This will be fun to watch! I see the deflationist’s point that deflation (net decrease in supply of money and credit) will continue as debt is paid down by consumers or defaulted on, with little or no credit available to back fill. The question is what will the response of our government be to plunging tax revenues and collapsing economic conditions? Will they simply watch and do nothing, or will they continue to borrow and run colossal deficits? What will the bond market reaction to continued borrowing with absolutely no ability to repay the debt?
I believe this is where I part ways with the deflation crowd. When the bond market finally realizes that our government, with the help of the Fed, intends to create as much money out of nowhere as is required to keep the lights on, they will avoid further purchases of US debt and seek to dump what they already have. The Fed also intends to keep all insolvent “too big to fail” banks alive and kicking through cash infusion swaps for their toxic “assets.” This will prevent the massive default and de-leveraging that should naturally occur, commonly known as “extend and pretend.” The deadly combination of the two will lead to the Fed being the principle buyer of US debt. They already own more debt than China! If the Fed does not buy the new US debt, interest rates will skyrocket and bring about the deflationary crash that Stoneleigh sees. If they do buy the debt, interest rates stay low and the value of our currency goes to zero as our debt skyrockets.
So what happens depends on what our government and Fed decides to do when the bond market caves in. Either way, default or hyper-inflation, destroys the dollar. So stockpiling dollars is pure insanity. Stoneleigh believes the dollar will appreciate due to scarcity. This might be true if there was something standing behind the dollar that had intrinsic value. But, there isn’t. It is exactly like a company that is going into bankruptcy, would you rush out and buy its stock? Or would you sell the stock you have and look somewhere else where value can be found? If the company paid its vendors and such in counterfeited dollars, would you rush out to acquire stock or would you go somewhere else where debts are paid in a legitimate fashion?
So I think we will continue to suffer in a depression (deflation) until our government and the Fed destroys all confidence in the bond market, then we will see a hyperinflation that brings down the entire global monetary system. Gold will emerge as the clear choice to launch a new system to replace the collapsed system. This system will be based upon the concept of Freegold espoused by FOFOA and others.
Stoneleigh wants you to believe that safety resides in stockpiling the dollar. Look at the following chart and ask yourself how stockpilers of the dollar should feel about what it says? YGTBSM. The chart shows the performance of the dollar compared to that of gold. If I were shift the ratio around and say lets compare gold to the dollar, it would be the inverse, a channel climbing up and to the right. This chart tells me that stockpiling the dollar has resulted in a huge loss, while stockpiling gold has delivered a huge gain of over 600% !!!!!
Well RE is going to get his wish. His friend at Automatic Earth is going to debate Gonzalo Lira regarding whether we are headed for a deflationary or inflationary crash. Does it really matter at the end of the day? A crash is a crash. If Bernanke was not printing at hyper-speed we would have experienced a deflationary crash already. If he continues to print and ramps it up, we will experience an inflationary crash. It sucks either way. Here is a link to the site.
It’s on Thursday, Feb. 10, at 9pm EST. The link is here: http://fosslira.blogspot.com/
Maybe I should charge $45 to watch me thrash Smokey and SSS like rag dolls about Boomers destroying the world.
• A 1930s-style deflationary depression?
• Or a Weimar-style hyperinflationary crisis?
For the first time ever, two of the most prominent writers on this issue will face one another in a live online debate, to be held on Thursday, February 10, 2011.
NICOLE FOSS, a.k.a. “STONELEIGH” at The Automatic Earth, ranks among the most prominent of the deflationists. She maintains that the ongoing contraction of jobs and overall income in the US will lead us into a sustained deflationary depression. Consequently—and in direct contradiction to the advice of hyperinflationists such as Lira—Foss strongly recommends Americans stay liquid in US Dollars and avoid going into any debt. As jobs and many businesses disappear, Foss foresees a crash in the money supply, leaving most people without cash or credit, and a minority hoarding the little that remains.
GONZALO LIRA has emerged as one of the web’s most high-profile hyperinflationists. Drawing on personal experience from Chile in the early 1970’s, Lira says the same hyperinflationary crisis will soon take place in the United States, due to the massive oversupply of debased U.S. dollars chasing after a finite supply of tangibles. He argues that Americans would be well-advised to structure their investments and their own personal lives in anticipation of a rapid and stunning hyperinflation.
This live online debate will be moderated by Jay Carter of Financial Survival Radio.
Stoneleigh & Lira will be taking audience questions—live. Attendees are advised to have a microphone attached to their computer, in order to ask spoken questions in the live Q&A, though written questions will also be taken.
DATE & TIME: Thursday, Febrary 10, 2010 beginning at 9:00 PM EST
It’s clear that some type of economic depression is coming to the United States and to much of the rest of the world. In many ways, it has already begun.