*****Hyperinflation And Deflation Of Non-dollar Assets*****

Deflation isn't limited to paper money (dollar, pound, etc...). In fact, deflation has nothing to do with paper money: it is about the destruction of credit money. Below is an extract from the Wikipedia's explanation of the history of money which explains what credit money is.

Credit money

Credit money often exists in conjunction with other money such as fiat money or commodity money, and from the user's point of view is indistinguishable from it. Most of the western world's money is credit money derived from national fiat money currencies.

In a modern economy, a bank will lend to borrowers in excess of the reserve it carries at any time, this is known as fractional reserve banking. In doing so, it increases the total money supply above that of the total amount of the fiat money in existence (also known as M0). While a bank will not have access to sufficient cash (fiat money) to meet all the obligations it has to depositors if they wish to withdraw the balance of their cheque accounts (credit money), the majority of transactions will occur using the credit money (cheques and electronic transfers).

Strictly speaking a debt is not money, primarily because debt can not act as a unit of account. All debts are denominated in units of something external to the debt. However, credit money certainly acts as a substitute for money when it is used in other functions of money (medium of exchange and store of value).

Deflation can happen in any asset class whose supply has been boosted by "credit money" (debt/IOUs). This might be confusing, but by reading the two examples below, you should get an idea how deflation can (and will) happen in the gold market.

From the Wikipedia's explanation of the history of money:

Warehouse receipts

Warehouse receipts became a very successful form of representative money in ancient Egypt during the reign of the Ptolemies around 330 BC. Farmers deposited their surplus food grains for safe-keeping in royal or private warehouses and received in exchange written receipts for specific quantities of grain. The receipts were backed and redeemable for a usable commodity. Being much easier to carry, store and exchange than bags of grain, they were accepted in trade as a secure and more convenient form of payment, acting as a symbolic substitute for the quantities of food grain they represented. The warehouse receipt itself had no inherent value. It was only a symbol for something of value.

The invention of representative money had profound effect on the evolution of both money and society. It directly led to the creation of a new social organization, banking. The network of royal and private banks that were created during the reign of the Ptolemies constituted a national grain or giro-banking system. Grains were deposited in 'banks' for safekeeping. Warehouse receipts were accepted as a form of symbolic money because they were fully 'backed' by the grains in the warehouse.

More important but less obvious, the introduction of banking by the pharaohs made possible the creation of money. Until then new money could be grown as a crop, raised as an animal or discovered as metal in the earth. Now it could be created by writing a warehouse receipt. At first these receipts were issued only when additional grain was deposited and cancelled whenever the grain was withdrawn from the warehouse. But it required only a small step in imagination for the bankers to realize that they could also create new grain receipts on other occasions. If someone applied to the bank for financial assistance, the bank did not need to provide it in the form of grain. It could simply create and give to the borrower a new warehouse receipt that was indistinguishable from those issued when grain was deposited. Although the new receipts were not backed by additional deposits of grain, they were still backed by the total value of grain on deposit at the warehouse and, therefore, readily accepted in the market as a medium of exchange, so long as the public had trust and confidence in the overall financial strength of the grain bank.

Creating indistinguishable warehouse receipts = creating "credit money"

The graphic below illustrates how ancient Egypt's banking system used IOUs to inflate supply:

Here is an another example of how "credit money" can expand the supply of a commodity like gold.

Hundreds of years ago people would pay the local goldsmith to store their gold for them in his vault. He would then give them a receipt for the amount of gold that was stored. The receipt was not money, it was a money substitute. It was later common for people to use the receipts as payment for goods and services since they could be exchanged for the gold held in the vault at any time.

The goldsmith found out that only a small amount of the gold was ever claimed since people just kept exchanging the receipts. The goldsmith started writing receipts for more gold than he had, using some of the receipts to buy things and loaning the rest at interest, while taking title to real property as collateral. The gold for these extra receipts did not exist. By adding to the amount of receipts in circulation, the goldsmith stole from the people with the real receipts and decreased the value of the real gold receipts by creating inflation. The more of something there is, the less it is worth and more it takes to trade it for something else.

The graphic below illustrates how goldsmiths used IOUs to inflate the gold supply:



Deflation

When the public stops trusting banks, people start redeeming their warehouse receipts (or requesting delivery of gold futures, etc). This is a run on the bank. As banks have been selling IOUs for assets they don't own (warehouse receipt is an IOU) and since no one can print gold or grain, widespread defaults and bank failures follow.





Why there hasn't been hyperinflation so far

The US banking system has increased the dollar money supply nearly 20 times in the last thirty years.



Despite this, the price of commodities like oil and gold has not increased 20 times:



The reason why there has been tame inflation so far is that banks have been creating commoditiy (and stock) IOUs at the same rate they created dollar IOUs. Below is a graphic that illustrate this massive credit bubble which has grown in commodity derivatives.



As long as investors are willing to accept paper promises (like gold futures) instead of the real thing, inflation will not go out of control. However, when an event inevidably shakes faith in the US banking system, the world will see hyperinflation unlike any seen before.

Instant Hyperinflation

ALL episodes of hyperinflations have been caused by rampant money printing. However, there has never before been a country which has leverage every single assets class to the extent that Wall Street has done. The hyperinflation that is about to hit the US will be caused (at least initially) by deflation of non-dollar assets (stocks, gold, grains, etc...). The dollar's collapse will therefore be more rapid than any previous period of hyperinflation.

Manipulation of Gold

Believing commercial banks hold the price of gold down because it is only thing that make sense. Consider the following:

1) Commercial banks have the ability to sell gold IOUs in unlimited quantities, with no margin requirements or supervision. (This is fact)
2) Banks have been irresponsible in every aspect of their business that we know about (subprime CDOs squared, for example) and have no risk control. They are operating without reserve requirements thanks to an accounting gimmick (deposit reclassification). They also built up trillions in OTC derivatives and created overleveraged off-balance sheet financial vehicles (ie: SIVs, VIEs, etc...),

Logically, these banks are virtually guaranteed to have abused their ability sell paper gold and have boxed themselves into a massive short position as a result. To support this claim, there is a mountain of evidence of gold manipulation.

Warped perception of risk in the market place

Right now, the entire commodity derivative market is built on the idea of no default risk. This is to say, investor are now taking default risks very seriously in the credit markets (after experiencing horrible loses due to financial crisis), but these concerns over counterparty solvency are completely absent in commodity derivatives.

We now have a twisted situation where insolvent financial institutions can't even sell bonds (promises to deliver dollars at a later date) without an FDIC guarantee, but those same financial institutions have no problem selling investors OTC commodity derivatives (promises to deliver commodities at a later date). While there is no transparency to the OTC commodity derivative market, simple logic dictates that financial institutions are taking advantage of the complete absence of risks premiums and cheaply selling enormous amounts of commodity denominated debt to meet funding needs. As long as counterparty fears remain absent from commodity derivative markets, the number of financial institutions turning to those markets for funding will continue to grow, causing the commodity credit bubble to grow ever larger.

Widespread deflation fears have undoubtedly made the commodity credit bubble worse. After all, if the price of commodities is expected to fall, why sell debt denominated in dollars? Selling commodity derivatives instead would make far more sense.

Unfortunately, as the credit crisis has demonstrated so far, reality eventually catches up with those selling debt they have no hope or means of repaying. Default will begin occurring on commodity derivatives, most probably COMEX gold futures. Unlike the credit bubble, the fed will be powerless to stop deflation of the commodity credit bubble, as it can't print commodities.

Concern with default risks is also absent in the stock market, bond market, and currency derivative market. This complete absence of risks premiums on non-dollar denominated debt and currency derivatives is not sustainable.

The end is near

The dollar has begun to break down.



And the yield of the thirty year treasury has broken up.



This is evidence that confidence in the US, Wall Street, and the dollar is near an end.

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

41 Responses to *****Hyperinflation And Deflation Of Non-dollar Assets*****

  1. Anonymous says:

    I have just one question...how am I going to get to sleep tonite?

    Seriously, thanks for keeping track of the things that really matter.

  2. Martijn says:

    Haha, well, after all this printing warehouse receipts, or IOUs is one of the oldest tricks in the book.

    And somehow we (humans) always rediscover it. Not only in the gold market. The whole naked shortselling thing is exactly the same!

    Quite funny, we use printed money to buy printed stock. The world is starting to look like the Matrix.

  3. What happens when the dollar collapses to personal consumer debt? Will the government outlaw gold? Will the debt be reduced across the board? What is Eric's opinion, please???

    Won't government default preceed dollar collapse?

  4. Anonymous says:

    it is hard to take you seriously when you quote a source as unreliable as wikipedia.

    also, in the quote below, did you mean "leveraged"?

    "there has never before been a country which has leverage every single assets class to the extent that Wall Street has done."

  5. Anonymous says:

    Hello Eric,
    The timeline for the commodity “printing” and the dollar printing is different. On first sight this looks like there is no relationship at all. On a closer look the money went into the bull market of the time; oil and gold in the seventies, after that stocks from around ’82 until 2000 (or 2007?) and from then on into commodities again.
    The official inflation numbers are tame, but measured as 1980 the increase in prices is way higher if you believe John Williams. http://www.shadowstats.com/alternate_data

    What means deflation of paper gold for the metal? If the amount of paper gold plus metal shrinks because the paper is not accepted instead of the real thing, the amount of gold shrinks. The amount of metal does not change because the paper gold disappears, so the metal should be way more expensive. But the amount of money might shrink too because the issuers of the paper gold go broke and credit money disappears too. A price trend prediction seems difficult here.
    Gunther

  6. Jim T says:

    So when do we hit the wall? I have been predicting this event since October 2007, calling it to hit September 2008. September 2008 was very eventful with Fannie, Freddie, Lehman, AIG, etc.... it only proved to be the beginning of the end run or HITTING OF THE WALL!

    I'm sick of all of the BS games and Trillions of Dollars being spent to only forestall the inevitable.

    So what is your timeline? When do we hit the Wall?

  7. Anonymous said...
    it is hard to take you seriously when you quote a source as unreliable as wikipedia.

    Well, you could do what I did: FACT CHECK. Do you really think I would put anything on this site that I haven't double checked first? Using sites Wikipedia allows me to save time. Why write three paragraphs on "credit money", money when I can quote wikipeadia? Or would you rather I spend hours putting everything into my own words and not reseaching what is going on in the economy? I don't have an infinite about of time.

    Sorry for being blunt, but I am perfectly aware of the unreliability issues with the wikipedia (if you don't know what I am talking about, click the "discussion" tab on any wikipedia entry). However, when there is a well writen entry which I know to be true from my own knowledge/research, I will use it.

    also, in the quote below, did you mean "leveraged"?

    I mean the supply of all assets, especially commodities and stocks, have been increased ("leveraged") via bank IOUs. In the stock market, the supply is increased via "share entitlements" (stock IOUs) created by securities lending. In commodity markets, the supply is increased via futures, forwards, options, and other derivatives. The point is that Wall Street figured out how to turn pretty much everything into a derivate/security, and any derivate/security can be sold short (creating an IOU and increasing the supply).

    Anonymous said...
    Hello Eric,
    The timeline for the commodity “printing” and the dollar printing is different.

    Confidence ebbs and flows. Commodity "printing" exploded in the last five years because that is when there was a huge inflow of money.

    On first sight this looks like there is no relationship at all. On a closer look the money went into the bull market of the time; oil and gold in the seventies, after that stocks from around ’82 until 2000 (or 2007?) and from then on into commodities again.

    Correct, as stated above, Confidence ebbs and flows. However looking at the big picture, Wall street absorbed demand (via paper IOUs) of any hot market (commodities, stocks, etc). Overall there is no question that both dollar and non-dollar IOUs increased enormously in the last thirty years, largely cancelling each other out.

    The official inflation numbers are tame, but measured as 1980 the increase in prices is way higher if you believe John Williams.

    True, but even using John Williams's stats, the numbers don't add up. Wasn't inflasion higher considering the 20-fold increase int the money supply in the last thirty years? The only answer is that the supply of other assests was being increased via IOUs too.

    What means deflation of paper gold for the metal? If the amount of paper gold plus metal shrinks because the paper is not accepted instead of the real thing, the amount of gold shrinks. The amount of metal does not change because the paper gold disappears, so the metal should be way more expensive. But the amount of money might shrink too because the issuers of the paper gold go broke and credit money disappears too.
    Gunther

    I have gotten dozens of emails asking me: since gold is going to go up, should I buy gold futures/options (Answer is NO)? The fact remains that 95% of investment for gold/commodities flows into "paper" markets (futures, fowards, etc). Only 5% of investment demand goes into the physical market. So when faith in Wall Street crumbles, investment demand in physical gold will increase 10 to 20 times.

    Meanwhile, the supply of money is unlikely to shrink. Virtually the entire dollar money supply is insured by the FDIC. Unless you believe that the US will bank out of FDIC guarantees (FDIC protection has been promised to Americans for decades. There is no way for the government to back out of it now without destroying all trust in the US financial system.), the supply of dollars (checking, saving accounts, etc...) isn't going to shrink.

    A price trend prediction seems difficult here.

    No, it isn't. Over 50,000 tons of gold derivatives have been sold, and Wall Street has much less than 500 tons of gold left to meet delivery demands. That is a leverage of 100 to 1. Unlike dollar deposits, you can't print gold. So the possibility of gold deflation is far more real than dollar inflation.

  8. Anonymous says:

    Eric,

    Quote from you:

    Concern with default risks is also absent in the stock market, bond market, and currency derivative market. This complete absence of risks premiums on non-dollar denominated debt and currency derivatives is not sustainable.

    Quotation ends.

    I have bought physical PM, and I don't have to worry anymore about COMEX default. However, how can we protect from stock default? I mainly have stocks in PMs and commodities, like AUY, DBA. Please advise.

  9. Matheus says:

    I do agree with you !
    Continue your work ! It´s amazing !
    And i see also the hyperinflation coming.

  10. Numonic says:

    Eric I agree with you but I would still be cautious about loosing money in banks because the debt for the currency(derivatives) is so large that it has made it just as hard to produce the amount of currency(at the current denominated caps[i.e. $100 bill]) to stop defaults as it is to produce enough physical gold to stop defaults in the gold market. So until i see the govt. or Fed issue larger denominated bills, bank defaults(loosing my money in banks) is still very likely. But this is very bullish for the price of things(esp. gold/silver) and very bearish for the price of debt(bonds and thus the currency) as I've explained that defaulting on the debt would expose the true cost of things, which are much higher than they are without the mask of credit. One way I believe we could see this issuance of a larger denominated Federal Reserve Note might come through the talks of the Fed issuing it's own debt. This could be the currency that is the $1,000,000 dollar Federal Reserve Note. I don't know, all I know is that in order for the govt. and Fed to stop defautls and save depositors is Weimer/Zimbabwe size printing. They are going to have to print larger bills, otherwise depositors will loose their money through defaults. So I'm hoarding my cash along with my silver.

  11. Numonic says:

    Actually now that I think about it, my cash doesn't matter. Hoarding cash doesn't really matter because whatever I loose in saving my cash in a bank, I'll more than make up with the rise in value of my silver due to the default. By the time there is a default that the govt./FDIC can't make whole in a short period of time as they are currently able to do within a weekends time, the price of gold/silver will go sky high, making up more than you could loose from the money in your bank account.

    But there are benefits to hoarding your cash at the moment yourself, (i.e. avoiding ATM fees, avoiding ATM withdrawal limits, avoiding inconvenient bank operating hours/lines in banks etc.) but on the other hand there is no insurance if this hoarded cash gets burned or stolen. But I feel it's unlikely that my hoarded cash will get burned or stolen so it depends on you and your environement.

  12. James says:

    I wonder if we will eventually go back to a gold standard where some new reserve currency is backed by gold. All this talk about using the SDR of the IMF won't solve the problem. When the price of gold goes through the roof, like say to $5,000 an ounce, what am I suppose to do with it? Do I sell at that point and redeem in Canadian dollars? I know I am doing the right thing by holding physical gold, but I am not sure what to do when the price greatly increases, any suggestions (no one I have asked thus far has had a good answer)?

  13. Hugo says:

    @James I dont think anyone can predict what to do then. There are so many options and it is such an undiscovered scenario that is hard to tell. I think we will have to wait and see what goes on, how goverments react, how people reacts, even how armies reacts. I dont think anyone can reallistically give you any advise. Well have to wait and see.

    @Martijn I completely agree about the Matrix. The more I know about the finantial system, the more I feel I am living in the Matrix.

  14. Hugo says:

    Btw, a crash in the stock market would not result on another deflation period giving some temporary strenght to the dollar and posponing the collapse?

  15. Hugo says:

    Sorry, for posting again but I forgot to say that this is one of your best post. You made easy and understandable all this mess.

  16. KAIMU says:

    ALOHA !!

    In America there are really two currencies.

    ONE that you fold and put in your purse or wallet and the OTHER that you never see or touch that resides in electronic numbers on credit cards and at the US FED. This I call MOUSE MONEY.

    MOUSE MONEY can be created with the click of a MOUSE. TRILLIONS can be mouse clicked within a nano-second. This technology did not exist during the Great Depression. Only about 10% of money is the real stuff that is made of paper and ink. Imagine if the US MINT had to create more "real paper" very quickly?

    When(not if) there are runs on banks what will the runs really look like? Will people want more MOUSE MONEY or the "real" folding stuff? What if there is a bank holiday or a computer virus that wipes out your electronic wallet? How long will the line be to prove how much your account had? All you will have is your last statement.

    Then, while you discuss the value of physical gold and while you say physical gold cannot be PRINTED there is one other commodity that can never be printed wither and it is one you cannot live long without. That is FOOD! You can live forever without ever holding a gold coin or a COMEX gold futures contract but how long can you live without three meals a day?

    Consider that of late CHINA has been increasing its gold reserves and under the radar CHINA has also been increasing its holdings of "farmland". The only real estate sector that has been increasing in value over the past decade and continues to rise further is "farmland". There is NO warehouse receipt for that. Beware the three day supply chain. If your recall this was tested during KATRINA ... It did not end well!

    While I agree with the HISTORY OF MONEY and the whole warehouse receipt scam that has been going on since ancient times I still believe there is one factor that keeps gold and silver above all the rest within the "real money" World and that is its long standing integrity and the absolute fact that gold and silver have absolutely NO COUNTERPARTY RISK. You cannot say that about anything made of paper!

    In closing do not lose sight of what is REAL and what is WEALTH. Many a time OPRAH constantly babbles on about how WEALTHY America is. Well, if DEBT equals WEALTH then there is no question that OPRAH is correct, but DEBT does not equal WEALTH! That is the issue that everyone in America struggles to comprehend. Why? Because we were taught that your ability to secure loans is all that matters since high school. Default is happening. All empires end in DEFAULT even the US EMPIRE! All we are witnessing on TV every day is the unwinding of the US EMPIRE ...

    The USA and the rest of the World are in for a major lesson on what REAL WEALTH is. It does not reside at Bank America or Goldman Sachs and it most certainly does not reside at the oval office!

    GOVERNMENT IS ONLY AS HONEST AS ITS MONEY!

  17. Martijn says:

    @Numonic

    Actually now that I think about it, my cash doesn't matter. Hoarding cash doesn't really matter because whatever I loose in saving my cash in a bank, I'll more than make up with the rise in value of my silver due to the default.

    Nonsense. Should the described event occur (default) imagine what would happen if all your money would be in silver. You'd be an unimaginable amount richer that while still holding cash.

    Holding some cash and some physical metal is a good way of playing the various scenarios (e.g. a default is not "guaranteed"), but you should not reason that holding cash does not matter under any scenario.

  18. SteveR says:

    Eric,

    How do we protect against stock default - in particular, shares of PM mining companies such as NEM, AUY, SLW, etc.? Do we need to actually obtain paper certificates?

    Also, even though I believe that ETF/ETNs are not safe, I have purchased some of Jim Rogers' funds, such as RJA, because I trust him. Any thoughts?

  19. Jimmy says:

    Eric,

    I posted a question similar to SteveR's (before him). Here I post it again. Please try to help me out. Thanks!

    How can we protect from stock defaults? I mainly have stocks in PMs and commodities, like AUY, DBA.

    SteveR:

    I wouldn't trust RJI and RJA. They are ETNs. There are A LOT of credit resks with ETNs. I am not sure how they work. RJI and RJA are issued in Sweden. They are not from Rogers Holdings that is based in Singapore.

    I am thinkng of opening an account in Canada.

    Jimmy

  20. Anonymous says:

    Anyone planning for armageddon should read "The Alpha Strategy" by John Pugsley - link for PDF copy http://www.biorationalinstitute.com/zcontent/alpha_strategy.pdf Hard to believe it was written almost 30 years ago.

  21. Anonymous says:

    Um, so correct me if I'm wrong. From your article, can I deduce that the price of non dollar items purchased on credit (boats, cars, toys) will deflate in value.

    With this drop in value of second homes, cars, boats and other credit excesses, could the govt be thinking that a deflating of the dollar as good if it coincides with this drop in non-dollar values.

    As the banks crash or the system crashes, credit is no longer available, accounts possibly frozen,and investments are either lost or stolen...So, silver and gold are the best currency? Will gold deflate for a short time...or only until the 'market' (which may no longer exist) determines the true supply of gold and thus its value?

    I enjoyed your article, but just a little fuzzy on connecting all the data points. Thanks, keep up the good work.

  22. Keith says:

    Anyone:

    I am just really getting the big picture for the scam of the century (The Fed, Wall street). I started getting into what is real and what isn't (I love The Matrix) back in Aug 08, and I went with my gut instinct and moved all of my assets out of stocks, etc and into bonds/monkey, I mean money, markets.

    What I am planning on doing shortly is:
    1) Buy PM (gold, silver)
    2) Buy storable food and goods (batteries, crank lights, etc)
    3) Do a garden setup with rain barrells, etc. Even if this collapes takes a year or so, gardening never hurt anyone.

    Anyway, I don't know which currency I should invest in more: Krona, Euro, Yuan, or....?

    Thanks.

  23. Numonic says:

    "Martijn said...

    @Numonic

    Actually now that I think about it, my cash doesn't matter. Hoarding cash doesn't really matter because whatever I loose in saving my cash in a bank, I'll more than make up with the rise in value of my silver due to the default.

    Nonsense. Should the described event occur (default) imagine what would happen if all your money would be in silver. You'd be an unimaginable amount richer that while still holding cash.

    Holding some cash and some physical metal is a good way of playing the various scenarios (e.g. a default is not "guaranteed"), but you should not reason that holding cash does not matter under any scenario."

    Defaults would lead to rising prices on all things and decreased prices on debt. I hope you know that. So to the person that asked, a stock market crash would cause the price of all things to rise hyperinflation style. I hope you know that the reason Gas isn't 40/gallon right now is because of these bailouts and all the money being printed. If massive defaults happened, the price of silver among many other things would be through the roof and the value of the dollar would be close to 0. I can't believe after all I've been talking about this great credit contraction causing borrowing costs to rise and be passed on to the customers and that if these companies weren't/couldn't get money from the govt. they would be getting it from the customers and that in order for the govt. to avoid massive defaults and continue to bail companies out so that they wouldn't be forced to raise prices to get the money they need to pay back the rising borrowing costs and you still don't get it. People when gold and silver rise to those extraordinary highs, don't look to exchange those metals for paper, look to exchange those metals for things because those metals will be the currency. Why are people so accepting of paper or gold/silver certificates as the currency but not the metals themselves. Why are people looking for a gold "standard", when standards equal price fixing. Why can't people just want a free market currency? Why do people want to be lazy and let someone else manage their store of value for them? Why can't we practice hoarding and managing our store of value ourselves? Fortunately we have no choice, hoarding will become the norm whether people like it or not. There is no way lending will continue after massive defaults. This is bearish for the currency because of massively rising borrowing costs for those that depend on borrowing(companies) that will be turned in to massively rising consumer prices.

    I'm done, today was a bad day for me. I lost my wallet with allot of important stuff in it. :(

  24. Vlad says:

    I read your articles regularly, however I am confused here. Are you saying that the prices of gold and commodities will crash down when the firms that sold the contracts will not be able to deliver?

    'The hyperinflation that is about to hit the US will be caused (at least initially) by deflation of non-dollar assets (stocks, gold, grains, etc…). The dollar’s collapse will therefore be more rapid than any previous period of hyperinflation.'

    Does that mean that the prices of gold and commodities will crash down and will be followed by hyperinflation?

    'After all, if the price of commodities is expected to fall, why sell debt denominated in dollars? Selling commodity derivatives instead would make far more sense.'

    I am confused here as well. Are not derivatives, or futures contracts for gold and commodities priced in dollars?

    Still, I got much out of your article and it has fresh ideas. I would like to be able to understand your thinking more. Btw I am native Russian and living and working not too far from you in the Nutmeg state. I am slowly gestating your ideas about Russian agriculture. I would have to see with my own eyes the state of lawlessness there to be able to consider and advise you. However caveat emptor always over there.

  25. Hugo says:

    @Vlad Does that mean that the prices of gold and commodities will crash down and will be followed by hyperinflation?No. Deflation means there is less of something. When there is a default of any commodity derivative, the paper IOU for that commodity has no value, thus reducing the amount of them (deflating them). That will push the value of the commodity up, since the market will realize there is less quantity of that commodity available than it was made believe by the people selling naked IOU's (IOU's with no real commodity backing it).

    If commodities prices go up, that means the dollar is loosing value, since it will buy a lot less.

  26. Anonymous says:

    What I am planning on doing shortly is:
    1) Buy PM (gold, silver)
    2) Buy storable food and goods (batteries, crank lights, etc)
    3) Do a garden setup with rain barrells, etc. Even if this collapes takes a year or so, gardening never hurt anyone.

    Please don't forget protein. This may be the most difficult to obtain in a crisis. May I suggest whey or egg protein (Optimum Nutrition has the best taste) from GNC, bodybuilding.com, etc. It has a good shelf life.

    Prepare for the worst...then we can survive anything less.

  27. Jimmy says:

    Could anyone explain a good approach to invest in agriculture? DBA, RJA, POT/AGU/MOO, etc? I basically don't trust ETNs.

    Thanks,

  28. "Are you saying that the prices of gold and commodities will crash down when the firms that sold the contracts will not be able to deliver?"

    The prices of PAPER gold and commodities will crash down "when the firms that sold the contracts" are unable to deliver. Prices of physical gold and commodities will soar.

    For example, investor who would normally buy futures will instead go directly to the physical markets. This is bad for those owning futures, but good for anyone owning the real thing.

  29. Numonic says:

    Eric, if people running away from paper gold will drop the paper price of gold, what is causing the paper price of gold to rise right now?

    Are people buying more paper gold now than ever? Is that what is causing the price of "paper" gold to rise? Is more money going in to "buying" "paper" gold? I thought buying "paper" gold decreased the price of all gold "paper" and physical. What is the exact action that is causing the paper price of gold to rise? This is one thing that has been bugging me. I can understand why the physical price of gold is rising but i can't understand why the COMEX/Stock Market/Paper gold price is rising.

    I'm going to ask this question to another metals/business expert but I'd greatly like your answer Eric.

  30. Anonymous says:

    So what will it do to my mortgage?
    Will it get inflated away?

    (I'm assuming I'll be able to keep up the payments i.e. that I'll still have a job while all this horror is unfolding, but then maybe not)

  31. JLH says:

    @Numonic: I'd like to explore your statement a little further:

    "Defaults would lead to rising prices on all things and decreased prices on debt. I hope you know that. So to the person that asked, a stock market crash would cause the price of all things to rise hyperinflation style. I hope you know that the reason Gas isn't 40/gallon right now is because of these bailouts and all the money being printed. If massive defaults happened, the price of silver among many other things would be through the roof and the value of the dollar would be close to 0."

    It seems to me that one of your statements can be true, but not both insofar as rising prices on all "things" and low prices on debt.

    The bailouts didn’t prevent $40/gallon gas. They more likely prevented $40/bbl crude—or less.

    Looking to the Great Depression, we can see that the crash was *deflationary*, and what led to the long term problem was the failure of the Fed to intervent and add liquidity—they were “keeping the powder dry for a *real* emergency.

    For one, a major collapse of the stock market is a highly deflationary pressure. M3 money would shrink hugely. Thus, the value of the dollars used to denominate “things” gets stronger and prices go down, not up. The value of debt would be hugely deflated because there would essentially be zero demand in a risk-averse environment.

    So if we have tons of printed currency (and we do) and we have really low interest rates targeting liquidity (and we do) and we have a lot of gov’t spending (and boy do we ever), we have everything the Keynesians tell us will prevent deflation. But we still see contraction in the money supply—and the Fed is using all the tools in the toolbox. They are essentially paying people to borrow money (ZIRP) and STILL can’t get the credit markets unlocked.

    The problem with inflationary concerns right now is that the Fed can’t print M3 money. M3 money (which is no longer published, thanks Ben? ) is created by economic activity, primarily the credit markets. So having tons of money printed by the FED does *not* mean that there is automatically tons of USD in circulation. Credit markets make those dollars circulate. Someone has to want a loan for a bank to make the loan. Bank can’t thrust loans upon unwilling consumers.

    Moreover, the FED’s ability to effect the money supply is more like a rope: pull, but not push. The FED can directly pull money out of circulation and somewhat easily head off inflation (if they actually WANT TO rather than engage in more “irrational exuberance”). But they can’t PUSH money into circulation—they can only make more money available. Think of it like food supply and an appetite. I can make you hungry by withholding food. But I can’t FORCE you to eat more by offering an unlimited smorgasbord—you’d have to pull the food from me as you have room in your stomach.

    Normally, we’d see a $100 “hard money” deposit become up to an additional $900 of “mouse money” through iterative fractional reserve lending at a 10% reserve ratio (i.e, $90 is loaned on $100, $81 loaned on the $90, $72 loaned on the $81, etc etc). If the “system” is stable with at that $1000 level, and the $900 in “mouse money” is defaulted upon, all you are left with is the $100 is hard money. This is how collapses lead to deflation all else being equal.

    But all else is never equal. It seems to me that Eric’s main argument is that we have all this printed money on one side of the balance, and on the other side is a lot of “soft” assets like IOUs that he thinks will inevitably collapse. Thus, he argues hyperinflation from the massive imbalance of large amounts of “money” chasing what has been revealed to be an actually small amount of hard assets (i.e., not IOU, CDOs, CDSs, etc).

    But the key assumption is that you’ll have all that money on the one side of the scale sitting still while the asset side of the scale is chaotically diving.

    That’s not likely. The money side of the scale and the asset side of the scale are interrelated.

  32. Numonic says:

    JLH before i read your reply to my comment, I want you to know that my stance and understanding of the situation has changed. Most of the stuff I was talking about over 6 months ago are no longer how I feel.

    My stance is basically that the reason that asset prices are dropping is because banks are decreasing lending and that banks are intentionally causing asset prices to fall because by selling the assets to the Fed, they have put themselves in a short position where they need asset prices to fall so that when the Fed sells the assets back to the banks, the action does not cause the banks to suffer a short squeeze. The banks sold the assets to the Fed in exchange for Federal Reserve Notes which they were in shortage of. The action was a loan, meaning at some point in the future the Fed will sell the assets back to the bank in exchange for the Federal Reserve Notes. Now in order for the banks to not suffer a short squeeze the value of those assets need to drop so that when the Fed sells the assets to the banks, the banks will pay less for them than what they sold it for, leaving enough cash in the banks. If the asset prices are more than what the banks sold them for when the banks are buying the assets back, the banks will end up giving the Fed back more Federal Reserve Notes than they got from the Fed when they sold the assets to the Fed. And the banks were already suffering a shortage of FRNs at the time they sold the assets to the Fed so they can't afford to give away even the amount they got from the Fed when they sold the assets to the Fed, let alone more. Anyway I think the worst in the banking system is over and my barometer is the draw down in FDIC funds. You can see my current stance by reading Eric's blog titled: "Gold market reaching a breaking point" My latest replies are in there.

    Also my reason for holding physical silver is because every single currency in history has hyperinflated and even though I don't see how the US$ will hyperinflate, because 100% of currencies in history(not including the ones used now) have hyperinflated, i see a great chance for some time in the future the US$ hyperinflating. And holding physical silver is insurance against that probable hyperinflation.

  33. Numonic says:

    JLH, I agree that defaults are deflationary, this is contrary to what I believed before.

  34. Numonic says:

    JLH, i agree with the pushing on a string theory, but in a way I also disagree. I disagree that the Fed can cause banks to loan less. Because the monetary base has nothing to do with bank lending as bank lending is electronic and banks can create as much money as they want without regard to reserves. So instead of the pushing on a string theory, i like to think of it as a NO string theory. There is no connection between reserves and bank loans. Banks do not need reserves to make loans. Reserves are physical and loans are electronic. The only thing reserves are used for is for those people who wish to withdraw physical cash from the bank or ATM. That's the only thing the monetary base/reserves is used for. Even though the consensus is that banks require reserves to make loans. I disagree with that consensus. Banks need nothing but a computer and network connection to make loans. It's as simple as me sending you an email and in the email box it says "$15" and in the title of the email it says "savings" and that basically considered a bank account. It's like your email address is a bank account and I can be sending you emails with "$15" every month and totaling it up and telling you how much you have in your bank account. That's basically our banking system and how loans work. I don't have to have the physical cash to give you $15 electronically. In my analogy, it's like people are accepting an email with a dollar amount typed in it and accepting it as money and forwarding the email to people as a means to pay for things. And banks when they make loans, it's like they are making a new email letter. And there is nothing restricting the number of emails they can send. A bank account is no different from an email account except in this analogy when you forward an email, you no longer have that email in your in box. Anyway my point is banks don't need reserves to make loans because loans are electronic and reserves are physical.

  35. Numonic says:

    My greater understanding of money.

    This letter is a combination of my greater understanding of money and a response I'm sending to someone who asked me if I'm hoarding food and supplies as a proactive measure against hyperinflation. I realize that money is not only about value but about safety(durability). Here is the response I'm giving to the person asking if I'm hoarding food and supplies, I think you will agree and enjoy it.

    "I'm not hoarding food for the same reason I am not hoarding the paper currency and that reason is that they both can be destroyed in a fire or disaster. Gold and silver can not. And that is one major aspect of money: safety. Realize that I said I am not 'hoarding" the paper currency, that is not the same thing as saying I am not holding the paper currency. What I mean by that is that I still have savings in the currency except the savings are in the bank, I am not pulling out the physical cash and stashing it under the mattress so to speak. There is still a part of me that trusts that the banks will not default on me and will give me my money when I come to withdraw it(which is why I still have savings in the bank) but there is also a part of me that realizes that there is a chance I'll be defaulted on and that side of me is what pushes me to become a hoarder and hold my money myself and I am not doing so with things that destroy easily like the paper currency or food, I am doing it with things that are hard to destroy in a fire or disaster like gold and silver. The reason people trust letting someone else hold their money for them(which is what they do when they put their paychecks in the bank) is because the banks have a track record of never failing to pay the depositors when they demand their money. It's not an issue of inflation and deflation, those two things are natural and would happen regardless of what the currency was. Inflation and deflation are not bad or good things. They have to happen as the supply and demand for everything is constantly changing. So even if your savings were in silver and gold in your own private vault, it would be worse for that silver and gold to have a gram per oz disintegrate every month from your private stash than it would be for the weight of the metals to remain while the price fluctuates. It's one thing for your silver and gold to loose value, it's another thing for your silver and gold to loose weight. At least if you still have the precious metal, you have a chance of benefiting from a possible rise in value but if you don't have it you can't benefit. That is why safety is a very important aspect with money. People aren't just saving their money in the banks because they believe the currency will be strong, they are saving it in the bank because they believe the bank will keep the money safe, otherwise they would hoard the money themselves in physical form(Federal Reserve Notes and US coins). So it's a combination of value and safety. The reason people are holding dollars is because they believe it will stay valuable and the reason they are keeping the dollars in banks is because they believe the banks will not default on them, which would be the same thing as loosing what you're hoarding in a fire or disaster. It's about safety.

  36. Numonic says:

    So even if you are expecting food to be scarce, hoarding food is not the solution. I'm not saying that there won't be people hoarding food, some people will have to as there is not enough silver and gold or even the currency in it's physical form for people to hoard, and this is why you see so much of the physical cash printed up during hyperinflation. The govt. prints up so much of the physical currency to try to get people to stop hoarding everything else and instead hoard the currency because the hoarding of everything else is taking supply of everything off the market and causing the value of everything to skyrocket against the currency. The govt.'s actions to entice people to hoard the physical cash fails because the currency is very fragile and easily destructible and the things best for hoarding are those that are most durable. In this way defaults cause hyperinflation(massive price rise), and it is brought on by a loss of confidence not in the currency but in the people you let hold the currency(the banks). Had the currency been made of something durable like gold and silver instead of paper, it would be different and the govt. would succeed in getting people to hoard the currency. Hoarding food can't work because it would be like only having one supermarket in the country. If that supermarket goes bust, you will not have any supermarket to go to. If you keep all your food in one place, you have a greater chance of loosing all your food in a fire or disaster than if your food was spread out in different places. The only thing that works in hoarding are things that last and can survive fires and disasters and gold and silver are those things. So if you are going to hoard anything it should be gold and silver. From this aspect, I can understand why some people say gold and silver are money and nothing else is."

  37. Numonic says:

    The person I'm talking to still responded basically saying that there will be a far greater demand for food than for gold and silver and here is my response. It is long but I think it is very informative and in the end I use what you told me about Zimbabwe.

    "In response to you basically saying in a time of hyperinflation and food shortage demand for gold and silver will be no where as high as demand for food, I disagree. The reason I disagree is because you are confusing the cause and the effect. The reason people will be hoarding food won't be because the price is rising too much, the price will be rising too much because people will be hoarding food. The rise in price of food is the effect of the hoarding, not the cause. We know why the price will be rising(because of the hoarding) but you haven't figured out why people will be hoarding food. People will be hoarding food to have a medium of exchange. The shortage of things won't be brought on because of a desire for those things, it will be brought on because of the desire to have something to exchange. There has always been a desire to have something to exchange regardless if that something was meant for nothing but exchange and that is evident in the fact that our current currency does nothing for us other than giving us something to exchange and yet it is accepted. I can make the argument that you can not eat Federal Reserve Notes and yet they are still accepted by many. They are accepted because people want something to exchange. And in order for someone to keep that thing they use for exchange, it has to be durable. Paper currency is not durable(this explains why there is a larger use of electronic money(debit cards) than physical paper money(Federal Reserve Notes/US coins)), food is not durable but the electronic system of banking we have seems to be durable. Our electronic banking system has had a track record of never failing to give back to depositors what the depositors gave to the bank. It has not defaulted on any depositors. The banking system and thus the currency that the banking system holds is as good as gold in the respect that it seems indestructible. I'm just realizing how important it is for people to have a medium of exchange, not a specific medium of exchange but just having something to exchange. Just having something, anything to exchange is important. So if that is important, then being able to keep a medium of exchange is also important. That means the most durable medium of exchange is what people will be looking for. A medium of exchange has always been important, in the best and worst of times. And like I said, the reason the food will be in shortage won't be because of an increased desire and stomach for the food, it will be because people want something to exchange and the food will be an alternative when the gold and silver run out. What will be driving the food shortage(and the shortage of everything else) is the lack of a medium of exchange. So if the lack of a medium of exchange is what drives the food shortage, this means that there is a greater desire for a medium of exchange than there is for food.

  38. Numonic says:

    The hoarding of food won't be because people have a desire for food as much as it will be because people have a desire for a medium of exchange. I think the reason people have this desire for a medium of exchange is because first of all a person's primal medium of exchange is his ability to work and the reason people want something else as a medium of exchange is because a person realizes that 1, he/she will not be able to work his entire life. As he gets older his body and brain will have wear and tear, and he will be unable to do the same things he did when he was young. So in that respect, he will loose his all of his/her medium of exchange if his/her only medium of exchange is his/her ability to work. And 2. at anytime a person can get injured and this too can effect his/her ability to work. So this is why people choose to have a medium of exchange other than their ability to work. Because the ability to work is as fragile a medium of exchange as paper or food is. That primal medium of exchange has an expiration date(old age) and can also be damaged(which is when a person gets injured and can't work anymore). This is why people need an alternate medium of exchange and why people look for a medium of exchange that is durable and hard to destroy(like gold and silver). The lack of an alternate medium of exchange besides your ability to work will be caused by the banks defaulting(not honoring depositors, meaning your checks and debit/ATM cards no longer operate.). The reason people use the banking system as their medium of exchange is because so far it has the look of durability and indestructibility. Even when banks get robbed for the physical cash, depositors never loose a penny if their money is in the electronic form. Even if a bank burns down or closes down depositors money is still in the electronic system and they'll be able to operate it from another bank. So this electronic banking system we have seems durable and indestructible, just like gold and silver. It is when this banking system finally defaults that it looses it's status as durable and indestructible. I'm still not sure yet what would cause it to default or why it would default but for now I know that default is what would cause people to see the banking system as a poor medium of exchange and this is what would drive people to a more durable medium of exchange and that will be gold and silver. And when there are no gold and silver left, people will run to the next best durable medium of exchange, food will be on that list but it's not one of the best durable mediums of exchange. The things that are the most durable and convenient to carry around will go up the most in value because the reason for the hoarding will be to have these things. People will hoard food but only if there are no better durable medium of exchange alternatives. This means the value of gold and silver will go up against food. You will be able to buy more food with your gold and silver in that time than you can now.

  39. Numonic says:

    And one more revelation. Lending is not what will cause the value of the dollar collapse, it's what the borrowers do with the money lent that will. And because people have this huge desire to have a durable medium of exchange, people will rather park the majority of the money they get in the bank than spend it on a bunch of things that can easily be destroyed. You see that desire for a durable medium of exchange is hidden. Despite all the money slushing around the world buying up tangible goods and services, a majority of the money that exists is parked in bonds and banks. This is proof that there is this huge desire for people to have a durable medium of exchange. No one I know has ever thought of this or brought it up. I am just recently realizing this. And since there is this huge desire across the world for people to have a durable medium of exchange, when the banks and bonds default, people will run to the next most durable medium of exchange because the reason people held their medium of exchange in the banks and bonds is because they saw the banks and bonds as a durable medium of exchange. That desire for a durable medium of exchange won't go away when the banks and bonds default, people will go on to look for the next best most durable medium of exchange and that is gold and silver.

  40. Numonic says:

    The reason the mass defaults we are seeing today isn't causing a run away from the banking system as a medium of exchange is because the defaults are happening to the banks not to the people. People are defaulting on the banks, the banks are not defaulting on the people. Had it been the other way round and the banks started defaulting on the people by not allowing access of debit cards, ATM cards or checks or access to the banks, people would start to move away from banks as being their medium of exchange and look for the next best most durable medium of exchange, which is gold and silver, but to be fair other banking systems that have not defaulted on their depositors are also better alternatives as more durable mediums of exchange than the banks that defaulted, like for instance when one nation hyperinflates(defaults) it doesn't drive the world away from banking entirely, it only drives people away from the banks in the nation that defaulted and if that nation that defaulted has a majority of the worlds gold and silver then that default would cause the value of gold and silver to rise in every currency because people of that defaulted nation will be flocking to gold and silver as an alternative medium of exchange. So I'd say be weary of the nation without much gold and silver or much goods at all because there would be less things stopping that nation from defaulting. If the banks in that nation can default without hurting the currencies in other nations, it probably will. Zimbabwe's hyperinflation did not hurt other nation's currencies because Zimbabwe did not have much gold or silver. Had Zimbabwe been a major holder of gold and silver when the hyperinflation hit, then the rush by Zimbabwians to gold and silver would cause a shortage of gold and silver around the world and would cause the value of gold and silver to rise in every currency. Zimbabwe was a nearly barren nation when the hyperinflation hit. That is why the hyperinflation did not cause a shortage of things in other places of the world. People in Zimbabwe were trying to hoard things as an alternative medium of exchange to the defaulted banks but Zimbabwe had nothing to hoard. That's why it is best to stay in a nation that has the majority of the worlds things because then there would be fear from the world if that nation hyperinflated(defaulted). And the world would do everything it could to prevent that nation from hyperinflating(defaulting on depositors). The world would give that nation the money it needed to prevent defaults on that nations bank depositors. I still don't know why banks default but I will find out.

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