My crystal ball tells me: At some point the USGov’t will “blame” the Fed for the “worthless scrip” and will follow China’s lead in having a bi-metallic backing for the New US Treasury Dollar. With the small amount (no amount?) of available gold or silver available in Fort Knox, the amount of gold and silver backing will be miniscule. Maybe the Treasury will pull a 1933 “redux” making gold / silver illegal to spend. [How well did the USGov't respect Chrysler bondholders' rights the other month?]

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Nothing could be more deflationary than honest money, Paul — even slightly honest money with barely a whiff of metal backing. I doubt we’ll reach that point before fiat has been repudiated, but it will take a complete collapse of the economy to bring that about. Meanwhile, as long as foreign producers continue to accept worthless U.S. paper for real goods, what is the incentive to reform? RA

I’ve been reading your letters for some time now and they make much sense.

I have been very fortunate in life and made some money selling a business a few years ago.

My question is how do i protect my assets from the current financial storm and try to maintain their purchasing power?

I own a house in northern california and have a mortgage of 20% of its current value.

I then have half my cash in US Dollars and the other half split between sterling, the aussie dollar and the norwegian khrone.

I am sick of useless financial advisors and dispensed with them all over 18 months ago when i went into cash. I recently asked someone else for their advice and their advice was to buy california muni bonds. i have no interest in lending money to broke cities in a state which is broke.

Any ideas would we most welcome.

thanks

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I’m skeptical that California munis area safe bet, and I’ll grow even moreso if and when the Federal Government wades into the water by “guaranteeing” the state’s debt. New York, New Jersey and a bunch of others will be right behind, and by then the government’s guarantees will be redeemable only in worthless scrip. So what to do? Besides holding 20-30% of one’s nest egg in physical gold, and 10-20% for speculation in selected mining shares, I’ve been telling friends to consider bonds issued by companies that look like better bets than the U.S, Government: IBM, Johnson & Johnson, Proctor & Gamble, Safeway and Merck, for instance. RA

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Sure enough, the dollar has broken a support level, Jacob. Stuff like that sometimes happens, and all you can do is keep an eye on it and not stay married to a particular outlook. RA

Cheers
Lennart

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Short of credit dollars, anyway — and collateral. I’m so very pleased for you that you have had this epiphany, Lennart, even if it has come from your merely having acknowledged observable reality. RA

One item that can’t come under your heading of ‘grocery store inflation’ is oil. Already we see crude rising over 100% from its low of last year, and yet the IEA says they expect a further fall in world demand. Now whether or not you accept the ‘Peak Oil’ theory, India and China’s thirst for oil is unquenchable. India has a middle class equal in size to the entire US population, and while sections of the Chinese labour force are losing their lowly paid jobs, the enormous burgeoning middle class is not doing so badly, at least that’s what we are told.

With China’s auto makers able to produce a car for $2000, and the Government bent on building a huge SPR, I can’t see the oil price remaining where it is for long.

If you recognise that the entire concept of economic growth has only been facilitated by the continuing supply of cheap portable energy, and that there is no viable alternative to oil for the foreseeable future, then it won’t just be a US economy that is collapsing but the entire world.

Any comments?

M

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The rise in crude’s price has an affordability ceiling like everything else. Actually, it is more than a ceiling and rather like a limiter on global commerce, since, at a certain price, the expense of crude will throttle global trade and manufacturing. In that way, inflation in crude will ultimately prove deflationary. Meanwhile, if crude were at $200 a barrel and U.S. gas cost $8 gallon, would that be “inflationary”? I don’t think so, since there would be no pricing power to cause inflation to spiral outward. This isn’t the 1970s, and the pathways of inflation would not be operating as they did in the more or less normal economy of the 1970s. We are in a global deflationary collapse, and the anomaly of high-priced oil, no matter what currrency in which it is measured, cannot possibly persist. RA

I’d really like to know if you or anybody else thinks the perception of an inflation is in trade whether or not reality actually backs it up. Does the true winner of the inflation/deflation debate really matter if Joe Public is trading as if inflation is the winner despite the presence of any good indicators? It would seem to me that perception is beating reality here. Either that or investors want to get their inflationary environment positions now (gold/oil) way ahead of when it actually kicks in. Just a few thoughts …

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Let me repeat this for the hundredth time: The only aspect of the inflation/deflation alleged “debate” that matters is whether or not homeowners with negative equity — at some point, that will include just about every American with a mortgage — get bailed out. RA

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I am sure that Americans will stiff their mortgage holders last, Andy. RA

But seriously, I think Rick has been saying that deflation should eventually bring down education and health care costs.

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It is doing that right now, fulfilling a prediction that I’ve been shouting from the rooftops for a decade. Education, health care and government are THE three intractable engines of inflation, but cost growth in each is being shut down by something even more powerful: AFFORDABILITY. Obama’s health care lunacy will breathe new life into health care inflation, but that too will run up against the problem of affordability for a federal government that is moving toward bankruptcy. Meanwhile, although the spinmeisters continue to lie through their teeth about signs of “recovery,” every American knows that a precipitous decline in the standard has already occurred and cannot be reversed: college is no longer affordable, since home equity borrowing to finance it has been lost; and, the Baby Boomer retirement dream has slipped away and cannot possibly be retrieved. Bernanke can keep predicting a “recovery” in the latter part of 2009 or in 2010, but considering how powerful and palpable this incipient Depression already is for each and every American, his assurances ring utterly hollow. RA

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I am simply reading the charts rather than attempting to explain the unexplainable paradox of deflation in a world whose financial system is built on now-worthless currencies. The charts say Gold will at least remain buoyant even if the dollar is rising. The decoupling effect need not necessarily be extreme, and Gold will not necessarily go to $5000/oz, although it could do so when the dollar short-squeeze collapses, as all short-squeezes eventually must. But whatever happens, there shouldn’t be any doubt that gold will at least hold its purchasing power relative to all other classes of investable assets. RA