Dear Mr. Wilson,
I have just released my new benchmark report* on gold which I think is a really high quality read! Feel free to share this report with the public. We’ve got to spread the (golden) word!
Best regards from Vienna. Your regular reader,
Ronni!
Ronald-Peter Stöferle, CMT, Erste Group Bank AG, Vienna, Austria

As editor of www.FinancialArticleSummariesToday.com I am following through on Stöferle’s request and present below further reformatted and edited [...] excerpts from his 71 page report* for the sake of clarity and brevity to ensure a fast and easy read. Stöferle goes on to say:

Gold is the seismograph for the financial system’s health
In periods where “black swans” are no singular occurrences but are practically coming in flocks, the status of gold as a safe haven has yet again proven its worth. Gold is the money that has won the favour of the free market over the past millennia. Gold has always been a seismograph for the health of the financial and monetary system, as well as inflation.

Gold remonetisation has started
Gold is an excellent measure of the quality of paper money. It contains no liquidity risk, and it is globally accepted and traded around the clock. There is also no credit risk associated with gold, and gold cannot turn worthless.

The economy develops in cycles. In times of prosperity and growth, confidence surges, and so does the risk appetite. In such periods, the need for safety is relegated to the sidelines. This behaviour is currently undergoing a radical turn-around, and we believe that the remonetisation of gold has now finally begun.

Gold is not in a bubble
The statement that gold is “a bubble” has cropped up many times. We wholeheartedly reject this contention and will give you a number of reasons on the following pages as to why the parabolic phase is still ahead of us.

There are those who claim that gold is a bad investment which would surely be a sound argument for anyone who bought gold at its cyclical high in 1980 but the most explosive increase only lasted three months (through the end of 1979 to the beginning of 1980). The story changes once we compare gold to equities, however. It took the Dow Jones index until 1954 to pass its 1929 highs; the Nikkei index is still more than 75% below its all-time high of 1989. The Dow Jones has increased by a cumulated 1,400% since 1971, whereas gold (not being fixed anymore from 1971 onwards) has soared by a factor of 40.

Gold as perfect portfolio insurance
Gold is often portrayed as the investment of doomsday prophets, pessimists, and fear mongers who are hoping for the collapse of the financial system. However, they tend to forget that gold is an excellent portfolio insurance with a history dating back thousands of years. Nobody taking out fire insurance would wish for their house to burn down. The goal is only to protect oneself against the negative consequences, and in doing so, one pays a premium. However, it is crucial to hold the insurance policy before the actual damage occurs. As the saying goes “hope for the best, but prepare for the worst”.

Gold is an excellent “event hedge”
The fact that on 40% of the weakest days of the S&P 500, gold not only outperformed the market in relative terms but also recorded the best performance in absolute figures, illustrates that gold is an excellent “event hedge”.

Gold is being bought in net quantities by central banks
In 2009 we saw a paradigm shift with the central banks turning into net buyers for the first time in 20 years, even though gold had been repeatedly called “too expensive”. The Indian and the Chinese central bank were seen on the buying side yet again, while the Central Bank Gold Agreement (CBGA) hardly reported any sales. We think that this structural shift heralds a new phase of the bull market.

Gold’s long-term target price is USD 2,300
The gold price has de-coupled from the U.S. dollar and this latest development shows that a stronger greenback does not necessarily entail a weaker gold price. In spite of the recent dollar rally the gold price has remained high and even set a new all-time high. This is even more remarkable in view of the weak seasonality, and might suggest a new phase in the current bull market. Bull markets in gold are also characterised by two extremely strong human emotions: fear and greed. The combination of these two factors should trigger a parabolic increase in the last phase of this trend, and as a result we expect the gold price to reach our long-term target price of USD 2,300 at the end of the cycle.

Positive environment for gold likely in the coming years
Three years ago nobody would have expected the Federal Reserve to take USD 1,250bn worth of mortgage-backed securities (MBS) on to its balance sheet. This most certainly was not beneficial to building confidence in paper money – and neither are the countless desperate stimulus and bailout packages of the past few years. On the other hand this represents a clear argument in favour of gold and should thus ensure a positive environment for gold investments.

The “Long Term Budget Outlook“ of the CBO (http://www.cbo.gov/ftpdocs/102xx/doc10297/06-25-LTBO.pdf) paints a bleak picture. The report for the period of 2010 to 2080 starts with the words “Under current law, the federal budget is on an unsustainable path – meaning that federal debt will continue to grow much faster than the economy over the long run…” According to the report the USA will not be able to produce a budget surplus in the next 70 years.

In spite of the fact that the limelight is on Greece and the other PIGS countries, the situation in the USA (and the UK) is just as precarious. We cannot see any austerity measures in the USA. In August 2009 the forecast for the new debt of the coming decade was revised upwards from USD 7 trillion to 9 trillion. From May 2009 to April 2010 debt increased by USD 1,710bn or 11.7% in terms of GDP. Currently US government debt amounts to USD 13 trillion, which equals USD 42,000 per capita.

A vicious cycle of debt is being set off
If it is impossible to generate a surplus even in prosperous times, clearly the problems are of a systemic nature. Due to compound interest, debt grows exponentially, which causes massive problems in the long run. As soon as debt plus interest is growing faster than revenues, a vicious circle of debt is set off.

The USA is expected to issue more Treasury bonds this year (20100 than the rest of the world combined. The balance sheet of the Federal Reserve has deteriorated dramatically as well. Between December 2008 and March 2009 it purchased fixed rate securities worth USD 1,700bn, or almost 12% in terms of GDP. The majority (USD 1,250bn) was made up by mortgage-backed securities of highly dubious value.

Debt deleveraging usually takes 6 – 8 years
A McKinsey & Company report entitled, “Debt and deleveraging: The global credit bubble and it’s economic consequences”, (January 2010) analysed 45 deleveraging phases since 1930 and in 50% of the cases the debt was paid off through a stepped-up savings ratio – which lead to deflation almost every time. The growth path (i.e. continued spending) was undertaken three times but typically involved war. On average the payoff would commence two years after the onset of the financial crisis and last six to eight years according to the study. From 1929 to 1933, i.e. in the thick of the Great Depression, the private household debt fell by 32%. As a result of the reduction of private debt, the public sector had to step up its debt so as to offset the lack in demand. Thanks to these measures, the economic growth rates was positive, but clearly below the potential.

Gold is the optimal investment both in deflation and inflation
The central question of whether the next few years will be dominated by inflation or deflation, however, still remains unanswered. In periods of inflation, tangible assets are the preferred asset class, whereas in times of deflation, cash is king. Gold is liquid, divisible, indestructible, and can be easily transported. It has a worldwide market and there is no default risk associated with it, which means it is cash of the highest quality. Therefore gold is the optimal investment both in deflation and inflation. To be precise, gold shows a positive performance in 8 of the 10 deciles showing a clear outperformance in the 7th, 9th, and 10th decile of the CPI development albeit showing weaker returns during times of low inflation.

Higher inflation is the most feasible remedy
Nowadays there are a substantial number of experts who regard the concept of inflating the economy as the only possible solution to the excessive level of debt. Kenneth Rogoff, former chief economist of the IMF was already quoted at the end of 2008/9 in the Central Banking Journal as claiming that a higher but controlled rate of inflation of 5-6% over the next couple of years was healthier than a deflation of 2-3%.

Exceptional times require exceptional measures, according to Rogoff. He believes that otherwise taxes would have to be raised by 30-50% in the USA, which is illusory and, as such, inflation is the only feasible “exit strategy”. His successor, chief economist Olivier Blanchard, recommended to the central banks that they should accept rates of inflation of up to 4% instead of 2% in the future. This is particularly remarkable seeing as the IMF would traditionally consider monetary stability as no.1 priority.

Gold price correlates very strongly with inflation
Although the inflation rate is currently on its way down, this is not the least due to the statistical base effect. The gold price correlates very strongly with inflation as soon as the latter hits extreme values.
- From 1971 to 2009 the monthly correlation coefficient of gold and the inflation rate was 0.48.
- In the period of high inflation from 1978 to 1982 it soared to 0.76. When the rate of inflation in the USA and Europe soared to new highs at the end of the 1970s, so did the gold price.

We know a similar situation from history, i.e. from WWI and the Weimar Republic. From 1914 to 1918, the German money supply soared from 8.5bn to 55bn Reichsmark, which paved the way for hyperinflation of historic dimensions. In January 1919 one ounce of gold would have set you back by 170 Mark, whereas by November 1923 the price had shot up to 87 trillion Mark. An important feature of high inflation is the rapid loss of trust in the own currency.

Gold is an excellent hedge in periods of deflation
In times of pronounced deflation public budgets are strained, the financial sector is faced with systemic problems, currencies are depreciated in order to reflate the system, and the money supply is continuously rising. The credit worthiness of companies and countries is queried, the confidence in paper currencies falls, and gold is subjected to remonetisation.

Gold shares perform well during inflationary periods
However, the most significant share price increases happened only after the deflationary period (1929-1932) and at the sudden onset of inflation 1932-1935. [For example, the shares of Homestake Mining went up 737% from their 1929 low (during deflationary times) to their high in 1936 (at the height of inflation) while those of Dome went up from $6 to $61.25 during the same period of time. Source: Ian Gordon, Longwave Group] We can well imagine a similar scenario for the foreseeable future.

Taking into account the fear of deflation and numerous texts and speeches by Ben Bernanke (e.g. “Deflation: Making Sure “It” Doesn’t Happen Here”), we believe that further interventions by the Federal Reserve are likely. The natural shakeout during a deflationary recession will probably be fended off at all costs.

Conclusion
The groundwork is being set for major gains as the above scenario depicts and this should ensure a sustainably positive environment for gold [and silver, gold and silver shares and the warrants associated with gold and silver companies in the years to come].

*http://www.gata.org/files/ErsteGroupGoldReport-06-2010.pdf

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.

See larger image Why Gold?: The One Sure Cure for Inflation and Economic Tyranny (Hardcover) By (author) Leslie Snyder Bates List Price: $22.49 USD New From: $21.97 In Stock Used from: $29.22 In Stock

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Ron Hera’s (http://www.heraresearch.com/newsletter.html) original article* for the sake of clarity and brevity to ensure a fast and easy read. Hera goes on to say:

Green Shoots Have Turned Brown
Despite the sighting of supposedly green shoots in the spring of this year the evidence is anything but encouraging:
- the unemployment rate has risen to 9.9%,
- paychecks in the private sector have shrunk to historic lows as a percentage of personal income,
- personal bankruptcies have risen yet again,
- roughly 14% of U.S. mortgages are delinquent or in foreclosure,
- credit card defaults are rising,
- consumer spending hit 7 month lows,
- consumers appear to be borrowing to service existing debt.

Outside of the federal government, which is borrowing at record levels and expanding as a percentage of GDP, and outside of the bailed out financial sector, debt deflation has continued unabated since 2008. [Following is evidence of such an event unfolding and some examples of the ultimate result:]

1. Money Supply is Contracting
A contraction of the broad money supply is taking place because the influx of money into the U.S. economy, i.e., lending to consumers and non-financial businesses, has fallen below the rate at which money is flowing out of general circulation as a function of debt service (interest and principle payments on existing debt). Thus, a net drain of money from the broad U.S. economy is taking place. As a result, additional borrowing, as consumer spending falls, appears to be servicing existing debt in a pattern that is clearly unsustainable and that signals a further rise in debt defaults in coming months.

The estimate of the broad money supply (the Federal Reserve’s M3 monetary aggregate) is crashing and the Federal Reserve’s M1 Money Multiplier, a measure of how much new money is created through lending activity, fell off of a cliff in 2008, and remains practically flat-lined.

2. Debt Servicing Remains Low
The contraction of the broad money supply points to a potential slowing of economic activity and indicates that consumers and non-financial businesses will be less able to service existing debt. Despite easing somewhat in March 2010, credit card losses are expected to remain near 10% over the next year and mortgage delinquencies, are currently at a record highs, and these dismal predictions implicitly assume a stable or growing money supply.

3. A Tsunami of Mortgage Defaults Expected
A tsunami of eventual mortgage defaults seems to be building and loan modifications have been a failure thus far. There have been only a small number of permanent loan modifications (295,348) under the Home Affordable Modification Program [HAMP] in 2009, out of 3.3 million eligible (60 days delinquent) loans and more than half of modified loans default.

4. Consumer Savings Are Being Liquidated
Although it has been reported that American consumers are saving at a rate of 3.4%, the contraction of the broad money supply suggests savings liquidation. Given a contracting money supply, ongoing debt defaults and declining consumer spending, the increase in non-mortgage consumer loans indicates that consumers are borrowing where possible to consolidate debts, cover debt service, or borrowing to continue operating financially as their total debt grows, thus as they approach insolvency.

5. There is a Reduced Ability To Borrow
The increase in non-mortgage consumer loans has not prevented an overall decline in total household debt attributed to ongoing deleveraging by consumers. While deleveraging (paying down debt) has been interpreted as caution on the part of consumers, or as low consumer confidence, the decline in outstanding credit reflects a reduced ability to borrow, i.e., to service additional debt. This suggests that the recovery of the U.S. economy may be illusory and that the economy is likely to contract further in coming months.

Commercial borrowing has declined more sharply than household debt suggesting that the nominal return to growth estimated at 3% has not been matched by debt financed expansion in the private sector.

6. Structurally High Unemployment to Remain
Unemployment and labor force data suggest that the U.S. labor market is in a structural decline, i.e., millions of jobs have been and are being permanently eliminated, perhaps as a long term consequence of offshoring, outsourcing to other countries and the ongoing deindustrialization of the United States. However, the immediate meaning of the term “structural” has to do with the fact that jobs created or sustained during the unprecedented expansion of debt leading to the financial crisis that began in 2008, e.g., a substantial portion of service sector jobs created in the past two decades, now appear not to be viable outside of a credit expansion.

The total number of unemployed or underemployed persons, including so-called “discouraged workers” (Bureau of Labor Statistics U-6), is at 17.1%. Using the same methods that the BLS had used prior to the Clinton administration, U-6 would be approximately 22%, rather than the official 17.1% statistic. With official U-6 unemployment of 17.1% and a workforce of 154.1 million there are roughly 26,197,000 people officially out of work. Using the pre-Clinton U-6 unemployment calculation of approximately 22%, there would be 33.9 million unemployed. If the average US household consists of 2.6 persons and if 33% of the unemployed are sole wage earners, then 55.5 million US citizens currently have no means of financial support (17.9% of the population).

While it has been reported that the labor force is shrinking, the characterization of workers permanently exiting the workforce by choice may be inaccurate. While a shrinking workforce could reflect demographic changes, the rate of change suggests that tens of millions of Americans are simply unemployed.

Setting aside the question of whether or not those “not in the workforce” are, in fact, permanently unemployed, the workforce– as a percentage of the total US population– is currently at 1970s levels. Since many more households today depend on two incomes to meet their obligations, compared to the 1970s, a marked drop in the percentage of the population in the workforce points to a decline in the labor market more significant than official unemployment statistics suggest.

7. Structural Government Deficits to Remain in Place
What is more important, however, is that structural unemployment suggests structural government deficits, e.g., unemployment benefits, welfare, food stamps, etc. Since more than 2/3 of US GDP (roughly 70%) consists of consumer spending, a sustainable recovery from recession seems improbable if unemployment is worsening or if the labor force is in a structural decline, since that would imply unsustainable government deficits, whether or not they are masked by nominal GDP gains thanks to economic stimulus measures.

8. GDP Growth May Stay Negative
The U.S. federal government is a growing portion of GDP, thus reported GDP growth is largely a byproduct of government deficit spending and stimulus measures, i.e., reported GDP growth is unsustainable. Total government spending at the local, state and federal levels accounts for as much as 45% of GDP, thus nominal gains would be expected when government deficit spending increases. According to some measures, reported gains in GDP are a byproduct of relatively new statistical methods and, using earlier methods of calculation, GDP remains negative.

9. Declining Dollar and High Inflation a Distinct Possibility
Government borrowing and spending may have offset declines in the private sector, but only to a degree and only temporarily. The resulting growth in U.S. public debt has an eventual mathematical limit: insolvency. Of course, the actual limit to U.S. borrowing remains unknown. The continuing solvency of the U.S. depends on the ability and willingness of governments, banks and investors around the world to lend to the U.S., which in turn depends on the tolerance of lenders for the U.S. government’s profligacy and money printing by the Federal Reserve, e.g., quantitative easing and exchanging new cash for worthless bank assets. U.S. Treasury bond auctions will fail if lenders conclude that a sufficiently large portion of their investment will be diluted into oblivion by proverbial money printing. In that event, the U.S. dollar will surely plummet, despite deflationary pressures within the domestic U.S. economy, and the cost of foreign goods, e.g., oil, will rise, causing high inflation or triggering hyperinflation.

According to the Bank for International Settlements (BIS), the federal budget deficit increased from 3.1% of GDP in 2007 to 9.2% in 2010. Rather than being the result of one-time expenses, such as temporary stimulus measures, much of the deficit represents permanent increases in government spending, e.g., due to the growing number of federal employees. If increased government spending is removed, GDP appears to be declining significantly. Of course, sustainability has more to do with total debt than with deficit spending because a deficit assumes that there is an underlying capacity to service additional debt.

10. Debt is Unsustainable
While asset prices have declined, e.g., real estate and equities, debt levels have remained high due to the federal government’s policy of preserving bank balance sheets, which had ballooned prior to the financial crisis to the point that overall debt in the U.S. economy reached unsustainable levels.

The absolute debt to GDP ratio of the U.S. economy peaked in 2007 when debt levels exceeded the ability of the economy to service debt from income based on production, even at low interest rates. Although U.S. GDP began to decline prior to the advent of the global financial crisis, debt coverage had been in decline approximately since the 1970s, coincidentally, around the time that the U.S. dollar was decoupled from gold.

Government deficit spending cannot correct the situation because, for every dollar of new borrowing, the gain in GDP is negligible and some have argued that the U.S. economy has passed the point of “debt saturation.”

In a growing economy, additional debt can result in a net gain in GDP because the money supply grows and economic activity is stimulated by transactions that flow through the economy as a result. The debt saturation hypothesis is that, as debt levels rise, additional debt has less impact on GDP until a point is reached where new debt causes GDP to decline, i.e., the capacity of the economy to service debt has been exceeded and, not only is it impossible for the economy to grow at a rate sufficient to service existing debt (since interest compounds), but economic activity actually declines further as a function of additional debt.

11. A Downward Spiral in Debt Deflation is to Continue
The process of debt deflation is straightforward. New lending at levels that would maintain or expand the broad money supply is impossible for two reasons:
1. asset values and incomes have fallen and millions remain unemployed and
2. debt levels remain excessive compared to GDP, i.e., real economic activity (outside of the government and financial services industry) cannot service additional debt.

The inability to lend, actually the result of prior excess lending, results in a net drain of money from the economy. The drain effect, in turn, leads to further defaults as cash strapped consumers and businesses fail to service existing debt, and as debt defaults impact bank balance sheets, putting a damper on new lending and completing the cycle of debt deflation.

Keynesian economic policies, i.e., government deficit spending, are irrelevant vis-à-vis excessive debt levels in the economy and bailing out banks is not a solution, since it cannot stop the deterioration of their balance sheets. The process is self-perpetuating and cannot be stopped by any government or monetary policy because it is not a matter of policy, but rather one of mathematics.

Since the presence of excess debt (beyond what can be supported by a stable GDP, or by sustainable GDP growth) impacts the broad money supply, efforts to preserve bank balance sheets, i.e., to keep otherwise bad loans on the books of banks at full value, will ultimately cause bank balance sheets to deteriorate more than they would have otherwise. The fact that U.S. banks issued trillions in bad loans cannot be corrected by changing accounting rules, nor can the consequences be avoided by government deficit spending or by unlimited bailouts, and the problem cannot be papered over by dropping freshly printed money from helicopters flying over Wall Street.

Conclusion
The major problems facing the U.S. economy today, namely
- a tsunami of debt defaults,
- structural unemployment,
- massive government budget deficits,
- a contraction of the broad money supply outside of the federal government and the financial system, and
- a lack of sustainable growth
cannot be addressed as long as excess debt levels are maintained. As von Mises clearly understood, sound economic conditions cannot be restored unless and until the excess debt, which resulted from a boom brought about by credit expansion, is purged from the system.

The current policy of the United States, is a downward spiral into a bottomless economic abyss.

*http://seekingalpha.com/instablog/496474-ron-hera/74344-into-the-abyss-the-cycle-of-debt-deflation

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from James Wood’s (http://seekingalpha.com/article/176804-deflationary-depression-the-simple-explanation) original article* for the sake of clarity and brevity to ensure a fast and easy read. Wood goes on to say:

It is all about the amount of money and the prices for assets when there is less money. The American government has pumped several trillion dollars into the economy in the last two years. However, the value of real estate has gone down many trillions more, in both commercial and residential real estate. The value of stocks has still declined many trillions from the October 2007 high, even taking into account the substantial recovery since March 2009. In short, there is a lot less money going around today than there was in October 2007, even when you add back in the trillions put back into the economy by the U.S. government.

How does this affect prices and cause deflation? Look at a hypothetical country that has assets of only 4 apples and $4,000. What is the price of each apple? Inevitably, the price of each apple is $1,000. While economists do not have a problem with this simple example, it is much tougher in the real world. Yet the fact is that if the amount of real assets remains constant and the amount of money goes down, the prices of things are going to go down.

The Real Money Supply is Down
In spite of the government pump priming of trillions, the real money supply is down because the value of assets that define money is down dramatically. Furthermore, the prospects for 2010 are a continuing and likely dramatic further decrease in the amount of money.

Approximately one quarter of the nation’s mortgages are owed by people whose house is currently less than the value of the mortgage. Mortgage workouts have not worked and a new explosion is coming. Commercial real estate values are dropping. Savings are going up as people are realizing they must borrow less meaning that debt at the consumer is level is not increasing which could help further new purchasing for business. In short, the driving force of the economy, the consumer, is pulling back in part because of necessity and in part because he realizes that he cannot go on as he has, particularly if he is now in the 1 in 6 people who does not have a job or works in an unsatisfactory part-time job.

What IS Money?
One problem in understanding this for many people is knowing what money is. Traditional definitions of what is on commercial bank balance sheets have become almost meaningless. The massive creation of bonds that keep getting repackaged and then resold as new bonds shows how we can now almost have infinite money creation, since for practical purposes there are no meaningful reserves to limit the creation of new money by relending.

While few people doubt that money is created when stock market prices are going up, most people find it illogical that money disappears when stock markets go down. People say that someone must have the money, but it is not so. If Google sells for $500 per share and there are 1 million shares, there is a monetary value of $500 million. If just one person sells one share for $300, and no one comes along to argue with that evaluation, then all shares are worth $300 until someone comes with a new price, either higher or lower. The reduction in value did not go into someone’s pocket, the money simply disappeared. As the stock market is 30% less today than October 2007, the holders of those stocks have collectively lost 30% of the value that existed in 2007. Likewise, all the owners of homes in America have lost something like 20%, with some markets taking as much as a 50% loss. The decline in the value of stocks and housing far exceeds the stimulus money put in by the government, and it is for that reason we are at the beginning of the deflation, not the inflation currently expected by those buying gold.

Why Will Deflation Lead to a Depression?
Many readers may, at this point say, I understand how there can be deflation, but why is it necessary that this will lead to a depression? The simple answer is that we have had decades long monetary creation that has little justification for the price except for the amount of money chasing it. When there is a dramatic decline in the money supply, something which is clearly started but far from finished, this means that there will necessarily be a dramatic drop in prices.

A dramatic drop in prices means that those people living with high debt levels will now proceed to go broke. This is true at both the consumer level and the business level. As individuals go broke, their capacity to consume drops dramatically. As businesses find they have far fewer customers, particularly those who live with high debt levels hoping for ever increasing sales that will not now develop, end up going broke. In short, declining prices means that people in debt will now go broke in large numbers. These individuals and businesses going broke is what will bring on the depression.

Massive Monetary Creation Must and Will End
We have had massive monetary creation for decades now which we have finally come to the day of reckoning. We do not know if the top will be next month, next year or even later but we certainly are getting to the top where we cannot buy our way out of the problem through a new stimulus injection.

There are many measures of a market and monetary top but one of the clearest is when the government virtually is assuming all the risk. There is virtually no private sector housing financing going on. Virtually all lending is being laid off to the government (Fannie Mae, Freddie Mac, etc) and these government agencies are all bankrupt. The government lends trillions virtually for free, and it is not really fixing the problem.

Interest Free Stimulus Does Not Work
When nearly interest free stimulus does not work, will the government pay you to take money? Money that has little or no cost, it is all borrowed and with few opportunities to invest beneficially, cannot offset the economic collapse. Government stimulus works in the early and mid stages of economic expansion, but is largely wasted money in mature stages of the economic cycle where everything than can be done beneficially, has been done.

Thus, it is not surprising that government stimulus money is going to the wrong places with the wrong result. The payment of B of A of the TARP money is extremely illogical, worsens the position of the equity shareholders and exposes the banks to a much worse downside scenario when the economy further weakens. The payments of Goldman Sachs to its employees are equally bad. The payments are made now before we see the results and the shareholders are left to hold the bad bag of problems likely to come. The government money does not find good places which stimulate useful investment and is going to make another financial bubble which the world citizens will pay for shortly. Dubai is providing a cannon shot across the bow about the risks of unjustified massive spending that basically relies on the presumption that a government will bail them out and the borrower never really had good financial analysis, enough to justify the loans.

This seems old fashioned, but government stimulus can only work where there are beneficial areas to invest. Since we do not have good investment opportunities, the money is wasted and ultimately worsens the amount of problems that we have to deal with.

In the coming months, we can expect to see a return to the down side with a loss of value in almost all categories of assets with the exception of the dollar. Oil, gold, silver, and commodities generally, long term bonds, both government and private, currencies other than dollars, emerging market debt, high yield debt, municipal debt, stocks of all kinds and countries should be collapsing at some point during the next year or so. While the dollar will be viewed adversely, it will look better than most of the rest. Even so, this period will represent the end of the dollar’s dominance as the world’s reserve currency and countries such as China will come more into their own.

Protection of your assets’ principal value is your first priority, not “making money” on your investments.

*http://seekingalpha.com/article/176804-deflationary-depression-the-simple-explanation

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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- Submit a comment. Share your views on the subject with all our readers.
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See larger image Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression (Hardcover) By (author) Robert R. Prechter Jr. List Price: $29.95 USD New From: $16.85 In Stock Used from: $16.86 In Stock

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Darryl Robert Schoon’s (www.drschoon.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. Schoon goes on to say:

Global demand is again falling as credit contracts, a sign that debt-driven deflation is back but, today, there is an additional danger as well. Since 1971, because of the U.S. default on its gold obligations, money no longer possesses intrinsic value and the consequences will soon become apparent. Deflationary depressions and a collapse in the value of fiat money have happened before but never simultaneously. Soon, they will.

The Day of Reckoning Has Arrived
We are in what Stephen Roach, Chairman of Morgan Stanley Asia, calls the end-game, the resolution of past monetary excesses and imbalances, excesses and imbalances that reached never-before-seen heights in the last decade.

The Problem
Capitalism cannot function unless its constantly compounding debt is serviced and/or paid down. Today, the U.S., the world’s largest debtor, can no longer pay what it owes except by rolling its debt forward and borrowing more [in] what the late economist Hyman Minsky called ponzi-financing, financing common in the final stages of mature capital systems.

The amount of outstanding U.S. debt, according to Martin D. Weiss, www.moneyandmarkets.com, has now reached levels that can never be paid off. The United States government and its agencies have, by far,
- the largest pile-up of interest-bearing debts ($15.6 trillion),
- the largest accumulation of unsecured obligations (over $60 trillion),
- the largest yearly deficit ($1.6 trillion), and
- the greatest indebtedness to the rest of the world ($4.8 trillion).

The unpayable levels of U.S. debt are not just the problem of the U.S. because the U.S. dollar is the lynchpin of today’s fiat money system, U.S. debt is everyone’s problem. The U.S. dollar is the world reserve currency and a default by the U.S. will have far-reaching consequences, especially in China, its largest creditor.

The Solution
Bill Gross, co-founder of PIMCO, the world’s largest bond fund and an expert in matters of debt, wrote in 2006 that the way a reserve currency nation [such as the US] gets out from under the burden of excessive liabilities is to inflate, devalue, and tax.

a) Inflate
Inflation destroys the value/cost of liabilities by eroding the value of money. Debts are paid back with inflated currencies, a process which benefits the debtor and injures the creditor. This is why reserve currency nations usually inflate their way out of debt by printing what they owe.

b) Devalue
Devaluation is another option afforded reserve currency nations. By devaluing the value of their currency, the value of what they owe falls relative to other currencies. Again, the benefit is to the debtor at the expense of the creditor.

c) Tax
Taxation is another option but is no longer available to the U.S., as its liabilities are now too high. It would be like forcing the elderly and morbidly obese to engage in strenuous exercise to regain youth. Of the three, inflating away debt is by far the preferred option but it is one the U.S. can no longer choose.

Why Inflation Won’t Work
It’s tempting to think that the U.S. can inflate its way out of its fiscal problems. A faster, sustained increase in prices would erode the real value of past debt, and higher future inflation would – other things equal – reduce the real resources needed to service and pay back the promises we are making today. However, inflating away U.S. debt won’t work because as Richard Berner points out nearly half of federal outlays are [now] linked to inflation, meaning that increments to debt would [also] rise with inflation.

Inducing monetary inflation would also raise aggregate U.S. debt resulting in a self-defeating cycle of higher prices and higher debt. However, there is also another more fundamental reason why inflating away U.S. debt won’t work, to wit: Inflation is almost impossible to induce during severe deflationary contractions. Fed Chairman Ben Bernanke understands this difficulty quite well. Bernanke’s late mentor, Milton Friedman, theorized the Great Depression could have been prevented by sufficient monetary stimulus and so in 2008, faced with the possibility of another deflationary depression, Bernanke put Friedman’s theory to the test. Unfortunately, when tested, Friedman’s theory didn’t work. Despite Bernanke’s massive monetary expansion, global credit is still contracting and lending is drying up.

Inflating away debt is virtually impossible in the presence of deflation, but if U.S. monetary expansion is sufficiently large, it could result in the hyperinflation of the U.S. money supply, which would destroy both U.S. debt and the U.S. economy as well.

Managing Director and Chief U.S. Economist at Morgan Stanley, Richard Berner, recently discussed the reasons in We Can’t Inflate Our Way Out, February 24, 2010. www.morganstanley.com/views/gef/index.html#anchor6647bf63-2073-11df-978b-bbc960980e46

Will Devaluing The U.S. Dollar Work?
Devaluation is the U.S.’ only remaining option but, as pointed out in Comstock Partners’ special report of February 25th, “The Cycle of Deflation, Impediments to Debt Relief”, the major impediment to a U.S. devaluation to reduce debt is China saying:
“There is a stumbling block to the normal competitive devaluations that typically take place. In the past, a country that incurred too much debt just did what they could to devalue their currency in order to export their way out of the dilemma by exporting their goods and services to their trading partners…[but] the Chinese have linked their currency to ours, so as we debase our currency, one of our major trading partner’s currency is also declining and China becomes the major beneficiary of the debasement of our dollar.”

The China peg to the U.S. dollar thus prevents the U.S. from altering its trade deficit by currency devaluation, but it does not prevent the U.S. from devaluing the dollar for other reasons. If the U.S. does devalue the dollar, it will not be to reduce debt—it will be to maintain its advantage over the world in general and China in particular.

The Influence of China On U.S. Actions
U.S. dominance is being challenged by China. While it is not possible to know what the U.S. will do, it is naïve to believe the U.S. will do nothing; but whatever happens, U.S. debt and the U.S. dollar will be affected.

China has now significantly reduced its buying of U.S. debt leaving the U.S. with growing deficits and a virtual boycott by China of new U.S. IOUs. This will impact future U.S./China relations. The tentative but mutual benefits of the past are being replaced by self-interest as U.S. spending and consequent debt is increasingly perceived as being out of control by China. That perception is correct. Since the 1980s, America’s focus has been on borrowing more, not spending less and the implications are clear.

With China moving away from increasingly risky U.S. debt, the U.S. is now far more likely to treat China as a challenger than as a needed creditor and, while devaluing the U.S. dollar would have minimal impact on overall U.S. debt, it would have a significant impact on China. In December 2009, total foreign holdings of U.S. government debt equaled $3.29 trillion. With total U.S. obligations now close to $100 trillion, a 30 % devaluation of the U.S. dollar would impact only that debt held by foreigners. China currently owns at least $1.7 billion in U.S. dollar denominated securities and, if the U.S. devalued the dollar by 30 %, China’s losses on its investments would be in excess of $500 million.

As stated earlier, it is not possible to know what the U.S. will do but since WWII geopolitical considerations have always outweighed economic factors in U.S. policy decisions and there is little reason to expect this to change—even as the end-game approaches.

The End Game and Sovereign Default
The U.S. is trapped. Caught between rising expenditures and the need to borrow more, outstanding U.S. debt is incapable of ever being repaid and should the credit rating of the U.S. ever reflect its actual state, sovereign default, not devaluation would be the result.

In 2008, Kenneth Rogoff and Carmen Reinhart, in their book “This Time Is Different: A Panoramic View of Eight Centuries of Financial Crisis,” reviewed the history of sovereign defaults concluding that the then dearth of defaults was in actuality a warning of more to come. They were right.

As the end-game progresses it is impossible to know what the U.S. will do. It is likely the U.S. doesn’t know itself. What the U.S. does know is that it is now trapped by increasing levels of mounting debt from which there is no easy exit.

*http://beforeitsnews.com/story/21/656/Will_the_US_Devalue_the_Dollar.html

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Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Ian Gordon and Christopher Funston’s (www.longwavegroup.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. They go on to say:

The entire world is now in an economic depression which always occurs at this point in the 60 to 70 year long cycle we refer to as the Longwave Cycle.

The Longwave Cycle
An understanding of the Longwave Cycle enables us to identify where we are in the cycle, to recognize each season in the cycle and, critically, to determine the move from one season to the next. That determination enables us to make correct investment decisions. There are good and bad investment mediums appropriate to each of the seasons. Typically, investments that perform well in one season do poorly in the following season.

The Longwave Winter
In the Longwave Cycle there is always a deflationary depression and this occurs in the winter of the cycle. The onset of winter is signaled by the peak in stock prices which ends the biggest stock bull market of the cycle. During the Longwave winter, debt is purged, which causes huge stress and significant bankruptcies to creditors and debtors alike. In order to protect ourselves from the financial and economic onslaught that ensues, we buy precious metals, particularly gold and the gold equities of producers and explorers.

Deflation Coming
During this recent surge in gold activity, there appear to be many investors getting aboard because they fear a return of the demon inflation. They perceive that many economies are on the road to recovery from the recent economic downturn and credit crunch, thus they are looking for an insurance policy as a hedge against an inflationary outbreak. As previously mentioned, gold can also appreciate in value within a deflationary economic environment. While inflation may rear its ugly head at some juncture well down the road, it is a deflationary outlook that Long Wave Analytics is embracing as the most realistic probability to unfold over the near to mid-term time horizon. Witness the Japanese deflationary experience which is still unfolding.

Understanding Inflation and Deflation
Understanding inflation and deflation is critical to making the right investment decisions. Strictly speaking, inflation is simply an increase in the supply of money and deflation is a decrease in the money supply. Most financial advisors are now calling for inflation to resume and even hyper-inflation to run rampant in the United States, because of the Federal Reserve’s current effort to circumvent deflation by excessive money printing. We are of the opposite, and certainly the minority, view.

We believe that central banks will be unable to forestall deflation and that when it arrives, it will be unprecedented in magnitude. This conclusion is based upon three factors:

1. Once the debt bubble is unwound, it is deflationary in nature because it is painful and results in bankruptcies on both side of the ledger. Actually, it takes money out of the system and during our Kondratieff winter, trillions of dollars of debt will be expunged.

2. Under these circumstances, banks won’t lend money because those banks that survive bankruptcies, and most won’t, will conserve it. Consumers and corporations won’t be able to borrow money, even if they so desire.

3. The velocity of money will essentially come to a standstill, since there will be none to spend. Money will be hoarded, either under the mattress, or in banks that consumers believe will survive the debt deflationary onslaught. During inflation, as in the 1970s, the velocity of money increases as people spend their money today, rather than pay higher prices tomorrow. In deflation, as in the 1930s, those few people with money curtail their spending in the knowledge that prices will be lower tomorrow, next month and next year. As the early 19th Century saying goes ‘money like manure, does no good till it is spread’.

Between October 1929 and April 1933, despite the desperate efforts of the Federal Reserve to reflate the economy, money supply contracted by 28%. The argument today – supported by Ben Bernanke, the current Federal Reserve chairman – is that the Fed didn’t do enough at that time… This interpretation is at best false and at worst dishonest. All strenuous efforts by the Federal Reserve to overcome deflation failed back then because the amount of money coming out of the economy, through bankruptcy and bank failure, overwhelmed the Federal Re¬serve’s attempts to reflate.

We are gold bulls and deflationist but most gold bulls are inflationist. How do we explain this dichotomy? During inflation, the price of gold rises along with all other ‘things’, such as out-of-print comic books, art, antiques, etc. Why? Because as we have just explained, during inflation the price of everything rises and people buy today because prices are cheaper than they will be tomorrow. In these times, gold is viewed primarily as a commodity, although it does still perform a minor monetary role versus the dollar, which is being debased through monetary inflation. In the inflationary summer there is absolutely no threat to the banking system because debt is not that high and there is no threat to the economy because money is plentiful and easy to access. So, when the threat of inflation passes, as in 1980, the prices of gold, commodities, comic books and antiques fall.

However, deflation is another kettle of fish, since it comes about through the destruction of the financial system and the economy, because of the bursting of the debt bubble. When that occurs as in 1873, 1929, and now, there is fear and panic.

In all panics, there exists an instinctive will in all of us to survive. We instinctively turn to the people and things we trust. When it comes to money, people always go to gold – or gold equities.

*http://www.longwavegroup.com/publications/winter_warning/2009/_pdf/2009_Winter_Warning_Volume_10_Issue_1.pdf

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Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Edward Harrison’s (http://www.CreditWriteDowns.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. Harrison goes on to say:

What is Hyperinflation
Hyperinflation is the economic apocalypse many doomsdayers pose as the logical end to the world’s experiment with fiat money. In a letter to clients last June, Rob Parenteau of the Richebacher Letter wrote about Weimar, one of the worst episodes of hyperinflation:

“Hyperinflation episodes are characterized by rapidly accelerating inflation, a collapsing foreign exchange rate and, eventually, a widespread disorientation and disruption of productive activity. Keynes, writing in 1919, well before the terminal stages of the Weimar hyperinflation had been revealed, characterized the nature of the mayhem involved in such episodes as follows:

“As the inflation proceeds, and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”

Is this what awaits the U.S. or the U.K.? Marc Faber’s quote to open this post is symptomatic of the kind of rhetoric which says yes. I love Marc Faber. I consider his interviews first-class economic entertainment and I certainly share some of his concerns about inflation, bailouts, moral hazard (and so forth and so on, as he would say). [That being said,] is Marc Faber an ideologue pushing a rhetorical line of argument to the point of hyperbole or should we take his warnings very seriously?

Let’s attack this question using Zimbabwe and Weimar Germany as examples. These are the two most extreme cases of hyperinflation that economic historians have ever witnessed. They are instructive in regards to what causes hyperinflation and what does not.

Weimar Germany 1919-1923
After World War I, every nation which fought was broke because of the war’s cost. No country had enough gold assets to repay the billions of dollars they owed and this was a multilateral problem. For example, Britain could not repay its debts to the US until the other Allies repaid their debts to Britain. The Americans were not sympathetic. The prevailing desire was recovering the over $25.5 billion the US had loaned to other nations during the war.

As a result of these debts, the war’s victors laid out draconian terms to punish the Germans in the Treaty of Versailles in 1919. War reparations were one third of Germany’s spending. Therefore, Germany’s budget deficit was half of GDP. (The situation in Iceland due to Icesave’s collapse comes to mind here). To make things even worse, reparations were in a foreign currency.

It’s not as if the Germans could print off a bunch of Reichmarks to make good on their reparations. When the Germans defaulted on their obligations, the Belgians and the French moved in and occupied the Ruhr region, Germany’s industrial heartland. The result was widespread strikes and idled productive capacity. Afterwards, demand for goods in Germany far outstripped the productive supply.

As such, with a huge portion of tax revenue going to pay reparations in foreign currency, the German government turned to the printing presses to make good on its domestic obligations. The surge in money supply and the lack of productive resources led to hyperinflation and collapse.

The key to Weimar’s hyperinflation was two-fold.
1. The German government had a large foreign currency debt obligation.
2.The German economy lost huge amounts of productive capacity causing prices to soar as demand outstripped supply.

Zimbabwe
While the facts in Zimbabwe are different, the underlying causes for hyperinflation were the same: foreign currency obligations and a loss of productive capacity.

Zimbabwe had established Independence from Britain in 1980. Yet, by the late 1990s 70% of productive arable land was still held by the small minority 1% of white farmers in the country. After years of talk about redistribution, in 2000, the President Robert Mugabe began to redistribute this land.

The redistribution process was a disaster, both legally and economically. Many whites fled as violence escalated. The result was an enormous decline in Zimbabwe’s agricultural production. With agricultural production having plummeted, Zimbabwe was forced to pay to import food in hard currency.

Meanwhile, the government turned to the printing presses to fulfil its domestic obligations. As in Germany, the foreign currency obligations, the loss of productive capacity and the money printing was a toxic brew which ended in hyperinflation.

Hyperinflation in the U.K. or U.S.?
So, that’s a brief outline of what happened in the two most notorious cases of hyperinflation. Notice that in each case you had an enormous foreign currency obligation and a massive loss in productive capacity. The U.S. has not suffered this kind of loss. In fact, productive capacity swamps demand for goods in the U.S. and…the fiscal deficits in the U.S. are a far cry from the 50% of Weimar.

Without pricing power or a large fiscal deficit and large foreign currency demands, talk of hyperinflation in the U.S. [and the U.K.] is misguided. Crucially, Marshall Auerback writes:

“Inflation is ultimately about competing distributive claims over real resources. The main limitation then, or rather the determinant of the limits of a “sustainable” fiscal policy, especially with respect to hyperinflationary risks, have to do with real resource constraints, not “running out of money” or absence of government financing, for countries possessing sovereign currencies.”

The inability to tax and dependency on foreign currency are central to hyperinflation or national solvency. Moreover, in Zimbabwe and Weimar, it was the trashing of productive supply that created inflation (think supply versus demand).

Ideology
The above is the economics of hyperinflation. What about the ideology? Well, the Modern Monetary Theorists say that the Austrians ideologues and the gold fetishists have a deflationary bias when inflation doesn’t change the real productive capacity of a nation. Clearly, the hyperinflation talk is a gimmick with which to discourage deficit spending. You should see this debate as about a specific policy prescription driven by ideology.

Nevertheless, inflation does alter business decision-making via accounting’s tie to nominal numbers and the money illusion. Moreover, inflation reduces relative wealth by transferring income from those who receive the money first like banks versus those who receive their money later, your typical widow living on fixed income bonds and annuities. Finally, inflation encourages the accumulation of debt by benefitting borrowers over savers. I see inflation as a problem to be avoided.

Ideologically, I see inflation as the increase in the money supply and where inflating the money supply does not eventually lead to consumer price increases, it does lead to asset price increases which foster a stronger boom-bust tendency. As such, people like me look at large government deficits in a fiat currency system as an invitation to print money and inflate the money supply. If you take this way of thinking to a logical extreme, you end up with what Marc Faber is talking about: hyper-inflation.

The above, however, is ideology – not economics. The claims of hyperinflation awaiting the U.S. or the U.K. seem hyperbole at best, misinformation and deception at worst. Hyper-inflation has very specific pre-conditions in foreign currency obligations and a loss of tax revenue and productive resources. ‘Printing money’ alone doesn’t get you there.

Conclusion
It simply isn’t credible to claim that hyperinflation in the U.S. or the U.K. is in the offing now or anytime in the immediate future.

*http://www.nakedcapitalism.com/2010/05/mmt-fear-of-hyperinflation.html

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Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below reformatted and edited [..] excerpts from Andy Sutton ‘s (www.sutton-associates.net) original article* for the sake of clarity and brevity to ensure a fast and easy read. Sutton goes on to say: We’ll get to that later.

Inflation
For starters, let’s put to bed (hopefully) once and for all where price inflation comes from. Prices rise because the supply of money and/or credit has increased – effectively monetizing demand – which pushes up price levels. It is categorically impossible for general price levels to increase in the long run without a commensurate increase in the supply of money and credit. It is important here to make the distinction between short and long run. In the short run, an increase in general prices can be absorbed without a growth in the money supply because it could, in theory, be sustained by devouring savings but in practice, generally speaking, that isn’t how things work. People tend not to expand spending unless they feel comfortable that money and (particularly) credit are readily available.

Bubbles
The housing bubble of the early 21st century is a prime example. 30-year mortgage rates dropped steadily from 1981 through the present. Not surprisingly, low rates and readily available credit led to a massive price expansion by monetizing demand. The expansion in money to fuel lower mortgage rates and the expansion in home prices came from M3 in the US which nearly tripled during that period.

Deflation
That being said, one thing that should be utterly fearful of is the recent freefall of M3 growth. Most folks understand that inflation has been responsible for the vast majority of our economic ‘growth’ over the past century. Inflation fueled the dotcom and real estate bubbles. In short, our economy is set up to run in an inflationary environment. Unfortunately, there is a predictable end to this scheme. At some point, the monetary environment devolves into hyperinflation, then a deflationary collapse. We certainly haven’t experienced hyperinflation yet in the U.S., and we know the Fed can win a battle with deflation because it can create as much money as is necessary to overwhelm deflationary forces. The current Chairman didn’t get his nickname because he used to fly puddle jumpers. So we’re left to ask: what exactly is going on here?

Default/Devaluation; Deflationary Depression
I think the answer lies in the fact that there are roughly 20 countries right now that are on the verge of bankruptcy and an outright default – the U.S. and U.K. among them. In my opinion, we are likely moving towards a coordinated outright default, which will involve the devaluation of currencies followed by central banks capping money growth, which in turn will trigger a second deflationary depression. Most people realize that we now have a fiscal gap of around $100 Trillion just in the US alone. It cannot be filled via conventional means consisting of tax increases and program cuts.

There are two choices now: hyperinflation or default. While the collapse in M3 growth does not yet constitute de facto proof that we’re headed for the default scenario, it is certainly something that has to be considered. The good news in that scenario is that cash money would be worth more because it would be in short supply. The bad news is that there won’t be enough of it to maintain our current standard of living – especially in a situation where there is a concurrent devaluation.

Gold
The benefits of precious metals are well documented in the case of hyperinflation, but not so much so in the case of deflation. It is logical that if there is a shortage of cash, then the presence of cash ‘substitutes’ will be very beneficial. The rationale for holding precious metals will be different with deflation than if we experience hyperinflation, and their use would be different as well, but I think it is foolish to assume that owning gold would be a detriment in either case.

Down the Road
Hopefully everyone reading this understands the importance of watching the monetary aggregates for clues as to what is coming down the road. Ultimately, our monetary destiny lies in the hands of global banking interests. We will proceed down the path that best serves them, not our national interest.

Congress abdicated its responsibility for our money, as outlined in Article 1, Section 8 of the U.S. Constitution, when it passed the Federal Reserve Act back in 1913. The best thing this Congress could do with the rest of its time is craft and pass legislation to repeal that Act in its entirety.

*http://www.sutton-associates.net/issues/mtc_2010/mtc_04092010.php

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Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited excerpts from Steve Heller’s (http://blog.theprogressivetrader.com/) original article* for the sake of clarity and brevity to ensure a fast and easy read. Heller goes on to say:

Fisher set out the sequence of nine events that determine the deflation of debt levels from asset bubbles as follows:
1. Debt liquidation and distress selling.
2. Contraction of the money supply as bank loans are paid off.
3. A fall in the level of asset prices.
4. A still greater fall in the net worth of businesses, precipitating bankruptcies.
5. A fall in profits.
6. A reduction in output, in trade and in employment.
7. Pessimism and loss of confidence.
8. Hoarding of money.
9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

The above sounds a lot like of what we just went through and what I think Europe is currently heading towards. The problem is, however, that it could further deflate things here, and the dollar could be the star.

What got my attention was that palladium has been plummeting lately. It is used in auto manufacturers and aerospace, so is this the tell-tale sign that the developed economies of the world are headed towards a deflationary period?

Oil, too, has shared a similar fate. I don’t think oil goes from $85 to below $70 simply because of a strengthened dollar, on top of the most disastrous oil spill in American history. I think there is real fear out there that Europe will have another deep recession, possibly even a depression. Greece will go through one, will the rest of Europe?

It remains to be seen if we will experience a deflationary period, but if we do, obviously cash will be king. Always remember: the best have cash at tops and bottoms of markets. [Are you one of 'the best'?]

*http://seekingalpha.com/article/206251-deflation-the-dirty-d-word?source=email

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Angola (1991-1999)
Angola went through its worst inflation from 1991 to 1995. In early 1991, the highest denomination was 50,000 kwanzas and by 1994 it was 500,000 kwanzas. In the 1995 currency reform, 1 kwanza reajustado was exchanged for 1,000 kwanzas. The highest denomination in 1995 was 5,000,000 kwanzas reajustados. In the 1999 currency reform, 1 new kwanza was exchanged for 1,000,000 kwanzas reajustados.

The overall impact of hyperinflation: 1 new kwanza = 1,000,000,000 pre-1991 kwanzas.

Argentina (1975-1991)
Argentina went through steady inflation from 1975 to 1991. At the beginning of 1975, the highest denomination was 1,000 pesos. In late 1976, the highest denomination was 5,000 pesos. In early 1979, the highest denomination was 10,000 pesos. By the end of 1981, the highest denomination was 1,000,000 pesos. In the 1983 currency reform, 1 Peso Argentino was exchanged for 10,000 pesos. In the 1985 currency reform, 1 austral was exchanged for 1,000 pesos argentine.

Hyperinflation continued reaching a peak annualized rate of 4,923.3 percent in December 1989. At that time, government expenditure reached 35.6 percent of GDP and the fiscal deficit was 7.6 percent of GDP.

In 1990 the Argentine government created a new monetary system and established a Currency Board in April 1991. Inflation fell from 1,344 percent in 1990 to 84 percent in 1991. In the 1992 currency reform, 1 new peso was exchanged for 10,000 australes. The inflation rate for 1992 was 17.5 percent, 7.4 percent in 1993, 3.9 percent in 1994 and 1.6 percent in 1995. By 1995, government expenditure represented 27 percent of Argentina’s GDP.

The overall impact of hyperinflation: 1 new peso = 100,000,000,000 pre-1983 pesos.

Austria (1921-1922)
The supply of paper kronen was increased dramatically from 12 to 30 billion in 1920, to about 147 billion kronen by the end of 1921. Inflation reached a peak of 134 percent between 1921 and 1922. In August 1922, consumer prices were 14,000 times greater than before the start of World War I eight years earlier. The highest value banknote for 500,000 kronen was issued in 1922.

In October 1922 Austria secured a loan of 650 million gold kronen (equivalent to 198 metric tonnes of gold) from the League of Nations, with a League of Nations Commissioner supervising the country’s finances. This had the effect of stabilizing the currency at a rate of 14,400 paper kronen to one gold Krone. On 2 January 1923 the Austrian National Bank (Österreichische Nationalbank) started operations, and took over control of the currency from the defunct Austro-Hungarian Bank.

In December 1923 the Austrian Parliament authorised the government to issue silver coins of 5,000, 10,000, and 20,000 kronen which were to be designated half-schilling, schilling, and double schilling. The schilling became the official Austrian currency on 20 December 1924, at a rate of 10,000 kronen to one schilling.

Belarus (1994-2002)
Belarus went through steady inflation from 1994 to 2002. In 1993, the highest denomination was 5,000 rublei. By 1999, it was 5,000,000 rublei. In the 2000 currency reform, the ruble was replaced by the new ruble at an exchange rate of 1 new ruble = 2,000 old rublei.

The highest denomination in 2002 was 50,000 rublei, equal to 100,000,000 pre-2000 rublei.

Bolivia (1984-1986)
Before 1984, the highest denomination was 1,000 pesos bolivianos. By 1985, the highest denomination was 10 Million pesos bolivianos. In the 1987 currency reform, the peso boliviano was replaced by the boliviano which was pegged to the U.S. dollar.

Brazil (1986-1994)
For most of the early part of then 20th century, Brazil’s money was called Reis, meaning “kings”. By the 1930s the standard denomination was Mil Reis meaning a thousand kings. By 1942 the currency that devalued so much that the Vargas government instituted a monetary reform, changing the currency to cruzeiros (crosses) at a value of 1000 to 1. In 1967 the cruzeiro was renamed to cruzeiro novo (new cruzeiro), and three zeros were dropped from all denominations. In 1970 the cruzeiro novo was renamed, dropping the “novo” and once again being called simply the cruzeiro. During the 1970′s while the Brazilian economy was growing at 10% a year, inflation was running anywhere between 15 to 300%.

By the mid 1980s inflation was out of control reaching a peak of 2000 percent. In 1986 three zeros were dropped and the cruzeiro became the cruzado (crusade). In 1989, another three zeroes are dropped and the cruzado becomes the cruzado novo.

In order to avoid confusion and not associate the new currency with previous monetary policy, the cruzado novo is renamed the cruzeiro with no change in value in 1990. By 1993, three more zeros are dropped from the cruzeiro which becomes known as the cruzeiro real. In 1994 the cruzero real is replaced by the real (royal), worth 2.75 old cruzeiros reais.

A 1960s cruzeiro was, in 1994, worth less than one trillionth of a US cent, after adjusting for multiple devaluations and note changes. In 1994, the following measures were enacted:
1. A constitutional amendment in 1994 which empowered the Central Bank not to finance the budget deficit
2. The Central Bank made it illegal for regional banks to buy government-issued bonds
3. Wages were frozen and a new currency — the real — was introduced as part of measures to de-index the economy.

As a result of these measures, prices dropped dramatically from July 1994 onwards and by 1997, inflation had been reduced to standard international levels.

The overall impact of hyperinflation: 1 (1994) real = 2,700,000,000,000,000,000 pre-1930 reis.

Bosnia-Herzegovina (1993)
Bosnia-Hezegovina went through its worst inflation in 1993. In 1992, the highest denomination was 1,000 dinara. By 1993, the highest denomination was 100,000,000 dinara. In the Republika Srpska, the highest denomination was 10,000 dinara in 1992 and 10,000,000,000 dinara in 1993. 50,000,000,000 dinara notes were also printed in 1993 but never issued.

Bulgaria (1991-1997)
In 1996, Bulgaria defaulted on its international debt and narrowly escaped a revolution. From 1991 to 1997, Bulgaria experienced hyperinflation (rates of inflation exceeding 50%) that crippled its banking system and during the winter 1996-97 hyperinflation and food shortages led to hunger protests. A currency board established in July 1997 slashed three zeroes off the currency.

Chile (1971-1973)
Beginning in 1971, during the presidency of Salvador Allende, Chilean inflation began to rise and reached peaks of 508% in 1973. As a result of the hyperinflation, food became scarce and overpriced. The economic and social troubles culminated in the 1973 coup d’état that deposed the democratically-elected Allende and installed a military government led by Augusto Pinochet.

China (1939-1950)
China saw an extended period of hyperinflation shortly after the Central Bank of China took complete control of the money supply and began issuing fiat currency. In June 1937, 3.41 yuan traded for one US dollar. By May 1949, one US dollar fetched 23,280,000 yuan for anyone who cared to have some.

Ecuador (2000)
Officially pegged its currency to the US dollar on September 2000 after a 75% drop in value in early January that same year.

Georgia (1995)
Georgia went through the worst inflation in 1994. In 1993, the highest denomination was 100,000 laris. By 1994, the highest denomination was 1,000,000 laris. In the 1995 currency reform, 1 new lari was exchanged for 1,000,000 laris.

Germany (1923-1924, 1945-1948)
During WWI, Germany borrowed heavily expecting that they would win the war and have the losers repay the loans. In addition to these debts, Germany faced huge reparation payments. Together, these debts exceeded Germany’s GDP. In 1923, when Germany could no longer pay reparations, French and Belgium troops moved in to occupy the Ruhr, Germany’s main industrial area. Without this major source of income, the government took to printing money which resulted in hyperinflation.

At its most severe, the monthly rate of inflation reached 3.25 billion percent, equivalent to prices doubling every 49 hours. The U.S. dollar to Mark conversion rate peaked at 80 billion.

Some countries eased off on Germany’s war reparation burden and a new interim currency, the Rentenmark, secured on mortgages on land and industrial property restored stability. In 1924, the Reichmark, replaces the Rentenmark and has an equivalent to the pre-war gold mark.

Germany suffered high inflation again after WWII. In the official markets ration cards and permits are more important than currency while on the black market cigarettes, soap, tinned beef and chocolate serve as currency. In 1948, Germany replaced the Reichsmark with the Deutschemark and abolished the price and wage controls and most of the rationing system.

Greece (1944-1953)
In 1943, the highest denomination was 25,000 drachmai. By 1944, the highest denomination was 100,000,000,000,000 drachmai. In the 1944 currency reform, 1 new drachma was exchanged for 50,000,000,000 drachmai. Another currency reform in 1953 replaced the drachma at an exchange rate of 1 new drachma = 1,000 old drachma.

The overall impact of hyperinflation: 1 (1953) drachma = 50,000,000,000,000 pre-1944 drachmai.

Hungary (1922-1927, 1944-1946)
Hungary went through two hyperinflationary periods. The former gold-backed Austro-Hungarian kronen was replaced by the Hungarian korona at par. The money supply of the konrona was increased and subsequently plummeted in value. On 21 January 1927 it was replaced with the pengõ, at a rate of 12,500 to one. The pengõ was defined under a gold exchange standard as 3800 to one kilogram of gold.

For a period of time, the pengõ was considered the most stable currency of the region. During the great Depression the pengõ was devalued. During the Second World War, silver coins quickly disappeared from circulation, and later, the bronze and cupro-nickel coins were replaced by coins made of cheaper metal. In the last act of the world war, the Hungarian government took control of banknote printing and issued notes without any cover, first in Budapest, then in Veszprém when Budapest had to be evacuated.

The peak inflation rate for the korona of 98% from 1922 and 1924 seems quite modest when compared to that suffered by the pengõ post-WW2. The pengõ has the dubious double honour of having the worst recorded rate of inflation in modern history and highest denominated banknote. The 100 quintillion pengõ was issued on 11 July 1946. In mid-1946, prices doubled every fifteen hours, giving an inflation rate of 41.9 quintillion percent. By July 1946, the 1931 gold pengõ was worth 130 trillion paper pengõs.

On 1 August 1946, the forint was introduced at a rate of 400,000,000,000,000,000,000,000,000,000 = 4 × 1029 pengõ. The estimated total amount of circulating pengõ notes had a value of less than 0.001 forint. The exchange rate for the US dollar was set at 11.74 forints.

Israel (1979-1985)
Inflation accelerated in the 1970s, rising steadily from 13% in 1971 to 111% in 1979, to 133% in 1980, to 191% in 1983 and then to 445% in 1984. In 1985 Israel froze all prices by law. In 1985, inflation fell to 185%. Within a few months, the authorities began to lift the price freeze on some items; in other cases it took almost a year. In 1986, inflation was down to just 19%.

Japan (1944-1948)
Japan experienced post-WWII hyperinflation in which consumer prices rose by 5,300%. There is also the issuance of military yen (also known as banana money) to soldiers of both the Imperial Japanese Army and Navy. This currency was first issued during the Russo-Japanese War of 1904 and reached a crescendo during the Pacific War. During this time, military yen was forced upon the local population of occupied territories. Military yen was printed without regard for inflation, unbacked by gold and could not be exchanged for Japanese yen. When the Japanese occupied Hong Kong, military yen was forcibly exchanged with Hong Kong dollars at a ratio of 1 to 2. Anyone caught with Hong Kong dollar was to be tortured. After the exchange, the Japanese military purchased supplies and strategic goods from the neutral Portuguese port of Macau using Hong Kong dollars. On 6 September 1945, the Japanese Ministry of Finance announced that all military yen became void thereby leaving overseas holder of military yen with pieces of worthless paper.

Madagascar (2004)
The Madagascan franc lost nearly half its value in 2004. On 1 January 2005 the Madagascan ariary replaced the previous currency at a rate of 1 ariary for five Madagascan francs.

Mexico (1994)
On 1 January 1993, the Bank of Mexico introduced a new currency, the nuevo peso which was equal to 1,000 old pesos. Since the Mexico Peso Crisis of 1994 the value of the Mexico peso has plummeted by almost 60%.

Nicaragua (1987-1990)
Before 1987, the highest denomination was 1,000 cordobas. By 1987, it was 500,000 cordobas. Nicarauga went through a currency reform in 1988 which saw 1 new Cordoba replace 1,000 old cordobas. In the mid-1990 currency reform, 1 gold Cordoba equaled 5,000,000 new cordobas.

Total impact of hyperinflation: 1 gold Cordoba = 5,000,000,000 pre-1987 cordobas.

Peru (1984-1990)
Peru went through the worst inflation from 1984 to 1990. The highest denomination in 1984 was 50,000 soles de oro. By 1985, it was 500,000 soles de oro. In the 1985 currency reform, 1 intis was exchanged for 1000 soles de oro. In 1986, the highest denomination was 1,000 intis. It was 5,000,000 intis by 1990. In the 1991 currency reform, 1 nuevo sol was exchanged for 1,000,000 intis.

The overall impact of hyperinflation: 1 nuevo sol = 1,000,000,000 pre 1985 soles de oro.

Poland (1922-1924, 1990-1993)
Poland suffered two bouts of hyperinflation. The first occurred from 1922 to 1924 when inflation rates reached 275%.

After three years of hyperinflation, the 1994 currency reform saw 10,000 old zlotych exchanged for 1 new zloty.

Romania (2000-2005)
Romania is still working through steady inflation that began around the time when the Iron Curtain came down. The highest denomination in 1998 was 100,000 lei. By 2000 it was 500,000 lei. Consumer inflation that year was over 45%. In early 2005, notes of 1,000,000 lei circulated in Romania. In July 2005 the leu was replaced by the new leu at 10,000 old lei = 1 new leu. Inflation in 2005 was about 9%. In 2006 the highest denomination was 500 lei (= 5,000,000 old lei).

Russia (1921-1922, 1992-1994)
Russia experienced 213% inflation during the Bolshevik Revolution and again during the first year of post-Soviet reform in 1992 when annual inflation peaked at 2520%. In 1993 the annual rate was 840%, and in 1994, 224%. The ruble devalued from about 100 r/$ in 1991 to about 30,000 r/$ in 1999.

Taiwan (late-1940′s)
Severe inflation existed in the late 1940s due to factors such as corruption and the 2-2-8 Incident. Increasingly higher denominations were issued on the island, up to one million yuan. The new Taiwan dollar was issued in 1949 at a ratio of 40,000-to-1 against the old Taiwan yuan.

Turkey (1990′s)
Throughout the 1990s Turkey dealt with severe inflation rates that finally crippled the economy into a recession in 2001. The highest denomination in 1995 was 1,000,000 lira. By 2000 it was 20,000,000 lira. Recently Turkey has achieved single digit inflation for the first time in decades, and in the 2005 currency reform, introduced the New Turkish Lira; 1 was exchanged for 1,000,000 old lira.

Ukraine (1993-1995)
Ukraine went through the worst inflation between 1993 and 1995 with inflation rates peaking at 1400% per month. Before 1993, the highest denomination was 1,000 karbovantsiv. By 1995, it was 1,000,000 karbovantsiv.

In 1996, the karbovantsiv was taken out of circulation, and was replaced by the hryvnya at an exchange rate of 100,000 karbovantsivi = 1 hryvnya (approx. US$0.20 at the time).

Vietnam (1981-1988)
Inflation rates remained high in Vietnam following the end of the war till 1989, peaking at nearly 500% in 1986. Gold trading was outlawed during this period till 1988, leading to an active black market supplying gold to those persons seeking to preserve their wealth as the domestic currency collapsed in value. At present, the inflation rate in Vietnam exceeds 25%.

Yugoslavia (1989-1994)
Second worst hyperinflationary period in recent history with a monthly inflation rate of 5 quintillion percent. Between Oct 1, 1993 and January 24, 1994 prices doubled every sixteen hours on average.

At the end of it, one novi dinar = 1,300,000,000,000,000,000,000,000,000 pre-1990 dinars.

Zaire (1989-1996)
Zaire went through a period of inflation between 1989 and 1996. In 1988, the highest denomination was 5,000 zaires. By 1992, it was 5,000,000 zaires. In the 1993 currency reform, 1 nouveau zaire was exchanged for 3,000,000 old zaires. The highest denomination in 1996 was 1,000,000 nouveaux zaires. In 1997, Zaire was renamed the Congo Democratic Republic and changed its currency to francs. 1 franc was exchanged for 100,000 nouveaux zaires.

The overall impact of hyperinflation: One 1997 franc = 300 billion pre-1989 dinars.

Zimbabwe (1999 – present)
The Rhodesian dollar (R$), adopted in 1970, following decimalization and the replacement of the pound as the currency, was set at a rate of 2 Rhodesian dollars = 1 pound (R$ 0.71 = USD $1.00). At the time of independence in 1980, one Zimbabwean dollar (of 100 cents) was worth US$1.50. Since then, rampant inflation and the collapse of the economy have severely devalued the currency, with many organizations using the US dollar instead.

*http://dollardaze.org/blog/?post_id=00107&print=1 (Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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In further edited excerpts from the original article* David Galland (www.caseyresearch.com) goes on to say:

More Money
With the economy continuing to struggle, the only reasonable assumption that can be made is that the Fed – in cahoots with the entirely politicized Treasury – will keep shoveling money onto the economic embers, and continue to do so until economic activity again flares up. That will, of course, require increasing the quantity of money that actually makes it into the economy – but that should be child’s play for Team Obama – with direct hiring and spending, continuing to buy mortgages and other loans to suppress interest rates, forgiving the bad debts of banks, or changing accounting rules so that banks can postpone reckoning day. That’s just for starters, all of it packaged nicely in the name of the public good.

Higher Inflation
Once the money starts to flow, there will be a pick-up in economic activity, which will beget yet more money moving around. At first, this money will be a palliative for the economic worries, but then comes the inflation – a small trade-off, the politicians will decide, if it buys them enough of a recovery to make it through the November elections and get the President the second term you know he so strongly desires.

Higher Interest Rates
If the U.S.’s many creditors come to agree with our point of view – that the dollar is being led to the altar as a sacrificial lamb to political expediency – then they’ll further reduce their purchases of our Treasuries and start trading their dollars for stronger currencies and tangible assets, including precious metals. At that point, interest rates will have to begin rising to attract new buyers.

Of course, the higher those rates ratchet, the more it will cost the U.S. government to carry its massive debt. While rising rates will continue to drive demand to the short end, suppressing those rates, in time the sheer quantity of paper that will have to be rolled over, and the rising tide of inflation, assures that short-term rates will have to rise too. At that point, the train begins to leave the track.

Innovative ‘Taxes’
As the train wreck approaches, the government is going to have to find creative new ways to fund its social contract with impatient voters. Perhaps, for instance, pegging everyday fines and assessments to the amount of income a person makes. Executed brashly, such policies might even allow the government to charge a person of means hundreds of thousands of dollars – that’s correct – hundreds of thousands of dollars for a speeding violation. Indeed, that is precisely what is occuring today in Europe in such countries as Switzerland, Germany, France, Austria and the Nordic countries. In Germany the maximum such fine is $16 million – yes, $16 million – and “only” $1 million in Switzerland! To date the highest fine has been a $290,000 (euro203,180.83) speeding ticket slapped on a millionaire Ferrari driver in Switzerland and a euro170,000 (then about $190,000) ticket in 2004 to a driver in Finland. I know what you’re thinking: C’mon, let’s be realistic – that could never happen here – but think again.

Changes to IRA/401(k) Contributions/Withdrawals
Maybe the government will force you to convert some or all of your IRA or 401(k) into Treasuries, perhaps packaged up in an annuity. You’d be given the choice of making the switch or making a withdrawal and paying all outstanding taxes at that point. indeed, a recent article from BusinessWeek reveals that the Treasury is now looking very hard at the trillions in retirement accounts and trying to figure out new ways to “help” the owners of those accounts.

Changes in U.S. Dollar
Something will have to give. We think that something will ultimately be the U.S. dollar, as it’s politically more acceptable to have a failing dollar than a smoking hole where the economy used to be. Before this thing is over, I would not be surprised to see a new currency regime adopted that introduces exchange controls and a different category of dollar to be issued for the purpose of paying back foreign creditors. Such a dual-track currency system is nothing new having been used by desperate regimes numerous times throughout history.

Manipulated Economy
The economy is now so manipulated by politicians, big bankers, and special-interest groups that making sense of the markets has become an almost impossible feat. Which is to say, it must push even harder on the levers of its printing presses, further setting the stage for the massive period of inflation we continue to see as inevitable… and for a stunning rise in interest rates.

*http://www.financialsense.com/editorials/casey/2010/0113.html (David Galland is the Managing Director of Casey Research, LLC., publishers of Doug Casey’s International Speculator which provides unbiased research and recommendations on the highest quality junior exploration companies.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

See larger image How to Prosper During the Coming Bad Years in the 21st Century (Paperback) By (author) Howard Ruff List Price: $14.00 USD New From: $3.45 In Stock Used from: $0.26 In Stock