I spent many hours over Thanksgiving weekend responding to a huge backlog of e-mail messages, many of which concerned our favorite topic, deflation. Below are a few such letters that I thought you might find interesting. I will publish the remaining letters tomorrow (Wednesday). First up is Kahlif David, responding to my theory that someday we could all wake up broke, with no savings to shift into such presumably safe assets as gold. Khalif writes as follows:

“You have very valid points which have in the recent past been borne out by experience. In 1990 Brazil was in a hyperinflationary mess. In March of that year a newly elected president took office and immediately announced the freezing of all bank and saving deposits except for a nominal amount that could be withdrawn from each account.

“The effects were something to behold! As you point out, everything collapsed simply because there was no readily available cash to pay for anything, even a currency that was losing 3% a day to inflation became extremely valuable. Gold, dollars stocks all meant nothing, just cash and the supermarket owners were the most sought after people around because they were receiving cash. One could buy the blocked deposits at a 50% discount because so many people needed cash for urgent necessities.

Gold Reasserted Itself

“Since nothing was done about the underlying causes of inflation, it soon returned and the merry-go -round started again, but the stock market kept falling for another year and PE's of one or less were quite common. The lesson I learned was that in the short term you need huge gobs of cash, but in the space of weeks the hard currencies and gold reasserted themselves.

“But Brazil was different. We had no bond market to speak of and all government debt was churned in one day repo's or indexed to inflation, indices that were usually rigged. The asset of choice was land and property -- not that they were liquid, just that they were more difficult to steal! But on a three-year view, stocks came off best.”

‘Expendable’ Savers?

Here’s some point and counterpoint between your editor and Walter Eichelburg of Vienna, Austria. My comments are in italics:

“Thank you very much for your interesting series of articles. In one of them [concerning the odds of hyperinflation], you asked whether "savers were expendable". I think this is a very important question. In my personal opinion, savers are expendable for the Powers That Be -- i.e., central bankers and politicians.

“You wrote as follows:

You have also casually written off the wealthy 20% of savers as though they were expendable. This might be true at the ballot box, where the rabble have the votes, in theory, to confiscate Patek Phillipe wristwatches, Mercedes Benzes and Beluga if they so desire. But if the downtrodden and their elected representatives decide to punish the rich by hyperinflating savings into oblivion, they will be destroying the only source of wealth we have to rebuild the financial system.

Keeping Things Afloat

“Hmm. That’s a very good description of the political process. I don't think that these elites think ahead about how they will rebuild the system. Their only interest now is to keep the current system going as long as possible. And of course, to keep themselves in their positions. If it is possible to do so for a few months or years longer by hyperinflating (direct monetization of everything). they will probably do it.

“I see only two counterforces to hyperinflation: a) The collapse occurs so precipitously, as you wrote, that the central banks will not be able to react quickly enough. It is important to note that they would need to change their monetization methods in a drastic way; or, b) The market outsells them by dumping everything on the market much faster that the central banks can buy those assets. So, the respective currencies collapse.

A Big Confidence Game

“Savers and creditors are doomed in any case, because the worldwide mountain of (bad) debt and derivatives is so big. The whole thing is a confidence game, and if confidence in money vanishes, money is effectively gone too.

“Here are some questions to consider concerning why the elites do not think about the future or of rebuilding a devastated financial system:

- Why do Asian central banks buy so many U.S. Treasury Bonds? Answer: They want to

   export now.

- Why do the authorities permit a $250 trillion build-up of derivatives? Answer: They

   want to stabilize the system now.

- Why are hedge funds barely regulated? Answer: They do the monetizing via the carry-

   trade.

- Why do central banks permit such giant real-estate and debt bubbles? Answer: To keep the system afloat as long as they can.

“All of these activities keep the monetary system up a bit longer. But the price will be devastating if something significant breaks. This is LTCM times a thousand. In any case, it is not an   easy task to prepare for hyperdeflation and hyperinflation at the same time. The time to react in the right way may be very short.”

Hyperinflation ‘Practice-Run’

Thanks for your insightful letter, Mr. Eichelburg. Concerning your argument that expediency alone impels us toward monetization, I would agree. In fact, we can observe a practice-run hyperinflation in the means the government has chosen to bail out the airlines, assuming their pension obligations. The Fed is not directly involved as it would be if implementing bond-buyer-of-last-resort provisions of the Monetary Control Act. Instead, the transaction on the surface looks like capitalism in action, since the Pension Guaranty Corp. gets airline stock in return for ponying up cash on-the-spot. It is predictable that this same procedure will be ported over to GM and Ford, but the monetization aspect will remain obscure, since it will be spun as a loan-for-stock deal just like the current one. Concerning the choices that elites make, they are transparent only when viewed with the proper amount of cynicism. Deniability should pose no problem down the road, since only Chicken Little can see the disaster that is taking shape.

Barter Under the Nazis

In the following letter, South African Bob Visser, a self-described gold bug, recalls the Nazi occupation first-hand, when whiskey and tobacco were the staples of barter:

“I am a gold bug, based on experiences of many years ago. As such I follow eagerly all that is written in connection with that metal on the internet.  In my 70s I have the time, even though my IT knowledge is limited. As a  frequent visitor to 321Gold, I also do come across your regular  contributions, which display a free-thinking spirit, although I have no clue what the meaning of hidden pivots is. I also am not, or cannot play with ‘shorting’ markets outside of South Africa. Normally I therefore would have no reason to write to you. However, your publication of the letter by E. Overton that suggested whiskey might be more valuable than gold following an economic collapse brought back memories.

Huns Were in Clover

“I grew up in Friesland during WWII under Nazi-occupation. The Huns were in clover. Here was a nation that bathed in all the luxuries of its colonial East at prices that were a gift .During the first few years, the Krauts shipped all the chocolate, coffee and cigars etc. they could lay their hands on to the Heimat. By 1943 stocks were running low and there were no new supplies. Result: Prices went sky-high for what little that was left. The same applied to diminishing stocks of ordinary food-items. No problem. The Germans did what they had learned under the Weimar-regime: Start the printing presses. By 1944 the Netherlands were awash in paper Guilders that had no  value. If you wanted a new rubber tire for a bicycle,  you had to produce a side of bacon, or pounds of butter. For less exotic, everyday items, a couple of eggs or some milk might do the trick. Most popular in those days was tobacco – or, if one could get rolling paper (hymn-books were used), very bad cigarettes. The tobacco was grown in a climate most unsuitable, and the product was unpalatable. Nevertheless it was in demand.

Whiskey Will Do

“I do not remember anyone making whiskey or rather, in Holland, the more popular gin (‘jenever’), but we did cook sugar beets to make a type of jam. Reading your doomsday scenario, in which there are no takers for gold, the whiskey idea is not all that farfetched and in a way comparable with the bacon and eggs etc. mentioned above. As the world has become much smaller, I still believe in the ultimate value of gold, but concede that for daily necessities, whiskey could be more practical. All of this may sound mundane -- the ramblings of an old man -- but maybe you find it of  interest. PS: Rereading the above, another thought did come to mind. At the time, we had many Jewish children in our community, hiding from the Germans. Some had their hair bleached to look more like us, or were partnered with dark-haired children. From there the name Ackerman rings a bell. I think there was a boy called Paul Ackerman, maybe a relation of yours? There also was a little girl, Betty, who was adopted by our baker, via the good offices of my father and got the name Visser. Well, excuse me, these were just some memories that welled up spontaneously.”

Thank you for your fascinating recollections, Mr. Visser. Concerning the Ackermans you remember, whether they are related to me, I cannot say.