The housing boom fires are stoked. Credit score criteria is loosened and more people qualify for mortgages. Credit Repair becomes virulent also boosting scores. Hordes of now qualified buyers get new homes and the 6% contribution by sellers towards closing costs by sellers. Soon it appears all the credit bureaus have relaxed scoring criteria. Most lenders will take the lowest or middle credit score on the three bureau report to qualify the applicant. The housing spiral goes parabolic. Europe makes tons of money off mortgage securities. Federal government rakes in tons of income tax dollars. Property tax revenues erupt like Old Faithful. Everything is good.. or is it?

The housing Ponzi scheme which makes Madoff look like a kindergardener finally stops producing. The bankers and hedge fund bunch get the blame. Let’s look deeper at the cancer. The roots are the credit scores which allowed for this anomaly to take hold. Without qualified applicants there is no overnight eruption in the housing market. Once in place, it is nurtured by every level of government so as to squeeze more and more tax dollars from the unsuspecting public. Yeah, right ..they were blind to this. Perhaps they shouldn’t have approved of some foreign power having access to most of the credit files of the entire U.S. population.

In the end, the gamble fails for the Eurogreedsters. One world government and one world currency..well not yet anyhow. Cap and Trade, Global Warming, Al Gore, Socialist agendas etc. .. Americans are allergic to these irritants and will react against them. The Euro is down and the USD up.

Unfortunately, as the USD rises the stock market and gold decline these days. This occurs up to a certain point though. Look at the end of January 2009 and you will see gold holding hands with the USD through the middle of March. This is encouraging . Most know that gold is a hedge against inflation; however, it is a hedge against equity instrument declines. In other word, somewhere around $INDU 8100 gold ends its romance with the market and turns to the USD as its new lover. Thats the good thing about that old Casanova Gold.. when the romance sours it finds a new paramour. Thus the Euro is diddly, the U.S. ecnonomy is in Dr. Hyde mode, and gold is doing well waiting to hitch a ride to new highs.

Another one of those dreaded Austrians Murray Rothbard makes a good point in “Mystery of Banking” that there is significant lag between the increase in the supply of money and the eventual rise in prices. Like you said, lots of dead money lying in the banks with no one to lend it to. But look out when confidence starts to return and credit demand starts to pick up. There is a tremendous amount of potential energy stored up in personal and corporate savings as well as bank balance sheets. When the fear subsides and this energy begins to turn kinetic you will have price inflation. When people feel a palpable sense that their money is depreciating rapidly, you will have hyperinflation and a currency crisis. It’s happened many times before in history. Technology does not change human action.

My other hunch is that the yuan’s rise in the Spring of 2008 led to the spike in USD oil in the summer of 2008. And that if the yuan was freely floated, we would be paying a minimum of +$10.00/gallon for gas.

In which case the central banking system would be under direct fire from Congress as Congress has the ability to pull the plug on their fixed game. Americans will tolerate many things but being the loser isn’t one of them.

Before the Weimar Republic fell into an inflationary trap, was the economy in good shape? What led to the inflationary spiral?

What led to Rome falling into the inflationary spiral?

&&&&&

What on earth are you talking about, Jason? RA

Chris T: Yes, Liquidity, Velocity and Volume are all decreasing.

my point though is that V is an irrelevant and discredited concept altogether, that does nothing to inform us either way in the inflation/deflation debate.

Another apt analogy to money velocity is inventory velocityÖ

Whether the goods are going out the door at a rapid pace or not has no effect on their price, as neither does the V of money.

MV=PT thus becomes M=P, how much meaning is in that?

As prima facie evidence of potential being in the eye of the beholder, please enjoy one of the better summaries of Federal debt far exceeding the ability of the world, let alone the Republic, of repaying it.

To me it looks like default-driven deflationary implosion making dollars scarce from the house of cards built on sand waiting to collapse as debt crowds out productivity. What’s that game piling on and removing wooden sticks until they collapse?

Scriptures for millennia forbade Riba/Usury because they ultimately eat the seed corn with the borrower slave to the lender. That’s how Russia put Long Term Capital Management out of business.

To Stewart Dougherty on the link below, he see’s inflation benefiting gold.

Chris T: Yes, Liquidity, Velocity and Volume are all decreasing.

Edwardo: please get your facts and quotes straight or cease and desist.

John: Yes. I for one will be happy to reacquire gold and silver closer to original cost basis.

Other Paul: Goodonya. The day may come when Safeway takes Eagle PM coins, why we are still raising money for an ATM exchanging paper money for PM coins.
That day is not here (yet) when PM coins and goldgram spreads and costs well exceed the 1% Constitutional uniform Transaction Tax. The 1% TT on a quadrillion transactions a year with a spending freeze on discretionary items can quickly end the deficits, return private productivity and maybe even get us back to Andrew Jackson in 1835 when we had no Central Bank and no Treasury debt. Of course government may have to go on a diet. Can we all imagine a reality show called Biggest Loser for various government bureaucracies?

Robert: According to posts here and elsewhere, the Fed is already monetizing as much as 80% of Treasuries, which Geithner is trying to extend from 49 months average duration to 72 months “before interest rates rise.” The 10 year T Note rate almost doubled in a year. With 20:1 leverage, the $2 T capital of the Fed can acquire $40 T in debt assets, with nowhere to put or sell them. Doubtful Congress, Debt markets and Taxpayers may tolerate too many more TELFs, TARPS or PPIPs before raising iRates further due to sovereign credit risk, a big talking point today. $40 T may seem like a lot of buying power until we remember no one on the Street nor the Fed could swallow Lehman. Wait until Stewart spells out the staggering total of IOUSAs that dwarf the global economy, let alone America. If interest rates go up 5% the Federal Reserve is underwater.

YT Moey: We may see $5 oil and $500 eggs in that order.

http://www.kitco.com/ind/Dougherty/jan222010.html

Regards All*RichI

“If Uncle Sam can’t pay his bills, who will want his paper?”

My response is that we will see the day (sooner rather than later) when this question will be definitively answered, and I’m guessing that the answer will be the US Federal Reserve.

I’m firmly in the Schiff camp- when the “real” buyers of US debt stop showing up, the FED will step in under enormous political pressure and fire up the presses. I say that because if the choice was between printing money, or having Congress join the Ron Paul “Banish the Fed” movement- the Fed will choose the presses.

The USZ (United States of Zimbabwe) will be underway long before we see 300 dollar gold- and the reason for this (in my opinion) is that once debtors realize that deleveraging over time is akin to hopelessly losing a race- they will simply throw in the towel on the starting line and decide against even running the race at all.

How many of us “Good and decent” US citizens are seriously thinking about walking away from our mortgages because we feel we are throwing good money after bad? There is a very telling macro level psychology to be studied in that question.

From where I sit, the rates of defaults on debt appear to be moving upward at a far faster pace than the rate that asset prices are moving down, and I don’t believe that default counts as deleveraging- deleveraging requires compromise between lendor and debtor- default is the debtor lifting a big middle finger to the lendor- leaving them holding the bag…

With the public sentiment toward banks being what it currently is- I don’t think it will take much more pressure to see a lot more middle fingers over the next few years.

Perhaps the gov’t will get smart and side with the people (not the banks) when the next wave hits, and that might be a game-changer, but I’m not counting on it.

This is a bogus concept, and should not be used to underpin any argument either in for inflation or deflation.

While the notion predates him, Irving Fisher (some call him the original deflationis, though charlatan or bufoon are more apt), famously placed that concept in his (many times) refuted equation: MV=PT

Sadly, the “V” part has survived as a concept even so.
Henry Hazlitt over fourty years ago did a great job at debunking this, anyone interested needs to investigate.

V is not an independent variable, it is always = T, thus the notion is bunk. Hazlitt sums that up:
“What we have to deal with, in the so-called circulation of money, is the exchange of money against goods. Therefore, V and T cannot be separated. Insofar as there is a causal relation, it is the volume of trade which determines the velocity of circulation of money, rather than the other way around… the velocity of circulation of money is, so to speak, merely the velocity of circulation of goods and services looked at from the other side. If the volume of trade increases, the velocity of circulation of money, other things being equal, must increase, and vice versa”
Changes in the demand for money DETERMINE the velocity, not the other way around.

Hazlitt again:
“Average individual cash holding must always be the total supply of money outstanding divided by the population… People who are more eager to buy goods, or more eager to get rid of money, will buy faster or sooner. But this will mean that V increases, when it does increase, because the relative value of money is falling or is expected to fall. It will not mean that the value of money is falling, or prices of goods rising, because V has increased… It is the changed valuation by individuals of either goods or money or both that causes the increased velocity of circulation as well as the price rise. The increased velocity of circulation, in other words, is largely a passive factor in the situation.”

Finally, a little Mises on this concept:
“The service that money renders does not consist in its turnover. It consists in its being ready in cash holdings for any future use. The main deficiency of the velocity of circulation concept is that it does not start from the actions of individuals, but looks at the problem from the angle of the whole economic system. This concept in itself is a vicious mode of approaching the problem of prices and purchasing power. It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available.”

So, please, leave this long discredited idea behind, it is not a “lack of velocity” that is deflationary, nor is an “increase of velocity” inflationary, because it has no bearing on the value of money, because it is not causative.