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What $1,000 Gold Is Telling Us

By Rick Ackerman Posted on October 13, 2009, 12:54 am EDT Last Updated May 28, 2010, 3:24 pm EDT

The inflation/deflation discussion in the Rick’s Picks forum has attracted some interesting comments — none moreso than this one from our Lake Tahoe friend, retired Merrill fund manager and investment maverick Rich Cash:

When we show donors the long-term Econocast Consumer Price Index Forecast to measure against investment performance, they see more than a doubling of CPI over the coming decade after a few minor decreasing negative CPI blips last year. Most people call this inflation. It is institutional inefficiency. It is the cost of government administrations, bureaucrats, congresses, courts and wars on everything, the tyranny of fiat red tape, Barack Obama’s one month in office Nobel Peace Price nomination and award notwithstanding.

Myers

He wants to share it with everyone. Maybe he could share it with Martin Armstrong, Dr Franz Pick, Col E.C. Harwood or Vern Myers, American political prisoners whose property was seized while they were held in jail indefinitely without due Constitutional process, some eventually plea-bargaining to get out as do 98.5% of people incarcerated by government. Harwood, Pick and Myers died while Martin Armstrong is held Fort Dix Prison Camp until 2012 smuggling economic truth out.

99% Conviction Rate

USA Courts have a 99% conviction rate. The USA has the highest percentage of people in prison in the world.  Ten percent of the working age population are in jail, plus half the people work for or depend on an unproductive government. People who consume but do not produce drive up the costs for everyone else. Various commissions defined CPI down to reduce government COLA payments: Cost of Living Adjustments are as unrealistic as government savings bonds and TIPS: Treasury Inflation Protected Securities.

Real inflation which affects asset prices, is a credit condition. Anyone can look at John William’s Shadowstats Chart of M-3 since 2008, read David Rosenberg’s Gluskin Sheff report of the $20 B reduction in consumer credit in August temporarily hidden by cash for clunkers, take a good look at GE Credit and GMAC DiTech 125% Loan to Value shadowbanks disappearing. Or they can merely consider their own disappearing paycheck, home or mutual funds, to know which way the Arctic credit wind blows the economy. In fact, divided by the eternal constant gold, we had -83% real declines in Real Estate since 2007, -83% declines in the dollar since 2001 and -84% real declines in the Dow since 1999. It is not so much gold going up. Most assets are going down.

A Proxy for Real Rates

Central Banks are doing everything they can to prevent a bubble in gold, for it is the basis of all money, finance and trade. Gold is a proxy for the real rate of interest that reflects increasing scarcity of capital as it flees for freedom. At 1061.50, having quadrupled since 1999, gold is telling us real interest rates (deflation plus nominal rates) are the highest in history. With high interest rates comes higher tax rates. It is no accident Fed usury and income taxes came the same year to the home of the brave and land of the free in 1913 with a Princeton Academic President. 70% of Federal income taxes are paid by the working class.  There were no tax cuts for the middle class.  Then or now.

Now we have a Princeton Academic head of the Fed and a Princeton First Lady. The Fed took trillions from Americans by creating trillions out of thin air and government TALF, TARP and PPPIP programs to protect a failing banking system by purchasing toxic assets to bail out big bank members and their corporate friends like AIG, GM, FNM, FRE marking the end of the biggest inflation of corporate monopoly government in the history of the world. We face the prospect not only of failing, underfunded government agencies and programs like FDIC, OPIC, PBGC with an insolvent treasury, but a failing Fed, bailed out by foreign central banks like the BIS and the IMF, which happened in Revolutionary, Civil and World Wars with Panics and Depressions.

 No Zimbabwe

To think the Fed is likely to inflate the money supply to Zimbabwean levels is to forget the inflated Treasury debt market is at least ten times the size of American equity markets. Equity does not drive the derivative markets, debt does. If real money supply inflates again, bondholders sell in droves, driving nominal interest rates to the sky to reflect gold prices. Only Centenarians who were adults coping with the Great Depression may intuitively comprehend this. Thus 1061.50 gold, which may be the high-water mark, reflects the failure of the Fed and Treasury to stabilize the economy against the Greatest Depression. Quadrupling gold prices are not inflationary, but deflationary, as compounding Treasury interest devours everything in its path like a Borg Cube Black Hole.

Treasury Interest is already the third largest budget item after transfer payments and the military industrial complex. In coming years, Treasury Interest may compound to number one, unless Treasuries default first. None of this realpolitique finance is inflationary for college tuitions driven sky-high by student loans, defense budgets bloated by foreign conquests, dollar creation based on limited Treasury bonds, government subsidized healthcare or unfunded entitlements. Even ammo, food or guns may slow their appreciation for a time. People are most bullish at golden tops and most bearish at dollar bottoms. Regards…Rich.

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  • Rich October 15, 2009, 8:45 pm

    The Jay Leno Show

    ● The big story out of Washington is the healthcare bill passed the Senate Finance Committee by a vote of 14-9. The bill costs over $800 billion . . . and that’s just what lobbyists had to give to members of Congress.

    ● The good news is we’ll probably have some kind of improvement in our healthcare system. The bad news is, it won’t be in our lifetime.

    ● The Fox News White House correspondent, a man named Major Garrett, has the swine flu. And President Obama has ordered Fox News quarantined. For up to five years.

    ● Of course, Republicans still can’t believe that Barack Obama won the Nobel Peace Prize. But then Democrats can’t believe that Sarah Palin wrote a book.

    The Tonight Show with Conan O’Brien

    ● Today in Los Angeles we experienced our second day in a row of rain. Or as people here call it, “the Apocalypse.”

    ● Last night, the White House hosted a tribute to Latin music, and President Obama wiggled his hips a little on the dance floor. At which point a committee in Sweden immediately awarded him a Latin Grammy.

    ● Some of the celebrities at the White House Latin Music Night included Gloria Estefan, George Lopez, Eva Longoria, and Jose Feliciano. Apparently, it was much more fun than last year’s party which was just President Bush and Dora the Explorer.

    ● A top adviser to President Obama says that the most important interactions the president has with Joe Biden happen when no one else is around. Obama also says that the best interactions with Biden happen when Biden isn’t around.

    Late Show Top Ten

    Top Ten Signs Your Toddler Watches Too Much Television

    10. He’s got a satelite dish on his crib
    9. Wants Neil Patrick Harris to host his birthday party
    8. Can count to 10/9 central
    7. At bedtime, asks you to read him the Nielsen Ratings
    6. Instead of security blanket, clutches a ShamWow
    5. Keeps wanting to know why grandpa “got canceled”
    4. He weighs 135 pounds
    3. Thinks the capital of Montana is Hannah
    2. Constantly implores you to have your pet spayed or neutered
    1. His first words were, “Your local news starts now”

    Late Show with David Letterman

    ● Cold today here in New York City. So cold, Sen. John McCain’s teeth were chattering . . . on his nightstand.

    ● Bernie Madoff got into a fight in prison. So they’ve got him on a diet of bread and water . . . like his investors.

    ● Martha Stewart had the same problem in prison. She got into a fight. Someone had swiped her nutmeg.

    ● The healthcare bill passed the Senate Finance Committee: 14 yea; 8 nay; and 1 “You lie!”

    The Late Late Show with Craig Ferguson

    ● It’s raining here in L.A. If we get washed out, the women will just use their fake breasts as flotation devices.

    ● When it rains here, people go nuts. They’re already too busy to drive because they’re putting on their makeup, texting, and getting liposuction.

    ● I think I like the rain. I like to see everyone miserable.

    Jimmy Kimmel Live!

    ● It’s been raining here in L.A., and no one seems to know what to do about it. On Monday night, it rained and there were 186 car accidents. It’s like it’s raining tequila right into our mouths.

    ● A little rain and we all turn into Lindsay Lohan. One hybrid car with a vanity plate that read “treedom” was actually crushed by a tree from the excess rain. It was an irony tree.

    ● The Obamas held what they called a “Fiesta Latina” and a performer, Thalia, encouraged el president to salsa with her. Michelle Obama didn’t seemed pleased at all. So much for the Nobel Peace Prize.

    Late Night with Jimmy Fallon

    ● Yesterday the Democrats’ healthcare bill made it past the Senate Finance Committee in a 14-9 vote. Republican Sen. Olympia Snowe broke ranks with her party and voted for the Democrats’ healthcare bill. She’s been missing ever since.

    ● The bill easily made it through the committee with a vote of 9-14. Or as Roman Polanski calls it, the perfect age range.

    ● Even though the Democrats’ healthcare bill was passed, President Obama said that now is “not the time to pat ourselves on the back.” Mostly because you might tear a muscle.

  • Rich October 15, 2009, 4:20 pm

    Aloha All

    In response to Smithsonian Collateral Bonds etc:

    5 August 2009 Mark Kamstra and Robert Shiller

    We make the case for the U.S. government to issue a new security with a coupon tied to the United States’ current dollar GDP. This security might pay, for example, a coupon of one-trillionth of the GDP, and we propose the name ‘Trill’ be used to refer to this new security. This new debt instrument should be of great interest to the Government for its stabilizing influence on the budget (as coupon payments fall in a recession with declining tax revenues) and for its yield, based on our valuation. Standard asset pricing analysis also suggests that Trills would enable important new portfolio diversification strategies and, in contrast to available assets that protect relative standards of living in retirement, Trills would have virtually no counterparty risk. We believe there would be a lively appetite for the Trill from institutional investors, public and private pension funds, as well as the individual investor. We make the case for the U.S. government to issue a new security with a coupon tied to the United States’ current dollar GDP. This security might pay, for example, a coupon of one-trillionth of the GDP, and we propose the name ‘Trill’ be used to refer to this new security. This new debt instrument should be of great interest to the Government for its stabilizing influence on the budget (as coupon payments fall in a recession with declining tax revenues) and for its yield, based on our valuation. Standard asset pricing analysis also suggests that Trills would enable important new portfolio diversification strategies and, in contrast to available assets that protect relative standards of living in retirement, Trills would have virtually no counterparty risk. We believe there would be a lively appetite for the Trill from institutional investors, public and private pension funds, as well as the individual investor.

    The tradeoffs appear to be:

    Devalue the dollar and increase the CPI as happened in the 70s.
    By now the USA knows it cannot inflate its way out of deficits.
    Increase Taxes or lower Transfer Payments to
    decreases deficts at the cost of much lower output which cannot be offset by the Feds. Higher stock prices mean higher productivity and Lower stock prices mean lower productivity, why Rosie and others may be missing the boat.
    (Good ol’ trailing stops!)
    A national sales tax is even more contractionary, while the 1% Total Transaction Tax can stabilize the economy and markets.

    Re gold, dollar and stocks, the first is overdue for a fall, the second overdue for a bounce and the third overdue for a fall according to our Big4 Asset Allocation model….

    Regards*Rich

  • Chris T. October 14, 2009, 3:30 pm

    I wasn’t going to write anymore to this thread but ricecake writes:

    “p.s. I don’t mind pay a bit more taxes to get us all out this mess. Short pain is better than long pain.”

    Technically, there are prob. many of us, who would be willing to shoulder some burden, if it would right the ship.

    But our governments’ (states, too) history proves that this simply does not happen. These extra funds are never used as you intend them to.

    Case in point:

    If you look at a graph of official US debt (40 years is plenty), you can not find any spot along that curve which is flat (tangent line parallel to X), let alone any spot with a downward slope.

    Thus, what about those vaunted Clinton surpluses? If you don’t believe they were a sham to begin with, how come the total debt did not decline when we had more govenrment income than expenditures? The obvious answer is because the excess funds were used for new, other, non-debt-reduction purposes.

    This will be no different, no matter how much extra pain you, or any of us, are willing to suffer, and that is why there is no point in going there.

  • Ben October 14, 2009, 2:38 pm

    Chris T. 10.13.09 at 11:14 pm (in response to my post) “Why is this notion that debt will be defaulted on by us rather than monetized (nflated away) so prevalent? ”

    Hello, Chris (or do you prefer Mr T?)

    First, I must correct (yet again) what I posted. Likelihood has nothing to do with it. Rather, EXTENT does. That is what I should have said. And I don’t know to what extent monetization, default, and sheer terror will shake out the weaker creditors. That’s probably why I didn’t put it that way. It was last-minute, rush correction.

    But what I am near certain of is that the shaking-out will take place so that interest may rise. The weak hands will be kicked out, while the strong endure. The best bluffers will out-lie the worst bluffers.

    Why do I think so? I refer you to one Antal Fekete for a fuller illustration…

    http://www.professorfekete.com/articles.asp

    Read any/all about the sickness of unstable interest and backwardation. I would point you to the best ones, but unfortunately it has been a while since I read them, and I don’t remember which they are. They’re all quite good, and worth reading, imo.

    I would say more, but my time is short this morning. Sorry. All I can say is that a gold fever is the only way back to economic health. Creating new money to pay off debt simply will never do it. Just imagine if a body couldn’t have a fever. Viruses and bacteria would have a field day, wouldn’t they? Something has got to give so that real recovery can begin, and that means balancing the proportion of credit to debt to money to pay it. Of bondholders… bribe them out, scare them out, default them out… Just so long as they go OUT. This is obviously not on the minds of the powers that be, but this what natural law is suggesting. No… it’s INSISTING upon it. That will become apparent as the chaos grows. Gold is the “big bad wolf” at the door of the house of low-interest cards and maniacal markets. It means to huff and puff, and be wrecking ball to the unstable structure. And speaking of long-winded things…

    I’ve written too much and I REALLY gotta run now! To the rest, I regret that I couldn’t read most of the posts. Some of them are quite interesting. I thank Mr Ackerman and Mr Cash for posting this topic!

  • mario cavolo October 14, 2009, 8:58 am

    Senior Cuidado….we easily meet in the middle on half of your perspective because it indeed bears some truth and a wise warning. Note my other articles on my site where I mention how the Chinese seem to be subtlely kicking foreigners out of their country by making visas more and more restrictive and note the recent scathing European Commission Annual Report on business becoming harder and harder to do in China when it should be getting easier and easier. Indeed, I agree with your fear, their interests far more selfish than some might believe. I have no love here, just seeking appropriate, measured opportunities on the stage of world markets and asking where is the strength likely to continue? Yes, Senior Cuidado, I also believe the Chinese are quietly, indirectly, cleverly playing their cards in the magnificently sneaky way they have mastered. However, they are not so dumb as to cut off their nose to spite their face too soon and there are ways for us to partner along to our advantage for quite a few years yet. With respect to Mish’s opinion on the yuan, I sense that he severely underestimates how much cash is in China in both the public and private sector. They are not building “a” subway line in a city. They are building FIVE subway lines in EACH city…all paid in cash, not muni bonds. “China rising” is an unstoppable phenomenon as the “U.S. rising” was post WWII…so sad to see where’s its headed now at the expense of 150 million or so Americans who are the main sacrificial lambs whose lifestyle and freedoms have been slaughtered…Cheers, Mario

    &&&&&

    Mario, I do not understand your confidence in the government of China (and frankly the rest of Asia) to support the Rule of Law and property rights going forward.

    The problem with the western nations right now is that they are heading downward toward a systemic lack of transparency that is the cultural norm in Asia. Jim Rogers Macro China Theory is based on a ludicrous assumption that the cultural foundations for long term stable economic growth (Rule of Law, property rights and transparency based on the Magna Carta, English Bill of Rights, U.S. Constitution etc) have been successfully transplanted to Asia.

    IMO under the coming duress China and Japan and the rest of the Asian Tigers will revert very quickly to tradition.

    Side note: the yuan as future world reserve currency is a joke. Mish Shedlock is correct when saying that, if allowed to float, the yuan would likely crash. The USA is admittedly now a banking debacle due to Oligarchy. But China is the home of institutional Communist Party black box banking.

  • Frank O'Connell October 14, 2009, 8:40 am

    The coming Inflation or deflation
    ————————————————–
    I live in a lovely part of N.W.England , Formby,on coast a place near the sea.
    It is a place were people very rarely leave.
    It is still an old-fashioned place, and the children and community have manners and respect for one another.
    These are very difficult times for us all.
    I could could put in my 5 penny with regards to this discussion.
    I recently looked online at a New York library-Bronxville libary:-http://villageofbronxville.com/sub1d.htm
    Looking at the old pictures of the area not unlike England in the early part of this century.
    Where did it all go wrong?
    I am 73 years old, never having had a mortgage, and I never took on debt.
    I was born in a little place 8 miles from Manchester. I am the eldest of four children.
    My father earned £5 per week in early 1940’s and my mother never worked. She looked after us all.
    We lived in a cobbled street, no locks on the door. I still remember the names of all my neighbours. We had no electricity, no hot water. Seems austere, but it wasn’t. I had a wonderful childhood.
    Now it is all debt.

  • John October 14, 2009, 6:54 am

    James questioned, “Can you explain why Iceland is not experiencing deflation?”

    To me, it looks like Iceland has overall deflation with some inflation on things needed to survive (like food).

    On February 28 2008, Ron Paul called for an inflationary depression. Fox News video with Ron Paul calling for an “inflationary depression that could be worldwide”.
    http://www.youtube.com/watch?v=0EZeNulOz9E
    Jump to 4:10.

    Instead of Ron Paul’s intelligence and proven economic ability, the GOP put their head in the sand and nominated the gun-grabbing amnesty-supporting warmonger never-had-a=private-sector-job McCain. Oh well, it’s apparently too late to fix the system. We can only choose how bad the govt/corporate plutocracy will make it.

  • ricecake October 14, 2009, 5:28 am

    Since all the bad things already been said, I’m saying something different.

    I think the US government is making money. Big time. Here’s why:

    1) Interest rate low T-Bill’s cheap. Lots of cash in the money market earning literal thing. People give the government almost free money to put where it want.

    2) Right now and in the future Americans are the major customers of the Government Treasury, not the foreigners. People are saving not spending. How much money in the Money market they say? 3. something trillions? My retirement is all in money market because I’s so scared so confused o put them anywhere like in the stock market. And guess what? Last I check my money is on the T-Bill, bonds, and cash etc. Many others like me. All the retirement deducted from our paychecks are put in the money market funds and therefore, in the T-Bs

    3) We all know that the government pop up the stock market that means the government is directly invest in the US industries and businesses supporting their stocks equity price due to the fact that People get so scare they are out of stock market for good. So the government must pick up the tasks in helping to develop new technologies and new energy as well as new energy utilization for the future. I think the US government will make lots of profit from doing that.

    4) Government also put money in the Real Estates paying 10 cents on a dollar(?) So when the Economy gets better in – say 5 10 years time, the US government also will make money.

    Ok may be I’m fantasizing. But I believe there are grains of truth in the above too.

    p.s. I don’t mind pay a bit more taxes to get us all out this mess. Short pain is better than long pain.

    The difference between the USA and Zimbabwe is that when the US government prints money, there’s lot of stuff for you to buy in the USA. But this is not the case in Zimbabwe because Zimbabwe does not has the economy to back their government printing press. Moreover, Zimbabwe people are not the American people, such as you guys here. Although the USA has too many obese lazy evil people, there are also lots of good people quality people too.

    At the end is all about the people and their creativity and productivity and their spirit.

    p.s. if everyone only their invest in Gold, do you think we would have iPHONE? Microsoft? GE? J&J? P&G? Google? The internet? The mobil technology? GPS? Aerospace technology? Most Advance Agriculture in the world? Most Advance medical technology and pharmaceutical biotech in the world? The defense industry that on one dare to invade the USA?

    In the new energy development regime, China is all together working crazy right now while you Americans are still fighting one another like bunch of Stanford wives and fish wives, nothing ever gets done but yelling whining and addicted deeply into such endless Doom Gloom End Of The World Porn. No wonder Thomas Freeman pleaded: ” If only we can be China one day. Then get back to the Free market …”

  • Senor Cuidado October 14, 2009, 4:58 am

    Mario, I do not understand your confidence in the government of China (and frankly the rest of Asia) to support the Rule of Law and property rights going forward.

    The problem with the western nations right now is that they are heading downward toward a systemic lack of transparency that is the cultural norm in Asia. Jim Rogers Macro China Theory is based on a ludicrous assumption that the cultural foundations for long term stable economic growth (Rule of Law, property rights and transparency based on the Magna Carta, English Bill of Rights, U.S. Constitution etc) have been successfully transplanted to Asia.

    IMO under the coming duress China and Japan and the rest of the Asian Tigers will revert very quickly to tradition.

    Side note: the yuan as future world reserve currency is a joke. Mish Shedlock is correct when saying that, if allowed to float, the yuan would likely crash. The USA is admittedly now a banking debacle due to Oligarchy. But China is the home of institutional Communist Party black box banking.

  • mario cavolo October 14, 2009, 3:00 am

    Government’s laws of the land have tied the hands of the American citizens to be able to be the entrepreneurs they need to be to make a living when times get tough. The reason so many of us expats appreciated moving overseas to places like China is that there were far fewer restrictive rules and policies. Why do we care about this? Because of the inconvenience? That’s a small part of the problem. We care about being strangled by the laws and rules because they are expensive, inefficient and inflationary, as they have proven to be. Now the government is getting more and more involved in your daily lives, and that means the things we need will become even more out of reach financially, while at the same time, the deflation of assets is making us poorer and poorer — a double whammy to bear. A further problem is that here in China, they ARE listening to the international community, to become more transparent and standardize the laws and policies here too, and so we are also seeing the inflation that comes from the new expenses and inefficiencies of the new laws and policies that must be followed. For example:

    1. “Average citizens” in China to now are “poorer”..they take buses and subways, they drive bikes and scooters…FOUR on a bike INCLUDING INFANTS….you know what we call that here in China?…a FAMILY taking their children to school and then going to work to make a meager wage. You know what it’s called in the U.S.?…CRIMINAL CHILD ABUSE…someone dials the police, arrests you for a variety of minor traffic safety offenses, and CPS comes and TAKES your children from you because you have endangered their lives. I’ve seen women breastfeeding their infants on the backs of scooters!!…oh, they forgot to put on their helmets though!

    2. We need to make money to feed our family, pay our bills. My wife makes a mean tasty italian tomato sauce. Cool…hey I’ll make a few extra jars each week and start selling it to the neighbors…that will help and everyone’s happy — except I’ve just broken a dozen laws ranging from labor laws, health & safety violations, no permits, no inspections, and tax evasion. Or I’ll go and find some cheap goods to sell out of the back of my tricycle cart along the street. Even better I’ll buy a metal barrel, put in wheels, stick coal in the bottom, to make an oven that bakes sweet potatoes. I’ll walk up and down the street selling them. People LOVE them. But I go to jail and my family starves.

    They’ve ruined your life. They’ve raped your lifestyle. They brainwashed you as a society into thinking that it was ok to pile on too much debt, getting themselves rich. Well what DID you think their purpose was? Then they’ve tied your hands to do anything about it.
    I’m surprised I’m writing this, but this is reality and we need to formulate very carefully how to position ourselves for the future. ONE IDEA: Here in China, there are still many, many places where you can buy an apartment at $60 to $100 per square foot. I suggest you do so as soon as possible for two reasons. 1) Price-decline risk is very low, if any. 2) Inflation protection 3) Those assets will be in Chinese yuan. That’s a wise strategy to compliment your global portfolio and gold/silver holdings.

    Mmm too long a rant but I think relevant…Cheers, Mario

  • Jan Van Goyen October 14, 2009, 1:45 am

    I remember Vern Myers. He was so popular that People Magazine had a piece on him. He was an old school geologist type. You can barely find him on the internet.

    &&&&&

    Myers was one of my personal heroes. His common-sense approach to economics made fools of those with advanced degrees in the subject. I interviewed him at his home in Spokane for a piece I’d planned to submit to Barron’s, but he was not at his best that day, and so I withheld the interview from publication. RA

  • Chris T. October 13, 2009, 11:28 pm

    Ben one more thing on another of your points:

    “The U.S. has the best refineries in the world, especially for producing quality diesel fuel. The world wants and needs that grade of fuel, and they get it from us.”

    Where do you get that from? It is completely not correct. If it were true, why then were we producing such sh**ty quality diesel until just recently of a kind that hasn’t been available in Europe for years?
    European diesel manufacturers such as Mercedes or VW actually stopped selling their Diesels stateside, when the Diesel-garbage produced here no longer allowed them to meet the more stringent emission standards. They had to wait for the “clean” diesel to be introduced, which is not anything they didn’t already have at home.

    In fact, our refinery capacity for anything other than high grade sweet crude is woeful. It is easy, and cheap to deal with a raw material that was made nice by mother nature to begin with..

    And the gasoline stuff we produce is the laughing stock elsewhere: Our premium is almost no better than the regular elsewhere, and our regular used to be laughed at in Europe as “polish” gasoline (when Poland was still communist-ruled).

    When we had our $4 gasonline a while back, it was in part driven by inadquate capacity here, and in part due to our inability to deal with very available, but lower grade crude. Thus we had to purchase refined product abroad, which caused capacities in Europe and elsewhere to be diverted to producing for the better paying US market, and driving up prices there as well.

    We have the “best”, yet have to rely on others when everything is not just perfect for lack of ability?
    Hardly.
    \

  • Chris T. October 13, 2009, 11:14 pm

    Ben writes:

    “…until either money supply is forced to inflate (not likely) OR debt forced default
    (likely)….”

    Why is this notion that debt will be defaulted on by us rather than monetized (nflated away) so prevalent?

    It makes no sense fot those involved, either legally or politically.

    a) Legally: What actual obligations do US T-Bills, Treasuries, etc place on the government and what has been promised to the creditor?
    Merely this: To “redeem” one “piece of paper” at maturity for other “pieces “of paper”. (In actual fact it is one ledger entry with a depository with anothe ledger entry at a financial insititution in most instances, how many bonds, bills are still printed-up?).

    This, the US Government will ALWAYS be able to do, thus it will always be able to honor its legal obligation to redeem. Therefore, no need to ever default.
    If there i n reaseon to default, why ever would one do anyway?

    There is no explicit legal obligation in these debt instruments for the US Government to redeem with “paper” any specific value, just with the a nominally correct amoutn of this “paper” itself..
    In fact there is NOT EVEN an IMPLICIT obligation to do so, which is proved by the existence of the TIPS. If the obligation were implicit, then there would be no need for TIPS in the first place. By their existence the debt-issuing entity is actually EXPLICITLY stating, that it is planning on redeeming the non-TIPS debt with debased “paper”, and that it is willing to offer a few takers protection against that announced debasement. (leaving aside any discussion as to the values of TIPS themselves).

    b) Politically:
    Default will not be any less visible, impact future ability to borrow any less, nor cause any less catastrophic short-term effect than monetization — it will have much greater immediate impact, and hardly with immediate better effect (see Argentina after its defaults).
    Why ever would a political system and its actors, with their “long-term” outlook, not lasting beyond the next election cyclye, choose immediate, very visible, and drastic pain over much slower, less immediate, and much less visible, and (even if) harsher future pain?
    Especially when in the latter case, it still appears that there are willing takers (unless all of these are already stealthy Fed purchses, I doubt that though), whereas in the former, there would be no takers right away..

    Because it is the right thing to do? Politicians?

    &&&&

    C.V. Myers proved you point in an series of exchanges with the Treasury Department. Myers

    Interesting point, since all bills used to say “This note is legal tender for all debts, public and private, and is redeemable in lawful money…” In an amusing series of letters exchanged with the Treasury Department, C.V. Myers tried to redeem some $5, $10, $20, and, eventually, $100 bills for “lawful” money — of course with no success. Treasury, not without its own sense of humor, sent him two $5s for the ten-dollar bill and simply returned the $20 and $100s. RA

  • James October 13, 2009, 9:03 pm

    >> Do we really need to read this article, or, like 99.99% of the inflationists who post in this forum, does it neglect to consider asset deflation as an overwhelming offset to milke-and-eggs inflation? <<

    Rick,

    For one, I have no axe to grind in the 'Flation debate. I'm just an average schmoe trying to figure out how to protect what wealth I have. I've read both sides and, imo, the INflationists have the stronger argument. But, I guess we'll see in time how things play out.

    Regarding what you call "milk and eggs" inflation, for those of us, in the majority, who own our homes (along with the bank in most cases), I fail to see how the great decline in the value of my home offsets the increased money I'm laying out for food and gas. It's great that the price of houses and jumbo sized flat screen TVs has come down, but I can get along without a new TV or a second home. I can't get along without eating, drinking, heating my home, and filling up my car.

  • Paul October 13, 2009, 5:52 pm

    To correct my questions from my comment, above:

    I’d like to ask Mr. Cash if he:
    1. Feels confortable with his [billwilson’s] non-USD holdings. Isn’t [Shouldn’t] he [billwilson] concerned about a race to the bottom by Central Bankers?
    2. Wants to revise his [Mr. Cash’s] USD price for the top in gold [1061.50]?

    To add a comment:
    What a brilliant observation by Mr. Rich Cash in his last paragraph, if I interpret correctly–banks and the government are running out of the ability to continue to finance so many things that had run up in price: housing, tuitions, healthcare, etc., because of the increases in payments of interest on exisiting debt.

  • D G October 13, 2009, 5:06 pm

    This is a lively discussion. A couple of observations:

    1) goldseek.com has a John Williams interview this last week on their radio site. If I hear him correctly, he feels this process is unfolding towards hyperinflation, though the hyperinflation is not at all apparent now. It is well worth the thirty minutes of listening. He thinks this will slip, slip, fall 2 to 5 years from now.

    2) The trends are in place to support Williams’ argument. Unabated rising unemployment. A government that has no restraint on borrowing money. A populous that encourages the government to borrow. He says that Zimbabwe functioned because it had a “dollar back-up black market”. We do not have that luxury. Do you get the idea that Pelosi, Reid, and their ilk have any concern for these issues? Not bashing these folks, but observing them without the pom-poms. W and McCain were no better.

    3) We have got to let up on protecting Obama from criticism. All Presidents should be criticized. I am PO’d with his lack of political spine. I didn’t like him because of his income redistribution desire and his “socialist” alliances, BUT I was hopeful that maybe he was smart and did have some conviction for good change. Hope is eternal.
    He is just as bad as W….only no one called you a bigot if you criticized Bush. This all but guarantees that race plays a bigger and unfortunately negative role in future elections.
    Neither one of these clowns had or have any intention of stopping the inflow of illegal immigrants if it means those new tax eaters could be a possible vote. Fiscal responsibility? They could not care less. Deficits don’t matter is a Cheney quote.

    4) This is an epic proportion mess. It will not be resolved smoothly by pulling on a few levers, tweaking, this, adjusting that, and gently turning. It will be resolved in typical parabolic, greed, fear, crash characterization. This will be a long episode in time which our children’s children will be discussing….like we discuss our Grandparents and their trials with the 30’s, WW2, the Hitler, etc.

    Just my worthless two cents…which is worth exactly 1.1 cents in melt value, up substantially in the last 10 years.

  • Rich October 13, 2009, 4:25 pm

    Good point.
    Which came first, chicken or egg, excess public or private debt and taxes?
    The whole idea of a central bank leveraged 20:1 or more with no collateral but debt, fiat franchise and treasury taxes, violating the Constitutional mandate for gold and silver as legal tender, begs the question. We could have replaced the destructive selective income tax 80% paid by private individuals, with a Constitutional productive 1% Transparent Transaction Tax decades ago, but for big banks and government apparatchiks. Ways and Means published my testimony in 1994 regarding replacing the Income Tax.
    This may only seem like a rant since mass media were busy trumpeting the corporate monopoly government line since 2001, how (ersatz) recovery is just around the corner thanks to debt, derivatives and the Fed shadowbanks. Media could address the 22% real rate of unemployment and the incalculable real rate of malinvestment due to government interference in the economy, growing gargantuan and crowding out productive enterprise, the Gulliver and Leviathan Swift and others parodied in their Travels. As Maggie Thatcher said, “The problem with Socialism is you run out of other people’s money.”
    We chided the Japanese for not taking bad bank writeoffs and suffering lost decades. Now we have met the neoCon neoKeynesian enemy. To paraphrase Ron Paul, big Fed government took an ordinary several year panic correction and is busy turning it into the Greatest Depression, media enablers still refusing to use the D word. When they do, it may mark the final economic bottom, sometime out around 2014, according to Econocasts currently, subject to elongation if big government continues this economic charade.
    (Jubilee peaked in 2000 in real terms of gold.)
    Government, industry and then our population over-leveraged and wasted equity savings to live beyond our means. Look back at Hoover and FDR. Not for the first-time, as those familiar with 4000 years of Sabbatical, Jubilee and prohibitions against slavery and usury know.
    The fallow Winter Season of the Jubilee Generation wave may be extra-long this time because we set new records in prodigal profligacy. The sooner we take our lumps and write-downs, the sooner we may recover. As CV Myers said, “Every penny of every debt must be repaid – if not by the borrower, then by the lender.”
    PS: I supported Obama after Ron Paul did not get the nomination. I pray he finds the courage to stand up to money trust union handlers that continue to cripple our economy with currency debauchery, deficits, destructive subsidies, export of living wages and manufacturing jobs, import of illegals and red tape taxes ruining the American Dream…

  • Paul October 13, 2009, 3:48 pm

    The circuses and free bread will continue–until?

    Is it too far a stretch to see the Treasury selling collateralized bonds? How about bonds backed by the contents of the Smithsonian? The Strategic Petroleum Reserve? Federally owned timber? Offshore royalties?

    I’d like to ask Mr. Cash if he:
    1. Feels confortable with his non-USD holdings. Isn’t he concerned about a race to the bottom by Central Bankers?
    2. Wants to revise his USD price for the top in gold?

    Mr. Cash’s commentary is very thought-provoking. Thank you.

    P.S. Rick, maybe you could ask forum readers to contribute to a “Top Ten” list of when the end is near in the Treasury’s ability to sell bills at 1950s S&L passbook rates.

  • James October 13, 2009, 1:42 pm

    My first comment did go through.

    Can you explain why Iceland is not experiencing deflation?

    From Bloomberg:

    Iceland’s economy will shrink 8.5 percent this year and consumer prices will climb 11.7 percent, both the worst performances among the world’s 33 advanced economies, according to the IMF’s latest forecasts. As the rest of the world begins to recover, Iceland’s recession will stretch into next year, with the economy contracting 2 percent, more than any developed nation except Ireland.

    Contracting economy, high unemployment, high interest rates, credit dried up.

    Sounds like a recipe for deflation, but prices are up almost 12%.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=awXzaHHx8T6M

    &&&&&

    See my comment below, James. RA

  • Ben October 13, 2009, 8:38 am

    Rich Cash: “If real money supply inflates again, bondholders sell in droves, driving nominal interest rates to the sky to reflect gold prices.”

    Very interesting point!

    This is why I don’t believe that the world is just going to dump their bonds and their dollar reserves. At least not ALL of the nations that have said or “said” they want to. Just think of what they gain if they hold them, but manage to scare everyone else out of them (ahem…China…ahem) by SAYING they will or want to (but look at the numbers… sales of Treasurys hasn’t plummeted, nor have dollar reserves decreased). I suspect that this bluffing game will continue until either money supply is forced to inflate (not likely) OR debt forced default (likely). In either case, though, gold and interest will rise to the moon, forcing general price levels to deflate due to extreme gold fever.

    billwilson: “America’s fundamental problem is a desire to live beyond its means as evidenced by driving SUV’s (while importing 60% of its oil)”

    Sorry to rant, everyone, but it’s like this…

    The U.S. has the best refineries in the world, especially for producing quality diesel fuel. The world wants and needs that grade of fuel, and they get it from us. But it’s not the greatest yeild from a barrel of crude oil. Gasoline is. Blame it on the laws of chemistry, if you must blame something. If you refine lots of diesel, which needs to be done not only for exports but also domestic use, the gasoline has got to go somewhere. Our “inefficient” vehicles are the best means to facilitate that supply and demand, from a scientific, environmental, as well as economic perspective.

    Yes, it is that simple. If we didn’t drive “less efficient” vehicles, I doubt that so much progress would have been made in the world today, and I’ve little doubt that things would be much worse. If you think the U.S. miltary is over-deployed, just imagine how it would be if all these developing countries weren’t able to progress as they have, for the want of diesel fuel that required (and still requires) “inefficient” vehicles to make economically available. The same can be said of the level of pollution and/or the economy.

    Things could be very much worse, I assure you.

    The problem with the U.S. is not SUVs. One thing I’m well aware of is that, despite Officialdom’s creation of the CAFE standards, and raising the bar of… Seems the more cars are made “efficient”, the worse things get, the more people complain about MPG, the more Offciaildom reacts to the mess it created in the first place, the worse things get…

    One would think that after all these years, people would wonder if their attacks on “excess” are ill-placed. But then again, the road to hell is paved not only with good intentions, but also (and more often the case) baseless accusations and blind criticisms.

  • Chris T. October 13, 2009, 7:13 am

    [CORRECTION TO PREVIOUS post, Rick, sorry!]:
    [Beginning]:
    That is a symptom, as is the loss of production to off-shoring, and as is the importation of cheap(er) labor via the legal AND illegal pool, and they are these specific actors’ (families, manufacturers, services) coping mechanisms, of trying TO KEEP UP what was once had. Sure it was beyond the DECLINING means, but only in an effort to use any way possible of KEEPING up a certain lifestyle, that was had already..

    There is a truth to Leave it to Beaver or to Happy Days:

    [Last sentence]:
    That is what long-term debasement/inflation does, it changes not just the economy per se, but the whole of society.

  • Chris T. October 13, 2009, 7:04 am

    “America’s fundamental problem is a desire to live beyond its means as evidenced by driving SUV’s ”

    That is a symptom, as is the loss of production to off-shoring, and as is the importation of cheap(er) labor via the legal AND illegal pool are the specific actors” (families, manufacturers, service-sectors), of trying TO KEEP UP what was once had. Sure it was beyond the DECLINING means, but only in an effort to activate any method possible of KEEPING up a certain lifestyle.

    There is a truth to Leav it to Beaver of the Happy Days: The one earner could provide a decent middle class life for the whole family, and those women who chose to (of course not all wanted t0) could stay at home.

    How many can do so today? Do all young mothers give Similac and place in nurseries at 3 months by choice, or are they forced back to work, because the other earner can’t privide enough?

    And when the 2nd earner was not sufficient, then the mortgage ATM had to be activated. That of course is now passe. Not all Americans drive brand new Merceds GLs or Range Rovers, they were Broncos, Blazers, ’95 Explorers too, gaz guzzlers sure, but cheap.

    You must believe in the “living wage” based on your post, well less than 40 years ago, you could buy a decent home in a decent neighborhood for less than 2 times a wage of $6/hour. Don’t believe it?
    2years x 52weeks x 40hours x $6 is about $25000 gross.

    What does that buy you today? There still are scores fo people earning way less than $10 per hour, but of course if you walk into Dunkin Donuts, or White Castle, or any establishment like that, they only do it, because they used to get less then a few bucks a day, and they are willing to put up with 10 people in a 2 bedroom flea-bag.

    How much would your Taco Bell burrito have to cost, if they paid the kind of wage one earnied in a place like that in 1970?

    So don;t blame people for trying to cope, especially if the coping mechanism was dangled in front of them like the proverbial carrot. You could blame them, if for anything, for not getting it, and putting up with this for so long.

    &&&&&&&

    A telling point about the “Leave It to Beaver” era, Chris. Consumer goods — especially electronics –are so seductively fabulous nowadays that one could overlook the fact that America’s middle class can no longer afford the trappings of affluence that our parents’ generation took for granted, including the stay-at-home mom, real wood furniture. and plaster lathe walls. RA

  • Senor Cuidado October 13, 2009, 5:50 am

    [Bill Wilson notes below that Rich Cash’s] “rant [??] is entertaining, as far as that goes, but it misses the key point. It is the American “way of life” (of the last 30 years) that is the problem. Until it changes, nothing changes. Live within, or below your means. That means defense cuts (big ones), tax hikes (on the rich), shared sacrifice (universal health care), much smaller cars (reduced oil imports), etc

    Generalities don’t paint the true picture. Not everyone got into irresponsible debt with an Pay Option ARM and a HELOC. The vast majority of Americans have kept their own lives in reasonable financial order over the past decade. It only takes rotten government and 5% of the population to go crazy with EZ credit ripoff schemes to bring the entire banking industry to its knees.

    But I have a strong suspicion that you’re the kind of person who would make this same statement – “American “way of life”… that is the problem” – at any other time in American history also. As if pre-1980 (your 30-year mark) everything was just fine and dandy in the USA. Because this country has never been good enough for certain kinds of people. The people with perfectly organized sock drawers and the people who want to make the trains run on time and the people whose greatest pleasure in life is telling other people how to live their lives. The people who don’t give a damn about liberty and turn us into a statist worker’s paradise based on the Swedish Model. Right? That’s a certain kind of person’s twisted idea of America.

    But the real America has always been chaotic, messy and stubbornly out of control. Because that’s what liberty looks like. It’s not always so pretty. But it’s the key to our success.

    This statement: shared sacrifice (universal health care) is so emotionally invested in dysfunctional big government statism and so deeply anti-American to the core that it’s off the charts. Please. The government is the problem. Its corruption and its unrelenting growth and its interference in the affairs of the citizens.

    The Fed, the Treasury, the Congress, the Backstopping Policy and the Too Big To Fail ideology have brought us to the brink of disaster. NOT the American way of life.

  • Mark October 13, 2009, 4:25 am

    The decline in the U.S. has been accelerated the last 8 years by a government that has sided with wealthy individuals and corporations to prey upon it’s general populace. The Predator State is one that permits exorbitant usury, aids in the breaking of labor to the level of indentured servitude (which capital has always sought), and builds into it’s laws unequal protection (like a corporation, legally an “individual”, permitted to simply pay a fine but “admit no wrongdoing” – try that one on the judge if you go to traffic court.) Corporations have a vested interest in converting the U.S. political system to one like Communist China – where the country is run via the same rules as a corporation – appointed leaders and no input from the worker-class. Is it any wonder that those in positions to aid and abet such a transformation have made China – once seen as a threat through it’s communist political doctrine – a favorite destination for our corporate “leaders”?

  • billwilson October 13, 2009, 4:11 am

    I was referring to to the following comments that detract from the article and have nothing to do with the article. Their sole point seems to be a dog whistle to the Obama haters out there.

    “Barack Obama’s one month in office Nobel Peace Price nomination and award notwithstanding.” (nothing he did)

    “Princeton First Lady” (and this is supposed to mean what?)

    &&&&&

    Exactly my point: The very mild mention of Obama hardly constitutes Obama-bashing. As for “Princeton First Lady,” it marks Michelle as an elitist, somewhat removed from the problems of America’s downtrodden. RA

  • James October 13, 2009, 4:01 am

    Iceland Shrinks 8% as Prices Increase 11% in Deepest Recession

    http://www.bloomberg.com/apps/news?pid=20601110&sid=awXzaHHx8T6M

    In Iceland, the stock market’s down 97%, no one’s borrowing or lending, the economy shrunk by 8%, and yet consumer prices are up by almost 12%. Why aren’t we seeing deflation in Iceland?

    &&&&&&

    Do we really need to read this article, or, like 99.99% of the inflationists who post in this forum, does it neglect to consider asset deflation as an overwhelming offset to milke-and-eggs inflation? RA

  • billwilson October 13, 2009, 2:57 am

    America’s fundamental problem is a desire to live beyond its means as evidenced by driving SUV’s (while importing 60% of its oil), using houses as ATM’s, wanting tax cuts without cutting spending, and expecting the world to continue to finance this orgy of excess from its savings as the US prints more and more dollars.

    Your rant [??] is entertaining, as far as that goes, but it misses the key point. It is the American “way of life” (of the last 30 years) that is the problem. Until it changes, nothing changes. Live within, or below your means. That means defense cuts (big ones), tax hikes (on the rich), shared sacrifice (universal health care), much smaller cars (reduced oil imports), etc.

    Unfortunately until the rest of the world cuts the US off, it seems it will refuse to face reality, or take responsibility for its own situation. Once the wall is hit however the road back can begin. Let’s see how long it takes to hit the wall.

    I am now 40% gold (down from 80% over the last 5 years), with lots of cash (50% – non USD). If gold hits $2,500 it is going to be a pretty rough world out there. I hope I don’t see it.

    &&&&&&

    I’ve edited out your hyper-sensitive references to Obama-bashing because I couldn’t find any evidence of it in recent posts to this forum or in today’s commentary — hardly a “rant” — by Rich Cash. RA


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