Menu Close

Disabusing Popular Assumptions

There are a couple of assumptions floating around in certain quarters that I’d like to disabuse. One is that based on its recent statements and actions, the Fed is reflating. Another is that it will be successful, in fact too successful, resulting in high inflation. Another is that foreign central banks will be around to take on all the debt that the US Gimmeit will have to pile on the market at very low rates to realize its bailout/stimulus pipedreams.

All quite logical, except for the fact that as the deflationary collapse progresses the FCBs themselves will probably run out of money first. They will need to be net sellers of all kinds of US paper to meet the needs of their own citizenry. That the FCBs will be there for us as long as necessary isn’t a bet I’d be willing to make.

I think that it’s more likely that one of these days a Treasury auction is going to fail. Then what? Who the hell knows? That’s what.

Have you seen all the news about companies cutting salaries and benefits for all their employees? Have you seen the prices in the retail stores lately?

We are so doomed.

It absolutely astounds me that we are in the early stages of deflationary debt collapse and economic collapse, and people are actually trying to figure out ways to justify the idea that we are going to somehow end up with inflation as a result of collapsing prices and wages.

Show me the evidence that deflation is ending first, then I’ll be willing to consider what comes after. Show me the evidence that the amount of new debt created by the Fed is anywhere near the amount of debt and being destroyed by the private sector.

I can’t understand why people are speculating on this stuff when stock prices will tell us when things are beginning to turn around. How many weeks ago did people on our boards (Stool Pigeons Wire) start buying the double long energy ETF?

I mean, really. HAVE WE LEARNED NOTHING?

THE TREND IS THE TREND UNTIL IT ISN’T.

Here we have something in our hands right now–it’s called cash– that is increasing in value for the moment, and people insist on throwing it away.

I don’t get it. I just don’t. I’m sorry, but I am just not into games about predicting the future by trying to see around blind corners. I’m not going to play that game. It’s tough enough to figure out and understand what is right now, and what the immediate effect will be, without speculating 10 moves ahead. This ain’t chess. It’s an unstable system, not a game with fixed rules and predictable outcomes, and we do not know what the effects of these moves will be, and neither does the Fed or the US Government.

Bernanke thinks he knows what caused the Great Depression, and he thinks he knows how to prevent another one.

Well, it just so happens that the Great Depression was caused by the bubble that preceded it, not some widely debated errors made by the Fed as the Depression was getting under way. The government can’t stop these processes until they have run their course. Please note that Japan started trying to do so 19 years ago. By not allowing the natural processes of depression and regeneration to happen, here we are 19 years later, and not only are they still fighting the same battle, now the rest of the world is too.

The lesson should be clear to everyone. Once the forces of deflation have been set in motion monetary and fiscal policy are powerless to stop them.

Join the conversation and have a little fun at Capitalstool.com. If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.

14 Comments

  1. Caliboy

    Great post Lee. You nailed it.

    The MSM is going on ad nauseum about how the Fed is printing money. But the reality, for anyone who cares to look beyond the propaganda, is vastly different. They are simply preserving a few chosen survivors while condemning the rest of the American people to generations of debt servitude.

    However, I don’t agree that Bernanke et. al. are unaware of the ultimate futility of their efforts to prevent deflationary collapse.

    Rather it appears to me they are simply trying to milk the crisis for all it’s worth in order to gain even greater control over the insurance, financial and key industrial sectors of the economy in order to allow them to proceed forward with their grand experiment in global social engineering.

    I won’t believe differently until I see proposals relegating the Federal Reserve to a perfunctory role.

  2. don

    As usual, you hit it right on the nose.

    For some time now you have emphasized the deflation/deleveraging action underway, noting many months ago that commodities would go bust. You were right.

    I have been confounded by all this talk of inflation coming down the pike as a result of the Fed’s actions. This notion falls back on the assumption that the US economy will be growing again, perhaps as soon as second half of ’09. Yet, with the increasing layoffs and the positive feedback loop between the West and East driving down each other’s economies, 2009 will not bring about an reflationary escape from the global and deep recession.

    Your insights and assessments are much valued.

  3. lurker

    “I think that it’s more likely that one of these days a Treasury auction is going to fail. Then what? Who the hell knows? That’s what.”

    When that happens is when you’ll get your inflationary explosion. Not before. I don’t see any alternative. This is why so many people are in the inflation camp. But before that happens, we’ll have deflation.

    If you are nimble enough to trade around it, great. I suspect it will be sudden and without warning.

  4. JJ

    It is possible, or even likely, to have price inflation amid a deflationary collapse.

    Did prices in the bankrupted Iceland go up or down?

    Most of our consumer goods is imported, or have imported components. When the US cannot sell Treasury bonds to foreigners and when the foreigners take dollar debts as payment no more, the price inflation in this country will go sky high in the middle of a deflationary collapse.

    70% of oil is imported. 90% of seafood imported. Etc. etc.

    When the US can no longer print dollar (a.k.a. creating dollar debts) and buy imports, yes, it becomes inevitable to have high price inflation or outright shortage, under a monetary deflation.

    I thought this should be very obvious. But, nobody point it out.

  5. JJ

    The deflationary trend Lee so eloquently presented will lead to high price inflation, as I stated above.

    Have we reached the threshold of deflationary collapse triggering high price inflation yet? Not yet.

    The threshold is when the foreigners refuse to buy more US government debts, or worse, turn into net sellers.

    The Treasury auction failure, as Lee speculates, is the threshold.

    In my view, high price inflation is inevitable, not due to money printing, but due to the loss of credit worthiness of the US or an outright US sovereign default.

    I buy precious metals, not because of imminent hyperinflation (not likely to happen, in my view), but because of the destruction of the dollar debts. Gold and silver are wealth preserver. When dollar is no more, foreigners will still accept gold and silver as payment.

    One time during 1970’s, Saudi demands oil payment in gold.

    Lee mentioned that the so-called money, such as money market funds, may be merely mirage. The funds may be irredeemable when we need them. In a pure fiat currency system, as we are in now, money is merely debt, and debt becomes unserviceable under a deflationary collapse.

    Gold and silver are nobody’s debt. They are still money, when dollar debts are no more.

    Other essential tangibles also keep their value, especially food and energy.

    Do you know how the US dollar is originally defined in 1792? Answer: silver.

    The oldest and most common money – silver
    http://www.wallstreetbear.com/board/view.php?topic=52929&post=171316

  6. Lee Adler

    I think that gold and silver are a fine hedge. Probably the best hedge.

    The problem with the idea of the US dollar losing cred, as it must, is that every other government is in varying degrees of trouble as well. Japan’s debt load is even greater than the US. The ECB has done as much or more debasement than the US.

    I continue to believe that unlike the chess game, in an unstable system such as this, the next moves, and the results of the moves are unpredictable.

    Technical analysis gives us the best means of identifying when change is occurring. Day to day trend identification is the name of the game. TA always gives ample warning of major trend changes. Many of you are great chartists and know the truth of that personally. But if you are not a good chart reader, then it behooves you to know who is, and pay attention to those people when they sound the alarm.

  7. JJ

    The debts of Japan and EU countries are basically internal debts – money owing to their own people. The US is the only nation with huge external debts. This fact is reflected in the trade deficits between the US and EU/Japan. The deficits are balanced through the purchase of US debts by the surplus countries.

    Once the dollar debts are not accepted, then the US cannot continue the deficits. The US must balance the trade through a combination of the reduction of imports and increase of exports. That means price spike or shortage in the US to discourage import and consumption. For example, a Toyota Prius may experience price deflation in Japan, but show price inflation when selling in the US.

    This is the reverse of the past two decades, when the huge monetary expansion in the US was met with price disinflation, because the foreign countries accept the newly created dollar debts as payment and send tangible goods and services to the US. The result is the huge accumulation of the dollar reserve at foreign countries.

    The unwinding of the above dollar scam will be simultaneous monetary deflation and price inflation in the US.

    – – – –

    Only physical gold and silver will provide protections. The paper claims, such as GLD, SLV and CEF, will default. Shareholders of those ETFs will never see the physical metals.

    Some possibilities for these ETFs:

    1. The ETFs may have no real metals at all. They are just scams. Some silver certificate programs were exposed already to have no silver from the get-go.

    Morgan Stanley never ever stores a single ounce of silver for the silver certificates they sold, but charging storage fees, claiming “industrial standard practice” in a class-action lawsuit. See the article linked below.

    http://www.investmentrarities.com/10-23-07.html

    2. The ETFs may have some real metals at one point, but the metals are leased out to some third parties. When the right time arrives, the third parties, mostly Wall Street interests, just default on the lease agreements and keep the real metals.

    3. The government may seize any remanding real metals owned by the ETFs, claiming national security. The shareholders will be paid the official paper prices of the metals, currently gold at $42 and silver at 25 cents per ounce.

    After so many Wall Street frauds have been exposed, if you still seek safety in paper claims issued by Wall Street and banks, then you deserve to lose your life saving, just like the Madoff investors.

    Only the real yellow and white metals in your own hands provide protections.

  8. Lee Adler

    All quite logical. If this were a chess game I’d definitely bet on you!

    Meanwhile I will depend on the charts for timing the moves correctly.

  9. JJ

    As the worst recession in at least a generation spreads, so too does the clamor for gold bars and coins, assets less likely to go up on smoke like so many derivatives and asset-backed securities.

    “I’ve never seen a case where demand was so high and supply was so short,” said Chicago coin dealer Harlan Berk, who has been in the business 44 years.

    Full story:

    US Mint labors to meet demand as investors buy up assets they can hold in their hands

    http://biz.yahoo.com/ap/081224/gold_hunt.html

  10. John Davis

    The standard of living has already begun to decline across the globe. Governments can try and manipulate the values of their currencies all they want, but prices will inevitably continue to fall along with that standard of living decline. Deflation is already a certainty.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

RSS
Follow by Email
LinkedIn
Share

Discover more from The Wall Street Examiner

Subscribe now to keep reading and get access to the full archive.

Continue reading