Is this the time to acquire gold? Or is this the time to run away from it? Either answer could be correct, depending upon what course government chooses. Government is at a decision point, one that will determine how our economic malaise next turns. [Let’s review their choices.] Words: 922
So says ”Monty Pelerin” (a pseudonym derived from The Monty Pelerin Society) in edited excerpts from his original article* as posted at www.economicnoise.com .
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This, and the preceding paragraph, must be included in any article re-posting to avoid copyright infringement.
Pelerin goes on to say, in part:
Governments have two choices:
- Fight deflation by increasing the money supply by whatever amount necessary.
- Stop using monetary policy to offset the inevitable.
- aims to hold prices up in the face of a massive contraction in liquidity as the debt structure of the country shrinks, primarily via defaults. Even if this course is chosen, it is not certain that the rate of liquidity collapse will be offset by the creation of new liquidity. Government is clumsy and inept. Any attempt to counteract deflation risks inflation, perhaps hyperinflation. It is a choice fraught with potential unintended consequences.
The first choice defers depression for a while at the cost of greater pain and suffering some time in the future.
- It produces very high inflation, even hyperinflation.
- Ultimately markets collapse from the high inflation as people refuse to accept money in trade.
- Barter becomes a means of trade which dramatically decreases the possibilities and quantity of trade leading to a Depression.
… manias have occurred many times before, but the main issue is that a mania in gold and gold stocks is the likely result of the absolute balloon in government debt, deficit spending, and money printing. Saying all that profligacy will go away without inflationary consequences seems naïve or foolish. Inflation may not attract investors to gold and silver as much as force them to it.
Ultimately the price of gold will recede once the Depression begins. Any super-profit will likely disappear during the Depression, although its purchasing power should be maintained.
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Gold is money. It always has been. It increases in value as the purchasing power of fiat money decreases and decreases as fiat money increases in purchasing power. It is an alternative currency. When fiat currency deteriorates, real money appears to increase in value.
Like so many other things in our government-controlled economy, the price of gold is dictated by political actions more so than economic ones. If you believe that government will step aside and allow the economy to correct itself, then gold is probably not the place to be. If, on the other hand, you believe government will continue to intervene in order to prolong the charade that a recovery is in place, then you probably expect gold to increase in value as Mr. Clark’s conditions will worsen.
The second choice:
- accepts whatever level of deflation results as an inevitable outcome of past excesses. It abandons an expansionary monetary policy and faces the reality that a correction is both inevitable and necessary in order to return the economy to health. It will produce a Depression which purges the economy of the imbalances and misallocations which developed as a result of decades of government interventions.
- Without the continued stimulus from government spending and Fed money-creation, the economy shrinks and
- debts are defaulted upon.
A rare phenomenon has just occurred and may activate Fed action. The Fed and Mr. Bernanke are deathly afraid of deflation. Yet that is exactly what some data are suggesting. Zerohedge reports on a key indicator and the possible Fed reaction:
For the first time on record (based on Bloomberg’s data) 5-year / 5-year forward inflation expectations turned negative today. This kind of deflationary impulse has occurred twice in recent years and each time has been accompanied by dramatic Federal Reserve easing. The anticipation of the move by the Fed has caused Gold each time to surge higher on yet more expectations of the fiat-fiasco unwinding. Given the 5Y5Y inflation print currently, we would expect action from the Fed and one could argue that this would cause the price of Gold to rise to $2200 per ounce as the deleveraging continues.
The red arrows show the deflationary impulse (5Y5Y inflation is inverted) and the orange curve arrow shows the reaction function post Fed reaction to the blue arrow levels of the deflationary impulse.
A deflationary trend makes it harder to pay down debt or create jobs. Ultimately it produces a Depressionary scenario with massive unemployment and debt defaults. From an economists standpoint, that is inevitable at some point because the level of debt cannot be serviced. From a political standpoint, it is death. No political figure wants to be known as the new Herbert Hoover.
As mentioned many times before, decisions regarding the economy, or anything else for that matter, are not made in regard to what is best for the country. They are made for the benefit of the political class.
The last thing the political class wants is a massive economic downturn. Hence, my guess is that the Fed will bend to the wishes of its political masters and “print money.” As a side note, even if deflationary signals had not been seen, I would still expect government to print money simply because without it, government is unable to meet its obligations.
Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article
Any thinking person with a calculator knows that the current global monetary system is going to fail given enough time. Rather than going through the charade of more quantitative easing, what if the central banks, the collaborating Western governments, and the financial elites decide to let the system fail now? [What if]…people in control…have a plan…to accelerate the emergence of a new dollar.
Michael Pento, president of Pento Portfolio Strategies, and Peter Tchir, founder of TF Market Advisors, talk about Nobel Prize winner Paul Krugman’s recommendation that policy makers should consider allowing slightly higher inflation as a way to spur the U.S. economy.
The deficits aren’t going to stop anytime soon. The debt mountain will keep growing…Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things….The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for….[and] the Federal Reserve will hear their prayer. When will the economy reach the wall toward which it is headed? Not soon, I believe, but in the meantime there will be plenty of excitement. [Let me explain what I expect to unfold.] Words: 1833
If our assessment is correct, over the coming years, stocks, precious metals, commodities and real-estate will appreciate in value versus paper currencies. Furthermore, on a relative basis, we expect precious metals and commodities to outperform all other asset-classes. Conversely, we anticipate that cash and fixed income instruments will probably turn out to be the worst assets to own over the next decade. Words: 869
Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660
When government is wounded, trapped and desperate, it lashes out like a wild animal. Survival in the political class is just as strong a drive as it is in the wilderness. I don’t know how government will lash out, but you are likely to see laws, restrictions and behavior you never imagined….Washington has demonstrated it will “print money” in whatever quantities necessary to stave off a sovereign bankruptcy and a Great Depression but this strategy cannot work forever because existing debt is already too high to be serviced. It is only a matter of time before the U.S. economy succumbs – unless it engineers a ‘soft default’ [which will save it’s ass and get you shafted! Let me explain.] Words: 1394
The ending in the U.S. will be similar to that in Greece. It is assured for the same reasons. The Democrats will lose the 2012 election…and the Republicans will control government for the next two years. Whatever enthusiasm initially exists will dissipate as soon as the polls show how unpopular austerity is. If they try to cut spending, they will suffer the same fate as the European Austerians. [Let me explain.] Words: 1116
How this economic disaster ends is something about which many of us speculate. Two extreme endings are likely — a sudden deflationary collapse or a period of very high inflation/hyperinflation which ultimately cripples commerce and resolves itself in a deflationary collapse. In either case, the deflationary collapse is another Great Depression. It is important to know which route will occur because of what will happen to asset values along the way. Words: 1057
Money/credit expansion (inflation) is insidious and like an addictive drug. The first effects appear to be pleasant – a seeming increase, if not boom, in business; lower interest rates; more available credit and a decline in unemployment – BUT, unless the monetary stimulus is continued, and probably at increasingly higher doses, the temporary high disappears. Below is a sampling of what eventually happens when central bankers try to ‘help’ the economy by creating money out of nothing. Words: 799
People get confused about the nature of mass inflation, hyperinflation, and what causes both. [Let me clarify the nature and causes of each.] Words: 930
There is an all out assault on the part of global central banks to destroy their currencies in an effort to allow their respective governments to continue the practice of running humongous deficits. In fact, the developed world’s central bankers are faced with the choice of either massively monetizing Sovereign debt or to sit back and watch a deflationary depression crush global growth. Since they have so blatantly chosen to ignite inflation, it would be wise to own the correct hedges against your burning paper currencies
This analyst sees the perfect storm of converging criteria almost perfectly timed and aligned with the 2012 election cycle. When the moment arrives, the financial earthquake will rapidly demolish the existing highly precarious financial system. Government will stand by helpless, unable to shield itself, much less its vulnerable citizens or private financial institutions from the tsunami of debt and currency destruction. 2012 is shaping up to be the blockbuster main event of the ongoing financial crisis. Massive amounts of new debt, vast quantities of additional digital dollars and the spark of higher interest rates will set off version 2.0 of the credit-driven financial implosion. Let me explain. Words: 1443
Currency wars arise when a country steals growth from trading partners by cheapening its currency to promote exports. The new currency war began in 2010 when President Obama declared in his State of the Union address that it was the policy of the United States to double exports in five years. Since the U.S. would not become twice as productive in five years, the implication was the U.S. would severely cheapen its currency to achieve this goal. [Let me expand upon this.] Words: 666