Tuesday, October 6, 2009


Gold Sets Record High; EPJ Explains Plot Against Dollar

Gold hit a record high today, trading at $1,040.15 / ounce. I'm not being a wiseguy; has Mish or another prominent deflationist explained this?

If you want to read up on the international conspiracy against the greenback, EPJ has the latest. Is that the out that Mish et al. will take? "Yes, the dollar should have appreciated 10% annually for three years in a row, while the credit overhang was worked off. But the Saudis and Russians were idiots and dropped the dollar, fearing inflation, and thus set in motion a self-fulfilling prophecy." ?

Not for anything, but gold and the stock market have been marching lock-step for quite some time now. While I'm not a "prominent deflationist" ... I don't think that we can view a stock market bubble (and a correlated rise in gold) as a sustained period of inflation.

The argument by Mish, as I understand it, is that a credit unwind and an increased demand for dollars (although I don't believe he phrases it that way) will push down prices.

I think inflation will win the day ... but -- to paraphrase you -- has any prominent inflationist suggested when?

The collapse of the dollar has been predicted for decades now. And I assure you that I think it's coming, but can't deflation win in the short run?
Bob, what you are describing is a currency crisis; not inflation.

And by the way, it's not much of a currency crisis. Wake me when the index hits 70.

Love your work, but please lay off Mish. You guys are both on the same side in the larger picture.
If memory serves Mish's explanation would be "Gold is money", which is presumably why he's advertising GoldMoney after every post.
1. A currency crisis is a manifestation of inflationary policies, otherwise, why would there be a currency crisis?

2. It's possible to have gold soaring even as the dollar is rising. The Dollar index is the dollar relative to other currencies. So if say the fed inflates the dollar by 10% per year but the yen, pound, etc. were being inflated by 20% per year, then you will get a rising dollar and yet you will get rising gold prices. In that case, Gold will rise against all currencies.

3. Yes, there can be temporary deflation (currently, the M2 supply is contracting) but this will ultimately fuel inflation as the Fed prints money like mad to prevent price declines. Keep in mind that when banks fail and the FDIC bails out depositors, it is inflationary. In the end, only if depositors are allowed to fail will we get deflation. That will be politically unacceptable.

Deflation may win a battle or two but I'm with Bob, Inflation will win the war.
Anon, the war is all about the battles; what good will "winning the war" do you personally if you lost all your resources in one of the battles?

See, this is more than an academic exercise; this is peoples financial lives you are messing with here. Would you or Bob really have people commit their money to an inflation strategy right now on the strength of an article by Robert Fisk (and if you aren't familiar with him, Google that f*cker and see what you come up with) and Max Keiser, a guy who says that the US doesn't have government run health care because the country is racist?

I would trust my money to Mish before I trusted you or Bob. "Winning the war" or focusing on "the long run" can be pretty dangerous when deciding on tactics. I'd rather have someone who 1) observes what is actually happening and 2) makes decisions based upon that.

I assume you have put every last dime you have with the exception of next months rent in to gold. If you haven't... does that mean you really aren't committed to your case?
I like Mish's blogs but he's dead wrong on deflation. Neither you nor he nor anyone else can time the deflation/inflation inflection point. In the end, it will be inflation, so prepare for that.

If you expect deflation, by all means, keep some cash handy but hedge by also buying gold.

Do the math:
Assumption:- at some point, gold will replace paper currencies.
today, there is about 5 billion gold ounces in the world, give or take a few million (I think 5 billion is on the high side, so it's conservative).

Today's world GDP is about $65 trillion on a PPP basis.

If gold were money today, what would its purchasing power be? (Gold would be usedd to buy up all the stuff and services produced.)

Do the Math, this value doesnt depend on your inflation/deflation argument, it's immaterial infact to compute the purchasing power of gold.

All paper currencies will eventually return to their marginal cost of production which is zero. That means hyperinflation.

Prepare for that. you could try and get cute and time the inflation/deflation. But i wouldn't bother, I know the end result.

And yes, I have a fair bit of my savings in commodities I think will do well when prices increase.

What are you talking about? I am not predicting inflation because of the two guys you cited. I'm predicting it for all the reasons I've blogged about since Free Advice started.

Since you put your money with Mish and not me, how has that worked out for you? Can you point me to a specific Mish article where he began predicting deflation, what Mish's recommended investments were, and what the results have been so far?

I don't know what Mish has specifically said about gold, but I know most deflationists have said gold is going to crash. And they've been saying that for at least a year.

Here you go:


I also referenced this in a previous post on your blog: http://consultingbyrpm.com/blog/2009/09/1000-gold-wasnt-spring-then-spring.html

Please consider my comments there on why we're seeing movements in the price of gold.

Interested in hearing your opinion.
Gold is the best alternative for investment. Its is the safest investment instrument i have seen in my life.
M4Liberty, I looked at the Mish link, but I really didn't get what his point was. I am being unfair perhaps, but it seemed like he could explain any movement in gold as "a credit event." Well, right, but the issue is, if the supply of dollar-money is contracting, why shouldn't all dollar-prices be falling?

It's not just gold, but silver and other commodities are way up too (I believe) since January. Now year/year oil is still way down etc., so Mish could point to that. But even there, why did oil collapse in about 3 months, and since January has been steadily rising? According to the "credit destruction" deflationists, the impetus for credit destruction is just snowballing. So it makes no sense for commodity prices to collapse from Sep - Dec 2008, but then to appreciate a heck of a lot (and steadily) since then.

If Mish or somebody said, back in January, "I expect oil will appreciate 50% in the next 6 months, but then it will collapse" then I will apologize on the front page of the blog. But I'm pretty sure his view was that all dollar prices (except possibly for gold) were going to fall, and that people warning of price inflation were nutjobs.
It all comes down to the proper definition of the money supply. Mish, along with Stephen Keen, include debt and credit in their money supply definitions. Thus, if you do include these elements in money supply, then yes the money supply itself is decreasing.

If we look at Frank Shostak's work, then we ought to be looking at AMS or TMS. Shostak tends to focus on the pool of real savings and the corresponding demand for money when discussing liquidity. TMS data is available at mises.org; however, there is no data for any month in 2009.

If we do include credit and debt in the money supply, then this deleveraging that is happening is technically deflationary.

Also, if we're going to discuss the price of gold and various other commodities, then we have to discuss the GATA stance regarding central bank manipulation of gold prices.

I still do not understand why there cannot be a debate on the proper definition of the money supply and what role credit and debt (especially that which is created out of thin air) should play in determining periods of inflation and deflation.

Regardless of one's distinct stance in the grand inflation/deflation economics arena, there is certainly at least one fundamental thing we can all agree upon: central bank management of the money supply creates asset bubbles as nonproductive activities steal real savings from productive activities. Subsequently, once the asset bubble can no longer be supported and the inherent unsustainability of the asset bubble is realized, the respective asset prices must fall assuming the necessary correction is permitted to occur as firms, banks and individuals all deleverage themselves respectively.

Again, let's have the necessary and proper debate -- that is, one regarding the proper definition of the money supply and the role credit and debt play.
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