Peter Schiff: Gold price poised for spectacular and prolonged rally

specifically countries connected to China, Hong Kong, Singapore...etc. I bought a Hong Kong Stock at 2.95 and it is now at 6.00. Not bad.

"Government spending cannot create additional jobs. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other.", www.mises.org

Was Japan in deflation for a decade? That seems to be the popular opinion however if you look at the various changes in Japan’s GDR, MS, CPI as well as the PPI between 1991 and 2001 then you see a very different story, in fact you see something that cannot qualify as an actual deflationary episode.

The GDR was positive in Japan for 7 out of 10 years during this so-called deflationary period or “lost decade”. Japan’s M1 was in double digits for 4 out of 10 of those years reaching a peak at 13.7% in 2001. Japan’s CPI was at a positive inflation rate for 7 out of those 10 years and the PPI was in the positive for 2 out of those 10 years. Now, if it were truly a deflationary event as you and others propose then where on earth was the deflation?

Even the during the few deflationary years there was minor deflation. The reality of the Japanese “lost decade” is that only 4 out of the 10 years could even be remotely considered deflationary. In other words, prices rose 6 out of the 10 years, thus Japan was not in deflation for 10 years, quite the contrary. The vast majority of the deflation was in the fact that there was a surplus of aggregate supply since industrial production rose in 5 of the 10 years during Japan’s so-called “lost decade”. Thus, the deflationary years of 94, 95, 96 and 2000 was caused by rising supply, thus it could be considered growth deflation, but not monetary deflation. It is also evident that in 93, 98 and 2001 that the deflation was also caused by a fall in aggregate demand, which could indicate bank-credit deflation instead of growth deflation, caused simply by an increase in the aggregate supply. It is almost certain that 1999 was a combination of both increased aggregate supply and a fall in demand, but none of the minor deflation that Japan experienced was caused by monetary deflation in any technical sense. Profits only fell 3 out of the 10 years; this of course is a negating factor when considering deflation, at least real monetary deflation since profits tend to drop drastically when such deflation is effective on the economy.

As Mises stated, all government intervention into the market will always carry unintended consequences, creating problems that require more intervention, which always, without exception, create even more problems.

There is one very important fact to consider about actual deflation, if there is a deflationary event-taking place then it usually spreads through the economic system rather rapidly. You see price declines begin to spread across the board in every sector at a similar pace of decline, we obviously have not seen that; in fact we have seen just the opposite, we have seen minor deflation in some sectors mixed with far more inflationary pressures. The “deflation” in the real estate market is not actual deflation caused by any monetary policy, but it is a result of years of easy credit policies promoted by the FED and government. It was a bubble that had to bust and bust it did, but it was not caused by deflation, deflation in prices are the result of the bust, not the other way around. Thus, we have had very narrow deflation and not a broader deflation, which marks actual economic deflation. So, when people say that “like it or not, we are in deflation” it becomes necessary to qualify such a statement with actual facts, not simply ambiguous statements.

It should also be remembered that credit deflation is not necessarily indicative of an actual widespread technical deflationary event; this is especially true when the monetary base has been increased so drastically. Additionally, it should be remembered that there is still a substantial amount of lending taking place, money being created through the fractional reserve system even though consumer and mortgage credit have slowed. Again, if we were actually in a deflationary event then the deflation would spread or be spreading across the economic spectrum that is not the case.

As far as credit is concerned, we still have, by far; the largest borrower in history borrowing like there is no tomorrow, that borrower is the U.S. government. The FED has doubled, if not more, its balance sheet and is sopping up debt, monetizing it and creating the next huge bubble economy in the process. Looking at the FED’s balance sheet, as far as we are allowed to look, it appears that over 54% is in U.S. Treasuries and Government Sponsored Enterprises, such as Fannie/Freddie. 14% is in asset currency we call gold. 37% is currently being held in short-term transactions such as would be known as discount window transactions. The remainder appears to be in toxic assets although that is a closely guarded secret.

Recently, U.S. Treasuries have appeared to be the only game in town as a place to park funds, that might be, in part, due to fear and in part do to the assumption that we are in the same situation as Japan was during the 90s, but that is not the case. The two scenarios are completely and fundamentally different. The problem arises with our government and the actions it is taking which, by the way, will completely decimate our economy, not through deflation, but through highly inflationary policies combined with a confiscatory mentality that will eventually push all enterprise in this country into default. All the while, the government and FED will inflate the debt away. That is now the apparent policy of this government and it has to be since the government will receive approximately $2,500 Billion while spending more than $3,500 Billion this year alone. The government has also obligated itself to even greater levels of debt and will eventually have no other choice but to repudiate that debt by inflating, thus debasing, the currency to levels that will make the debt technically meaningless. Never in history has a government been so ultra-leveraged as our government is not, nor has any government in history ever followed such a determined path of economic destruction as our government is now doing.

For those who point out credit contraction or destruction it must be remembered and considered that the FED has created more credit than at anytime in history in one of the shortest time frames ever witnessed. Within the period of one quarter, the Reserve Bank Credit has been inflated to an astounding 2,922% per annum. Now, while there are those who are absolutely positive that we are either in a deflationary event or heading toward one, the facts are showing something completely different and something that none of the “deflationary prophets” are willing to expound upon…at least none that I have read touch the issue with a ten-foot pole.

Again, the assumption is that we are in a deflationary event because the supply of money, while drastically increased, is being reduced because it is not being placed in the loan market. As it appears, such a scenario would be correct since the risk aversion of the banks have caused banks to increased the reserves they have held against their liabilities, thus contracting credit circulation. There are however, several factors that appear to be contradictory within the apparent contraction of credit, it is not as it appears since the government is rapidly making up for the general contraction in credit by a multitude of methods, the least of which is the quantitative easing that is occurring. The fact is that in this market there is no decrease in demand, only a decrease in the available supply of easy credit. Credit is still available to “credit-worthy” borrowers and has been making its way into the general economy.

One of the main factors that support the position that we are heading for inflation is the fact that deflation is far too dangers to the government for the government to allow it to happen at a substantial and widespread rate. In fact, a truly deflationary event will not only “deplete” the Treasury’s vaults, place a far greater pressure on government debt obligations, thus inflation is a far better bet than deflation when the mechanisms for such inflation rest in the hands of the likes of Bernanke, Geithner and Obama. This government intends to survive intact without the curtain being pulled back, exposing the “Great and Powerful Wizard of Oz”. Deflation, like high inflation, pulls back the curtain and exposes the façade from which the government operates, but the government has sought to create a steady rate of inflation globally since the late 60s, the problem is that it can no longer maintain that steady rate since the massive distortions previous policies created have finally come home to roost. The government, along with their lap dog the FED, will do all it can to avoid actual deflation, even to the point of making the people of this country suffer under the weight of oppressive inflation.

The truth is that both credit contraction, along with deflation itself, has been the major problem that inflation and hyperinflation have. The fact is that there is a major misconception between deflation and contraction opposed to what we are seeing now which is nothing more than an economic readjustment to the boom cycle caused by the FED. We are witnessing the effects of the bust, not a deflationary event although there are naturally going to be symptoms of deflation in any bust cycle, but that does not mean that we are either in a deflationary event or heading toward one. In fact, if all depends on the type of structure within the credit system itself and how the boom was created as to whether or not a credit crisis actually contracts the amount of fiduciary media in circulation. Now, if there were a massive bank failure and the banks which remained “solvent” under the fractional reserve system did not “take up the slack” then their might well be an actual event of monetary deflation which would correspond in the economy as a general, overall deflation in prices, assets, production and profit, as well as wages, of course. None of that has happened. This current economic dislocation is not indicative of an actual deflationary event and the lack of credit is not being caused by an actual contraction of credit but by the voluntary abstention of credit expansion by the banks due to a present level of risk aversion toward such credit expansion. The problem, of course, is that when the a recovery from the bust cycle begins to occur there will be a change in the money relation within the general economy and will, by effect, increase the quantity of available fiduciary media and this will express itself in the pricing structure of both goods and services.

Additionally, there are few that either understand or explain the manner in which credit can be expanded. There are monetary situations where there are methods of credit expansion that are completely different than what we commonly know as genuine credit expansion. For instance, while the normal process of credit expansion is in the private sector through the process of fractional reserve banking, there is a type of credit expansion, far more insidious, that occurs when our government expands credit directly, thus increasing the money supply within the general circulation, this is done through what amounts to legislative expansion that by-passes what we think of as normal credit expansion. The Treasury essentially borrows from the bank. If you recall in 2008, there was a time when the Treasury was borrowing from the FED and then the FED was borrowing from the Treasury; to the outside observer it is a contradiction, but it is actually a type of direct monetary creation where the bank becomes the creditor of the Treasury and vice-versa. That whole scenario was nothing more than monetary inflation. The process is used, by the government, to place credit demands on businesses to expand their ventures even when economic signals point in another direction.

http://www.1776solution.blogspot.com

“There is danger from all men. The only maxim of a free government ought to be to trust no man living with power to endanger the public liberty.”-Adams

Oh the irony of this coming out on a day gold drops 2%. I think gold is heading to 880, maybe even under 850, but it doesn't really matter. It only matters if you are trading the metal. If you are buying to hold, get as much of it as you can. Gold is not a great investment. It is a store of value. If you want to make money on gold, buy gold stocks

You Judge A Tree By It's Fruit, NOT its Flower

put I got some today....hehe

"I believe the true significance of the Gold Commission is that the politicians and central bankers were so alarmed at such a thing that they made sure it was packed by an array of Keynesians and monetarists." (Ron Paul 1985)

Here is my question to you. How can the devaluation of the value of inflated real estate or equities effect the M3 number? Only the default in a loan or the bank collecting loan payments but now re-issuing new loans could reduce M3.

The drop in the market value of a house does not decrease the money supply. It may limit the amount of expansion that can occur in the future using that asset as collateral, but the decrease in market value is not, in itself, deflationary. Even a loan default does not, in itself, decrease the money supply because the money that was loaned into existence on that security was already spent into circulation.

The current slowdown was caused by the sudden slowdown in the creation of new money by the banks, not by loss of existing money. And the Fed is doing everything in its power to start that back up again. They will ultimately succeed. That new supply of money being loaned into existence by the banks, combined with the new money the Fed is loaning the government, combined with the foreing dollars that will be dumped, equals massive inflation.

The $14 trillion number does not equate to a loss of currency but to a loss of asset value. And that loss of dollar-denominated asset value can and will be pumped back up by inflation.

The inflation is reactionary....They did it because you haven't seen anything, and the prospect of inflating 3 trillion to more than 12 trillion is too big for any banker and private banking head to pass up.

Schiff is dead on target. This man must see the Senate!