bitbigt

The tie WILL be cut soon.

Fine by me - so long as this involves gold going up and oil going down (which will stave off a slowdown and thereby promote inflation and the gold price increase)

....yes, I know the market will never see it that way

Just now, it's completely the other way around

Oil shooting up, but PMs not following. Disappointing!

Hi OJ - yes I read it, but couldn't follow the logic (plus had no time then to write a long response)

The loan capital, even today, is already destroyed by the creditor paying off his/her loan. But the very fact that any loans are possible (even if just to government) means that, until that loan is full repaid, the money supply has been increased. That increase devalues money and causes inflation. That inflation means that future loans people take out must be bigger (in dollar terms), so continuing the money supply growth ad infinitum.

Then again, OJ, I think you may be on to something.

There are 2 ways to stop the money supply growing.

a. don't allow borrowing (what I was suggesting)

b. ensure that new debt issuance per year is never greater than the amount of old debt being repaid (a version of what you were suggesting)

So via option 'b' we could have some borrowing and still avoid inflation, and thereby be able to link the currency to gold!

...growth would be slower than it is at present, but

- it would be sustainable without the boom and bust turmoil

- it would reduce the wealth differential between rich and poor

As per my post (did you read it? ), surely this wouldn't happen if the loan capital was destroyed as it was repaid -- to counterbalance the money creation when the load was taken out.

Hi OJ - yes I read it, but couldn't follow the logic (plus had no time then to write a long response)

The loan capital, even today, is already destroyed by the creditor paying off his/her loan. But the very fact that any loans are possible (even if just to government) means that, until that loan is full repaid, the money supply has been increased. That increase devalues money and causes inflation. That inflation means that future loans people take out must be bigger (in dollar terms), so continuing the money supply growth ad infinitum.

So in short, as I understand it, any borrowing at all in society will create inflation and make it impossible to tie a currency to a never increasing element like gold

EDIT: My preferred solution is to simply allow loans but with much higher interest rates, to the degree that the money supply increases only very slowly and at a rate that matches national productivity growth. That way one pound today will buy the same amount of stuff at any time in the future, even though there will be a few more pounds around. But this still precludes a link to gold.

Or have 0% inflation and allow borrowing

I suspect this is not possble, simply because:

borrowing always produces a money supply increase which always produces inflation

Freedom, for who though?

 

If world currencies were to return to asset based currencies then how would governments prevent the increasing divide between wealthy families and poor families? Money supply does serve a purpose in free market economies, but is the problem with the money supply or the free markets themselves? Regardless of monetary system, freedom for people, in general, can only come from an equal distribution of productivity and the nature of using money to make money is the enemy of this. Proponents of free markets would argue that without personal investment, productivity cannot be planned to efficiently increase standards of living, but the fact that half of the world lives on 2 dollars a day indicates, to me, that analytical planning would struggle to do worse.

 

Here's some stats on freedom:

http://www.globalissues.org/article/26/pov...facts-and-stats

http://www.guardian.co.uk/money/2006/dec/0...ternationalnews

In my view, we can only go to a non-fiat (e.g., gold backed) currency if all borrowing is outlawed! ...that's why it won't ever happen, and it also lies behind it failing last century

The basic logic behind this is simple:

Ban borrowing = no increase money supply and no inflation, so the currency can be locked to something that doesn't change in amount

Allow borrowing = money supply will inexorably increase and inflation will exist, so eventually disconnecting the currency (in ratio terms) from any substance that doesn't change in amount

But some good things about not allowing borrowing (if it were possible):

- you could buy houses with about 8 years of current mortgage payments

- the rich-poor wealth gap would reduce

- society/economies would grow far slower, perhaps matching the planets ability to cope with us human parasites

- we could get rid of CBs, and bring some honesty and transparrency back into the system

Personally, I do not buy into the simplistic argument that inflation will be good for gold and deflation will be bad for gold. We are looking at the mother of all monetary crises and gold will be good not for its nominal price [which would relate to inflation or deflation] but due to the fact that it is money and a good store of value. Dollar/pound prices are a momentary obsession and are irrelevant in the larger long term picture of things.

...do you, however, buy into the argument that inflation will be good for gold

...do you, however, agree that a weaker pound does stoke up inflation

More generally, I think agree with your general thrust if what you're saying is that, since all fiat currencies will become worth less (whether or not they are eventually worthless) then it will hard to notice that unfolding devaluation as none of them will provide a reference point to 'see' those falls against

That ultimate reference will be the cost of 'stuff' that does not depend upon credit (e.g., food, gold, energy, rather than house prices, stock markets). And stuff going up vs currencies is inflation.

Grrrrr. Head hurts now.

Panic Selling in Gold: What's Next?

The author (a former racehorse tipster and philosophy graduate !) seems to think deleveraging will neutralise and overpower inflationary pressures. Anyone like to comment on that?

I have commented extensively, explaining i) there is a widespread lack of appreciation about the way money supply and its effects work, and ii) there is a current over-focus upon deflation because people are right now 'feeling the pinch' of the credit crunch (this 'tipster' epitomises that).

So to avoid being boring and repetitive, I'll make it brief:

- The massive increase in money from the last decade has not gone away, its just gone to Asia. That's causing massive out of control inflation there which will flow back to us

[EDIT]- The Western slowdown will help take some of the inflationary pressure out of Asia, and so allow them to keep going with high inflation without completely overheating

- In the West we may not be taking on so many new personal loans now, but the governments are more than making up the difference as they monetize the bad banks etc (M3 is at 15%, even after 1 year of US credit crunch and slowdown ...fact!)

- All the excess money we borrowed has been given to Johnny Foreigner in return for plastic crap, and 90% of the new government loans are also to Johnny Foreigner - meaning that our future growth is owed to someone else and so Sterling is going to weaken dramatically long term

- Shorter term, we're 1 year behind the US, and so a big and sudden currency fall is yet to come for Sterling (has just started to unfold) [i.e., very inflationary]

The main point to note: Western governments will not let deflation take over - they've said exactly that, and that they'll pump new money in to whatever degree is necessary to avoid it. They have bigger debt problems that anyone, and they can, will and do monetize it (as this is their only possible way of clearing that debt).

So just now we're seeing the first deflationary smoke coming out of the inflationary fire and masking it from sight. But behind that smoke the government are pouring petrol on the flames. Don't just watch the smoke - its part of burning process and more easy to see, but not the heart of the problem.

I suspect we're at the level where gold's price fluctuations are triggering as many (if not more) buy rather than sell orders. At least that's how it looked when it tried to go below 780

...a good sign?

Fellow UK residents... we really should start watching the charts in GBP and not USD, they're a lot prettier

Gold is actually only 15% away from its all time peak of mid-March in sterling (vs ~25% for USD). That's nothing!

In fact, linng up the two charts makes me suspect that golds price in an 'average currency' is just following a normal and healthy bull trajectory, with occasional corrections. It's just the big drop in the dollar and its recent manipulated rise back up, that makes everything looks so mannicky pannicky

I see a possibility that I will be buying silver at $12.XY tomorrow. Good night for now.

Well I just did... Doubled up my holdings at $12.5 just after 8am

Average price paid now £7.48 ($13.9 at current exchange rate)

Will double up again if it hits 10 dollars ...but I already see some silver blood on the streets, and sterling is collapsing

Anyone know what is happening to Oil ???

Its dropping, but quite slowly: http://www.livecharts.co.uk/MarketCharts/crude.php

Seems this latest drop in PMs is lead by silver. Were there a lot of stops at 14? Or has some masive one off sale just gone through?

There was a discussion on another thread here recently (between aSteve and hotairmail IIRC) about the role of the velocity of money, which has got me thinking.

Interesting, and something to think about more. My first (not fully thought through) reaction about money velocity is;

- maybe its nothing more than a secondary and rather useless indicator of debt/GDP: ...let me make an analogy...

As a medic (a long time ago) I was taught that when a disease shows itself its often too late. This is because organs have a massive spare capacity, and disease processes eat that up first with no outward symptoms. So when illness does appear, the underlying disease has been doing damage for a long time and is very advanced. In other words, symptoms show only when thresholds (of reserve capacity) are exceeded

Similarly, Joe Public's monthly pay served his needs and he had some reserve capacity left over each month. Then he started taking loans (pulling money from his future into the present) which added to his monthly bills, until his reserve capacity was almost all used up. Then interest rates rose and he passed his threshold - hence the disease called credit or liquidy crunch appeared. What we need to study though is not the acute symptoms (which are merely reflected in reduced money velocity), but how the amount of debt as a proportion of GDP has been growing (i.e., the full history/rate of disease progression).

It seems to me that the rate of growth of debt has been enormous. ...and since all new debt increases money supply, money supply growth has also been very large. And that's true globally, and that's the trigger for inflation.

But - I hear you cry - surely now we'll all stop taking on new debt, and so new money supply rates will fall to zero, or even become negative if people start defaulting or paying off debt. Well yes - we will reduce our debt - but just so much that we fall back under our 'symptom threshold' - and that's a tiny amount compared to the total debt (its a threshold effect, remember)! So only a tiny fraction of all the new money put in the system these last 10 years will be removed, and at the same time the government is creating loads and loads of extra new money on top to bale out all the distressed banks etc.

This simply isn't Japan - people will not start saving, become non-materialistic, pay off all their debt, and turn down even 0.5% loans for 20 years. We're greedy bast@rds in the West who will keep borrowing just below our thresholds, and at the same time our governments are desperate to clear their debt by monetizing it. Where will all this lead....?

Thanks. And I respect your willingness to do that. Especially when the "chips are down" somewhat.

Thanks for the various technical analyses, all of which make some sense.

But my own view is that just now the technicals may be less instructive than usual. It seems that, as of the last week or two, conditions (dollar strengthening, oil falling) have changed (which makes technical analysis using data before and after this time point rather dodgy). Just now there seems to be less 'conviction' in golds moves, and it seems instead to be swept along by dollar and oil moves (which is where manipulation is probably hapenning).

I think it may be a little while longer weeks or even months) before confidence and conviction comes back to gold - and this will require an enduring base formation and/or a change in the fortunes of the dollar & oil and/or some major geopolitical event.

Therefore, I would tend to view any bounce these next few days with caution.

All that said, I do think oils drop may decelerate and even reverse (as DrBubb indicates) for a while, and am hoping it first passes my 110 target to buy. This would then create a nice updraft for gold.

Bottom line - lots of clues, lots of subjectivity about what to pay attention to, and lots of uncertainty. I'm just going with the flow (as bought far lower) and spending my time trying to really understand the inflation/deflation stuff - as that its what wil matter in the time frame I'm interested in

...I saw this, and it raises an interesting idea :

 

http://www.safehaven.com/article-1385.htm

Thanks Bimble - that's one of the most well informed and informative articles I've ever read. Damn scary stuff too!

Regarding the earlier inflation/deflation debate I note the author states:

"In the long run price inflation is a function of money supply growth in excess of productivity growth. The Fed has been increasing the money supply 8-10% a year over the last five years. [note added: this article was written in 2004, and M3 has since been growing at ~15%] This is about the same rate as during the Lyndon Johnson and Richard Nixon eras which directly preceded the double-digit price inflation of the late 1970's."

and also

"Aggressive money supply growth is a longstanding trend likely to continue......Fed Governor Ben S. Bernanke remarked in Nov 2002 that the Fed is prepared to inflate without limit if necessary."

OK, here an example with numbers.

 

Say, M3 is X. Now a bank with a market capitalization of Y makes a loan of 100,000 to someone who buys a house.

 

Now M3 is X+100,000, because this someone takes the money and gives it to someone else. The bank doesn't win or lose anything (we disregard interest), so the market cap possibly stays at Y.

 

Now the mortgage defaults. M3 is still X+100,000, with no chance of the additional 100,000 ever being destroyed. The bank says, "CRAP, we have a write-off!" The stock market says "CRAP, they have a write-off!" The bank then does funny things on its balance sheet (reducing it by 100,000, I suppose), and if the stock market is rational, the banks new market cap is Y-100,000.

 

END RESULT:

M3 has increased, the stock holders of the banks have made a loss.

 

--> money supply INFLATION (and stock market DEFLATION)

As this site shows, its all quite complicated.. http://www.answers.com/topic/money-supply

My reading of it is that I've basically got it right, but may have been refering to 'M3' when I should have been referring to 'L'

Of all the money supply metrics, the main questions are 'which one is best predictive of inflation vs deflation' and 'how does all this interplay between the global and local contexts'

Since I should get some 'real' work done today, I'm going to leave it for now - other than to say I still judge we have been, and we are still, putting more new money into the global system than it can handle, and this will cause uncontrolled inflation over the next few years. The CBs will then play their 'natural' part in manipulating markets, but eventually the fundamentals wil exert themselves. Fiat currencies will continue to be devalued, and at an ever increasing pace. Its been that way for the past 100 years (1 dollar then worth 2c now) and I don't see why things should suddenly change now when bale outs are everywhere, M3 is growing at 15%, and Asia is roaring ahead

removed duplicate post

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Consumer Prices in U.S. Rise at Fastest Pace in 17 Years on Energy, Food

Inflation two times higher than forecasted.

 

Gold drops. Of course.

...yes, of course!!!

PPT are now shi77ing bricks about inflation, so they smack down oil and gold today

What else did you expect, a rational market - just now its all being 'fixed'

Can you explain to me in what way a balance alteration of a bank (the 'write-off') directly influences M3? How does this destroy 'money'? I agree that 'value' gets destroyed. But money? How?

 

So, yes, write-off means 'sorry, our asset is worthless'. I can't see how this destroys money. It destroys value, e.g. for shareholders, but no money.

I'm no expert, but my understanding is that the definition of M3 includes such things as the value of mortgage contracts, mortgage backed securities etc. I presume this is becuase they are a paper asset with an agreed value (just like a pound note), and they can be used to pay for things. Hence, if you write one off, its like burning a pound note.

So I think it all comes down to what's included in the definition of 'M3: money supply'. The narrower definitions (M1, M2) do not include thing like this

...very happy to be corrected if I'm wrong

my bones are telling me we might today be due a smackdown in oil, and therefore gold also

...hope I'm wrong

Writing off debt means that money in circulation that would have been paid back will never be paid back. Ultimately, write-offs mean therefore more monetary inflation (money that got created can not be destroyed anymore).

With respect, I think about this a little differently:

- I agree that there in this scenario money is left in circulation, which is proinflationary

- but the actual M3 (= 'total money in existance') number goes down. Imagine a 30k write off due to negative equity debt being written off by the bank. There was the 30k in the economy (part of the initial mortgage loan) plus the 30k part of the mortgage contract face value (that contract is 'money' as it can be exchanged for cash, packed into MBSs etc). Thus 60k in total. If the bank writes off that 30k there is now only 30k in the total system.

- But Magpie says they don't usually write it off, they just stop chasing you for a while. So no actual decrease in M3.

Only if they write off any outstanding debt, which they don't do for years. Instead they hold it against the mortgage holder and often return to pursue it years later. Meanwhile it sits on their books as an asset, albeit a rather distressed one.

...aha. Thanks, I've just learned something else that's pro-inflationary

What about when a bank repossess a property and then gets less than the value at auction. Is this not the equivalent of letting the borrower off the mortgage debt?

Yes indeed. And I believe I covered that in post # 786

I would judge the amounts to be small compared to new mortgae new money creation (and run the numbers in that post).

If you are never likely to need the 150k, then you also don't need it to make you a profit.

 

So have some fun!

 

If big, risky bets are your type of fun, then why not? Me - I'd rather see a bit more of the world, or maybe buy an exotic getaway, or a seaworthy boat, but each to their own.

...actually, and as usual, wrongmove probably speaks the most sense of all :-)

Seconded. I have to let it sink in slowly, then return later & see if my head is around it

 

May I turn this around into a simple, self-centred question?

 

If you had 150,000 lying in a Euro account, (& it is unlikely you would ever need it), would you not be tempted to stuff the lot in PMs right now?

.... because I am so tempted. All else (apart from Dr Bubb's, too much for my brain, investing) looks a disaster zone.

 

If I ask myself the question will Gold fall in relation to the Euro over 3-5 yrs, then it seems madness not to proceed?

 

If I go any deeper than this the clarity vanishes

 

All comments welcome please............ even 'shut up woman!'

Not trying to give advice, but perhaps you might llike to reflect on my strategy...

I try to look for the lowest risk investment options (which I define as 'prices won't fall permanently lower in the time frame I am willing to invest) balanced against the best likelihood of profit (which I define as 'near certainty that price will go up at some time within the time frame I am willing to invest)

The targets on my hit list are then:

- Asian stock markets

- Oil

- Alternative energy companies

- PMs

- global infrastructure

- water resource companies

- property in Switzerland

...I feel certain that ALL of these options will have a major bull run some time in the next 2-10 years, but NONE of these are yet at what I think is their bottom before they start those bull runs. PMs may be the only exception to that last statement (but until last week I thought that was true at 850 for gold, now I'm open to the remote possibility of 750)

So, with about 600k to play with, I've started into PMs now (100% in with gold at 600, 25-50% in with silver at 16.5), and will add more silver if it goes sub 14. I'm very close to starting to average in to oil (will start at 110 if we get there, and double up every 10 dollars lower). I've also made my first foray into Swiss property, and currently looking for more (they never suffered the bubble that most other countries did). And have one big toe in the alternative energy domain.

But that still leaves more than half my money sitting in bonds and high-interest cash and money-market accounts. I don't expect the bottoms will arrive in Asian markets, global infrastructure, and water resource companies until late 2009 with current trends, and so am holding fire for now.

Total fraction (of my investment money, not total wealth) in PM when all said and done: probably about 20%

EDIT:

- My list would also include small biotechs working on biotherapeutics if I could find time to create and investigate a good list

- might also add military hardware companies (given my expectations for world peace) but would feel rather guilty about this