RE: Bank Bailouts & Commodity Devaluations
Below is a comment that I posted in response to LibertyBaby's thread titled, Can someone explain why bank bailouts devalue commodities?. It's a little long so I figured I'd just post it as a thread of its own also. Caveat emptor - no one has a crystal ball, and this only my opinion.
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The relationship between the recent government bailouts and the fall in commodities is not a cause/effect relationship. What we are witnessing now - in my opinion - is a generalized deflation. Valuations are falling across the board - paper assets as well as commodities - but the government is choosing to save the paper assets with bailouts while letting the rest fall.
Since America left the gold standard in 1971, prices have been rising steadily, inflated by cheap credit supplied by the Federal Reserve. As I like to say, everything from a cup of coffee at Starbucks to the house down the street is overvalued due to the availability of cheap credit. Half of Americans are technically broke - no savings and net credit card debt. But they can still get a latte at Starbucks! Just put it on the credit card, if there is room. The result of the Fed's cheap credit policy is that it flowed throughout the global economy, causing higher and higher prices for some things, but paradoxically, lower prices for others.
An example of higher prices was the housing boom: People were only getting 1% in their bank savings accounts, so they thought, "Hey - maybe I should go out and try to flip a house. I'll get a liar's loan, buy a house and fix it up. Instead of 1%, I'll make 20, 50 maybe even 100%! And instead of just doing one, maybe I'll do 10, or build a tract of houses." And that worked for a while - it really did. Housing prices went way up from 2001 - 2005. That was the housing boom, but as we are now painfully aware it was only an illusion.
Meanwhile, cheap credit also flowed into industries like the domestic auto and airline industries, and overseas to countries like China. China had all kinds of money to build factories for the kinds of things Americans liked to buy to furnish their new homes: DVD players, flat screen TVs, and and cheap and flimsy furniture. Just like America got overbuilt with houses, China got overbuilt with factories. Likewise, the airline industry got over extended with excess capacity, and the auto industry went crazy with 0% financing allowing them to keep their factories humming. And why not? Credit was so cheap!
As a result, excess industrial capacity - in autos, airlines, factories in China, and yes, even Starbucks, - pushed prices down for consumer goods. It looked like the best of all worlds - assets were rising in price while stuff was getting cheaper. This is part of mechanism by which inflation (increases in money supply) was hidden. You could fly across the country and back for a few hundred bucks, and get a portable little DVD player at the drugstore to watch movies as you flew for $20. No inflation there, right? And while you're at it, charge yourself a $4 latte while you wait at the airport. (Yeah, $4 is a lot for coffee, but what is $4 more on a credit card balance of $10,000? People need their "little luxuries" in these hectic days, right? )
Prices may have looked fine at the time - including $350,000 for a converted half-a-duplex condo, and $4 cups of coffee - but G.I.G.O. as they say: Garbage in, garbage out. Economists (at least good ones) understand that price is information, and if that information is wrong, economic actors will make wrongheaded decisions.
Well guess what? The Fed mispriced the money. They marked it down in an artificial clearance sale. The problem is that money is the measure of all transactions in the economy. Misprice the money and you distort every transaction made in the economy. People made bad decisions because they got bad information. Yesterday the Fed sowed the wind, today we all reap the whirlwind. Too many houses were built, too many cars were made, too much airline capacity was created, and too many factories in China. And too many long-ago-consumed $4 lattes remain on the balances of consumers across this country, their prices increasing with the credit card's APR, day by day.
Eventually, the housing boom played itself out. Prices became so disconnected from reality that people actually noticed. The spell was broken once people realized en masse that they couldn't pay for their houses, and that flippers couldn't unload them.
Today's problem is not difficult to understand. We simply have too many houses, many of them empty. As a result, the paper assets (mortgages) backing these physical assets (houses) has collapsed. This caused a huge DEFLATION, because those pieces of paper were the underlying assets for mortgage companies (Countrywide Credit) commercial banks/thrifts (Washington Mutual), hedge funds (Bear Stearns subsidiaries), and other financial service firms (Fannie Mae & Freddie Mac.) This is the fundamental reason why so many financial firms are now facing survival issues. Many of the assets that they thought were good are now worthless. And many of the firms borrowed to the hilt to buy as many of these assets as they possibly could.
The collapse in paper assets caused fear that morphed into near panic. Investors abandoned paper assets, including the dollar, for real goods. The dollar went down and physical commodities - gold, oil, and other commodities - went up. Adding to the stampede into these commodities was the belief that emerging economies (China, India, Russia, etc.) were going to gobble up all the resources forever! Just as people believed in 2005 that housing prices couldn't go down , in 2008, until just a few weeks ago, people believed that commodity prices couldn't go down.
Wrong on both counts.
Much of China's tremendous economic growth comes from exports to the US. With the US in recession, possibly heading for depression, it means less demand for China's goods. This means China will have less demand for physical commodities, ergo, commodity prices begin to fall. Plus, stuff is just so expensive that people don't buy it anymore. Whatever the traders say, speculation was a major contributor to the commodities boom, and when hedge funds turn tail and run, unwinding their positions, we'll see dramatic declines in commodity prices, just like we saw in internet stocks in 2000, and housing prices in 2005 .
I hope now it is clear that the fact that commodities are going down as the government is doing bailouts is not a cause/effect relationship. What we are seeing is an across the board deflation. Everything is falling in value, from houses, to the value of financial assets, to the value of commodities, to the price of a cup of coffee at Starbucks. Starbucks is now testing $1 coffee with free refills.
It just so happens that the government wants to bail out certain entities because it is their goal to save the current financial system. They have no interest in bailing out the little guy (homeowners) though they pretend to for political reasons. They have no interest in supporting the price of gold, oil or corn, nor do they care much about the price of coffee. But they must save the dollar! The Fed may be dumb, but they are not stupid, in my opinion. They have pushed inflation as far as they could, and now there engineering a managed deflation, in my opinion.
Inflation and deflation are processes, not static events. We have already seen tremendous inflation. It is now time for a little deflation to even things out. Just as inflation took years to work its way through the economy, deflation will take its sweet time as well.
In response to one of my previous articles on deflation,, a random poster wrote one of the most insightful comments I have ever read:
I am fascinated by the common perception that the Federal Reserve is a proven non-stop inflation machine. Inherently, the Federal Reserve uses inflation and deflation to whipsaw the average bystander out of their savings. I don't see how one economic machination is more favored over the other when the goal is to ensure that the public's savings ends up in the accounts of the shareholders of the Federal Reserve System.
Let's just look at what has happened just since 1995, when I first began following financial markets closely: First we had the great inflationary stock bull market, culminating in the tech blowoff of 2000. Then we had the great deflationary stock market collapse until 2003 in which the Nasdaq lost 80% of its value, and the S&P 500 was cut in half. Meanwhile, the housing boom was building to an inflationary crescendo from 2001 - 2005, and since 2005 it has gone nowhere but down. Some properties have lost 95% of their value (in Detroit), and more will.
Feeling whipsawed? Most people are.
output
This article makes several
This article is only correct given the assertion that no one will ever unpeg from the dollar or bail out of the U.S. bond market. I believe they will eventually. Of course, if the Chinese continue to (falsely) believe that our consumption and inflation is driving their economy, they will stay pegged and suffer along with us. If they unpeg, their currency will rise relative to ours, making them similar to what we were in the 50s, 60s: a manufacturing-based economy that was consuming its own products. That will happen if the world abandons the dollar and stops extending credit to overleveraged Americans who will either not pay them back or pay them back in money of depreciated value, and if it does, they will prosper and we will enter a hyperinflationary depression. Remember, the Chinese have billions of potential consumers, but they are poor because their currency isn't being allowed to appreciate relative to ours under the fear that it will reduce exports (it will, it's just that it doesn't matter because exports will be replaced by internal consumption).
For those patriots buying
For those patriots buying metals, make sure you get your money’s worth. As in, do not pay more than a few percent above spot price for that day.
I’m only mentioning this, since many of the big gold and silver advertisers and dealers ( and likely many small ones as well ) primarily live off selling what is, according to them, ‘collectible’, ‘numismatic’ older coins, which of course costs substantially more per ounce than spot gold. Oftentimes several times more. While their advertising might focus on the ‘safety and security’ of owning gold, when you actually call them, the broker will inevitably try to switch you into some of these coins, where pricing is murkier and more subjective, allowing for much higher markups, and therefore higher broker commissions. And should you manage to hold the line and get them to sell you well priced bullion, expect to shortly thereafter get a call from a broker suggesting you trade into something else.
So, if buying metals, make sure you steadfastedly insist on getting bullion, and make sure the price you are paying, _per_ounce_, is very close to reported spot for the day you make the purchase. Anything else and you are likely taken for a very expensive ride.
Thanks Stuki
My dealer attempts to do the very thing you mention. He has cited a report that charts the return value of antique coins versus regular old bullion, according to him the antique coins fare far better, due to the built in historic value.
Any thoughts?
I don’t follow the antique
I don’t follow the antique coin market, so I can’t categorically say he is wrong, but I see at least two problems:
1. I honestly don’t think anyone is able to ‘follow’ the antique coin market closely enough to know for sure what the right price for a given coin is supposed to be. Which means you are pretty much stuck with what the dealer tells you it is and was. As gold has gotten more popular over the last few years, chances are more investors have called these dealers, many of them inexperienced, and many of those have been ‘switched’ into antique coins. This may have created an artificial demand for what is by definition a limited ‘commodity’, and prices may well have rocketed. At least the price the dealers are willing to sell for. What they will buy the same coin for is likely quite a lot less. If you get a chance to find out the exact info on a coin you are being offered, as well as its price, try calling another dealer and tell him you inherited or otherwise came by this exact coin and ask him what its worth. I can’t say for sure, but my limited experience with non auction ‘collectible’ dealers is that their spreads are often huge. Which may be ok if you are buying a collectible for its aesthetic value, but really makes it suck as an investment.
2. Collectibles always tend to boom in good times and bust in bad times, which is exactly the opposite of what most people want their precious metals investment to do. It doesn’t matter if it’s art, stamps, coins or old furniture; when people are flush they indulge in their hobbies, driving prices up. In a downturn, buyers for these things dry up, while true commodities tend to fare relatively a lot better. My understanding is most people on DP who are into buying gold are doing so for protection against a nasty economic downturn, not to speculate in a collectibles boom or subsidizing coin salesmen. As such, I think they would be much better served by getting the maximum amount of raw metal they can for their money, hence buying bullion at lowest possible price.
Thanks Stuki
My dealer attempts to do the very thing you mention. He has cited a report that charts the return value of antique coins versus regular old bullion, according to him the antique coins fare far better, due to the built in historic value.
Any thoughts?
Thanks Stuki
My dealer attempts to do the very thing you mention. He has cited a report that charts the return value of antique coins versus regular old bullion, according to him the antique coins fare far better, due to the built in historic value.
Any thoughts?
Here was my response to liberty...
O.K. Liberty, but you will need to fill in the blanks with research.
It all comes down to econ 101. Supply and Demand. Make sure you know what this is. It is very important. There are PHDs that still have a hard time, but try to think big picture. It is quite simple and basic at its core.
There is nothing that escapes this principle. Stocks, bonds, currencies, commondities, humans, animals, fish, etc. etc. In a free market, this principle will dictate price.
People say that oil should be $70/ barrell. Well it is what it is. If you want a barrell today, you will have to pay more.
Now when a bank collapses it shows the strain on liquidity. That is a difficult term but Wiki does a good job describing it.
In this modern day economy, paper money is really scarce, relatively speaking. It is all electronic.
Let's say a bank borrows $100 from the fed, electronically of course. For them to maximize their profit off of this $100 they will loan it out, sell the loan to someone else, then loan out the money they received from the sale of the loan and so on and so on. In other words they are leveraging their assets. Again, Wiki does a nice job of explaining.
Right now, there is a liquidity crisis. Banks need cash to satisfy short term demands, so instead of loaning out that cash over and over in a leveraged event stated above, they must give it to the depositor that now wishes to stick his/her money under their pillow. So not only does that money leave the system, but so does all that leveraging.
In short, when banks fail, there is actually deflation that occurs. Of course the fed prints money to cover the FDIC, but the potentially leveraged cash in the system goes away. This is an extremely small amount, but the wave of alarm is what really does it. People get another reminder that this crash could happen. Then banks become scared to lend money, and so on and so on.
O.K. now we get to commodities. While commodities are renewable or minable, in a snapshot they are fixed. When there is a sudden decrease in M3 as described above, then money becomes more valuable compared to salt, or aluminum, or corn, therefore the price of the commodity decreases.
There are other factors like what Big T states above, but the basic reason is as I described.
That is it.
WAHOR!!
http://www.dailypaul.com/...
Well
Friday is coming again....will they announce another Bank Failure after the close on Friday?? Hmmm?
Also.....Silver at $16.50 is a dream deal right now in my opinion.
I am sticking
To 2008 American Eagles. $1.79 over spot is the best I can find.
i know!
im in a very small town in the bottom of the boot. im glad i just found a bank that still sells silver dollars though! i was having to either get ripped off on shipping by apmex or travel an hour and a half to the closest coin shop!
25 dollars
for shipping 4000 worth was fine for me.
Right On
but driving a quarter mile for the spot price is better! especially giving im only nickle and diming, ha ha. ya know about 10 oz per buy. shipping will really get ya that way. In fact ive been gettin charged like 4 times every time i buy come to think of it. what my daughter and i do is collect all of the copper coins we can and once a month we go cash at coinstar, so that was a hit, plus gas, then im anti credit card so i use a prepaid card for any online orders, so theres another hit, then to top it off apmex charges on top of spot, plus shipping! darn, i am getting ripped, ha ha ha well that will stop now, i found a nice lil bank that sells outright new pieces AT SPOT! WHOO HOO!
It seems that as long as the
It seems that as long as the FED and fractional reserve banking exist it is impossible to know what the interest rates really should be. Since they create the money they are lending right out of thin air it is criminal to charge interest on that money at all. So in that respect they should paying us a certain rate to take their phony money. But we know that will not happen because then their cat would be out of the bag.
Also, if they can print all of the money they want, what would ever possess them to quit printing let alone decrease the money supply? I know if I could print all of the money I wanted without consequence I probably wouldn't stop.
This is my arguement for increased inflation.
This also leads me to believe there is a bigger problem then even the inflation. How could banks possibly have these benefits bestowed upon them, namely printing all of the money they desire and charging us interest, and go bankrupt? The answer is derivatives. With the loose gambling regulations in the markets in recent years the banks must be involved in making some really bad bets. With estimates in the derivatives markets from $300 - $700 trillion this dwarfs the problem of the printing of a few trillion dollars here and there.
I think hyperinflation is coming soon and the only answer is to get rid of the FED and the fractional reserve system.
It seems that as long as the
It seems that as long as the FED and fractional reserve banking exist it is impossible to know what the interest rates really should be. Since they create the money they are lending right out of thin air it is criminal to charge interest on that money at all. So in that respect they should paying us a certain rate to take phony money. But we know that will not happen because then their cat would be out of the bag.
Also, if they can print all of the money they want what would ever possess them to quit printing let alone decrease the money supply? I know if I could print all of the money I wanted without consequence I probably would not stop.
This is my arguement for increased inflation.
It also leads me to believe there is a bigger problem then even the inflation. How could banks possibly have the benefits bestowed upon them, namely printing all of the money th
so... for the little guy like me
its it really a smart thing after all to invest in silver bullion? ive justs started buying a few ounces here and there, thought it would be a good idea with all the inflation and stuff... but this post leads me to believe im catching it on the down stream and all the silver gurus are just making money off of me! this stuff sucks... any encouragement at all???
INVEST IN GOLD AND SILVER!
I'm sorry if I led anyone to believe something that I did not intend. I encourage everyone to buy PHYSICAL gold and silver and store it away somewhere safe. Gold is and has always been money.
Buying a little here and there is good. I do that too, at various coin shops in Boston.
You should continue to do so! You may be "catching the downstream" or I may be completely wrong. At any rate, like I said, gold and silver is not a "get rich quick" scheme. It is a way to preserve your hard earned wealth. This cannot be done with paper fiat currencies.
I hope this is clear. Keep doing what you're doing. It is a long term investment, and when you're 72 and have all that gold...well, you'll be glad you did.
GOLD IS MONEY.
Thank-you Michael
For the advice-my instincts have been telling me to continue to pick up what I can when I can.
thanks mike!
yea im gonna keep sticking with my gut instincts... you are a very respected man, and even though i may not comment much, i truely respect your insight on these troubled times ;)
peace
Thank you, too. ;)
Thank you, too.
;)
study the charts for the
study the charts for the last 8 years... if you really want to know what is going on in the silver market read ted butlers book.. you can download it for free at www.invesmentrarities.com .... if you only have a few ounces you won't get hurt. read butler then make up your own mind.. there are to many different things surrounding silver then gold.. totally different market!
as for me and my home, we shall worship the LORD
I'm
in the same boat as you. Definitely made the mistake of cherry picking whose advice I took. The silver and gold gurus just keep saying "look for a new rally!" Of course most of them have been saying to look in August/September for the start of it, so we'll see...
"The sinews of war are infinite money" ~ Cicero
thanks for the tips
yea i went into silver buying thinking it may give a good chance to at least save some money for my two kids of 6yrs and 1yr. im gonna have to check those links after work. but at least im credit card free and the only major loan i have is my house. i guess my good intuition of always hating credit cards worked out for me. hee hee
peace
Me again
Please see my comment above.
I did not intend to discourage anyone from investing in gold. Gold is money, plain and simple, and it is the only way to retain value in a fiat currency world.
Money has 3 functions:
1) A unit of exchange
2) A unit of measure
3) A store of wealth
The US dollar is excellent at #1, okay at #2, though it moves around, though the long term trend is generally down, so it is terrible at #3.
At the moment, gold is not great at #1, but is excellent at #2 and #3.
The point with gold is that it is SAVINGS. Its purpose is to protect you from the invisible tax of inflation, which is the government's scheme of confiscating your wealth.
There is more to 3), I'll write when I get a chance or
"Only a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters." Benjamin Franklin
---
if someone reminds me.
commodity prices
Here is a video that completely explains what is going on in the gold and silver market. The interviewer and interviewee have been following this gold market for YEARS and could probably tell you where gold was on a particular day. They know everything going on and explain the central bank manipulation really well. Also explain why it's in our best interest to take physical possession.
http://www.youtube.com/wa...
As far as agricultural commodities like corn, sugar, soybeans, wheat etc.... I grew up on a farm and worked for ADM right out of college. I know how these markets are driven and I'm sure many of you also know this. But for those of you who don't understand ag prices. The market at any time is based on supply and demand and ag commodities are traded out of Chicago. It's pretty simple actually. Right now it's purely a Midwestern weather market. Iowa and Illinois for example are the largest food producing areas in the world. All of that corn is processed into corn syrup (mainly sugar in soda and other bad things), flour, corn oil, feed products, ethanol etc. The weather since the drama of the floods has been beautiful for the crops and they are bouncing back. 2 months ago/during the peak price, everything was under water and the plans were yellow. You will see when you go to St. Paul that the crops look good. It's will not be a bumper year, but about average. If the sun didn't come out this summer, prices would be even higher. It was just coincedental that ag commodities were going up with fuel. All of the other crops are driven off the potential supply of the major crops and linked like gold to silver. In the winter the supply side is monitored in South America and a few other regions throughout the world. The weather is the reason why ag commodities are going down.
Food prices on the other hand are also majorly dependant on ag commodities and fuel prices.
My point is that you have to look at everything going on in these markets before you make a general statement. There are a lot of variable involved and they are changing all of the time.
Great analysis
It's refreshing to read something from someone who is really paying attention.
Just a little more proof behind your analysis. The fed has been printing like a madman since late 2007. The MZM growth spiked this spring to unprecidented levels. The TAF printed hundreds of billions of dollars. The overnight rate is at 2%. The fed has just guaranteed that it will pump money into Freddy and Fannie if needed.
All of the above points to inflationary pressure...the money supply is increasing with all of these actions...yet, the dollar has been very steady against foreign currencies this year.
All of the printing has not resulted in monetary inflation, but has acted to counter the mounting deflationary pressures from the housing collapse.
Just a note...let no one think this deflationary pressure will last forever, it may exist for a while, but eventually, we'll be right back on the inflationary train...that is unless this movement succeeds in getting the country to understand that there is a better way.
What do you mean by printing?
"Only a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters." Benjamin Franklin
---
Not literally
By printing, I don't mean literally printing money.
By printing, I mean selling the treasury bonds and TAF lending and other ways the fed uses to create money and give it to the banks.
That's what their overnight funds rate is maintained...they essentially print more money until banks start charging each other less money to borrow money.
They've printed this money at an alarming rate in 2008, and there hasn't been a drop in dollar value as an effect. This means to me that there is a pressure offsetting this inflation, and I believe that to be the deflation caused by the housing collapse.
Oh, so are you talking about bubblishious credit expansion?
"Only a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters." Benjamin Franklin
---
Great information. Thanks Michael.
CPAforRP
I am very thankful for this site and can't imagine not becoming one of the 'enlightened' ones. I have found myself reading and learning more and more about economics. The Lew Rockwell site is a great resource too.
On side note I think anyone who still has yards signs etc. Should put those out during the Rally for the Republic so that when people hear about it on the news they also see physical signs of support from their neighbors.
There are many ways to manipulate the economy.
I don't see why it would be necessary to raise interest rates to raise the value of the dollar. The dollar may just as easily be brought up in value by the actions of the central banks around the world. They are holding on to dollars. This prevents them from circulating which prevents inflation. Here in the States, since most banks now are not lending money as easily as they would in the past, there is no need to raise interest rates to prevent their over lending, either, since one reason to raise interest would be to stem off new borrowing. Financial institutions are already doing this without having to raise interest rates. Also since the Fed is bailing out bankers, they aren't going to raise interest rates on the bankers, since it would lead to more failures increasing not only the debt of the bankers to the Fed, but also the debt of the bankers clients to the bank. If interest rates were to jump dramatically now, then many people would bail out of their mortgages even more so and refuse to pay back their credit card debt as well. It seems to me they are going to pay hard ball, and we are in for a depression. It also appears that China isn't going to spend the dollars they have in reserve any time soon.
grant
Manny, do you see Fraudulant Naked Short Selling & Mtg Derivativ
and mortgage derivatives as a Big problem for the economy and the economy worldwide? How big and how important is this crises?
Its hard for me to get a grip or handle on the size of this fiasco. What percent is it in the bigger picture? Its hard for me to decifer how much of an impact and where it will hit and manifest itself.
In Peace & Liberty,
Treg
The crisis is huge
And it is pretty much at the root of everything, worldwide. As I said, hedge funds and other financial institutions borrowed to the hilt to buy what turned out to be worthless securities. Not only are they on the hook, but the institutions that loaned them the money are, too. Sometimes the purchasing firms levereged themselves 100 - 1. It is insane.
Now - poof - it all disappears.
These are the assets that back our entire financial system. This is why the Fed is printing like crazy, and despite that, they still believe that inflation will moderate. Why? Because assets are being destroyed faster than they can print the money to replace them.
So again, in my opinion, I believe that we are in for a bout of deflation. I just talked to someone who bought a high end condo in Florida earlier this year. He thought he got a good deal - $200K for a two bedroom luxury condo, swimming pool in the building, the works. It turns out now that identical units in the building are going for $110K.
So he's screwed. The project developer is screwed. The bank that financed the project is screwed. Anyone who bought stock in the bank is screwed. And anyone who loaned money to someone to buy stock in the bank is screwed.
And this is happening throughout the economy. Everything and everyone is so highly leveraged that once the collapse begins, we can see the cascading chain of cross defaults around the world.
Florida Condo
I had a nice Florida Condo too. I put it on the market in November 2005 for $330K, the going rate. The prices started down and I finally got out in January 2007 at $230K. Last week I checked and they just sold one for $113K. I still have my farm here and my guess is that it is worth about a third of its peak in late 2005 also.
The question is this.... if
The question is this.... if the fed wants to support the dollar then why didn't bernanke raise interest rates yesterday? all this talk about strengthening the dollar is LIP SERVICE! its a lie! the fed is damned if they do damned if they don't! all these bailouts are gauranteeing a much lower dollar! nothing goes straight up or straight down.. just as we've been watching gold and silver for the past 8 years! it has its highs and then retreats a little then over a period of time goes to new highs! the fed and government bash gold anytime they can because a rising gold price shows that there are major problems in the system! they can't have that.
so comes the media telling us that the dollar is going to strenthen.. people believe this and adjust there portfolios.. they sell gold and get taken into equities where they will be sheered again! Gold is the enemy of the federal reserve. until you see bernanke turn a 180 and raise rates, gold will go higher.. bernanke is no volcker! with all the bs we had to endure from the mainstream media with Ron Paul and not giving him attention or telling the truth about him, I cannot believe that people believe anything that cnbc tells you! the dollar has NOT strengthened hardly at all
from 71 to 74? all on lipservice form the dishonest federal reserve that Ron Paul wants to abolish? that move is nothing! some people think that these banks failures are deflationary.. how can it be deflationary when the fed comes in and bailes them out! they are adding liquidity! it is INFLATIONARY! maybe not this minute or this week but 3 or 6 months down the line it will show up! the powers that be can only manipulate this system for so long.. just as there are laws of gravity, thermal dynamics etc there are laws of economics. in time those laws will put down the manipulation! Ron Paul is calling for an Inflationary Depression.. Not a deflationary depression... some of you would be wise to study up on that subject.. the only way the dollar strengthens is if the fed raises rates to attract investment in this country.. its not happening!
as for me and my home, we shall worship the LORD
SIERRAHPBT did you run again
SIERRAHPBT did you run again
Fractional Reserve Banking 101
SIERRAHPBT,
Bank bailouts are deflationary events. There are two types of money in a fractional-reserve banking system:1.central bank money 2. commercial bank money. When a loan is funded with central bank money, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence, which is deflationary.
The bailout, only covers unfunded liabilities ( deposits) and bad loans (assets). However it stops the money multiplier money creation effect. For example an initial deposit of $100 of central bank money is lent out 10 times with a fractional-reserve rate of 20%. This means that of the initial $100, 20 percent of it, or $20, is set aside as reserves while the remaining 80 percent, or $80, is loaned out. The recipient of the $80 then spends that money. The receiver of that $80 then deposits it into a bank. The bank then sets aside 20 percent of that $80, or $16, as reserves and lends out the remaining $64. As the process continues, more commercial bank money is created. Therefore the opposite holds true in a bailout because the commercial bank money multiplier is canceled along with the banks loans (assets) so that money disappears from existence. ( unlike you who continues the baffle us with the latest BS you find in an obscure newsletter somewhere). Silver more valuable then gold? plzzzzzzzzz http://www.mises.org/Book...
SIERRAHPBT, you would be wise to study up on this subject before making extraordinary claims that have no basis. There is a cure for chronic foot in mouth disease, its called silence. Try it sometime, we'll be all glad you did.
as for me and my home, we shall cut back on our subscriptions of of one sided newsletters
Bailouts are only
Bailouts are only deflationary relative to continued operation, which is unlikely to be an option for a bailout candidate; not to cessation of operation and liquidation. Also, economy wide knowledge that the worst case scenario is a bailout rather than a complete loss, is in aggregate inflationary.
I do agree with you that the mere fact that so many banks are being bailed out indicates we are in a deflationary environment rather than an inflationary one. Still, all things being equal, if the fed and FDIC stopped involving themselves, or even ceased to exist, the rate of deflation would increase. So, sum total, their actions can be described as inflationary.
Not the only way
I am always wary when anyone says "the only way..."
There are always many ways. One way the dollar can rise is that it becomes more attractive than other currencies around the world.
One way this can happen is if other economies inflate faster than the US. No doubt the US is inflating, but we are on a global fiat monetary regime. Everything is relative.
ALL WAYS...
ALL WAYS ARE MY WAYS!!! - the queen of hearts
ps sorry just got reminded, sounds like the FED is the queen of hearts, or so they think!
Here's a thought...
Has the FED considered using their unlimited supply of digital money to buy USD or short gold, oil and other commodity futures?
They don't hesitate to piss our money away on corporate debt/equities bailing out corporations whose intentions are criminal.
"PunJab! Bring me my checkbook!"
Despite the FED's bailouts
there has been a lot of default that the FED has NOT acted upon. Low interest rates are not nessasarily inflationary. Low interest rates ENCOURAGE lending/borrowing, which is creation of "money". But with a lack of confidence lending /borrowing does not take place just because rates are low. The dollar strenghtens by a reduction in the growth of the money supply, not by raising rates. Raising rates only DISCOURAGES lending/borrowing. The dollar can strengthen as a result of the defaults, the ones that the FED is not acting upon. These defaults, combined with reduced lending/borrowing due to loss of confidence, can result in the same effect as raising rates. It is vitally important to remember that the FED rate does NOT create inflation/deflation, it is an Encouragement/Discouragement for lending/borrowing to take place. Loss of confidence or over confidence can override FED rates.
In Spite Of All The Fed Meddling
Market forces are taking over... as they always do.
And for the person who has resisted the impulse to follow the herd and been patiently watching, they have profitted.
Remember the old sayings...."high prices (and low) are their own solution". High prices create supply and low prices attract demand. It's always been that way and it sure seems its going to stay that way.
So now those who have invested wisely are taking profits and going right out to find bargains galore in real assets.
It's like a nationwide 'blue light special'.
Contrary to what we think, the wise investor can thrive in any kind of economy. It's the lemmings who don't think for themselves who get ground up by going against market trends and by getting sucked into the debt spiral.
Never more true than now..."Sell when nobody else is and buy when nobody else is." We are looking down the barrel of two good years to buy hard assets.
Even the hammered US Dollar is attracting buyers because its so cheap. Its found support just below 72.00 and if it can just breakthrough 74.335, where its been trapped all year it just might rebound. Those October 75.00 Call options that sold for $350 in July are now at $700 in just two weeks. Not bad. Especially when you consider that those who bought Oct Gold 8900 Call options on July 23rd for around $5,800 are now holding them at $2660!
There is some consolation in the fact that the four major currencies of the world are all fiat. Misery loves company and if the Dollar goes, the Yuan, Yen and Euro will all suffer. And there have been currency devaluations in history (lire) and yet countries have survived and their citizens have become wiser.
Our biggest problem (IMO) is the outright unprecedented, criminal behavior of members of the Bush regime. Therein lies the real threat to the safety, liberty and morale of our citizenry.
The markets, if studied well, are the last bastion of free enterprise.
"PunJab! Bring me my checkbook!"
Man, I just love this site
to think just a year ago I didn't know any of this stuff. Michael I am really grateful for everything you have done for the revolution. Educating everyday people like myself makes me feel empowered with knowledge. Everyone here is so good at explaining how things work. Things that I thought were just to hard to understand.
If commodities are going down would that include the price of food? Maybe, I bought my efoods to soon. Peace Patriots
More government bailouts...
Don't you wish you could get free money... apparently if your a big multi-national corporation it's pretty simple.
http://www.bloomberg.com/...
Now what happen between 2006 and 2007... George Bush apparently used to believe in a free market!
http://online.wsj.com/pub...
Mike
"Fire Team for Freedom" and "Revolutionary Business"
visit www.mikeandjake.com
Saw that one coming
re: your first link/Ford has been to the Fed several times this year
Michael-If overall it is to be deflationary, should the average Jane or John hold cash or gold?
Ok Michael
So does gold and silver go up at some point while the dollar continues to fall? I mean that is what we have been lead to believe so we buy gold and silver.
Healthnut4freedom
"Trust in the Lord with all thine heart; and lean not unto thine own understanding. In all thy ways acknowledge Him, and He shall direct thy paths." Proverbs 3:5,6
In the long run
In the long run, the dollar is toast. I advise buying physical gold bullion as you can, accumulating it over time, and keeping it stored somewhere safe. Don't buy shares, and don't let anyone else keep your gold.
Gold is the only financial asset without a corresponding liability. Everyone, everywhere, throughout time recognizes that gold is money. This is unlikely to change.
However, in the short run, it looks like the dollar has stopped going down.
The thing about gold is this: you don't buy it to make yourself rich, the way you try to pick some highflying stock to make you rich. You buy it simply to preserve whatever wealth you currently have. Inflation and deflation can increase or erode your wealth in dollar terms, but will have no effect on your wealth in terms of gold.
Example:
Right now gold is selling for $900 per ounce, and gas is about $4 per gallon.
Let's say that right now, you're spending $300 per month on gasoline for your commute to work. In other words, that one ounce of gold buys you a three month supply of gas.
Let's say we have very bad inflation, and gas goes to $16 per gallon, and your salary remains the same. From a dollar standpoint, you're screwed - how are you going to afford $16 gas? But theoretically, that one ounce of gold will still buy three months worth of gas. Its dollar price will rise with inflation. So if gas went up 4x, gold would also, to $3600 per ounce. You haven't really gained anything - you simply have price stability.
Conversely, lets say that commodities fall through the floor in dollar terms, as it looks like might happen here. Gas drops back down to $2, and gold drops back down to $450 per ounce. From a dollar standpoint, you're now much richer. You're only spending half of what you were spending now on gas. But from the gold standpoint, you didn't gain or lose - you just preserved the value of what you had. Again, price stability.
To answer your question directly, if the dollar continues to fall, gold should continue to go up.
The point that I'm trying to make in the article is that bailouts and commodity drops are not cause/effect related. Both are the result of deflation.
Further, I think it is likely that the Fed will act to arrest the fall of the dollar because they are not stupid. The dollar is the source of their power. They understand this, and they like their power. They won't, of their own accord, blow the dollar to smithereens.
Eventually, the dollar will be blown to smithereens, but I don't think it will happen just yet, based on what I have learned from studying financial markets for the past 13 years.
However, I could be wrong.
well then, what about if you
well then, what about if you have no real wealth....
For example, I'm just in college... all my money goes towards my education.... what little I have saved is either for living expenses or an emergency... everything else has to come from grants, scholarships, and loans....
basically, I don't really have anything.... so is it worth buying gold/making investments if I don't really have anything to protect? Of course, I'll still need money, but it'd be hard to protect something so small if you can't afford to make the investments to protect it..... and would it even be worth protecting?
It seems like either way I'm sort of screwed.... still, I'd like to try and find a way to be somewhat prepared in the event things were to get really bad.
LOL
Hey next time you want to eat a hamburger at Wendy's or wherever think about this. 20 bucks gets you an ounce of silver. 187 gets you a 1/10 ounce of platinum. There are ways to make your own wealth. Just make some sacrifices.