poor working saps as the proletariat debtors. Therefore they believe that when the debt mountain collapses, their version of “the Elite” will not print Zimbabwe-style because, even though they just took a tremendous haircut on their bonds, they want to be sure that the super-saps among us, the proletariat that are still working, will continue to service the remainder with dollars of today’s purchasing power.

This is a bass-ackward view in my opinion. The hungry collective provides ample political backing and sufficient naiveté for “the [Western] Elite” to print the full face value of their bonds and dump that worthless paper on the public’s front lawn. Furthermore, deflationists like Ackerman as well as practically all mainstream economists provide plenty of cover in the form of plausible deniability that hyperinflation would be the inevitable result.

But the story runs deeper still. The reason I have been putting “the Elite” in quotes or referring to them as “Smith’s Elite” is because, not only does he have the delineation wrong, but he is myopically focused on only one quarter of the bigger picture.

Some of you, I know, like to think in terms of grand conspiratorial conflicts, a “Clash of the Titans” (Clash of the Elites if you will), or something like that. Well I can probably help you with that view in this “Debtors v. Savers” paradigm.

We have the West which is roughly only 25% of the world’s population, and then we have the rest of the world. And oh yes, they have their own “Elite”. You’d probably guess that “the West” represents “the debtors” in this paradigm. But you’d be wrong to assume that the rest of the world is taking “the hard money camp” stance.

It is true, we are at the end of one of the longest-running “easy money camp” regimes. And these things usually swing back to the other side. But history has taught the world that while easy money regimes end in financial collapse, hard money regimes usually end in bloodshed. And it’s usually the blood of the hard money campers that is shed. (See: the French Revolution.)

So the rest of the world has taken a different stance this time. It has been “in the works” for several decades.

Q: **Who does BIS really represent?

A: “old world, gold economy, as viewed thru modern eyes” or “way to move from US$ without war”.

Those are the words of ANOTHER from my post “The Gold Man” (not Goldman) at the BIS. The BIS truly represents “the rest of the world” from a monetary perspective. It is the “trade union” of their Central Banks. All is not as it seems on the surface.

So how do you view an “old world gold economy” through modern eyes? And how do you move there peacefully with the easy money camp? It’s quite simple actually. You let nature take its course, you support that natural course however long it takes (rather than pathologically fighting nature like the dollar system does with its obsessive-compulsive drive to control), and you don’t deprive the easy money camp of their precious fiat. It’s Freegold. It is about allowing meritocracy to rise like a Phoenix from the ashes of the dollar’s inevitable collapse. It’s not about a transfer of wealth. It is about a re-born meritocracy. The transfer of wealth that will take place is what blinds most people from seeing its inevitable approach.

More from Charles Hugh Smith via Rick’s Picks:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then [who] owns the $160T in financial wealth?

First of all, it is unclear exactly how much gold there is, but it’s probably over $8T by now, and only about 18% of it is owned by central banks, not anywhere near half. That leaves $6.6T in private hands, at today’s price.

Smith exposes his ant-like perspective in this paragraph when he implies the Giants that own the lion’s share of $160T in financial products should have already crashed the value of those financial products and exploded gold in the stampede from one to the other, if a collapse of the dollar was really on the horizon. On the contrary, you have to think like a Giant to see the best way to move your Giant wealth from one system to the next. True Giants do not panic out like ants, nor like ants imagine that Giants would. True Giants know that if they panicked out, with the weight they carry, they would end up transferring much LESS wealth into the new system.

Viewed from the Giant’s perspective, you can see that most all of that dollar value, that $160T will vanish in a flash. And when that happens, the market for paper promises of gold delivery will also collapse and vanish as physical gold gaps up (in my estimation) 40x. That’s right, $160T vanishes, and $6.6T worth of gold—in private hands—gaps up to $264T.

Oooh. Now I’ll bet I’ve got the deflationists screaming! “You can’t turn $160T into $264T in a flash during a deflationary collapse!” Au contraire, mon frère. What you see is the result of the perspective you choose. Reader “Reven” recently asked this same question, to which I replied:

It is a fallacy to compare a snapshot of gold with a snapshot of “global asset values” because it ignores the time dimension in which gold flows. Even if you are correct about everything in the world (other than gold) being worth [$160T] in 2011 constant dollars, the value of all the gold can be multiples of that amount. It is theoretically unlimited, unlike paper wealth which is self-limiting by its own objective metrics and economic ties. Paper wealth is limited to the upside but unlimited to the downside. Gold is the inverse of paper, unlimited to the upside, limited to the downside. It’s not the total stock of gold that matters, but the flow from those that already hold it.

Here are a few snippets from my post How Can We Possibly Calculate the Future Value of Gold?

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

[...]

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much “stored purchasing power” everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

[...]

Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough “stock” is reassigned to “flow” to meet demand.

[...]

Lastly, understand that currency flows through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that, as I said above, it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more “flow gold” is moved into “stock gold”, not the other way around like commodities and paper.

This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have objective metrics for valuation or economically limiting forces. All except gold.

[...]

So, cutting to the chase once again, the biggest fallacy in your model is using “Total above ground gold” as your point of comparison. It’s not the stock that matters, it’s the flow.

Now, if you have a supercomputer you can try to run this unimaginably complex flow algorithm. But be careful with your assumptions. One wrong assumption can throw the whole thing off by orders of magnitude.

Back to Smith. Here’s that same paragraph again. Let’s see if we can answer his questions a little more concisely now that we have a new perspective:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then owns the $160T in financial wealth?

Yes, they’ve bought the gold and it’s still priced at around $6.6T, at least that portion that is in private ownership. No, there will be no gold-backed currency because we aren’t going back to “hard money” because “your Elites” wouldn’t like that. No, they won’t lose all their wealth; they will gain wealth. Here are the steps as viewed, not by ants, but by Gi-ants:

Step 1: Buy up as much physical gold as you can over a couple decades without running the price and without panicking out of your paper, while the Western investor is caught up in all manner of paper including paper gold.

Step 2: Wait patiently for the inevitable financial collapse. As Rick Ackerman himself wrote, “financial collapse is not just likely, but inevitable.”

Step 3: When the collapse comes, sell that $XXXT in “financial wealth” to the printer for fresh cash at full face value in the name of “saving the system” and “survival of the country and the Western way of life.”

Step 4: Spend the new cash.

Step 5: Adjust your balance sheet from the old paradigm where it used to read $160T paper/$6.6T gold to the new paradigm where it now reads $0 paper/$264T gold. A net gain of $97.4T.
Read the entire blog post HERE.

A quick look at today’s just released total debt to the penny from the Treasury may crimp the artificial smile of even such die hard administration sycophants as Moodys. Why: because the total debt, as we predicted when we observed last week’s 30 Year auction, is now at $14,305,336,580,992.11. This is a problem because as anyone who rails against the broken US fiscal apparatus should be able to tell you, the debt ceiling is $14.294 trillion. In other words we have now officially breached the debt ceiling by $11 billion. So why has the US not filed a notice of default yet? Because the actual debt that matters for legal purposes is the debt “subject to the limit”, which is $52 billion less than the total debt primarily due to $10 billion held at the Federal Financing Bank, and $41 billion in unamortized discount: a number which fluctuates in time depending on how much over or under par bonds are issued, but which ultimately will be zero at maturity of all debt (haha). In other words, as of today, the US Treasury has dry powder for just another $41 billion in issuance, or just over your average 5 Year auction. This can be seen best on the following chart from the Treasury where the total debt line has just passed the limit.

So what does this mean for near term issuance? Also per the Treasury, there is a total of $55 billion in debt paydown in the next week primarily in bill redemptions, offset by $14 billion in issuance in the last week of April. The problem is that this week also happens to be a major tax refund week. We anticipate that tax refunds will likely total between $20 -25 billion net over tax revenues. Which means there will be a net cash need of about $75 billion. As we ended Thursday at about $30 billion, Friday’s cash balance (released at 4pm by the FMS) could be very critical to determine if the Treasury will be forced to come up with some emergency form of 11th hour cash raise. It also means that the debt ceiling clock is ticking ever louder. The Treasury will have capacity for one more full weekly auction, to be completed in the first week of May, and then it is game over.

Update: cash as of Friday was $58 billion. With $55 billion in cash out this week and who knows how much of refund funding, it could get mightly close…

Read the entire article HERE.

By Michael Pento
EuroPacific Capital
Monday, April 4, 2011

For years the Federal Reserve has told us that in order to detect inflation in the economy it is important to separate “signal from noise” by focusing on “core” inflation statistics, which exclude changes in food and energy prices. Because food and energy figure so prominently into consumer spending, this maneuver is not without controversy. But the Fed counters the criticism by pointing to the apparent volatility of the broader “headline” inflation figure, which includes food and energy. The Fed tells us that the danger lies in making a monetary policy mistake based on unreliable statistics. Being more stable (they tell us), the core is their preferred guide. Sounds reasonable…but it isn’t.

If it were truly just a question of volatility the Fed may have a point. But for headline inflation to be considered truly volatile, it must be evenly volatile both above and below the core rate of inflation over time. If such were the case, throwing out the high and the low could be a good idea. However, we have found that for more than a decade headline inflation has been consistently higher than core inflation. Once you understand this, it becomes much more plausible to argue that the Fed excludes food and energy not because those prices are volatile, but because they are rising.

If you talk about the grand sweep of Fed policy, it’s fairly easy to fix the onset of our current monetary period with the onset of the dot.com recession of 2000. To prevent the economy from going further into recession at that time, the Fed began cutting interest rates farther and faster than at any other time in our history. During the ensuing 11 years, interest rates have been held consistently below the rate of inflation. Even when the economy was seemingly robust in the mid years of the last decade, monetary policy was widely considered accommodative.

Over that time annual headline Consumer Price Index (CPI) data has been higher than the Core CPI 9 out of 11 years, or 81% of the time. Looking at the data another way, over that time frame, the U.S. dollar has lost 20% of its purchasing power if depreciated year by year using core inflation, and 24% if depreciated annually with headline inflation. The same pattern held during the inflationary period between 1977 thru 1980, when the Fed’s massive money printing sent the headline inflation rate well above the core reading. The empirical evidence is abundantly clear. When the Fed is debasing the dollar, headline inflation rises faster than core. The reason for this is clear. Food and energy prices are closely exposed to commodity prices which have a strong negative correlation to the falling dollar that is created by expansionary policies.

Data we have seen thus far in 2011 underscores the need to focus on headline inflation and to avoid the trap of relying on the relatively benign core. The difference between the core rate and headline rate of inflation was .6 percent in January and a full percentage point in February. If annualized those relatively small monthly disparities will become enormous.

It is shocking how few Americans, even those with economic degrees and press credentials, fully appreciate the Fed’s vested interest in reporting low inflation. With benign data in hand, Fed policy makers are given a free hand in adopting stimulative policies. Central bankers who shower liquidity on the economy earn the gratitude of their peers and the thanks of their political patrons. But once a central bank goes down the expansionary path to fight recession it is much easier to keep pumping money than to reverse course when inflation starts to bite into purchasing power.

The sad truth is that the Fed’s record low interest rates are once again causing food and energy prices to rise much faster than core items. Bernanke is focusing on the core just as we need him to focus on the headline. It’s time for the Fed to stop hiding behind flimsy statistical juggling and to start protecting the value of our dollar, which unfortunately is in free fall no matter what statistics one chooses to use.

Read the original article HERE.