And herein lies the rub: if and when the economy ever picks up, and at this point that looks like an event that may well never happen, “Many economists worry that bank lending and monetary growth will eventually surge and, ultimately, cause higher inflation.” The backstops offered by the Fed looks increasingly more brittle: reverse repos and IOER. The longer ZIRP continues, the more aggressive the Fed will have to become if and when the money multiplier finally shoots higher. If prior examples of hyperinflation are any indication, this will not be a seamless or smooth process, which is why aside from the traditional calls for hyperinflation as a result of a collapse in the faith of the monetary system as a whole, many are also calling for this outcome should the Fed, paradoxically, stabilize the economy. And it is about to get worse: the Fed’s balance sheet is likely about to grow by another $2 trillion as soon as QE 2 is announced. Which means that by the time the economy needs to remove excess liquidity, the Fed will need to find a way to remove not $2Bn, but probably double that number. The simple conclusion is that the longer the Fed fights deflation, the greater the likelihood for (hyper) inflation as the final outcome once it ultimately rights the economy. We tend to think that Odysseus was faced with an easier choice.

From the St. Louis Fed:

The Monetary Base and Bank Lending: You Can Lead a Horse to Water…

In its response to the worsening financial crisis during the fall of 2008, the Federal Reserve took actions that dramatically increased the size of the monetary base (the sum of currency in circulation and depository institution deposits with the Fed) (see chart). Subsequently, the Fed purchased some $1.7 trillion of securities issued by the U.S. Treasury and federally sponsored housing agencies, which expanded the monetary base further. The base more than doubled in size between September 2008 and May 2010. Yet measures of the money stock, such as MZM, M1, and M2, increased far less. For example, M1 increased about 17 percent over these months; consequently, the ratio of M1 to the monetary base (measured by the St. Louis Adjusted Monetary Base), commonly referred to as the “M1 money multiplier,” fell from about 1.6 to 0.84.

Why was the increase in the money stock so small when the increase in the monetary base was so large? The answer centers on the willingness of depository institutions (banks) to lend and the perceived creditworthiness of potential borrowers. A deposit is created when a bank makes a loan. Ordi -
narily, bank loans—and hence deposits—increase when the Fed adds reserves to the banking system. How ever, despite an increase in reserves of
over $1 trillion, total commercial bank loans were some $200 billion lower in May 2010 than in September 2008. Banks added to their holdings of securities, which resulted in a modest increase in deposits and the money stock, but many banks were reluctant to make new loans. Partly this reflected weak loan demand, but it also indicated a diminished appetite for risk on the part of bankers. Further, a lack of equity capital (and a high cost of obtaining additional capital) constrained the lending of many banks (banks are subject to minimum capital requirements based on their outstanding loans and other assets).

Many economists worry that bank lending and monetary growth will eventually surge and, ultimately, cause higher inflation. Minutes of Federal Open Market Committee meetings indicate that Fed officials have discussed possible measures to discourage excessive growth in lending and the money  stock. One option is to sell securities outright or under repurchase agreements, which would shrink the monetary base. Recent experience illustrates, however, that large changes in the base may be necessary to effect the desired changes in bank lending. Another option is to raise the interest rate paid to banks on their reserve deposits, which would raise the opportunity cost of lending and thereby tend to exert upward pressure on market rates generally and slow the growth of loans and the money stock. However, because the Fed has little experience with paying interest on reserves,
it is difficult to predict how much bank loans would change in response to an increase in the interest rate paid on reserve deposits. Hence, the Fed may resort to both options if monetary growth threatens to become excessive.

—David C. Wheelock

The reality is that hyperinflation is first and foremost set in motion and driven by a deteriorating fiscal situation. In fact, significant economic weakness and deflation is a precursor to hyperinflation. Too many analysts believe that there has to be some economic demand or some consumption to stimulate inflation or hyperinflation. Printing money to try and stimulate your economy or excessive credit growth is what leads to inflation. Printing money because you are broke and can’t service your debts is what leads to hyperinflation.

Recently Jim Rickards wrote about how a change in velocity can trigger hyperinflation or severe inflation.

At Mises.org, Henry Hazlitt educates us on velocity:

For example, it is frequently said that the value of the dollar depends not merely on the quantity of dollars but on their “velocity of circulation.” Increased “velocity of circulation,” however, is not a cause of a further fall in the value of the dollar; it is itself one of the consequences of the fear that the value of the dollar is going to fall (or, to put it the other way round, of the belief that the price of goods is going to rise). It is this belief that makes people more eager to exchange dollars for goods. The emphasis by some writers on “velocity of circulation” is just another example of the error of substituting dubious mechanical for real psychological reasons.

Indeed! The focus on velocity may have led you astray over the past 10 or 15 years. Take a look at this chart of velocity from Dr. Lacy Hunt of Hoisington Investment Management.

As you can see, velocity actually increased during a time of disinflation and has been muted throughout most of the bull market in commodities. Moreover, despite in recent years, the sharp drop in credit growth and bank lending in the West, Gold and Commodities have powered higher. We know that Gold has made all time highs against every currency. Yet, take a look at this chart.

Priced in Euros and Pounds, Commodities have rallied back to their 2008 high! Priced against a basket of currencies (ex US$), Commodities are 9% below their 2008 peak. Not bad considering the crash in 2008 and ensuing deflationary environment.

Why are Gold and Commodities performing so well if we are in a deflationary environment? The greater the deflation and the worse the economy gets, the greater the worry about sovereign bankruptcy, which will come via default or hyperinflation.

Certain government bonds are rallying because they are safe-havens relative to other government bonds.

The point is, precious metals are outperforming and commodities to a lesser extent even without a rise in bank lending, a rise in credit growth and a rise in velocity. As we already explained, deflationary forces and a weak economy ultimately exacerbate the ability of various governments to service their ongoing and growing debt burdens.

Hyperinflation is a fiscal phenomenon borne out of a bankrupt state that can’t service its debts. Monetization is a trigger while a rise in consumption and velocity is a psychological effect as Hazlitt notes. After all, if massive inflation is coming, what is the first thing you want to do? You’ll position yourself in hard assets well ahead of thinking that “I need to spend now because this money will be worthless later.”

In our premium service, we have paid little attention to inflation-deflation or money supply or velocity. Instead, we correctly focus on the fiscal health of various governments. As that deteriorates, it brings us closer and closer to the eventual end game, which is a new currency regime. For what it is worth, I do believe we will see severe inflation but note that hyperinflation of the Zimbabwe or German kind is out of the question due to the deep and liquid bond markets that we, Europe and the UK have. If you’d be interested in more clear analysis and how you can reap big profits while protecting yourself, consider a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT

Jordan@thedailygold.com

http:/www.thedailygold.com/newsletter

Want premium information and analysis on Gold, Gold Stocks and more? Consider a free 14-day trial to our premium service.

Once again we see another bearish piece on Gold in the WSJ. Rather than attack the author personally, we want to illustrate how the article is another example of the lack of any quality gold commentary both in general and in mainstream publications.

First, its important to note why you won’t see much quality gold-related commentary (or any positive commentary) in publications such as the WSJ and the Economist. It’s because these publications can’t make any money (yet) selling gold-related advertisements. If I’m advertising something related to stocks or bonds, I don’t want to see any gold advertisements in that publication nor do I want to see any gold-friendly content. This is similar with the television networks. When CNBC can make lots of money advertising gold, you’ll see them become friendlier to gold. Why does Fox News talk up Gold? It’s because they are selling Gold advertisements.

Secondly, most professionals in today’s world are biased towards stocks because they grew up during a historic bull market. The only people who really saw and experienced the last bull market in gold are 60+ years old now. Go back to the 1970s and most professionals were skeptical of stocks and saw the value of gold. Today’s 40-year old professional, just three years ago had barely seen anything other than low inflation and a stock and bond bull.

This illustrates why it is pointless to compare stocks against gold. Both are different asset classes and there is a time and season for each. To try to say one is better than the other just shows bias. Gold bulls will start their comparison in 1971 while stock bulls will start their comparison in 1980. There is a time and season for everything.

Moreover, it’s important to understand why the stock market rises over time. It is because market indexes have a survivor-ship bias. The Dow of today is not the Dow of 1980 or 1920. It is always changing as stronger companies replace weaker companies. Hence, it is designed to go higher over time.

Now if Altucher wants to make a good argument against gold he should do some more research by attending our upcoming Webinar.

He starts off picking 1980 (as a comparison date), which any stock bull does. That immediately shows bias.

Secondly, he can’t figure out a “use” for gold. This is where stock bulls really fail.

Centuries ago Aristotle said gold and silver were money because they fit the five properties of money. Kings and governments used gold for international transactions. JP Morgan, 100 years ago, said gold was money and nothing else. If Gold has no use or utility, then why do central banks own it? Why does the US own gold and no paper reserves? It is because gold is money and the ultimate backstop to our monetary system. Throughout history no currency other than gold and silver has kept its value. You can’t get a stock bull or gold bear to admit to this, because it defeats their central argument against gold.

Altucher makes more mistakes. He talks about “recent spikes” in Gold due to hedge fund money. Where has this guy been? Gold has been rising for 10 years. It is actually up every year since 2000. Recent spikes aside, seems to me there were some buyers five and ten years ago.

Gold has been rising for a variety of reasons but the main reason is that there is serious question about the creditworthiness of governments. That is the “fear trade” that no one cares to clarify or explain. Unless you think the US, Europe and Japan can grow out of their debt problem, then there is little reason to be bearish on gold. Every major debt crisis, credit contraction and depression has seen a rise in the real price of gold. Gold will continue to outperform until there is a new monetary system or until the world can grow its way out of the debt problem. This isn’t doom and gloom. It is probable based on the facts.

The facts also tell us that stocks are not a good inflation hedge (as Altucher tries to assert). Look at the data. Commodities always outperform in periods of rising inflation. Altucher thinks that the stock market has grown greater than inflation, consistently for 200 years. How is this relevant to our lives? What is relevant is the next five or ten years. Stocks are in a bear market and will continue to suck wind for another five or seven years.

In the meantime, precious metals are the only asset (aside from bonds) in a full-fledged bull market. Bears often say “everyone is bullish on gold” but this is simply not the case. The bears provide zero research to back this claim, because there isn’t any! Barely anyone owns precious metals. Take a look at the charts in my last editorial. Less than 1% of global funds are invested in the precious metals sector. By the way, that figure was 26% in 1981. Given that statistic, it is obvious that too much money is in stocks and bonds and not precious metals. Furthermore, it is obvious that we aren’t even at the outset of a big move into precious metals.

Moreover, as we recently showed our subscribers in a premium research report, bull markets typically accelerate in the ninth or tenth year and then begin a final acceleration three to four years later. It is not difficult to see why we are on the cusp of acceleration in the precious metals. European banks still need to rollover $1.65 Trillion in debt by the end of 2011. Our big states are likely to need bailouts by the end of the year. The Fed will begin a new round of quantitative easing in a desperate attempt to help the banks recover so they can lend again.

Furthermore, it is just a fact that the US, UK, Europe and Japan can’t grow their way out of the debt mess. A new currency regime is coming. It is only a question of when. It could be five years or ten years if we are lucky.

Precious metals will continue to crush stocks for another five to seven years. However, a portfolio of quality emerging gold and silver stocks will outperform gold. Eventually silver will outperform gold. While we are bullish on the metals, we do agree with Altucher that silver is preferred and stocks are the way to go- as long as they are gold and silver stocks.

Hence, while we analyze the short and long term developments in the metals (in our premium service) we also focus on about 50 gold and silver stocks. We would urge you to consider a free 14-day trial to our premium service.

If you want to learn more about gold and silver and investing in the respective companies, then consider attending our free Webinar, sponsored by the CME Group. It is absolutely free and we promise it will be well worth your time.

Jordan Roy-Byrne, CMT

Jordan@thedailygold.com

http://www.thedailygold.com/newsletter

As we should know by now, when it comes to the capital markets, conventional advice is eventually deadly. It identifies trends too late and fails to warn when risk increases and reward diminishes. However, most people would rather feel more comfortable than be a contrarian. Most people are too weak minded to find the answers, which usually oppose the herd.

Look at the capital markets today and the trends are clear. With global growth likely to remain low to stagnant for quite some time, stocks and commodities will not help your portfolio. Treasury bonds are performing well but the threat of severe inflation and sovereign bankruptcy looms. Precious metals are the only winner, yet the herd doesn’t see it that way. To them, the bull market in precious metals isn’t even a bull market. It is an aberration. It is a mistake.

The vast majority looks at the 1980s and 1990s as the norm. This is especially true of the financial industry. They don’t make any money from Gold and Silver so they don’t pay attention to it. It is only a nuisance. When will the financial media care about Gold? The answer is when it can make money selling Gold-related ads and products.

It is interesting how much has changed. Fifty or sixty years ago you were supposed to have 10% invested in Gold and that was regardless of market conditions. Today, the mainstream advisors and analysts that like and recommend Gold, own less than 10%. They like it but they are afraid of it. It reminds me of a quote: The philosophies of one age have become the absurdities of the next.

Most people look at the last 30 years as the norm, when the norm was the 170 years before that. Monetary systems are restructured several times per century. It’s nothing new. A monetary system without an anchor will ultimately fail. The greatest generation and their forefathers knew this and owned Gold. It paid off in their time. Those with a long view of history know that the real risk is the current monetary system and not Gold/Silver. Every fiat currency in history has failed. Is it doom and gloom to expect the current monetary system to fail? No, its just prudence and foresight.

Now that we’ve established this let’s refute the bubble calls. Because of the recent collapse in so many markets and industries (technology, internet, homebuilding, mortgage finance, banking, oil) investing professionals and the public are now quite wary of any market that rises materially. Most will miss the coming explosion in precious metals because they are too scared of an eventual collapse. Yet, they don’t even realize that precious metals are not even close to bubble territory.  If precious metals were really in a bubble then please explain this chart to me:

As of last year Gold and gold shares were 0.8% of global assets. If we are in a bubble then what was 1981? A volcano?

And how are we in a bubble when the gold stocks have yet to breakout to new all time highs. (See the chart below). In fact, one of the best times to buy is when a market is on the cusp of a breakout to new all time highs. There are numerous examples of this in history.

Moreover, gold stocks are still much closer to historic lows when compared to common stocks. See the chart below of the Barron’s Gold Mining Index against the S&P 500.  It is highly probable that gold stocks will outperform common stocks over the next five years.

Meanwhile, even though Gold has outperformed stocks for 10 years, this chart suggests that outperformance has much more room to run. This is why one has to look at 100 years of history and not 10.

The reality is that too many investors will continue to make terrible decisions either on their own or through a mainstream advisor. They are convinced that precious metals are risky. You can’t even get them to put 5-10% of their assets in precious metals. We are talking about the only bull market! This isn’t 2003-2007.

Going forward, it is a near certainty that precious metals will outperform. Why? This is what happens in a major credit contraction. There is a run for real money. It doesn’t matter if there is hyperinflation or deflation. Since the crisis began we’ve had strengthening deflationary forces. Gold has advanced to a new all-time high and even higher against most currencies. Quality gold stocks have surged to all-time highs. Silver has outperformed nearly everything except Gold.

Amazingly, there is still time to get involved before the precious metals accelerate, leaving other markets in the dust. Looking to learn more? My publishers and I are hosting a CME-sponsored educational Webinar that will explain and educate on all things Gold, Silver and the mining stocks. It is completely free and you can sign up here.

We also maintain a professional service, which helps guide traders and investors through this bull market. We offer a free, no risk 14-day trial, which gives you access to a month’s worth of updates!

Good Investing and Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com
http://www.thedailygold.com

…or a massive cut-back in essential public services and widespread hunger:

Illinois Stops Paying Its Bills, but Can’t Stop Digging Hole

“For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state’s bills and refuses to take the painful steps — cuts and tax increases — to close a deficit of at least $12 billion, equal to nearly half the state’s budget.”

Here’s the article link:  NY Times

If you think our policy makers and the guy in the Oval Office that most of you wouldn’t put in charge of a hot dog stand are going to address the financial collapse in several States with anything BUT money printing, I would suggest that you layoff your medical marijuana for awhile.

BP Update

Oil is now hitting the shoreline of Texas and tar balls were found in Lake Ponchartrain, the large inland salt water lake that is bordered by New Orleans and several surrounding suburbs.  BP is now looking to global Sovereign Wealth Funds to invest in BP to help pay for this mess.  Anyone who takes that on is a complete moron.   I smell desperation on the part of BP.  Here’s the article link:  It’s Getting Worse

Obama urinates on more of his campaign platform and all over the 1st Amendment:  “”A photographer taking pictures of a BP refinery in Texas was detained by a BP security official, local police and a man who said he was from the Department of Homeland Security.”   That quote is from Zerohedge – here is the article LINK

Source: http://truthingold.blogspot.com/

As I type this, the US and other world economies are supposedly in nothing but increasing deflationary pressures that will not be able to be stopped by any government or central banker no matter how much stimulus or money printing they decide on doing!

At least that’s what many of the talking heads on financial TV are telling us especially within the last month or so. They have been saying this message for awhile now. Here’s an interview from Mike “Mish” Shedlock from October 2009 talking about deflation:

And so begins another inflation vs deflation debate.

Many of you who don’t want to learn everything there is to know about macroeconomics to understand what is really going on in the world right now are probably wondering is there an investment that will do well in inflation and/or deflation so you don’t have to be an expert economist to protect yourself and make an investment decision and get on with the rest of your lives?

First off, this is the best explanation summary I have read recently of what’s happening.

John Williams of ShadowStats even agrees (about short term deflationary pressures) as far as M3 goes, but is M3 even a valid measurement of the money supply and therefore of monetary inflation? My Austrian Economist friends would disagree with him here about M3 being a valid indicator of the true total money supply, but The M3 Money Supply figures John Williams has recreated do show M3 dropping! 

All of this I just mentioned about deflation will be a moot point if Ben Bernanke and other heads of central banks, including the IMF and Bank of International Settlements (BIS) aka the Central Banker’s Bank decide to step on the gas pedal and add more gasoline to the fire via more stimulus!

The Italian Keynesians in Italy are even upset with Germany for its “deflation policies.”

Despite declining M3 figures, ShadowStats’ Consumer Price Index (CPI) calculations also show inflation in consumer goods and services as measured by rising prices running at around a 6% clip.

James Turk, author of the book Dollar Collapse, Founder of the precious metals storage company GoldMoney, and a consultant for GATA thinks that hyperinflation is still by far the most likely outcome in his latest analysis.

What do these mixed signals mean? What’s the truth? Can I protect myself from inflation and deflation at the same time? (The short answer is Yes, you can.)

I even wrote an article awhile ago about commodities and commodity stocks telling you how commodities and their producers offered you inflation protection and also emerging market growth in case there is no real inflation.

Commodities are really the only asset class still in a long term, secular bull market and as an investor looking to protect and grow your wealth long term, I believe you need to be invested in this powerful long term trend.

I have already written a previous and very detailed article on Silver, which I think is perhaps the best long term investment one can make. Wall St for Main St Co-Founder, Mo Dawoud, of Mo Money Blog also has an article about Silver.

But, today I wanted to talk more about Silver’s more popular big brother, Gold.

See Gold has a secret power that most people don’t even know about! Besides doing well in inflation, Gold also does well as a deflationary hedge!

Surprised huh? I will start my case for how and why gold does well during a deflationary environment later in the article.

So what’s really happening in our economy right now? What should you believe? Which experts should you trust? How can you protect your portfolio in case of inflation or deflation or both? Are we going to have bad inflation, bad deflation or will it be some sort of weird, hybrid mix that will hurt and destroy everyone (some more than others)?

These are the types of things Mo Dawoud and I think about everyday at Wall St for Main St.

Despite the evidence I have shown you of conflicting inflationary and deflationary pressures happening worldwide (I could show you a lot more conflicting evidence still but let’s keep this article relatively short) and no real clear winner in the near term, in an “I told you so”  trumpeting fashion, deflationists like Bob Prechter of Elliot Wave International and Harry S. Dent are coming back out of the woodwork to pat themselves on the back for being right about their long term, “Deflationary Death Spiral” predictions.

What’s funny is deflation is really not a death spiral at all. We were just taught it was in Economics 101 by our Keynesian teachers and professors.

In fact, deflation is the cure for all of the inflation that’s been going on in our economy and monetary system for many decades. Deflation is something the markets badly want as a cure for our extreme debt problems.

The problem with deflation is central bankers and governments want to do everything they can to prevent it.

The truth about deflation is economics and business students have been brainwashed for decades that higher prices are a good thing! Higher (rising) prices are in fact inflationary if they are rampant in our economy.

Saying higher prices, loss of purchasing power in our money and therefore inflation is a good thing is a complete and total lie engineered by Keynes and his economic disciples, like Paul Krugman, who have written your school’s economic textbooks to justify government’s hidden agenda!

Higher prices are only good for higher taxes and for specific corporations. They have ZERO benefit for everyone! Higher prices do not produce higher wages. Increasing production and efficiencies, lowering costs and adding more useful skills produce higher wages.

If a business tries to raise prices too high, a competitor will come in and compete and threaten to steal market share or worse, bankrupt the company.

When the free market system is functioning properly due to innovation, proper competition and other gains in efficiency, prices should actually be falling on all goods and services while the quality of goods and services increases.

Capitalism or the free market system was founded on the belief of “Creative Destruction.”

To give you an example of how the free market works properly to benefit consumers, this is why a $600 50″ Flat Screen LCD TV of today is cheaper and of higher quality than a $5,000 30″ Flat Screen Plasma TV was of say about 7 years ago. This is how a market is supposed to behave.

We still have some markets correctly behaving in this manner but not nearly as many as there should be. This is 100% due to government interference in specific markets, like healthcare to name just one, and also large corporations deciding it is in their best interest to pay to lobby Congress and get tax breaks, tax rebates and subsidies instead of investing that capital in more useful things like innovation, research and development and other things that would have a long term benefit to society and to the company.

Many corporations have now sacrificed long term gains for short term profits. Malinvestment, corruption, inefficiencies and overbearing regulations are suffocating many markets and are preventing proper competition.

Competition and the threat of extinction produces innovation and better technology, lower prices and higher quality in all goods and services.

The problem is governments don’t like deflation even if that’s what the market says we all need to have happen. Actually, ‘don’t like’ is not strong enough. They hate deflation and will do everything in their power, legal or illegal, to fight it!

This often means changing the rules of money.

Why? Because government’s interest and the interests of specific corporate special interests completely conflict with the interests of its citizens.

The interests of government and its citizens, for the most part, are no longer aligned, which is sad, but that’s the truth about what has become reality now. Government is now a separate entity much like a corporation is a separate entity.

Many governments are still spending frivolously and have not tightened their belts like the rest of us are being forced to do in our personal lives and in our businesses.

This is the brainwashing I am talking about. You have been led to believe that there is nothing wrong with higher prices on the goods and services you need and want. I am telling you the opposite is true.

Why does the government hate deflation and lower prices?

Because it lowers their tax revenues, it gives private citizens back their purchasing power (makes money more valuable to hold and save and invest) in their money and it lowers asset prices and other other consumer prices for goods and services we need and want.

Deflation does not allow governments to use inflation as a tax to steal our purchasing power (inflation is 100% pure government policy and is really nothing but an invisible, hidden government tax) and it lowers the taxes they collect on normal things like wages, property tax, etc.

This is one of the major reasons why there is so much effort by the Fed and Federal Government to try to re-inflate the housing bubble and to create inflation.

It’s in the government’s interests to create inflation (not too much inflation at once or too many people will wake up and realize and also dump the paper, fiat currency).

The bottom line is modern governments and central bankers have not allowed deflation to occur without first trying to interfere heavily in a country’s economy and markets and to first create inflation.

History is strewn with countless examples of interventionist policy by governments where the free market was not allowed to heal itself and purge itself of the bad investments and misuse of capital.

There is some revisionist history out there in textbooks that says FDR saved the US from a deflationary death spiral during the Great Depression of 1929 because his predecessor, President Herbert Hoover,  who was supposedly a proponent of the free market stood by and did nothing.

Unfortunately, this is another lie we have all been taught and you will have to unlearn.

The truth is FDR just continued what Hoover started. Hoover was an interventionist also. He was anything but a “free market” guy. History book writers who wrote the textbooks we used in school all needed a goat to make FDR look like a hero and so the “truth” about Hoover was twisted to make FDR look great and Hoover look like an evil and uncaring Capitalist pig.

The last non-interventionist President that allowed a pure deflation and did not interfere in markets was President Warren Harding during the Great Depression of 1920. This is a video of a 50 minute speech Austrian Economist, Author, and Economic Historian Thomas Woods gave on the subject:

Harding refused to interfere in the markets and he ran on an “allow deflation” platform. In fact, Harding even cut government spending in half!

While the first year of that depression was very hard, and I believe unemployment numbers were higher for that first year than in 1929, the US was out of a depression and recovering in only 18 months!

Normally, a hyperinflation occurs followed by a deflation to wipe out the mess completely and so the system (our economy) can hit the reset button.

This is a very painful process, but we cannot avoid taking any pain and I am 100% sure we are going to have to take our “medicine” aka the cure eventually. That cure involves letting bad debts and bad loans and other toxic things like Mortgage Backed Securities go to their intrinsic value of zero or close to it.

Besides congratulating themselves, these deflationists also ALWAYS have one last word of advice.

They tell you to immediately sell your gold and gold stocks! This is it they say. The top in gold is in and they are fully sure of it.

There’s just one problem! They’ve been calling a top in gold for years! How many years have these deflationists been calling a top in gold?

Well, Bob Prechter has been calling a top in gold and silver every slight increase for the last 15 yrs or so! If you followed his advice and shorted gold and silver each time, you might be bankrupt.

Here’s a link to the best summary available on the Internet of Bob Prechter’s track record of forecasts. He and his Elliot Wave followers have been a lot more correct in the short and medium term with their predictions than in their long term predictions. In fact, CXO Advisory Group, the company who compiled the statistics and summary of Prechter’s forecasts gave Prechter a Guru Accuracy Rating of only 26%.

I would not be listening to Prechter for long term investment advice. In my opinion, he’s a very good technical trader. That’s it.

When asked what to buy with the money from selling your gold and gold stocks, Bob Prechter recommends short term US Treasuries as the best option.

That’s funny to recommend you buy debt in a debt crisis don’t you think?

Wouldn’t certain types of cash (non G7 “Westernized” currencies) be better and safer than US Treasury debt? Dent has the same recommendations as Prechter.

A Better Solution

Ok, so why the conflicting evidence of inflation and deflation? Is it even possible to have both inflation and deflation at the same time?

The answer is ‘Yes’ and according to Dan Amerman, this has actually occurred many times throughout history!

Dan Amerman is a former longtime, and now reformed (he saw the error of his ways) investment banker who has switched from helping Wall St design weapons of mass destruction (financial derivatives) to quitting that industry about a decade ago so he could focus on helping out the people of Main St from losing everything they have to Wall St and the government.

He also wrote the textbook many central bankers still use, so it would be slighting him to call him anything other than an expert at what he does.

He has a free Turning Inflation Into Wealth Mini-Course on his website that you can sign up for that he sends to you periodically through email updates.

I’d recommend you sign up for his course as he can help you increase your Financial IQ exponentially for free if you are willing to spend the time reading and learning!

After that brief introduction to Amerman, for those of you unfamiliar with him, now back to my regularly scheduled argument.

Deflationists say we cannot have both inflation and deflation at the same time. Dan Amerman counters that this is the Santa Claus Theory of Deflation that is so prevalently taught in classrooms by economics professors in academia.

For deflationists, this is what they’ve been taught in the economics classrooms by mostly Keynesian Economist schoolteachers and professors who teach central planning, tout higher prices as a good thing, and lots of other Keynesian nonsense and General Theory dribble.

This theory of deflation is theory and jargon and only exists in a vacuum where the US economy is not affected by other global factors and pressures!

In my humble opinion as well as Dan Amerman’s opinion, it can and will destroy your net worth if you adhere to it religiously and bet most or all of your investment and/or retirement money on it.

In fact, according to Dan Amerman, pure deflation where asset values AND prices/monetary supply both deflate at the same time has never occurred in modern history in the way and the historical examples the deflationists claim it has!

Amerman cites deflationists 2 main examples and successfully counters their arguments:

1. The US Great Depression of 1929
2. Present day Japan, which has supposedly been stagnant with deflation for going on 2 decades now.

I and many other experts not believers in Keynesian macroeconomics beg to differ.

They say deflation, which is a decrease in money and credit, is so powerful that there cannot be any way for central bankers and governments to continue to inflate/devalue/debase the Dollar and other paper currencies. I beg to differ.

As a last resort, the Fed and other central bankers can ALWAYS devalue the US dollar against gold by going into the open market and purchasing gold.

When you do that you are essentially shorting your own currency to make it weaker.

Now, admittedly, the US economy is facing some short term deflationary pressures, but the US economy and our stock markets are not inside a vacuum because of globalization and there is not deflationary pressures worldwide. In fact, China has increasing inflationary pressures!

Also, Helicopter Ben Bernanke and the other Keynesians at the Fed as well as President Obama and others in Congress are seeing the same thing and it’s time for another round or three or five of large Stimulus and Job bills!

Another $80 billion Stimulus bill is in Congress already and more will surely come.

There are nowhere near the amount of signs outside of the developed world that deflation is a risk. Inflation is still, by far, the main concern in emerging markets and will continue to be the main concern worldwide for years to come as all world governments continue to print money, Austerity Measures or no austerity measures.

Ok well now let’s move onto the conclusion and something the deflationists really have ZERO credible explanation for happening, the curious case of Homestake Mining.

Citing this example will win you an argument against deflationists of why gold does well during deflation every time!

The Curious Case of Homestake Mining and How it Disproves Everything Most Deflationists Think About Gold’s Behavior During Deflation

I have debated deflationists often about inflation vs deflation and about gold. All deflationists HATE gold and think it is a very poor investment in deflation.

The most popular answers always are, “you can’t eat gold,” “if the world is ending gold will be useless,” “if things ever come to that government is going to confiscate all of your gold and we are going to laugh at you, give you nothing for it and we are going to tell you ‘I told you so’,”  “you will not be able to defend your gold,” “water, food, guns, ammo and plant seeds will be more valuable.”

They then say how gold will collapse during a deflation and the price will fall by more than half. There’s just one problem.

History says otherwise!

The truth is they haven’t done their homework.

Almost none of the deflationists I have talked to, and I have debated dozens, have studied Homestake Mining and what happened to the company during the Great Depression of 1929. The deflationist camp cannot explain it away so they simply try and dodge the “Homestake” golden bullet/ace.

For those of you unfamiliar, Homestake Mining was the only major gold mining company listed on the NYSE during the Great Depression of 1929.

When deflation occurred and FDR took over for President Hoover, one of the first things he did was try to seize/confiscate all privately owned Gold.

Government agents were stationed outside banks and people were told to hand in all of their gold in exchange for a $20/oz price. Similar attempts were made with silver.

FDR then revalued gold to $35/oz against the US Dollar effectively devaluing the US Dollar against Gold by over 40%!!!!

The gold was then melted down into bars and a secure storage facility was built at Fort Knox.

After the confiscation, the bankers and people at the Fed knew the gold confiscation and dollar devaluation was coming ahead of time and they acted on this inside information and they managed to buy gold bullion and also shares of Homestake Mining knowing the confiscation of gold would make it a more scarce and desired commodity.

Confiscating gold will also create a Black Market for gold as people will have an even larger demand for it because of its scarcity.

What ensued after FDR’s confiscation of gold was shares of Homestake Mining reacted as a direct proxy for gold. Shares in Homestake Mining took off like a rocket despite deflation (it wasn’t real deflation as Amerman explains because government wouldn’t allow it).

Here are some more articles on Homestake Mining and Gold’s Secret Deflationary Powers proving my point:

• 1929 Market Autopsy
• Frank Barbara’s Analysis from 2005 he did of Homestake, 1929 and The Coming Gold Bull Market
• Physical Gold is Good, But Gold Mining Shares are Better (if they Confiscate Physical Gold)
• Gold Stocks Do Well During Deflationary Times
• Homestake Mining and Dome Mining Outpaced the DOW during 1929 Deflation
• Gold Stocks in a Depression
• Why the Gold Price Made People Millions During The Great Depression
• More on Gold’s Deflationary Powers
• Further Analysis of Gold Stocks During the Great Depression of 1929
• This is Like The Great Depression But Worse
• What if Deflation Wins?
• Gold as an Inflation-Proof Deflation Hedge
• Gold Does Well in Inflation & Deflation
• How Will Gold Perform During Deflation?
• Gold and Deflation: A Dissenting Dissection
• The 2 Best Catalysts for Gold: Deflation and Economic Weakness
• Gold Does Well in Both Extremes

The Bottom Line:

So you now know Gold’s secret power. That besides doing well in inflationary times, during deflationary times gold and gold mining stocks also do well. This is why people need to own both physical silver and gold and also mining stocks as a diversified precious metals portfolio in case of confiscation.

Gold will outperform silver during deflation and Silver will outperform Gold during Inflation. Even if gold is confiscated, other proxies for gold will shoot up in price like Homestake Mining did in 1929!

In conclusion, based on my own research into this matter, whether there is inflation or deflation or both, you will be a lot more protected in physical gold and gold mining shares than you will be in US Treasuries or in a lot of the conventional paper, fiat currencies that are still erroneously considered safe havens.

Moving some cash into foreign currencies outside of US Dollars, British Pounds, Japanese Yen and the Euro is probably also a good idea as well.

What’s happening now in the markets and our economy is exactly what gold was designed to protect against.

Gold is currently being revalued by the markets as money.

It is insurance and protection against financial calamity and chaos.

The deflationists have not properly studied history concerning gold and their arguments have no credible explanation for why Homestake Mining took off like a rocket.

Every deflationist I have talked to has dodged the Homestake Mining argument in fact.

I’d much rather be holding physical gold and gold stocks than holding US Dollars and US Treasuries.

Do you own due diligence into this, but I am of the opinion, that if you as an investor don’t have exposure to physical gold and silver or gold and silver mining stocks, you have not done enough research into this matter.

Governments and central bankers are going to continue to do everything they can to continue to debase, devalue and inflate these paper, fiat currencies and you need to protect yourself from this by diversifying in precious metals.

Source: http://www.jasonburack.com/debunking-deflationist-myths/

In the first stage, the economy enters a recession after a large credit bubble. The recession and end of the credit bubble lead to deflation. As a result, the US Dollar and US Treasuries outperform. Think 2008.

Policy makers (a term for interventionist bureaucrats) then provide stimulus via monetary easing and deficit spending. Gold and gold stocks outperform with silver not far behind. Think late 2008 to early 2009.

The economy gets a bump from the stimulus and economically sensitive markets such as commodities and stocks outperform. Think 2009.

This brings us to where we are now. The market is starting to sense that Europe’s debt burden is too high as its economies struggle to recover under the weight of excessive debt. The market is beginning to sense a rising probability of default. Precious metals are soaring against the Euro, the Pound and the Swiss Franc.

Meanwhile, with money moving back into US Treasuries, the US will have the ability to attempt another stimulus and announce further quantitative easing.  Europe is currently ahead of the US on its track to currency depreciation, rising inflation expectations and rising CPI/PPI. The US still has time before the market begins to worry about its debt burden.

The next stage is the transition from the initial outbreak of price inflation to severe inflation. Inflation accelerates due to a loss of confidence in governments and currencies. A failed economic recovery leads the market to realize that the debt burden is too large and will ultimately be defaulted upon or inflated away. At this juncture, all commodities begin to perform well again. It may take anywhere from six to 18 months for this stage to be evident.

Finally, inflation is exacerbated as supply shortages emerge. Tight credit restricts new production and consumers begin to hoard. During such a period, precious metals and commodities will continue to perform well but the agriculture sector will be the real leader.

In order for an investor to maximize returns, they must be able to hold their convictions and adapt to the changes in the coming cycle of inflation. Currently, precious metals are obviously far and away the best play. While more and more investors are waking up to gold, they are not embracing it enough. If it is clear that Gold is a safe haven, why are you only devoting 5-10% of your portfolio to it? Moreover, why do you have zero or 5% exposure to gold stocks when their outlook is superior to commodity stocks and emerging market stocks?

Of course market timing is important and we are here to help. Our combination of technical analysis and sentiment tools has allowed us to catch the last two short-term bottoms in the precious metals sector. We also use the same techniques in our Macro newsletter. If you’d like professional help in navigating the coming mania in the gold and silver stocks, then consider a free 14-day trial to our premium service.

Good luck and protect yourself!

Jordan Roy-Byrne

http://www.thedailygold.com

Jordan@TheDailyGold.com

In the long run, the inflationists are destined to win… but in the here and now, deflationary forces still have the upper hand.

The bulls and bears fight tooth and nail as they always have. But there is another battle royale still taking place – the fight between deflation and inflation. Or rather, the verbal sparring match between those who see one and those who see the other.

Both sides are firmly entrenched. The inflationists call their opponents blind to the enormous sums of money being printed. The deflationists retort that inflation is a rumor and an illusion, given what near-term prices and wages have to say.

View Larger Chart

The debate is further muddled by disagreement as to what “inflation” actually is. Some try to argue, with verve and force, that inflation is literally defined as an increase in the money supply, independent of what happens to prices.

The problem with this definition is that it does not match up with what’s in the dictionary. And it is less than helpful given that money printing activities can act on prices with a lag… sometimes a lag that lasts for years.

Worse still for the “printing equals inflation” dogma, it overlooks the fact that sometimes credit and wage destruction happens on a larger scale than money supply reconstruction. That is to say, if an economy loses X dollars’ worth of money and credit in circulation as a result of fiscal collapse, but only 0.5X worth of money supply is injected back into the system, the result is still a net decline in spending and pricing power.

Expansion is always relative to contraction. Positive and negative forces can cancel each other out, and thus the only way to truly get a handle on the inflation/deflation debate is through the lens of monetary velocity. (For more on this important topic, see the Feb. 1 Taipan Daily piece, “Is Inflation Tied to the Money Supply?” You can also sign up to read my fellow editor Adam Lass’ latest investment commentary.)

CPI Not Much Better

Source: WSJ

Of course, those who point to the record low Consumer Price Index (CPI) and say “Look ma, no inflation!” do not have a leg to stand on either. The very idea of excluding food and energy from inflation calculations is something of a farce. Worse still, the government is intentionally manipulative and deceptive in the way it handles CPI inputs.

What’s more, those who key off the CPI – ignoring printing press activity completely – are essentially ignoring the dead tinder and hot, dry conditions of future inflation risk that exist all around them, as if all that mattered was the unburned patch of ground in front of their nose.

First Deflation, Then Inflation

As we have stated before in these pages, “first deflation, then inflation” still seems the likely order of things. Right now, the world is still dealing with strong deflationary pressures, as evidenced by the following:

View Larger Chart

• Key commodity price gauges have all been stagnating or declining year to date. From both a daily chart and weekly chart perspective, important markets like crude oil and copper have stalled. Trends are somewhere between flat lined and heading south. The same is more or less true for natural gas, unleaded and various agricultural commodities.

• The U.S. dollar is at 12-month highs. The world’s most important commodities are still priced and traded in dollars, all around the globe. That makes dollar strength a deflationary force. A strong $USD also threatens U.S. economic expansion by putting a crimp in export competitiveness for small- to medium-sized U.S. businesses, and further means large U.S. multinationals could see their international profits cut.

• U.S. wages are still stick in the mud. In past episodes of heavy inflationary breakout (like the 1970s), rising wage demands were a powerful input. But there is very little (if any) pricing power for wage workers now, in both the United States and elsewhere.

• Joblessness persists. Consumers without jobs do not borrow and spend with abandon. “New claims for state jobless benefits unexpectedly rose last week,” Reuters reports, “suggesting the labor market recovery may have hit a speed bump.” And then there’s this, from The New York Times:

The recession seems to have penetrated a profession long seen as recession-proof. Superintendents, education professors and people seeking work say teachers are facing the worst job market since the Great Depression. Amid state and local budget cuts, cash-poor urban districts like New York City and Los Angeles, which once hired thousands of young people every spring, have taken down the help-wanted signs.

• A global tightening cycle is underway. China is being forced to deal harshly with inflationary pressures (lest civil unrest get out of hand). Europe is focused on belt-tightening austerity measures as the southern eurozone countries come to grips with their debt. New resource tax initiatives (kick-started by Australia) threaten to dampen economic activity in the countries that deploy them. Interest rates in the United States can only travel in one direction – upward – having already hit zero.

• Struggling equity markets cancel out the “wealth effect.” As Ivy League economists like Professor Robert Shiller have pointed out, “perception is reality” when it comes to consumer spending and economic vibrancy. When the equity markets are strong, Americans feel more optimistic and thus looser with their wallets. When equity markets are volatile and frightening, however, that optimism is replaced with a sense of foreboding, causing wallets to snap shut.

• Outright debt levels are still a huge problem. Western world consumers and Western world governments are still up to their eyeballs in debt. The “deleveraging” process is still a long-run necessity, regardless of temporary delays. The hemispheric overhang of all that debt is perhaps one of the largest pressure sources of all in respect to deflationary impacts.

Inflation as Endgame

In the longer term, the “inevitable inflation” case is still very solid. That is because, ultimately, only one of two things can happen from here:

1. Either we push our way through to genuine global recovery, in which case stagnant monetary velocity picks up and the “dead lake” of printed money becomes a raging river, or

2. The widespread deflation situation become so bad, and economic weakness so pervasive, that skyrocketing Western debt levels send investors into a panic, leading to an outright collapse of faith in the trust-based fiat money system that dominates the Western world.

Either outcome – and we have to get one or the other – could be hugely bullish for hard assets and other inflation-linked investments, while at the same time massively bearish for fiat currencies in general ($USD included) and U.S. Treasury bonds in particular.

But timing is everything when it comes to trading and investing decisions, and that’s why it’s important to recognize which side – the deflation side – has the upper hand in the here and now.

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Other Related Topics: Deflation , Inflation Rate , Justice Litle , Macro Trader , U.S. Economy

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