Euro Is Not Going To Crash

Below is the rebuttal to flawed deflationist logic circulating the media:


1) The euro is going to crash against the dollar because European bank losses dwarf those in the US


This bit of logic proves that deflationists (those predicting deflation in the US) don't understand deflation. Whether or not European bank losses dwarf those in the US is irrelevant. It is the euro which will rally against the dollar. Why? Because the euro zone, unlike the US, is about to experience real, honest-to-god deflation. Ironically, deflation is staring US deflationists in the face, and they are too blind to see it.

Understanding the difference between deflation and hyperinflation

The root cause of deflation and hyperinflation is the same: a nation plagued by mountain of debt. This mountain of debt can be in form of a massive national debt, an insolvent financial system, or both. What determines whether a debt-plagued nation experiences deflation or hyperinflation is the response of that nation's monetary authority:

A) If the monetary authority does nothing while the country defaults on its debt, its banks go bankrupt, and its depositors see their savings wiped out, then that country will experience deflation.
B) If the monetary authority chooses to monetize a country's national debt, its banks' bad loans, or the savings of depositors at failed banks, then that country will experience hyperinflation.

The US in the 1930s as an example of deflation

When a series of banking panics rocked the US financial system in 1930s, the fed did nothing as thousands of banks failed. As a result,
between 1929 and 1933, two out of every five banks in America collapsed, and depositors at those banks lost most of their savings, shrinking the US money supply. Why did the fed let so many banks go under? For one, the Fed could not by law directly lend to banks that did not belong to the Federal Reserve System, and most banks remained outside this system at the time. Furthermore, the fed was restricted on how much it could lend to its member banks: it could not, for instance, lend to banks on their real estate loan portfolios. Because of these regulatory restrictions (which have long since been removed), the fed was powerless to prevent the depression's cascading bank failures.

The following passage from the St. Louis Fed summarizes the US experience with deflation:

Starting in 1930, a series of banking panics rocked the U.S. financial system. As depositors pulled funds out of banks, banks lost reserves and had to contract their loans and deposits, which reduced the nation's money stock. The monetary contraction, as well as the financial chaos associated with the failure of large numbers of banks, caused the economy to collapse.

Less money and increased borrowing costs reduced spending on goods and services, which caused firms to cut back on production, cut prices and lay off workers. Falling prices and incomes, in turn, led to even more economic distress. Deflation increased the real burden of debt and left many firms and households with too little income to repay their loans. Bankruptcies and defaults increased, which caused thousands of banks to fail. In each year from 1930 to 1933, more than 1,000 U.S. banks closed.


Germany In 1920s as an example of hyperinflation

In 1920, German banks were insolvent and did not have the cash to honor checks. Since the German government itself was burned by its war debt and reparations payments, it could not borrow to bail out its banks. Furthermore, the government did not want to upset people with heavy taxes, and it feared a rise in the unemployment which would result from bank failures. As a result, Weimar Germany turned to the printing press to bail out its financial system, and its currency was brutally destroyed by hyperinflation.

The following passage from a 1970 report on Germany's currency collapse summarizes the German experience with hyperinflation:

In World War I, Germany -- like other governments -- borrowed heavily to pay its war costs. This led to inflation, but not much more than in the U.S. during the same period. After the war there was a period of stability, but then the inflation resumed. By 1923, the wildest inflation in history was raging. Often prices doubled in a few hours. A wild stampede developed to buy goods and get rid of money. By late 1923 it took 200 billion marks to buy a loaf of bread.

Millions of the hard-working, thrifty German people found that their life's savings would not buy a postage stamp. They were penniless. How could this happen in a highly civilized nation run at the time by intelligent, democratically chosen leaders?

The roles have now reversed

Today, the US is the nation facing hyperinflation as the fed monetizes debt, and the EU looks set for deflation as the ECB allows Europe's financial system to collapse. The reasons why is simple. Following the great depression, the US took steps to insure it would never experience deflation again, and Germany's experience with hyperinflation shaped the EU in a way to prevent hyperinflation from ever happening again.

The fallout of the US's experience with deflation include:

A) The rise and domination of Keynesian economics in the US. Keynesianism is the economic school of thought which gives such wisdom as "deficits are good" and "you can spend your way to prosperity".
B) All US bank deposits are now fully insured by the FDIC. This alone makes deflation impossible in the US, as it forces the fed to either monetize banks' bad debt or monetize the deposits which were used to loan out the bad debt.
C) The fed's sweeping authority to bailout whoever they want, whenever they want, however they want.
D) Social security and Medicare, which makes a default on the US's national debt unthinkable as this would reveal that the baby boomers retirement savings are gone.
E) Free money for the unemployed! Unemployment benefits are being extended by 33 weeks to 59 weeks and the average $300 weekly benefits are being increased by $25. You can now receive a 17,000 annual salary for getting laid off, courtesy of the government's printing press.
F) massive federal and trade deficits.

The fallout of the Germany's experience with hyperinflation include:

A) The "no bail-out" clause of the Maastricht Treaty (the treaty that led to the creation of the euro), which stipulates explicitly that neither the Community nor any Member State is liable for or can assume the commitments of any other Member.
B) The euro zone's lack of FDIC-type deposit insurance
C) The ECB's inflation fighting mandate.
D) Germany's 3,413 tonnes of gold reserves, the largest in the world (besides the US gold reserves, if they still exist), and the EU zone's 10,413 tonnes of gold reserves.
E) Germany's export oriented economy and trade surplus
F) Germany's long standing low-inflation policy
G) Germany's contempt for Keynesian economics. (a contempt I share)

The USD rally will end when Europe's financial system starts collapsing. Investors will realize that the EU won't print money to bail out its banks, and that will send the euro soaring against the dollar.

The dollar's and the euro's fate

Eighty years ago, at the most fevered moment of the German hyperinflation, the exchange rate between the dollar and the Mark was one trillion Marks to one dollar. This time around, it will be one trillion dollars to the euro (assuming the Maastricht Treaty holds).

As EU bank failures wipes out deposits and gold prices continue to rise (gold price rose during the great depression's deflation), eventually the value of the EU's outstanding currency will equal the value of its gold reserves. At that point, the EU will have the option of converting the euro into a hard currency, redeemable in gold.

2) Trade numbers show how China's dependence on international trade is smacking the daylights out of their economy.

Anyone who thinks things are going badly in China hasn't been paying attention

Optimism is growing in China. Economists now project that China will be the likely leader of an elusive worldwide economic recovery. China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008: Chinese loan growth and money supply have surged this January. Bank lending is multiplying the effect of the government's spending in ways that wouldn't be possible in the United States and Europe, where banks are burdened by toxic assets. The Shanghai Composite Index of stocks has also climbed about 36% from November's lows

Falling imports don't mean Chinese consumers are spending less

The reason why imports to China crashed 43.1% percent in January is easy to figure out. Consider the following:

1) Consumers around the world are downshifting to discounters.
2) Over 95% of the merchandise in Chinese Wal-Mart stores is sourced locally.
3) China's undervalued currency makes all foreign imports artificially expensive.

From these three facts, it should be clear that downshifting by Chinese consumers is helping their economy while reducing imports. Furthermore, remember that 70% of the merchandise in US Wal-Mart stores is also from China, which means that downshifting by US consumers helps China too.

It is true that falling exports are causing pain in China

China's export sector is shrinking and this means millions of migrant workers are losing their jobs. However, the prospects for unemployed migrant workers are far better than they are for America's laid off workers. Unlike the US, China's service sector is experiencing double digit growth. This means that laid off workers are finding new jobs or starting their own companies. Furthermore, migrant workers and college graduates who are returning home will help boost consumption in inner China. These young workers/graduates will push their relatives to buy computers, cell phones, and other modern gadgets they have gotten used to. The standard of living for rural China will be going up.

China has begun major reforms of its social security net to boost spending.

For the last three decades, China has experienced excessive
industrial expansion at the expense of consumption, with its consumption rate dropping from around 55 percent of GDP in the 1980s to merely 35 percent last year. The specter of high medical costs, coupled with the overall weak social safety net, has been discouraging Chinese from spending their money. As an example, Chinese government spending on health in 2006 amounted to less than 1% of the country's gross domestic product, ranking China 156th out of 196 countries surveyed. Medical reform has been deliberated by authorities since 2006, however China's battle with inflation has been taking priority over moving forwards with these reforms.

Now with the inflation threat temporarily faded, China is finally moving forwards with improvements to its social safety net. China has expanded social security and passed a new medical reform plan. Broad insurance coverage and social security will, over time, start to shift the balance in China away from savings and toward more consumption. China has irreversibly begun to break its "dependence" on US consumers.

Chinese authorities plan to boost rural spending to spur economic growth

To encourage rural consumption, China has implemented a nationwide program to provide 13% subsidies to rural residents on purchases of electronic goods such as cell phones, washing machines, personal computers, motorcycles, personal computers, water heaters and air conditioners.

The subsidy plan is working. Rural sales overtook urban sales for the first time in the company's history last year. Also, in the first 20 days of January, Chinese farmers bought more than 160,000 items of home appliances on government subsidies, 90 percent of the total in December.

China's focus on the consumption and standard of living of inner China is bad news for the US. When inflation goes out of control, Chinese officials will be faced with the choice of dropping its successful effort to promote domestic consumption or dropping its dollar peg (which has been unsuccessful at helping exporters).

The efforts to boost domestic consumption are working

Chinese consumers have been on a spending binge, bucking the global trend. Chinese domestic consumption is forecast to grow at about 20 percent in 2009.

The best place to see the diverging fortunes of the US and China is in a comparison between the US auto industry and the Chinese auto industry, which offers a stark contrast:

US auto industry:

  • About 1,000 GM, Ford, and Chrysler auto dealers went out of business last year, and about 2,500 more dealerships are expected to close in 2009.
  • Manufacturers are shelving plans to open new facilities.
  • Hundreds of suppliers are on the verge of going out of business in the next two months because US auto production has virtually stopped.

Chinese auto industry:

  • Dealerships have stopped offering discounts on 80% of their sales because of strong demand.
  • Manufacturers are investing in new plants and expanding workshop floors.
  • All Chinese auto makers are predicting growth for 2009, with some aiming to double their vehicle sales.

In January alone, Chinese battery and carmaker BYD sold 24,107 vehicles, up 80 percent from a year earlier.

It doesn't look like the "hard landing" is going to be in China...

3) China's treasury holdings are a much bigger problem for China than they are for the US.

I love this one. While it is true that China is having problems dealing with their massive dollar reserves, to then say that those reserves are a bigger problem for China then the US is hilarious.

Simply put, if you had to choose, which problem would you rather have?

A) China's problem of having "too much cash"
B) The US's problem of having "too much debt"

4) The US is facing a decade of falling prices

Droughts are plaguing the world's biggest agricultural regions, and the world is heading for a drop in agricultural production of 20 to 40 percent, depending on the severity and length of these droughts. Since the demand for agricultural commodities is relatively immune to developments in the business cycles (at least compared to that of energy or base metals), already rising food prices are headed significantly higher.

In fact, agricultural commodities NEED to head higher and soon, to prevent even greater food shortages and famine. The price of wheat, corn, soybeans, etc must rise to a level which encourages the planting of every available acre with the best possible fertilizers. Otherwise, if food prices stay at their current levels, production will continue to fall, sentencing millions more to starvation.


5) China is no more manipulating the yuan than the US is the dollar.

China's 2 trillion dollars of reserves are proof of manipulation. The process of building up foreign reserves puts downward pressure on a nations's domestic currency. So the yuan has been significantly undervalued as a result of China's reserve buildup.

The US, by contrast, has not been increasing or decreasing its foreign reserve, and therefore has not been manipulating its currency.

6) If China floated the yuan, it could easily get smashed like other export based economies.

A quick comparison of the fundamentals backing the yuan and the dollar should reveal how they would fare if the yuan was floated.

China's fundamentals:

  • At current exchange rates, China could use its 2 trillion dollar reserves to completely pay down its national debt and still have billions to spare. This means China is one of the only countries on Earth which has a positive net worth.
  • China is running record trade surpluses, averaging around 40 billion in the last four months.
  • China has one of the world's healthiest and strongest financial system.
  • China's economy is growing, with its service sector experiencing double digit growth.
  • Most of the world is dependent on China's cheap consumer goods
  • The Chinese budget is balanced.

The US fundamentals:

  • The US net worth is negative $11 trillion dollars (with unfunded commitments factored in = negative $53 trillion net worth)
  • The US has been running massive trade deficits for years.
  • The US financial system is completely insolvent
  • The US economy is collapsing, with both the service and manufacturing sectors contracting rapidly.
  • The US is utterly dependent on the rest of the world for its basic consumer goods.
  • The US doesn't even remember what a balanced budget is.

If China drops its currency peg, the dollar is going to get killed.

For those who still think the yuan would crash if it was floated, I have a few questions: is that how you invest your money? Do you go looking for the company with the worst possible fundamentals? (Companies drowning in debt, with declining sales, and no growth prospects) Or do you invest your money in companies with strong fundamentals?

7) There is nothing else that's as good of an investment as the US dollar.

ANYTHING is better than the US dollar: Yuan, euro, yen, gold, silver, oil, food, art, etc... Even the British pound will be worth more against the dollar by the end of the year. (and the British pound isn't going to be worth much...)

This entry was posted in Background_Info, Bailouts, Currency_Collapse, Euro_Zone, Gold, Market_Skepticism, Wall_Street_Meltdown. Bookmark the permalink.

30 Responses to Euro Is Not Going To Crash

  1. Permaculture says:

    eric, in following much of hwat you say, i'm so curious to understand the mechanism by which the dollar is gaining strength. Rick Ackerman has said that there are some major forces buying dollars in the asian market last night in the trillions of dollars.

    I'm curious to know why someone (aside from the cartel) would be buying dollars unless it's either a head-fake to lure in the last remnants of the small investor money (not my likeliest choice), or to bolster the US stock market to buy more time for further consolidation (likelier choice), or simply because of some other scenario of major global agenda which might not have been considered too seriously (anyone's guesses are better than mine here).

    Again, i'm curious to know your take.

  2. Bowtie says:

    I think that the dollar is gaining strength because everyone is being forced to liquidate. For example, hedge funds are facing a huge increase in redemption requests. Therefore they have to sell off assets to get cash. Those assets could include stock, houses, or any other asset imaginable. Fundamentally the sale of assets is really a purchase of dollars which would in turn push the value of a dollar up, because it makes less available. Since the sky is falling, once the investors get their redemption, they hold cash instead of going out and spending it on some other asset. I think this analysis pretty much applies across the board as everyone is forced into foreclosure or decides to sell stock. They get massive inflows of dollars but there's no place safe to stash it, so they leave it in the banks or buy treasury bills. At some point this has to end and I think that is when inflation catches fire. Check out the book "fiat money inflation in france." I think it's available free online somewhere. It's a great book, almost comical if it weren't so true and sad.

  3. dashxdr says:

    Eric you've got a typo. You say, "The fallout of the Germany’s experience with deflation include:" but you mean "hyperinflation" instead of "deflation".

  4. Anonymous says:

    "Rick Ackerman has said that there are some major forces buying dollars in the asian market last night in the trillions of dollars."

    Could be the Fed...
    Or some other entity that wants to keep their currency down in the hope of maintain exports...

  5. au trader says:

    This article has it exactly right, but few else seem to see it. Gold and food will be the places to be in 2010-2015.

  6. Anonymous says:

    Every country in EU has some sort of FDIC deposit insurance, from the minimum REQUIRED of 20000 EUR to total coverage in germany and a few other places.

  7. Anonymous says:

    The rebuttal #6 seems flawed to me. It contrasts US to China fundamentals. However most sane people already know the US fundamentals are bleak. Yet the flight to "save haven" results in US$ appreciation. So the whole point is that as of now markets act irrationally in complete disregard to fundamentals.

    Sooner or later the market has to turn and restore the balance, capital will find the real safe haven. But this is not happening yet.

  8. Numonic says:

    "As EU bank failures wipes out deposits and gold prices continue to rise (gold price rose during the great depression’s deflation), eventually the value of the EU’s outstanding currency will equal the value of its gold reserves. At that point, the EU will have the option of converting the euro into a hard currency, redeemable in gold."

    In order for them to maintain the purchasing power, this action would have to be followed by producing as much as the money supply is being expanded(as much as there is lending) and one thing I learned from history is that production never keeps up with the expansion of money(especially when the money is paper). With physical gold and silver, the lending game ends quickly because those things are rare and can not be easily produced to lend out. Point is lending is bad and ruins currencies and economies. Production never keeps up with lending(especially if the money is paper). I keep hearing this problem we are having was brought on by bad debt. There is no such thing as good debt, all debt is bad because production can never keep up with lending(especially if the money is paper). So they should be saying this problem was brought on by debt. So in order for the EU to avoid higher prices(or getting in to the same mess they're in now) after the action you proposed happens companies will need to adopt the attitude of working for the money(gold/silver) they need to start/maintain a business instead of borrowing it otherwise the rising borrowing costs will be passed on to the consumer(rising prices=decreasing purchasing power). In order for them to maintain this, paper would have to be removed as a substitute for money and the only money would have to be physical gold/silver. That means no gold/silver certificates of any form. I'm not sure if what I quoted you saying was suggesting this move or suggesting turning the Euro in to a form of gold/silver certificates redeemable for gold/silver. What they need to have after there is a balance with their gold reserves and their outstanding currency is a removal of using any paper as money(even if it is redeemable for gold/silver). Doing this would make it hard and almost impossible to over expand the money supply because you can only lend as much gold/silver as exists. Basically the solution is to go back to a gold/silver coin currency with no paper substitute.

  9. Anonymous says:

    When the US defaults on its T-Bonds, though the impact will be across the board (all bearers, domestic and international, it is still a loss to China.

    I means, in terms of a balance sheet, US debt is listed as an asset to China... their assets go down. No doubt, a US default will hit domestically much harder than internationally, its is still a hit for China.

    "3) China’s treasury holdings are a much bigger problem for China than they are for the US.

    I love this one. While it is true that China is having problems dealing with their massive dollar reserves, to then say that those reserves are a bigger problem for China then the US is hilarious.

    Simply put, if you had to choose, which problem would you rather have?

    A) China’s problem of having “too much cash”
    B) The US’s problem of having “too much debt” "

  10. Anonymous says:

    Eric,

    You do a great job with your blog. I look forward to reading it every day. Do you have a timeframe when we will enter the hyperinflation phase? Beginning of 2010?

    Thanks!

  11. Anonymous says:

    Eric... Keep hammering at the deflationists. I especially enjoy you taking on Mish. Honestly, he is getting tiresome.

    One thing that no one thinks about when it comes to US vs China equations. If we default, we will be locked out of borrowing, and we MUST borrow to keep the Ponzi scheme going. Borrowing is a must.

    If we default, the Chinese loose $2 trillion in RESERVES!! What factories disappear? What assets on people's balance sheets disappear? What effect does this have on China? Answer.... NONE. The lose some money, they turn around and make some more.

    Get real, folks... The U.S. is a million times more hurt by a default than China. The U.S. will not default. We will inflate. We gotta. We at least have a half a chance of coming out okay if we inflate.

    I gotta say, I doubt we will see true Weimar hyperinflation. We will just see something nasty. More of a Latin America kind of thing. My guess is 100-200% over the next 3-5 years. Then it settles down. That alone will eliminate lots of housing problems. Really.

    Keep up the good work

  12. Anonymous says:

    We all know about stimulus packeges, and it needs to financed, so in my opinion FED is buying USD so they can get financing from abroad. And when they get the money USD will fall against other currencies. But real question is when will Government stop with issuing new treasury bills(for stimulus) when they do I expect real fall of dollar and Hyperinflation.

  13. DKD says:

    HI Eric,

    I really like your blog, and I hope the EU isn't heading towards hyperinflation like you outlined.

    However, what do yo make of the bailout of Irish banks and the Irish Governments guarantee of all bank deposits? There is also a lot of talk of bailouts for the eastern european countries and the PIGS. Is the EU heading more towards the tactics the US is employing now? There is also talk of a 'Zimbabwe-isation' of the global economy, with gold hitting in highs against the Euro: see following link:

    http://www.telegraph.co.uk/finance/4682554/Gold-hits-record-against-euro-on-fear-of-Zimbabwean-style-response-to-bank-crisis.html

    Is the ECB really going to devalue the euro to get out of this crisis? I hope not but it is looking more like this. I would be interested to hear what you think, and hopefully explain to me how this is not going to happen!

    best
    Denis

  14. dashxdr says:

    Someone asked, "Eric, do you have a timeframe for the hyperinflation?"

    What kind of a question is that? It's like someone on the deck of the Titanic asking someone else how long they think the ship is going to take to sink.

    Do you like living life on the edge? Hoping to squeeze out a bit more profit before you duck and cover? The collapse could be at any time, any day. If you're not out of the dollar, any possible gains you hope to gain by staying in the dollar are dwarfed by the losses you risk.

    Use your head, man! You're smart enough to be reading Eric's blog, you ought to be smart enough to be preparing RIGHT NOW. Then you won't care about timing the hyperinflation. You'll sleep soundly. The timing won't matter.

  15. andy says:

    Is it even safe to be in assets denominated in dollars like CEF or GTU?

  16. Numonic says:

    Check out this video.

    Zimbabwe - gold for bread

    MDC activist Sam Chakaipa returns to his village in rural Zimbabwe to find his friends and neighbours starving to death, reduced to panning gold powder from the rivers to exchange for food at an exorbitant rate

    http://www.guardian.co.uk/world/video/2009/feb/11/zimbabwe-gold-panning-starvation-food

  17. Eric

    Excellent work! I look forward to reading more of your work. Keep going!

    I would rather bet Europe follow most debtor countries to face deflation, followed by hyperinflation (your article of "How Deflation Creates Inflation"). EUR/USD becomes tricky but I will bet on USD strengthening as the credit bubble is USD based (the same old story of strong USD during deleveraging). Two key points:

    (i) Protectionism

    I bet EU would also deflate as I bet protectionism and social unrest (driven by unemployment crisis globally) would totally damage investors' confidence. With social unrest EU would have no choice but to print more money, just to find investors keep hoarding cash (i.e. your description in "How Deflation Creates Hyperinflation"). The end game would be EU joining the world for hyperinflation - when gold price getting out of control rising.

    (ii) Money printing

    I understand that EU countries could actually issue more bonds, sell it to local banks, and local banks repo those government bonds back to the gov't. The local banks could therefore borrow money (repo) from the gov't/central bank to buy the bonds, and governments printing money relatively free from treaty.

    Unless politics stop money printing (highly unlikely), we are going to see deflation with cash hoarding, followed by hyperinflation. One addition - gold and precious metals would rise throughout deflation to hyperinflation. Gold would drive inflation - see my work "hyper gold inflation". The end game to stop hyperinflation would be "hyper gold standard".

    link:

    hyper gold inflation
    http://vicktorcapitalist.com/blog/2008/12/17/who-would-turn-the-world-from-deflation-to-inflation-gold/

    hyper gold standard
    http://vicktorcapitalist.com/blog/2009/01/21/peg-gold-at-us10000-per-ounce-the-ultimate-solution-to-this-crisis/

  18. Numonic says:

    As far as when we will start seeing rediculously high prices, i can't say exactly but i can say for sure that before this year ends we will see those rediculously high prices. I don't think we can go another 365 days without the credit market totally freezing up and passing on rediculously high borrowing costs to consumers. The game is over, the paper money has been stretched too thin and can't stretch anymore and thus is contracting causing borrowing costs to rise and companies who can't afford the borrowing costs to pass on the borrowing costs to consumers or fold. Lately allot are choosing the latter as they have no choice with competition still out there but with every company that folds, it only leaves less competiton for the rest and more room and reason to raise prices. I believe there will be very little competiton(extremely high unemployement) before this year ends and those remaining will have those extremely high prices.

  19. Anonymous says:

    There is no way the US is going to default on its debt. No way whatsover. They will monetize their way to oblivion, or start another war(s) for any number of reasons.
    With more and more countries turning to Protectionism, The US will have no choice but to take what is "rightfully" theirs.

    With all this "watering down of our whiskey", I wonder how long before we have food prices reaching unbelievable heights....6 months? 18 months? Who knows? Have you seen the price of bread recently?

  20. Anonymous says:

    Will the Canadian dollar follow the greenback

  21. Anonymous says:

    Numonic,

    I hate to butt heads here, but the notion that we should move back to a gold and silver standard is a bad idea.

    As Ben Franklin pointed out, 'money' can be 'anything' as long as the production keeps pace with the demand / consumption.

    For one, the banksters who use interest (that always compounds and always out paces the initial principle) will acquire all of the au/ag after several years of tribute payments.

    Tally this in with huge shortages on au/ag not just for industrial purposes, but for domestic use as a currency is even worse in my opinion, as the cost to produce and to supply the 'commodity' will continue to apply downward (deflation) preasure on everything else purchased with it (au/ag) as au/ag become increasingly rare as money shifts out of circulation and into private bankster accounts.

    I just can't see the benefits of going back to a au/ag standard, although it denies inflating the currency via minipulation, it still doesn't correct the deflationary effects attributed to using the 'sound' money to begin with.

    People seem to forget that the clause in the US Constitution that states the Government can only 'Coin or Borrow and regulate the value thereof' left the door open for the banksters to establish the modern day babylon banking / commerce system...

    And as you see, this is where it has lead us.

  22. Numonic says:

    It's funny because I just had an email conversation with Jason Hommel of silverstockreport.com and he basically speaks of the deflationary effect of gold and why gold isn't/will not be as good as silver as money because gold is/will be too rare.

    I don't know of these banksters you speak of as I'm assuming Fractional Reserve Banking or lending in general will no longer be going on. That means no more banks holding people's money. People will be holding their money themselves in their own safe boxes.

    A return to gold/silver as money will be the end for bankers, so the banksters you speak of won't have anymore access to the gold/silver as the next man and that will be by working for it. Unless you're speaking of the Central Banks who still have gold in their vaults which is practically none. The gold/silver albeit a very small supply is in the hands of people, or at least will be as the gold/silver rush picks up because of hyperinflationary rising prices on everything.

    Or you were probably assuming I meant going back to a gold/silver certificate style gold/silver standard. I was not. I am talking about cold hard metal being circulated and nothing more/No paper or even paper redeemable for the physical gold/silver. That means no more lending. If you give your gold/silver to someone to hold consider it theirs.

    As far as producing gold and silver check out the video I posted of what they are doing in Zimbabwe because that's how the silver/gold will be produced. The people will produce it. Those who own the tools to produce/dig for gold/silver the best will be the ones who own the gold and they will give it to people for goods and services. These people will get the gold/silver for their goods and services and they can accumulate enough gold to buy machinary/tools needed for digging/producing gold themselves. Plus when prices of gold and silver rise there will be more incentive to find more and produce more goods and work more to get this gold/silver. Economies will be booming. But most of all gold/silver will be in a free market so if the value of gold is too high or gold is too rare for circulation, people will move to the lesser rare precious metal(silver) and if the same happens to that metal, people will move back to gold or to platinum/palladium or copper. The fact is the free market is always working even when we think it isn't.

  23. Bowtie says:

    Great comments, however, there is less silver above ground than gold; something to think about.

  24. Numonic says:

    Another funny thing. I always knew from months of research that silver was more rare than gold, until Jason Hommel (the ultimate silver bug) gave a reason for silver being better used as money than gold because of gold being too rare. I don't know, all i know is that silver and gold will be more valuable and if you want to protect your wealth grab some silver/gold.

  25. Anonymous says:

    Numonic,

    Again, I just don't think that notion can hold water.

    Sure, the producers who search for the au/ag might be the ones who turn up 'getting it' - but the 'investment' has to come from someone.

    Considering who owns most of the gold mining companies to begin with...

    America was the exception, and she was abundant in silver but not in gold (not at the start) - silver could easily be a sound monetary unit of measurement, but again it too can become exceedingly rare if over consumed - it does have many many many more applications then gold in industrial uses as well as civilian and etc.

    Again, I am of the Carey / Lincoln believers in that government should be the issuer of credit and not some foreign entity who uses interest to clobber us with impossible to pay loans..

    (techincally by civil law, all impossible contracts are null and void.)

  26. Numonic says:

    Again I think the free market will work everything out.

    Regaurdless who owns the mining companies, those people who own them have to eat and need/want things. The gold they mine will be given to those who provide other services and goods. Those people providing services and goods could accumulate enough gold/silver to start their own mining company and more silver/gold will be produced.

    "Sure, the producers who search for the au/ag might be the ones who turn up 'getting it' - but the 'investment' has to come from someone. "

    The investment will be coming from allot of people as people try to protect themselves from rising prices in the US dollar and other paper currencies riddled with debt and trade deficits.

    The rise in price of silver/gold will lead to more mining of the metals.

    If silver/gold became too rare that would mean standards of living would be high along with the production and overabundance of goods.

    We are no where near there right now. So even though I believe the the prices of things will rise dramatically in relation to the US dollar(because of the massive debt and trade deficit), I don't think the price of things will fall dramatically in relation to the price of gold/silver. We'd have to do allot more producing of other things before we can say silver/gold is too rare. But the prices of things will indeed be falling in relation to gold/silver because of the rush to gold/silver to store wealth but it won't be as dramatic as leading people to say/feel gold/silver is too rare because allot of nations are experiencing trade deficits and poor manufacturing not to mention the droughts. If the price of things ever becomes to cheap in relation to gold/silver that would mean we'd have an abundance of those things. Especially since we use such small amounts of silver for industrial use even though we use it more than gold. Silver has very important properties but it doesn't take much to produce allot. And if we have an abundance of things, people wouldn't have to work so hard, we could take it easy, consume a little more, give more and let the free market work it out and bring back equillibrium. But right now in relation to things in the world, I don't think silver/gold is too rare. It's allot more rare than the paper money out there and this is incentive to get silver/gold. So people will be doing what they can to get it. That means producing more goods and services.

    I don't think it will be possible to say silver/gold is too rare while economies are suffering like they are now with poor manufacturing. The gold/silver will be valued against other things and if those other things are almost as rare, then gold/silver won't be as rare as you think, although it will be a heck of allot better than any paper currency. Gold and Silver will only be too rare when economies have over produced other things because gold/silver will be priced in relation to those other things.

    And besides there are other metals like Copper which are more abundant.

    Anyway I'm not looking for a standard, like I said the money should be in a free market. I'm just thinking of the now. And right now if you want to protect your wealth silver and gold is the way to go. Maybe in the next century it will be platinum and palladium, who knows. All I know is you should be holding something that stores value and can be used as currency. Gold/silver still look good to me.

  27. Bowtie says:

    The government should provide credit? Wow... I just cannot understand people who think the government is good and wonderful. "Government is the essentially the negation of liberty."

  28. killben says:

    An excellent post!

    If the monetary authority chooses to monetize a country’s national debt, its banks’ bad loans, or the savings of depositors at failed banks, then that country will experience hyperinflation

    My only question here is:

    Does this happen for sure? Does it not assume that stimulus leads to demand and therefore hyperinflation?

    I have my reservations because I feel when there are job losses, depletion of wealth and wounded buyer psyche, it is unlikely to create demand whatever the persuation...

  29. ZV says:

    Hi,

    Interesting article. You wrote the Euro wont crash because they wont bail their banks out..looks like they did..is it back on now, in your opinion?

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