IS U.S. DEBT JUNK?
If you missed this segment on CNBC today it’s worth taking a look. Michael Pento, the very vocal gold bug, is debating whether or not the USA is essentially insolvent (we all know my positions here – deflation remains the greater risk and the USA is certainly not bankrupt). He makes all the classic inflationista arguments while always making sure to point out that gold has been rising. What he fails to actually do is exactly what he accuses Erin Burnett of not being able to do – justify his argument. Pento claims that the onus is on Erin Burnett to explain to the guest why she doesn’t believe a particular position. Erin rightly corrects Pento and reminds him that he is the guest and she is merely the moderator. So, of course, the onus is on Pento to prove why the USA is insolvent.
Unfortunately, Pento has been beating this drum for ages. He has been fantastically wrong about the macro picture for various reasons. While he’s nailed the gold trade the constant fear mongering over government insolvency, inflation, crashing treasuries, etc has all been wrong. He’s been correctly pessimistic, but for all the wrong reasons! Nonetheless, he continues to trot out this inflation argument. The onus is on the inflationistas to explain why they have been so wrong for so long. And simply pointing to one assets rise is no longer a reasonable explanation. The macro inflation argument has been so far off the mark (in terms of how all other assets have reacted) that gold’s rise is of little significance to the overall debate. If you’re going to continue arguing that hyperinflation and USA default are right around the corner the onus is on you to first explain why you have been so wrong for so long. Only then can we actually have a constructive debate about these issues.
Source: CNBC
Segment would have been 10X better with you on the other end of this argument. It’s time for the guys at Euro Pacific to be put in their place. You can’t keep harping on inflation for this long before you eventually lose all credibility.
this is why CNBC is a must watch…chock full of trading ideas and gems like this moment. It is also is head and shoulders better than the dog and pony show going on with twitter and trading. When did trading become a team sport?
Mao and all you CNBC watchers will love this:
http://www.youtube.com/watch?v=adTnyC4MLB0
Ha! Great segment. Erin was impressive!
Ha! Great segment. Erin was impressive!
tell that to the d-bags at Zero Hedge
Why does anyone bother with these people? They are all convinced the world is going to implode into anarchy. There is no reason in their arguments. Just pure hate filled and destructive fear mongering. They’d rather invest in a rock than something productive.
HS!
re the d-bags at zero hedge, et al… there’s no humility in any of those guys. They’re set on their doom and gloom and refuse to budge, even as the evidence piles up against them. I know because I used to be in that camp.
The peculiar thing is that the hyperinflationistas don’t like stocks, though stocks perform well during hyperinflation.
Park: didn’t the stock market stay flat in the 70s during inflationary times? Would love to see some data that correlates hyperinflation and equity gains. I’ve heard the statement that stocks should do well in the environment a few times, and just need some data to be convinced.
Nico,
Well, the US in the 1970s was not in hyperinflation. Just high inflation.
The German stock market in the 1920s and the Zimbabwe stock market in 2007 rose much faster than consumer prices.
I can’t give you correlation, but look at Chapter 7 in the ‘economics of inflation’ by Constantino Bresciani-Turoni
http://www.questia.com/PM.qst?a=o&d=23309569
and the following link for Zimbabwe.
http://mises.org/daily/2532
The people on CNBC are so full of themselves. Erin was impressive? IMO, she was ridiculous. None of them ever think they could possibly be wrong about anything. Haines, Burnett, Kudlow, Liesman…horrible – all of them. They all ask questions and then never let anyone give an answer. I’ve seen them literally laugh out loud at guest. They are incredibly unprofessional IMO. If not for Santelli and one or two of the Fast Money guys that station could slough off into the ocean as far as I’m concerned.
TPC,
I think you misunderstand the points he is making. Let’s just say that I think he is wrong in the present, but he is sounding the proper call.
In other words, both these gentlemen are right, it is just a matter of timing. I hate to say it, but in another 10 years (if we stay on the present path) then you can pay $20 for a gallon of milk as no one but the Fed buys our debt.
In other words, the day of reckoning is a ways off, but BALANCE SHEETS HAVE CONSEQUENCES, even if they are a decade off.
In the next 2 years though, I would not be shorting T bills, no way, no how.
Stocks dont perform well in high inflation. They maintain value in more stable currencies but dont grow unless their market does.
A global company with income balanced around the world might compare well with gold.
Gold will only grow if people use it more as money, if the bond market unwinds that might effectively happen but not much so far as its yield is zero. I’d rather bet on emerging bonds to benefit at least partially
Nice to see Erin actually gives a dam but she did more then ask questions she put across the point that where else are they going to go to buy secure debt.
That seems a weak argument in a growing world, if a large enough disparity appears between countries growing and countries just keeping their head above water. A better overall rate of return will appear elsewhere, enough to surpass historical advantages.
Markets change their bias when the trade no longer favors any advantage by continuing, even the slowest largest flows of money should follow this I think
TPC,
Prescient 11 is prescient and right. Pento is not wrong in his argument; he is trying to get the US to change course before it is too late. He makes much the same argument that Jim Rogers, Marc Faber and Soros make in that we will keep printing money and that that will eventually lead to inflation. As Faber says it , our bonds will sell very well right up to the end when they don’t. All of the other countries will be forced to go through a default or restructuring before it gets to the US because in relative terms the US is stronger. So investment will flow to our bonds as the other countries get hit with default. Albert Edwards has expounded on the same principle. This is a good thing up to a point. Since we are last to go through the process , there will be a lot more pain for us when it happens. I believe that we will experience deflation for several years before inflation has a chance to raise its head.
This is my frustration with the inflation crowd. The argument is: “just you wait, TPC!!!!” No one actually lays out the steps or explains to me (with factual evidence and knowledge of the monetary system) why we will suffer hyperinflation at some point. I have laid out my deflation argument in great detail. I have laid out the facts and told people exactly why the bond market will not collapse. I have backed all of this with operational FACTS. The hyperinflationists can’t do the same thing.
I have literally never read an argument that cogently describes the path to hyperinflation. I read lots of nonsense and articles that prove that people don’t understand the monetary system (like Mr. Pento), but no one has yet shown me a true path to hyperinflation. The onus is on Pento and people like him to tell us all why they have been wrong before they can now tell us that they will be right.
Could we experience inflation? Sure, when productive capacity ramps up and the US economy starts humming again we might see some inflation. The alternative is a total collapse in the productive base of America (good luck with that bet – we’re too greedy to stop making stuff). I’ve explained this and shown how inflation could occur. But hyperinflation and this fear mongering nonsense needs to be put to rest (I will soon write a detailed piece doing exactly that). You either need to explain why it hasn’t happened yet (as all of these people said it would) or you need to cut your losses and realize that you’ve been wrong. Thus far, it’s painful to watch. It’s like seeing someone hang onto Enron all the way to $0. At some point, the “just you wait” argument stops working. I’ve been waiting two years for this to blow up in our faces. It’s not happening….A lot of people have been horribly wrong. The onus is on them to explain why. Otherwise, they are no longer worthy of the attention they get.
I have no idea why Wall Street and investors reward failure time and time again.
TPC, first I want to say I’m currently in the deflation camp with you. But, eventually we’ll have inflation its just a natural cycle – two sides of the same coin. We had inflation up until 2007, it was mostly in asset prices, specifically homes and now we’re in a deflationary unwind.
The Federal Reserve is desperately trying to prevent deflation from taking hold because it would cause great losses for the bankers which the Fed is beholden too.
http://www.safehaven.com/article/14505/deflation-and-bankers-mix-like-oil-and-water
However; deflation is necessary to heal the economy from the previous bout of monetary inflation:
http://www.themarketoracle.info/Article21777.html
Once the debt has been unwound either by paying it back (highly unlikely because of the amount of debt compared to income) or by default – we’ll experience inflation again. I think eventually we’ll have stagflation because of the Fed’s monetary debasement policies, though hyperinflation is a possibility IF people loss faith in the dollar and considering fiat currencies last about 40 years it cannot be ruled out.
http://www.marketoracle.co.uk/Article9849.html
The 64 million dollar question is WHEN do we move from deflation to inflation?
And in this business timing is everything.
TPC,
Let me see if I understand your point correctly. Are you saying that the federal government can continue to build up massive debt and run insane deficits every year with no consequences?
And, assuming they do it as all politicians are weak, then the consequences of these actions will be deflation?
I don’t need complicated monetary theory to explain my thoughts on this. Inflation will happen because deflation is too painful and they simply don’t have the stomach for it. Further, our money supply is no longer constrained by a tie to gold or anything hard.
That is why I believe inflation will happen, it is too easy to do.
I am saying that the size of the deficit will not matter until the private sector recovers (and hopefully the spending will be put to better uses than it has been). Until then, we have a deflationary bias. After the private sector recovery the deficit will have to be reduced and there will be some natural shrinking as tax revenues increase and the govt eases spending back. That could fuel higher than normal inflation, but let’s actually see the recovery first before we start worrying about the size of the deficit.
We are agreed on that point 100%.
I am just concerned about the long term here, and in 5 years we may be at these levels even though the “recovery” happened.
For those in a Treasury mood, below is one of the freshest analysis of treasuries I’ve seen in a while. Includes the short-term capital appreciation of treasuries from the rolldown effect of loose monetary policy.
http://econompicdata.blogspot.com/2010/09/on-value-of-treasuries.html
SCharfy,
Thanks for that. It’s an excellent little bit of research. Damaging evidence to those who believe there is a bond bubble….
Yep; this was a good take
Thanks Scharfy
(Hyper-)Inflation ? No way ! Why not ? The channel through which that inflation has been induced (the banking system) in the last, say 40 years, is about to close down.
US insolvent ? Yes, the US is already insolvent. But that does not automatically mean that the US will go bankrupt TOMORROW.
Mr. Prag Cap,
The deflation argument does NOT stand the test of hard data. Let me give you an economic lesson -
Deflation is defined as a contraction in the supply of money and debt. Today, TOTAL debt in the US (thanks to the Fed expanding its balance-sheet by over $1 trillion) is at a record high! Even the private-sector in the US has only repaid $300 billion worth of loans BUT total debt is still growing and this is inflation
Moreover, even if you are stupid to use the CPI as an inflation measure, the US has 1.2% ‘inflation’. Only in Japan is the CPI in decline, everywhere else, it is in positive territory.
Finally, gold is at a record, silver is at $20, oil is trading above $70 and the developing stock markets are rallying like crazy! You call this deflation?????
Mark my words, the Fed will have no option but to create dollars and buy Treasuries. This will result in very high inflation or even hyperinflation.
So, if you look at total debt or the CPI, we have inflation. WAKE UP!!!
First of all, I have maintained that we are in a disinflation with a greater risk of deflation than high inflation or hyperinflation:
http://pragcap.com/why-deflation-remains-the-greater-risk
In addition, the facts don’t agree with your “lesson”.
You say we need decline in money supply:
CHECK!
You say we need debt reduction:
CHECK!
1.3% CPI, stagnant PCE, low govt bond yields are all consistent with disinflation.
Gold alone does not prove that there is inflation. In fact, I’d argue it merely represents the high level of fear and uncertainty. Sure, there is higher inflation around the globe, but we’re talking about the US economy here. And here in the USA there are no signs of worrisome inflation. The evidence speaks for itself above. At least according to your definitions.
Aside from that, your argument appears to be the typical inflation argument: “just you wait and see TPC! Just you wait and see!”
Dude,
Only the private-sector’s debt is contracting BUT the federal debt expansion has totally overwhelmed this deleveraging. So, TOTAL debt is still expanding. Why don’t you deflationists see this point? Why do you only focus on the private-sector???
net household financial income = current account surplus + government deficit + Δbusiness non-financial assets.
The govt hasn’t been able to generate inflation because monetary policy is a blunt instrument in a balance sheet recession. This is a private sector debt problem. My focus on the private sector explains why I have been right and you inflationistas have been wrong. You have misunderstood the workings of our monetary system by focusing on the govt sector and its failing attempts to stimulate. You have all been focused on govt debt without realizing that the expansion in the monetary base is not necessarily inflationary. Ironically, most of you have argued that the stimulus would fail, but you didnt connect the dots between that and inflation….
The govt can’t cause inflation in this environment without a fiscal helicopter drop. Give the USA $2T in fiscal stimulus injections and I’ll change my tune overnight. But that ain’t happening….We can’t even pass a tax cut these days because the lawyers have concluded that we are bankrupt.
TPC
It WILL happen
They will literally give money away if they have to.
You may not be able to leverage an unemployment (not yet anyway, soon maybe!) check but if you magically turn that unemployment check into a payroll check you can sure leverage that.
as i’ve said before , the inevitable mechanism for inflation will be social and political pressure on the fed….while they’re out of bullets now, they invariably will not pullback in time or amount to stop the snowball from rolling down the cliff…you think ben is astute enough to stick that 747-landing in my driveway?
just as secular bear and bull markets build and wane,..this is a natural cycle, it always happens….history proves it.
this time is never different.
tho i totally agree w/your short and mid run senario and what SHOULD be done now and in the past.
but come it will, along w/vigilantes…
in 3-5 yrs. 1-2 oz. of gold will buy the dow….natural,inevitable,predictable,historical and not harmful,….ultimately….love it, like it, hate it….whatever.
as a group(read MARKET) we are just a bunch of people…logic obviously is not the main operating premise in our lives……our technology does not change our emotional makeup…..human nature will not change in a thousand years let alone our lifetime.
Mr. Pragcap,
Oh please!!!! Deflation, deflation, deflation.
Wake up and take a look around you – in the real world. Prices of just about everything are going through the roof. Gold is flirting with its record-high, silver is above $20, grains are appreciating, oil is above $70!!! If this is deflation or disinflation, why are all these commodities flying????
Forget about your deflation dogma, welcome to the real world and don’t fight the tape. Cash and gov’t bonds will prove disastrous over the next 5 years.
Wait and watch.
Good luck you deflationists. You will need it in spades
TPC expects others macro calls to perform like daytrading calls……except when they are his own macro calls…….those are of “to be determined later” duration.
We’ve been having this inflation/deflation debate for several years now. The hyperinflationists have been on a rampage since the Fed began “printing money”. It’s now two full years later (not mere days as you imply) and the evidence is mounting up against the inflationist crowd.
They have been wrong. They have explaining to do before they can continue walking around arrogantly shoving their opinions in other people’s faces.
“It’s now two full years later (not mere days as you imply) and the evidence is mounting up against the inflationist crowd.”
When they made those predictions did they say the US dollar would collapse by 20xx of course not.
Ive heard 5 7 or 10 year calls not 2010 calls
Oh by the, way when does the SP revisit 666, now, later, in 10 years?
They said the Fed printing would cause inflation. Now they’ve all changed their tune. They all say deflation is the near-term threat and that hyperinflation will eventually happen. Of course, they don’t provide a timeframe because they have no idea how or when it could actually happen. If you stay an inflationist for your whole life you might eventually be right. The one thing we know is that they’ve been dead wrong for two years and there is a very high probability that they will continue to be wrong.
I don’t forecast the market moves out more than a quarter. If you were familiar with my position and my work you’d know that.
PS – Unlike most of the hyperventilating fear mongerers, I was actually bullish at 666: http://pragcap.com/coming-this-week-the-m2m-rally
“I don’t forecast the market moves out more than a quarter. If you were familiar with my position and my work you’d know that.”
Then you don’t make any macro calls.
If the bond market bursts or the US dollar totally tanks in the next 10 years you will have been proven spectacularly wrong.
You’ve only been commenting here for a few months (“commenting” is generous – most of your nonsense is baiting, trolling and just generally acting like a child) so it’s understandable that you have no idea how I approach the world.
I formulate a macro view that leads my micro view. I have long believed we are in a secular bear which will be characterized by low inflation, low growth and high uncertainty. This makes buy and hold impossible. Therefore, my MARKET approach is near-term.
Of course I make macro calls. And yes, if the bond market implodes and the yields jump to 10% I will be wrong. No doubt about that. I have no problem admitting when I am wrong. In fact, I know I will often be wrong and I fully expect it to happen. But I won’t dwell on it and hang onto a losing position until it chokes the life out of me. The hyperinflationists have to be wondering what is wrong with their thesis as opposed to hanging onto the same trade hoping something will change. It’s a losing position. It’s time for them to own up to it.
I gave you one zinger when I first posted here, quit crying about it.
You encourage that with your constant back handed rebuttals such as “Oh you dont understand MMT”
Who does understand MMT, YOU and 4 other guys.
Its a free lunch, whats to understand
Not even one of your many comments here has been in any way productive. You make broad sweeping generalizations, attacks or snide remarks that add nothing to the conversation. This isn’t your personal playground. If you want to go irritate people and be a nag go to another site. I don’t really care, but I know no one wants to deal with that stuff here.
TPC,
Right or wrong I give you props for continuing to beat your drum. Sometimes it must feel like you are repeatedly banging your head against a brick wall. Keep up the good work.
“Sometimes it must feel like you are repeatedly banging your head against a brick wall.”
I don’t know if it feels like for TPC but I do know it SOUNDS like.
So we agree
Deflation is a myth – a joke!!!!!!!!!!!!!!!!!
Prechter has been calling for deflation since 1981. He is a pathetic liar who temporarily becomes a star when a bear-market comes along.
All the other deflationistas also think they are intellectually superior than others. Except the fact that data does NOT support their view.
Answer my question you deflation bugs – why are commodities going through the roof? During deflation, commodities should have collapsed, so why are they rallying???
Are the grains and beans also becoming more expensive as an anti-currency deflation play? Is crude also rallying because people are scared and converting their cash into barrels of oil! WAKE UP AND STOP SPREADING YOUR DELUSIONAL CRAP to other people. It is because of you deflationistas that these slimy central banks can get away with creating so much inflation.
Mark my words because you will remember them – Treasuries is the mother of all bubbles. Those who cannot see this will suffer. Remember, people couldn’t see the TMT bubble, then they couldn’t see the housing bubble and now, they can’t see the bond bubble!!! The fact that the American public is piling into Treasuries is a sure sign that this is an epic bubble. Bonds have been rising since 1981 and history will prove that the bond bull-market topped out in December 2008.
Everything else is wishful thinking by the perma-bullish bond holders.
Here is the asnwer to your commodity question. The Goldman Sachs commodity Index is down 60% from its peak.
We’ve seen some marginal strength from China and Asia primarily due to their increasingly wealthy citizens, increased consumption and stockpiling at the govt levels. In the USA we’ve seen a marginal decline in our wealth compared to them. That’s not the Fed’s fault. It’s our own damn fault for getting fat and complacent and spending too much damn money on useless crap rather than working hard and innovating. You want to inflate your way out of this mess? Take that stupid gold rock to a pawn shop and use the proceeds to start a real productive business.
FYI: Equal weight commodity index CCI made two year high today and just 20% off all time high. ETF that heavily screwed to WTIC and losing value to contango can’t be used to measure commodity inflation.
In addition: You sound very disconnected from reality of main street. You don’t know what persistent food inflation means to a family with one income and 3-4 kids. And you call them fear mongering. Today 40% of small biz owners want to call quit you want to know why? Hint: they are not fat nor are they complacent.
I am disconnected? The average family spends about 15% on food and beverage. They spend as much on transportation and 3 times as much on housing. And you want to just look at inflation as if the commodity index, that has huge weightings in commodities that the average family never uses, fairly represents an average household expenses?
I am not disconnected. I am just realistic. Inflation is very low in the developed world right now. You cannot formulate an argument otherwise that holds water….
TPC, as a long time reader and fan, allow me to play Devil’s advocate here for a minute. The way you can certainly seem ‘disconnected’ to any number of people on here is by leaving out [argubly] two much more determining factors in a family’s perception of ‘inflation’ – healthcare and education, two costs which have still gone up even as the credit bubble has bursted.
Now you and I know that ‘inflation’, as many lay people people perceive it, is not a mere monetary event. Even as calculated by the BLS, it is a price gauge as opposed to a purely monetary aggregate gauge. And of course it involves a complex interplay of both resource supply/demand, political events and monetary operations. For example, in the case of education, state colleges have increased tuitions [sometimes drastically] in response to decreasing tax revenues in the depressed areas. This even as private credit availablity shrinks. I do believe though, that private schools will soon [if not already] start decreasing their rates as the post-echo baby boom passes through and also in line with said decreasing credit availability. Healthcare costs are obviously a different argument, which I will spare here.
Back to the point, be careful about using terms such as ‘disinflation’, or broadly painting a picture that we are in ‘near deflation’ given the two pieces above. Yes commodity prices [and related food prices] are way down from the summer 2008 ‘crisis’ levels, and rents have decrased in many areas. But those are not the only things in play, and certainly carry a lot of weight to a educated middle class family type that has enough motivation to be reading your site.
I would also say it is useful to sometimes qualify ‘monetary inflation’ from other types of ‘inflation’, even if it may be a bit tedious at times. It will only serve to strengthen your credibility vs. that of the hyperinflationists, none of whom I see addressing their case with the nuance and qualification it deserves…
“Take that stupid gold rock to a pawn shop and use the proceeds to start a real productive business.”
Well said buddy.
Great debate.
Hey!?!?! if you brackets around words they fail to appear, huh???? Another try”
Ummmm…
It is entirely possible for (cost) inflation to occur during a (monetary) deflation event – that includes commodities (but lumber just took a big hit last spring, and rail cargo got plus’d up due to the strike in Canada @ Montreal – the whole St. Lawrence seaway was a gridlock – but the BDI still is telling a tale…)
This can even happen when the central bank is blowing up its balance sheet (monetary) inflation. It is b/c the velocity of the money heads to ZERO when the HHs and the CORPs are neck deep in debt and are trying to deleverage/destroy their debt.
2 cents/
As Mr. Prag Cap said above, the developed world is currently witnessing low inflation. Exactly my point!!!!!!!!!!!!!! So, why does Mr. Prag Cap go on and on and on about deflation??? It is NOT happening. It only exists in deluded economists’ heads – they are all full of shit and don’t know anything.
In the real world, prices are going up and life is becoming a very expensive business – a straightforward consequence of monetary inflation.
Disinflation with higher risk of deflation than hyperinflation. We’ve already had this conversation. If you’re going to keep screaming about hyperinflation then please prove why you’ve been wrong first and then lay out your argument.
There is no such thing as disinflation. Either you have inflation (expansion in the supply of money and debt) or you have deflation (contraction in the supply of money and debt). All other economic terms are jargon to confuse the masses.
Today, the supply of money and debt (including private and government) in the US is still growing and this is inflation.
Now, I’ll tell you why hyperinflation is inevitable. Allow me to explain:
This year alone, Obama will spend US$3.5 trillion. The US Treasury will issue roughly US$2.2 trillion worth of debt. In other words, roughly 60-65% of Obama’s expenditure will be financed by borrowing via Treasury issuance. In the world, we have had 30 hyper-inflations throughout recorded history and all these episodes had one thing in common. In EACH instance, the respective guilty government was borrowing more than 40% of its annual expenditure! The US government has already done this in 2008, 2009 and this year, it will borrow more than 60% of its expenditure.
The CBO forecasts that the deficits will shrink BUT they have used totally unrealistic GDP forecasts – they are saying that the US GDP will grow by 4.4% (real) per annum between 2012-2015. I’m sure we both agree that this won’t happen. So, if the economy doesn’t grow this quickly, Obama’s tax receipts will not increase as much as expected, therefore budget deficits will get bigger – not smaller. Within the next year or two, when the bond investors come to the same conclusion and realise that the US government is essentially broke, they will stop purchasing Treasuries; at least at the current yields. China has already started to cut back its Treasuries and over the past 15 months, it has SOLD roughly US$55 billion worth of US debt. Believe me, others will soon follow.
So, when tax receipts aren’t sufficient and people aren’t willing to lend to the US government, the Fed will have no option but to create/print money in order to meet the US government’s entitlement payments which cannot be avoided without a sovereign default. This year, the US Treasury has to pay roughly US$160 billion on interest payments alone and this figure will only increase.
You CANNOT solve a problem of too much debt by taking on more and more and more debt. One day, the creditors will wake up and realise; in the same manner buyers of mortgage backed securities realised that the emperor had no clothes.
Obviously, I don’t know when this will happen but this doesn’t mean it won’t. If the US wants to avoid sovereign default, the Fed will have to print trillions of dollars in order to meet the liabilities – so, my friend you will get hyperinflation.
Throughout recorded history, whenever we had a fiat-money paper system and any country ran excessive deficits, it ALWAYS resorted to money printing, which led to hyperinflation. This time around, things will not be any different.
Now, I have tried to explain in simple english how and why hyperinflation will occur. I hope you understand this reality but if you don’t agree, then please reply and present your case.
Whether or not hyperinflation happens is not just a matter of money supply growth, it’s mostly a matter of confidence. If tomorrow’s headline reads “Massive money printing going on, hyperinflation expected!” a big flight into hard assets takes place. The velocity of money increases massively, the value of currency drops big time.
In the current economic environment however, credit is contracting. Therefore, deflation is happening. The US government is doing everything it can to fight deflation, becoming increasingly agressive.
The question is, how long is the US dollar still credible? Hyperinflation won’t take place if authorities are able to destroy money if bank credit and the velocity of money start to increase. In my opinion they will have a hard time doing so with inflation as the ultimate result.
Even in an inflationary environment gold still sucks as an investment though. It has no inherent value, no cashflow and cannot be used for many industrial applications. Rather go for solid stocks able to pass on the inflation to their customers, combined with some REAL commodities as wealth protection.
Jonny,
Sorry but all your assumptions and ideas are wrong; the US has inflation, gold has intrinsic value during such times (anti-currency play), although stocks rise in nominal terms due to inflation, they do not keep up with hard assets. look what happened to stocks in the 1970s and look what happened to hard assets in the 1970s
If the US government does not cut spending now, hyperinflation will occur.
velocity of money and health of the economy have no correlation with inflation or hyperinflation. If you don’t believe me, go and ask mugabe who will teach you how he hyperinflated when zimbabwe was undergoing a depression!
There is indeed inflation according to the figures, although very low (inflation=CPI and not money growth as some austrians take). Gold only has value for how long people believe it has, it’s basically useless material. Only because of the diamond-water paradox prices are so high, thus you better invest in water than in gold if wealth protection is your goal. Gold has a much lower utility than water (or any other commodity for that sake), but is just more expensive to produce. The downside for gold is so much higher as it’s useless stuff only backed by people’s belief in it, without any cashflows to support it’s value.
The velocity of money has everything to do with inflation. If you print a quintillion dollars, give them to somebody who in turn puts it in a bankvault, then no inflationary effect whatsoever takes place. However, if people know that that much money is printed, they get scared and flee in to hard assets destroying the currency. It’s spending of money that causes inflation, not printing. And yes, if the gvt keeps on spending, of course you will get inflation. Not necesarilly hyperinflation though as that is caused by massive capital flight out of currency. See it as demand/supply of money against goods in which the preferences of the people are largely based on the credibility of the currency.
What happened to stocks in the 70s is in no way comparable to stocks in a hyperinflationary environment. Of course, stocks are hurt by the general loss in GDP caused by disruption of the economy. Stocks keep up with inflation if they can pass on inflation to their customers, AND stocks provide a cash flow as opposed to commodities which cost money to hold. Commodities are only useful as wealth protection, not to make money on the long run. Precious metals are the worst category of commodities as they are merely backed by confidence.
even cash and treasuries are only backed by confidence, nothing else. Look. I am not a gold bug but a flight towards precious metals seems likely. It will be one hell of a bubble and I intend to profit from it. Hopefully, I’ll get out before it pops. So, when gold goes parabolic and there is a mania, sell all gold and silver.
I repeat, a government willing to borrow and central bank willing to print can always create inflation and hyperinflation. Velocity has nothing to do with it, this is just Keynesian rubbish. Ask the Zimbabweans, they will agree with me.
Of course, cash is backed by confidence, that’s exactly my point: The value of cash (inflation being the differential of it) depends on how people trust it. Treasuries are nothing less than cash you’ll get in the future.
Velocity of money is important (this is not Keynesian, but monetarist!) because nominal money * velocity = price level * real expenditures. Money under matresses doesn’t cause inflation. If all money in the world is trying to get into hard assets because inflation is predicted, inflation will happen. Velocity is the one thing authorities have zero control over, if this spins out of control you will get hyperinflation. Higher nominal money causes inflation if the velocity remains the same, but not hyperinflation given that nominal money doesn’t increase that badly. If the velocity keeps dropping because people see cash as safe haven, you get deflation given that nominal money remains the same.
What you’ll get is first low inflation/deflation because the economy is bad, possibly followed by hyperinflation if confidence in the USD implodes. (higher nominal money makes the velocity rise in that case)