Friday, March 06, 2009

End Game: Hyper-Inflation vs. Hyper-Deflation

When it comes to predicting doom... Those Who Read the Bones are divide into two camps... there are those who believe there will be hyper-inflation... and those who believe just the opposite... hyper-deflation.

I'm going to explain the two catastrophes in extremely simplified terms... and yes... some accuracy will be lost in the translation but bear with me. Lets start with the Hyper-Deflationists.. whom we'll call the Downers... for the sake of brevity.

Now... first of all I need to state the position of the Downers isn't nearly as clear cut as the Uppers (hyper-inflationists). What the Downers fear, and among them you can count the Fed, is another a decline in the value of treasuries held by... you guessed it... the Fed. Look.. the Fed is out to make money... and make money they do. So if the market for US Treasuries starts to dry up then you can bet they won't hesitate to raise rates. That's why Hillary is out there begging at the feet of the Chinese. The administration has been told clearly... if the treasury market turns down... the Fed will raise rates... maybe dramaticly. That would result in a perfect storm. Banks, already terrified of even the slightest risk (because of their insane leveraged positions), would be forced to pay even more for money. Credit card interest rates go up. Mortgage rates go up... and that drives home prices even lower. The economy shuts down. Full Stop. Now Maggie Thatcher could handle that... How do thing Barak Obama will do?

Ok... that sounds pretty scary... and pretty reasonable... what's the other side say?

Well... the Upper position is a little more clear. We've been staving off economic collapse for decades by inflating one bubble after another. Think of the tech bubble in the 90s. We had a soft landing because at the same time it was popping, we were inflating a new real estate bubble. That's all good and fine... but its just ducktape on a dyke. We've been printing money and printing money... So much so that the Fed won't even release M3 anymore. Now.. the End Game for the Uppers is when everyone wakes up and realizes one day that the emperor has no clothes. And when I say that... I'm talking about not just dollar inflation... but everything inflation. The dollar is more leveraged than any bank ever was. Why? Because the currencies that are being used to prop the dollar up are also incredibly inflated. We have inflated a dollar bubble with a Euro bubble with a Yen bubble so to speak. Virtually every currency is inflated... So its very similar to a bank run. Its the true downside to globalization. Once one currency falls, they all start falling... then all those dollars start coming home to roost and the value of the dollar hits the floor. Its Germany in 1923. The dollar is losing its value so fast that literally people are leaving work to go shopping before their money is completely worthless. Also scary. Also not good.

The problem I have is... and maybe someone can clear it up for me... Why can't both happen?

Why can't China stop buying our debt... at the same time the dollar crashes? Sure.. the Fed raises rates through the roof... but it doesn't matter because the US government is spending money that doesn't exist like there is no tomarrow... because well... they honestly believe there isn't. So home prices crash because the dollar is worthless... and crash further because the rates are so high... and crash further because even at the high rates very few banks will lend. But even that deflationary influence isn't enough because the government is spending so much.

What you have is something akin to the Great Depression... where money was worthless... but you still can't get any of it, because the government controlled institutions were simultenously limiting supply to the people, while the government itself was choking the life out of the currency by spending the hell out of it. Of course buy spending it, what I mean is, printing it up from no where and giving it away to people or banks that gladly take it... then run like hell.

Its a big bloody damned mess people. And all I know is... you better buy gold. Ya know why? Becuase if the Downers are right... you aren't gonna be able to get ahold of any currency at all. But if you have gold... you can spend it. Dig? You'll have something to use to trade.... something with a known market value.

On the other hand... if the Uppers are right... well... your gold will be invaluable for the same reason.

The moral?

It doesn't matter who's right. They may both be right. All you need to know is... buy gold.

My biggest hope is actually tied to my biggest fear. The globalisation that leads to the crash could be the saving grace of the dollar... because when the fed does crank up the rates... the demand that disappeared could easily come back... lifting up the dollar inspite of the inflationary pressure of government gone wild.

In other words... if the government would just do nothing... we'd be fine in a few months. But the government will not do nothing... and it will drag out this whole thing for several years before the international demand finally catches up with us and brings us back to normalcy.

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