Tuesday, July 27, 2010

Deflation or Hyperinflation? BUY GOLD!

Deflation or Hyperinflation, that is the question. And it's been eating away at me. A casual observation of the economy reveals that the only thing "deflating" is the M3money supply, and the prices of leveraged assets, in particular, home prices.

If all money is debt, it is easy to understand why the M3 money supply is falling along with the prices of leveraged assets, home prices being the perfect example. As money is borrowed, or rather, as debt is created, it finds it's way into the money supply to purchase assets on credit. A mortgage on a house is a large debt, and a large creation of money.

If the supply of debt, or rather money, begins to fall, further purchases of assets become difficult or impossible. When demand for assets decreases, and supply begins to overwhelm demand, prices for assets begin to drop. This is today's housing market. A market that is clearly experiencing a deflation in asset prices.

Because the housing market has become such a key cog in our economy's growth cycle, falling home prices [Deflation] can have a tremendous negative effect on the overall economy. Particularly in light of the consumers use of their home equity as an ATM machine to fund discretionary purchases over the past 10 years.

Focusing on home prices in a Deflation/Hyperinflation debate is important if one agrees that the entire financial crisis we are presently enduring was the result of a collapse in the housing market. Could a Deflation/Hyperinflation event be focused on a single sector of an economy much like an asset bubble can be?

What if we look at home prices as already having been in a Hyperinflation from 2000 to 2007, then followed by the Deflation we are experiencing now. This would be much more in line with the Wiemar Germany Hyperinflation we hear so much about. Hyperinflation in Germany in the 1920s was followed by a severe Deflation in the 1930's Nazi Germany.

Recall that a Deflation always precedes a Hyperinflation. But in today's housing market, the Deflation appears to have followed a Hyperinflation of prices. True, but what precedes the hyperinflation in housing prices? 9/11 and a recession [deflation]...and low interest rates. What do we have today? A Great Recession [Deflation] and low interest rates.

Low interest rates are designed to encourage the growth of debt, or rather, the creation of money. And what follows the creation of mountains of debt/money? Hyperinflation. Has the stage been set for a Hyperinflation of the general economy in response to the Deflation that has followed a Hyperinflation of the housing market?

During the Hyperinflation of the housing market between 200 and 2007, home prices rose by 100% while incomes only rose 2%. Can you imagine the consequences if a similar scenario in prices and wages occurs in the general economy and not just an isolated sector of the economy?
Heaven help us all.

Gold is easily recognized as the "ultimate hedge against Inflation". The buzz today is that Gold will fail to protect ones wealth in a Deflation. Ignore the fact that we are more likely on the cusp of a severe Hyperinflation event than a Deflationary one...in the general economy. Deflation so far has been confined to leveraged assets, and it is the fight to save the "value" of these assets that is going to lead to a Hyperinflation in the general economy next, NOT a Deflation. The Deflation will come AFTER the Hyperinflation we are about to enter has run its course.

But how will Gold react to a Deflation? Look no further than our housing crisis to see the answer to that question. Gold has performed true to form on every level during the housing boom AND bust. Shockingly to many, Gold has actually performed BETTER during the housing bust [Deflation] than during the Hyperinflation run up between 2000 and 2007. The following two charts are worth 10,000 words on the subject of Golds performance in a Deflation.

I don't know that it could be any clearer. Gold rises during Hyperinflation, AND rises not only higher, but faster in Deflation. Gold is the superior asset for not only protecting the buying power of your wealth during a Hyperinflation, but it protects your accumulated wealth during a Deflation.

Therefore I declare the question of Hyperinflation or Deflation moot as it pertains to Gold.


Gold as a deflation hedge - What happens if the bottom falls out of the economy
By: Michael J. Kosares, USAGOLD
In an inflationary scenario, investor concern centers around the preservation of purchasing power. In a deflationary scenario, investor concern swings to protection against institutional failure and default, i.e., the complete loss, or expropriation, of one’s capital. The old saw, “I am not so much worried about the return on my capital,as I am the return of my capital,” comes to dominate investor thinking.

Typically deflations -- like the 1930s Great Depression and the Long Depression mentioned by Krugman -- occur in gold standard economies where the state is prevented from running up debt and then financing those obligations in varying degrees with printing press money. The downside of fiat money economies is typically that odd mixture of inflation and deflation called disinflation or stagflation (United States, 1970s) which occurs when the financial authorities, or outside events, apply the brakes. Deflation generally occurs in fiat money economies only after the state has exhausted all the inflationary possibilities and faith in the currency has become non-existent (Germany, 1930s). So to consider how gold would perform in a fiat money economy that somehow falls into the deflationary abyss, one would need to look to more weimar Germany and its aftermath (the Nazi Party) in order to find an historical equivalent, than the United States in the 1930s. To make a long story short, the rare German citizen who had siginificant assets after the virulent weimar inflation probably owned gold, and that same gold probably insured his or her financial survival in the subsequent deflationary breakdown as well -- for the reasons mentioned above. There is more to this scenario however than meets the eye.

Though gold preserved Americans’ capital during the Great Depression of the 1930s, the official price was fixed and as prices fell gold’s purchasing power increased. Under the current fiat monetary system, gold is free to seek its own price level. As a result, theoretically, we could experience a situation in which the price of gold rises while the price level is generally declining. For the gold owner that would amount to the best of all possible worlds. Oddly enough, after weimar Germany, the best case study for gold under these kind of circumstances might be the United States from 2008 to present. That period encompassed on a limited scale the circumstances one might expect in a deeper, full-blown crisis -- high systemic risk, investor flight to quality, massive government and central bank intervention, a financial market breakdown, etc. All in all, the net effect was severe disinflationary pressure that, though not deflationary, could be considered circumstantially a close cousin. with capital preservation suddenly the most hunted objective, investors took investment gold demand to record levels, and the price went from $750 at the end of 2008 to $1250 today. Gold, if we are to take this hint seriously, could turn out to be an even more effective hedge now than it was in the 1930s.

Comparing gold to home prices as measure of purchasing power

To illustrate the point, let’s consider a theoretical home purchase during both periods. In the 1930s as housing prices fell, the price of gold remained the same -- fixed at $35 by government mandate. Gold’s purchasing power increased as a result -- the sort of favorable outcome gold owners’ had hoped would be the case.

Since the onset of residential real estate correction in 2006 housing prices have fallen by one-third in some key urban areas in the United States. Simultaneously, gold has more than doubled from $530 in January, 2006 to roughly $1250 today. The increase in gold’s purchasing power with respect to housing inflation, as a result of free market pricing, has been extraordinary. A similar result, by the way, could be drawn by comparing gold’s recent performance against commodity prices and consumer prices -- two standard comparisons or determining the purchasing power of one’s savings.

(It should be added as a caveat that gold certainly could correct downward along the way and the relationship between gold and the general price structure would change as well.)

I give a full-blown deflationary depression in the United States about a 20% chance of occuring and even if it does occur, that is unlikely to happen until after all inflationary avenues have been exhausted. There will be abundant discussion about austerity measures, but quadrupling the annual deficit to nearly $2 trillion in rapid fashion and then promising to cut it by half is not my idea of a real belt tightening. Simultaneously, the Federal reserve, putting it politely, has been more than accomodative with its policies over the past few years, and there is talk of it becoming even more so if we drop into the double dip many economists are now predicting.

If the effort to kickstart the economy fails, which is a possibility, we more likely to experience more disinflation, or stagflation, than an outright deflation -- something similar to what Japan has experienced since the 1980s. At the same time, with so much talk of a depression, including among economic luminaries like the Nobel laureate, Paul Krugman, this short study is for those curious how gold might perform in deflationary circumstances under the current monetary regime.

Yet here were are once again this morning witnessing the absolute [insert expletive here] joke that is the NY COMEX Commodities and Futures Exchange. AKA, the CRIMEX. Home prices are up in another spin of the truth. Oh my, the housing crisis MUST be over...sell your Gold! What a crock! This "news" hit the wires at 9AM est., and from there the price of Gold and Silver tanked. Let's look past the BS associated with options expiration today for just a moment...this is pure bullshit.

Since the first week of June the US Dollar has fallen almost 8% as measured by the US Dollar Index. Over this same frame of time, the price of Gold has fallen 7%. Is this for real? HA! Gold ONLY falls in New York. Wall Street is trying to paint the delusion that the Dollar is as good as Gold [or as bad at this time].

Yesterday we get the spin that new home sales were up 23% over the previous month. Never mind the fact that the previous months record low sales number was revised lower [along with the prior tow months before that]. And why were they revised lower? Because on average, at least 25% of new home "sales" actually close as real sales. You see, new home sales are measured by purchase contracts, NOT ACTUAL PURCHASES. This is called spin. And like a drunken sailor spinning in a bar room in some foreign port, the fools on Wall Street believe, once again' that a sign of the bottom in housing has appeared. It's a mirage you fools!

Home prices increase 1.3 pct. in May from April
NEW YORK (AP) -- Home prices rose in May for the second straight month as federal tax incentives pulled more buyers into the market.

The Standard & Poor's/Case-Shiller 20-city home price index released Tuesday posted a 1.3 percent increase in May from April.

Nineteen of 20 cities showed price gains month over month. Only Las Vegas recorded a price decline.

The gains underscore the impact of the government's homebuying tax credits. Buyers rushed to purchase before the credits expired at the end of April.

The report also noted that May is typically a strong month for selling homes and that the price gains are unlikely to last through the year.

Nationally, prices have risen 5.1 percent from their April 2009 bottom. But they remain 29 percent below their July 2006 peak.


Some Monday Observations...
By Dave Kranzler, The Golden Truth
New Home Sales - The media ushered in the Commerce Department's new home sales for June with unusual ebullience and positive spin. Seasonally adjusted new home sales, as reported, came in a little better than Wall Street was forecasting at 330,000 (please note: seasonally adjusted - no one outside of the Govt's Ministry of Truth really knows what this means). The "spin" was evident in the headlined "23.6% sales increase" from May. What wasn't spelled out is that May's record low new home sales number was revised down even more from the originally reported - seasonally adjusted - 300,000 to 267,000. The 300,000 reported for May is the lowest new home sales number ever reported going back to 1963. That should put the 267,000 in perspective. However, arithmetically, that downward revision lets the media/CNBC jump all over the "23.6% increase" from May to June. See how this game works? The seasonally adjusted, annualized number for June was 16.7% below the sales rate for June 2009 AND it was the worst June on record. In terms of the inventory being reported as declining, don't put any stock in that number. The way the Census Bureau accounts for new home sales and cancellations - it's been running around a 20% cancellation rate industry-wide for about 3 years now - cancelled homes are not added back into the new homes inventory. So the real inventory of new homes has been significantly understated for at least 3 years. Given that the Government is the entity that accounts for the new home sales market, this should not surprise anyone. http://truthingold.blogspot.com/2010/07/some-monday-observations.html

New Home Sales: Worst June on Record
Ignore all the month to previous month comparisons. May was revised down sharply and that makes the increase look significant. Here is the bottom line: this was the worst June for new home sales on record.

You see how simple it is to peer past the bullshit and find the truth? Nothing has changed. The housing sector is STILL in the toilet, and the bowl is still swirling to boot. The CRIMEX is still laden with criminals, and lower prices for Gold and Silver will only INCREASE demand for them, not chase investors away.

The Dollars reaction to this wondrous housing news has been a return to the 82.22 line in the sand. Gold has gotten beaten down disproportionately to say the least, Silver even more so considering it's "industrial connections" to the economy. More proof of the fraud that is the CRIMEX.

Gold's on sale again today, and so is silver. Thank the fools on Wall Street. Relieve them of their burden, and pocket those Precious Metals for yourself...while you still can.

This just in:

Consumer Confidence at Lowest Since February- AP
A monthly consumer survey shows that Americans' confidence in the economy eroded further in July amid job worries. The reading raises concern about the economic recovery and the back-to-school shopping season.

1 comment:

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