Inflation V Deflation « The Financial Panner

Inflation V Deflation

September 16, 2009

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The topic of whether Inflation or Deflation will prevail is being heavily debated in the financial world. Inflation assumes that the purchasing power of a currency, in this case the US Dollar, will decrease due to money printing and bailouts, while Deflation assumes that due to the contraction of credit from corporate and consumer defaults in addition to rising unemployment cash will end up going much further with respect to goods and services (ala Cash is King).

There is no question that there are valid points on both sides. A recent interview with Peter Schiff provides clarity around this question. Use the following link to listen to the interview in its entirety, however if you only want to hear the key segment use the following link. Essentially the answer is that both inflationists and deflationists are right – in the context of the only real money, gold. In this context, inflationists are correct in that the US Dollar will lose purchasing power. In this context, deflationists are correct in that gold will gain purchasing power. In either circumstance, gold emerges victorious.

Additionally at a high level, regarding the Inflation V Deflation debate, the following are some of the key points to keep in mind:

As Robert Kiyosaki says at the end of this video, in the 80’s bailouts were in the *millions*, in the 90’s bailouts were in the *billions*, and today they are in the *trillions*.
China, the largest holder of US debt, is growing wary about its investments.
Without a buyer of US debt, the Federal Reserve will be forced to be the buyer of last resort, monetizing US debt (creating money out of thin air) at an ever increasing pace.
Discussions around displacing the US Dollar as the world reserve currency are happening with ever increasing frequency.

Finally, gold rose very close to its all time high of $1,033.90 today, while the dollar continued its decline toward its all time low of 71 on the USDX. Gold needs to close solidly above the all time high level to pivot the very critical $1,000 level as a floor and not a ceiling. As previously stated, things could get hairy if and when the dollar sinks below the critical 71 level on the USDX as there is *NO* historical precedent for where it goes from there. The next three to six weeks look to be extremely interesting!

UPDATE: Audit the Federal Reserve

http://www.auditthefed.com

H.R. 1207: Federal Reserve Transparency Act of 2009 now has 289 co-sponsors, up from 285 last week.
S. 604: Federal Reserve Sunshine Act of 2009 now has 25 co-sponsors, up from 24 last week.

MUST SEE – RON PAUL INTERVIEW – Scarborough says Ron Paul was ALWAYS RIGHT! (9/15/09)

http://www.youtube.com/watch?v=Ilcr6akrwoE

The Federal Reserve is involved a broad review of commercial real estate exposures at the nation’s largest regional banks, which Fed sources say is both the result of concern in that area but part of the “new normal” for how they will be supervising banks.
People familiar with the examinations say the fed is “getting granular” looking, for example, at the differences in banks’ concentration of construction loans vs. multifamily vs. motels and retail.

Foreign Demand for Long-Term US Securities Falls (9/16/09)

http://www.nytimes.com/aponline/2009/09/16/us/politics/AP-US-Treasury-Foreign-Holdings.html

Foreign demand for long-term U.S. financial assets fell in July, but China boosted its holdings, the Treasury Department said Wednesday.
Foreigners purchased $15.3 billion more assets than they sold in July. Still, that’s a steep decline from June, when they purchased $90.7 billion more than they sold.
The Treasury is auctioning record amounts of debt to cover a budget deficit it estimates will hit $1.58 trillion this year. Some economists worry that if overseas buyers don’t keep buying U.S. debt, interest rates could rise.

U.S. credit card defaults up, signal consumer stress (9/15/09)

http://www.reuters.com/article/businessNews/idUSTRE58E6LH20090915?feedType=RSS&feedName=businessNews

Bank of America Corp and Citigroup Inc customers defaulted on their credit card debts in August at the highest rates since the onset of the recession, a sign that the banks’ consumer lending woes are far from over.
The trend was echoed among most other major credit card issuers, dashing optimism sparked when many banks and specialty finance companies reported lower default rates for July.
Considering the trend of unemployment and the increase in delinquencies, analysts have estimated credit card losses will keep rising in coming months.
Lenders are also raising fees and interest rates ahead of a new law that increases protection for consumers. The law is expected to shrink the industry and limit subprime borrowers’ access to plastic money.

Could China Propel Gold to $2,000? (9/15/09)

http://seekingalpha.com/article/161540-could-china-propel-gold-to-2-000

Last week Alan Greenspan noted that “Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies.”
In other words, people are buying gold as a hedge against inflation.
Gold is up 27% over the past 12 months and last week it hit the psychologically important US$1,000 mark. Could China propel this further? From our vantage point in Shanghai this is entirely possible.

Gold seen above $1,100 in 2010 on cenbank buying (9/15/09)

http://www.reuters.com/article/usDollarRpt/idUSN1541476920090915

The price of gold could rise above $1,110 an ounce in 2010 as central banks diversify their reserves into gold due to a faltering dollar, economist Martin Murenbeeld told the Denver Gold Forum on Tuesday.
“The central banks and the G20 (countries) have complained more precipitously about the U.S. dollar and the U.S. monetary and fiscal policies, which leads them to think more and more about shifting their reserves,” he said.
“They don’t have a lot of options for shifting their reserves, and gold is being mentioned more frequently as an important asset.“
Recently, China and other emerging economic powers have signaled growing interest in gold rather than stockpiling their currency reserves in U.S. dollar-denominated assets.
In addition, Murenbeeld, who is also an adjunct professor for the MBA program at the University of Victoria, said that gold is becoming increasingly used in investment portfolios for performance and lowering overall risks.
“More and more portfolio managers are starting to think gold and commodities as an asset class,” he said.

Producer Prices in U.S. Rise 1.7% as Gasoline Surges (9/15/09)

http://www.bloomberg.com/apps/news?pid=20601087&sid=a0jz9TBzHhxo

Wholesale prices in the U.S. rose more than twice as much as forecast in August, led by gasoline costs that have since partially receded.
Energy costs rose 8 percent, today’s report showed, led by a 23 percent gain in gasoline. Some of the increase may be reversed this month. Crude-oil futures on the New York Mercantile Exchange closed at an average $69.40 a barrel in the first two weeks of September, compared with an average $71.14 a barrel for all of August.

Central banks seen becoming net gold buyers-expert (9/14/09)

http://www.reuters.com/article/usDollarRpt/idUSN1440639620090914

Central banks are expected to buy 6 million to 10 million ounces of gold annually due to currency uncertainties after being net sellers in past decades, Jeffrey Christian, managing director of CPM Group, told the Denver Gold Forum on Monday.
“What we are seeing is that central banks are making the transition from large net sellers to large net buyers,” Christian said.
Recently, China and other emerging economies have signaled growing interest in gold rather than stockpiling their currency reserves in U.S. dollar-denominated assets. (Reporting by Frank Tang; editing by Jim Marshall)

Stiglitz Says Bank Problems Bigger Than Pre-Lehman (9/14/09)

http://www.bloomberg.com/apps/news?pid=20601110&sid=a7UTn7JFw1qk

Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”
“We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The U.S. will “grow but not enough to offset the increase in the population,” he said, adding that “if workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”
The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.
“The question then is who is going to finance the U.S. government,” Stiglitz said.

U.S. runs budget deficit of $111.4 billion in Aug. (9/11/09)

http://www.marketwatch.com/story/us-runs-budget-deficit-of-1114-billion-in-aug-2009-09-11

The U.S. ran a budget deficit of $111.4 billion in August, the Treasury Department reported Friday, marking eleven straight months of deficits. Year to date, the U.S.’s deficit is $1.37 trillion. With one month left in fiscal 2009, receipts and outlays both fell in August. The July deficit was unrevised at $180.6 billion, Treasury said.

Faber Says ‘High’ U.S. Deficit Will Spur Inflation (9/9/09)

http://www.bloomberg.com/apps/news?pid=20601087&sid=az3plDWXOx2c

Investor Marc Faber said government spending and low interest rates will keep the U.S. deficit “very high” and will spur inflation.
“Money printing will be unprecedented because the deficit will need to be financed,” Faber said. “The weaker the economy, the more the stock market will go up because the money that is being printed will go into” speculative assets.
Faber also recommends that investors buy precious metals and other raw materials to hedge against declines in the U.S. currency. Before today, the greenback slid 4.9 percent against a basket of six major currencies this year and the 19-commodity Reuters/Jefferies CRB Index climbed 10 percent.
“The dollar will continue to implode against commodities,” Faber said. “I don’t see why someone would hold dollars and not own gold. More and more people will come to the realization that they have to own some resources, some commodities, some mining companies and some physical precious metals.“

Highlights from “The International Forecaster” newsletter (9/16/09)

Published and Edited by: Bob Chapman

Check out or Subscribe to The International Forecaster

What do you do after you have zero interest rates and you have flooded the world with money and credit? The answer is you attempt to fight off higher interest rates and see if you can dodge the inflation bubble that follows. The commitment for this current fiasco to save the world’s Illuminist banks has already caused an official debt responsibility for the US of more than $23 trillion of about 40% of world GDP. That is staggering and it is official. We wonder what the real figure is? It is also wise to remember that the Federal Reserve, and other reserve banks worldwide, all international, are responsible for the carnage we are witnessing.
The public is now paying for their gambling and corruption as central banks, who started this scam, transfer the debt to the taxpayers by buying up toxic garbage, guaranteeing losses and making sure none of the key Illuminist banks don’t go under. The Fed, privately owned, won’t let us look at their books, so we can tell what they are paying for these almost worthless assets. We are told it is a state secret.
There have been some salutary affects, but they are only transitory. As we can see the pace of job losses has slowed and will slow over the next year in anticipation of elections. About 80% of the stimulus package hits before the next election. There will be a slight increase in production and some inventory building. The real question is what will the Fed, government, Wall Street and banking due for an encore? They will most likely demand another stimulus package of some $2 trillion; keep zero interest rates and perhaps go to negative rates and continue to increase M3, money and credit, by 14%. That will neutralize the undertow of deflation and cause higher inflation. This game could last for a few more years, but one thing is for sure, many more are discovering what the game is and they are flocking to gold and silver in a flight to quality to preserve their wealth. If you have any doubts our Treasury Secretary, Mr. Geithner, has recently told us the same plan of easing is in effect. The manipulation and losses in fixed assets will continue. The underlying deflation will not go away. The remedy more money and credit and low interest rates will prevail. The manipulation of markets will continue; world monetization is going on full bore not only in the US but in the UK, China, Japan and many other countries as well. They are all working together to bring down the world financial system when it pleases them to institute world government.
A good part of money and credit injections have been into world stock markets to give a semblance of normality and to make people think all is well. At the same time we hear of eliminating this orgy of money and credit, but it gets pushed off further and further into the future, as it forms another speculative inflationary bubble. There is no doubt that a groundswell is forming as inflation begins to appear again, an event that really started in May, five-months ago. As you can see jobs are not being created and that this financial largess is again flowing mostly into financial markets. The inflationary bubble is on the way again worldwide.
G-20 members that are flooding the markets with money and credit think they are doing a great thing saving us. These are scam and propaganda artists. All they are guaranteeing is higher gold and silver prices. Governments issue bonds and central banks in part buy them monetizing the debt. All this in the name of bailing out bankers, insurance companies, Wall Street and the federal government. Reckless spending is ruining almost all world economies. Borrowed money is subsidizing deficit spending in a big way and soon it will turn inflation higher.
We have just seen Treasuries, Agencies and GSE MBS expand $2 trillion over the past year and expect a further $2 trillion expansion for the next fiscal year. The private sector and foreign central banks are simply not capable of financing such deficits. That means credit expansion and monetization has to take place and that will be inflationary.
This past week we again were treated to the “Fed Friday Night Financial Follies.” Chicago’s Corus Bank, under crippled by construction loans for condos, was seized by regulators and its $7 billion in deposits were acquired by MB Financial. This makes 91 failures this year and 416 FDIC insured banks are on the problem list.
In just the third quarter alone the Treasury has sold $442 billion of notes and bonds after selling $963 billion in the first half of the year, or $481.5 billion per quarter.
What the business media fails to mention is the Fed’s currency swaps. The Fed swapped dollars for five major currencies. Thos nations’ central banks are using that $500 billion to buy Treasuries.
We have a new site to visit to check out your bank. Go to http://www.ffiec.gov and go to bank performance reports.
Last Friday three more bank failures joined the FDIC Friday Night Financial Follies, taking the total to 92.
As you know we believe the Fed has five major banks buying US Treasuries with the dollars they received in the latest $500 billion currency swap. Now we hear from Rob Kirby and Ellen Brown that Bernanke is using hedge funds in the Cayman Islands to secretly buy huge sums of US Treasuries. Caribbean banks are doing the buying. Others believe the Fed is the direct buyer and has been for some time. We give these reports great credence, because the Chinese, Japanese and Europeans are not buyers and have not been buyers for some time.
Joe Stiglitz, Nobel Prize winning economists says, “The US has failed to fix the underlying problems of its banking system after the credit crisis and the collapse of Lehman Bros. To big to fail banks worldwide have become even bigger. The problems are worse than they were in 2007 before the crisis.” It is an outrage he says. We say it should be noted that when TARP money was proposed that voters were 100 to 1 against the bank bailout. This is why the new PM of Japan says, “We are not a colony of Washington.”
In one of his first major decisions on trade policy, President Obama opted Friday to impose a tariff on tires from China, a move that fulfills his campaign promise to “crack down” on imports that unfairly undermine American workers but risks angering the nation’s second-largest trading partner.
The decision is intended to bolster the ailing U.S. tire industry, in which more than 5,000 jobs have been lost over the past five years as the volume of Chinese tires in the market has tripled.
It comes at a sensitive time, however. Leaders from the world’s largest economies are preparing to gather in Pittsburgh in less than two weeks to discuss more cooperation amid tensions over trade.
The tire tariff will amount to 35 percent the first year, 30 percent the second and 25 percent the third.
Although a federal trade panel had recommended higher levies — of 55, 45 and 35 percent, respectively — the decision is considered a victory for the United Steelworkers union, which filed the trade complaint.
“The president sent the message that we expect others to live by the rules, just as we do,” Leo W. Gerard, president of the union, said Friday night.
China’s government and its tire manufacturers, as well as tire importers and some U.S. tire makers with plants overseas, had strenuously objected to the measure.
“The President decided to remedy the clear disruption to the U.S. tire industry based on the facts and the law in this case,” the White House said in a statement released Friday night. [This is the first shot in the beginning of a major trade war. The reason for the action is fundamentally sound and the Chinese are dumping dollars as fast as they can. So there is nothing to be lost in this decision at this time. Hopefully it will lead to tariffs on goods and services legislation in the near future so that America can again compete in world markets and that we can end free trade, globalization, offshoring and outsourcing once and for all. This will save our economy. Bob]
The Obama administration said Thursday that a program used to guarantee as much as $3 trillion in money market mutual fund assets will end on schedule next week.
The program, which will be closed down on Sept. 18, had no direct cost to taxpayers and earned more than $1 billion in fees paid by the mutual fund industry, according to the Treasury Department.
It was established at the height of the financial crisis last fall after a large money market fund “broke the buck” – meaning the value of its underlying assets fell below $1 for each investor dollar put in. [Pay particular interest to this announcement. If it is not changed you have little protection in your savings or checking accounts anymore. We suggest you keep absolute minimal amounts of money in your accounts. Those funds should be invested in gold and silver related assets as soon as possible. Bob]
Wealthy individuals’ Chapter 11 bankruptcy filings jumped 73% in the second quarter from a year earlier, according to the National Bankruptcy Research Center. More individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured are using Chapter 11 of the U.S. bankruptcy code typically associated with business reorganizations.
George Washington University is increasing holdings of commodities such as oil and natural gas out of concern that a return to inflation rates last seen in the 1970s may ravage the value of its $1 billion endowment. U.S. consumer prices may rise 8% annually within three to five years because of unprecedented government spending and deficits, said Donald Lindsey, the Washington school’s chief investment officer. Inflation, once it starts, could get very difficult to stop, Lindsey, 50, said. ‘We could see a stagflation environment that’s similar to the 1970s.
Foreclosure filings in the U.S. exceeded 300,000 for the sixth straight month. A total of 358,471 properties received a default or auction notice or were seized last month, according to RealtyTrac Inc. That’s up 18% from a year earlier.
About $134 billion of securitized ‘option’ adjustable-rate mortgages will reset to higher payments over the next two years according to Fitch.
The default rate on commercial mortgages held by U.S. banks will rise to 5.4% in 2011, the highest since at least 1992 according to Real Estate Econometrics LLC.
The president’s chief economic adviser warned Friday that the nation’s unemployment rate could stay “unacceptably high” for years to come – a situation that would seriously complicate Barack Obama’s ability to convince Americans that he’s beating back the recession.
The typical American household made less money last year than the typical household made a full decade ago.
To me, that’s the big news from the Census Bureau’s annual report on income, poverty and health insurance, which was released this morning. Median household fell to $50,303 last year, from $52,163 in 2007. In 1998, median income was $51,295. All these numbers are adjusted for inflation.
In the four decades that the Census Bureau has been tracking household income, there has never before been a full decade in which median income failed to rise. (The previous record was seven years, ending in 1985.) Other Census data suggest that it also never happened between the late 1940s and the late 1960s.
So it doesn’t seem to have happened since at least the 1930s.
FOR years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating.
But we are now injecting politics ever more deeply into the American economy, whether it be in finance or in sectors like health care. Not only have we failed to learn from our mistakes, but also we’re repeating them on an ever-larger scale.
President Dwight D. Eisenhower warned of the birth of a military-industrial complex. Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege. We’ve created a class of politically protected “too big to fail” institutions, and the current proposals for regulatory reform further cement this notion. Even more worrying, with so many explicit and implicit financial guarantees, we are courting a bigger financial crisis the next time something major goes wrong.
Nearly two-thirds of Americans think the news stories they read, hear and watch are frequently inaccurate, according to a poll released Sunday by the Pew Research Center for the People & the Press. That marks the highest level of skepticism recorded since 1985, when this study of public perceptions of the media was first done.
SLM Corp., the student-financing company known as Sallie Mae, had its long-term debt rating cut one level by Fitch Ratings to BBB-, the lowest investment-grade ranking. Sallie Mae has $34.4 billion of debt and preferred stock that’s affected, the ratings company said. On Aug. 27, Moody’s Investors Service said it may cut Sallie Mae’s long-term ratings because it “faces significant uncertainties.”
21.43% of FHA mortgages are delinquent or in foreclosure per its own service report.
FHA and VA are today writing loans with 3.5% down (and in fact 0% down if you use the $8,000 “home buyers credit”) and ignoring safe and sound front and back end ratio limits in a desperate attempt to prevent that which must happen to restore a sound housing industry: A decline in prices to sustainable levels.
The COT is unbelievable, the commercial are net short gold contracts of 270,797 right new its former high. The net increase this week alone was 54,089. In the options and futures combined the total net is 290,212 contracts short an increase this past week net short addition 63,881. In silver the net short of futures and options is 60,796. They are screwed.
It has now been six years since central banks embarked on supporting their currencies vs. gold. It was a futile effort because simultaneously they had to defend their currencies against the undertow of deflation. It was a battle they could not win and as a result gold has gained strongly versus all currencies in spite of massive manipulation in the form of gold sales. During that period gold rose from $350 to $1,009. Whatever the central banks did, it did not work.
The current depression and economic collapse has been caused by the decline of fiat currencies versus gold and its removal from the monetary system. Today all currencies, excepting the euro, are not convertible into anything and only survive on good will and monetary ledgermain. Based on these few facts alone it doesn’t take a genius to conclude why we have a worldwide monetary and financial crisis. Smart investors have not been taken in with the full faith and credit of all paper, non-collateralized currencies. This is especially true as gold completes its nine year first phase of a bull market, that will last through another 2 or 3 phases. What else could a prudent investor expect when many major nations are insolvent. As currencies decline against gold the stability of nations declines as well until ultimately they financially collapse. Remember, this all didn’t happen yesterday. It began on 8/15/71 when the dollar abandoned the gold standard. The only reason gold is not selling at $3,000 is due to intervention by central banks, many of whom are almost totally without gold. The suppression scheme slowed the assent of gold, but could not stop it. As the monetary crisis deepens central banks are forced to create more massive amounts of money and credit to keep the financial system from collapsing and as they do this they create inflationary bubbles, which create inflation and translate into ever higher gold prices, as investors flee in a flight to quality to gold – the only real money.
Since June 2000, when we began this quest, gold has outperformed every asset class. Gold has appreciated every year for nine years. The return has been about 8% annually. Up until now, and probably for the next few years, the powerful factor for gold has been and will continue to be inflation, as nations continue their massive expansion of government debt and central banks oblige by creating money and credit in ever massive amounts. The demise of the dollar will play an important part, because it is the world’s reserve currency, and gold is denominated in dollars. The Fed being the biggest inflator of all offers a perfect basis for further increases in the gold price.
On Tuesday spot gold rose $5.10 to $1,005 as the October contract rose $7.70. Spot silver rose $0.38 to $16.80 and December was $0.02 higher. The Chinese and Indians were bidders in size again today and they won’t be denied. That is why when gold fell to $991.00 it made a U-turn and headed right back up again. Nobody except us and a handful of others believe gold and silver are going higher and that is good. Gold and silver, like the market, climbs a wall of worry. There has to be 90% of pundits who believe they are going down. When you have that kind of sentiment you have raucous bull markets. Incidentally, we are glad the public isn’t in the market. We are happy they do not believe us, because they’ll be available to buy gold at $6,000 an ounce. We’d like to see gold $20 higher on Wednesday, Thursday and Friday to absorb selling we see coming next Tuesday and Wednesday. After that gold and silver will go moonward.
Gold open interest fell 12,038 contracts to 461,154, as silver OI fell 2,102 contracts to 120,902. That net speculative commercial short position is about 31 million ounces, up 6.4 million ounces in just one week and the fourth largest since January 1996. As this very big short position was accumulated, central banks began buying gold again as China and Japan challenged them in purchasing physical. It is no wonder gold and silver are so strong and they are going to continue to be strong. Why do you think Barrick, an appendage of the US government, covered its hedge shorts, said gold was going higher and ran for the hills? Less than 3% of Americans own gold. That is nine million people. Soon perhaps 1.6 billion people in China will own gold.
Every time we hear China is going to become number one and lead the world out of depression we stop and reevaluate our position. You are looking at an economy that has 30 million workers unemployed, plus those unemployed in the countryside, plus a very unbalanced economy. The country is wallowing in over capacity and its main driving force has been fixed asset investment. It is the same old command economy. Fixed asset investment will probably rise 35% this year due to investment of $600 billion and loan infusions of $1.2 trillion. That is a $1.8 trillion stimulus package, beginning in February and coordinated simultaneously. None of this spending will affect growth and spending outside China. Needless to say, this pump priming is unsustainable. Not that many found jobs, so private consumption will not pick up where the government left off. Incidentally, the US is about to find itself in the same dilemma. International trade, the driver of the economy, is not going to revive anytime soon, and recent tariffs on Chinese tires invading US markets will show China that their unfair trade practices are about to come to an end.
Then there is the problem of the end of its current bubble that could come as early as 2010. Will there be more stimulus packages, as the US also will have to do? Or will China face the prospect of revaluation? Thus far really all China has accomplished with quantitative easing are bubbles in the stock market, some 84%, and recklessness in the property markets. As a result of these problems and systemic problems in Europe, both the yuan and the euro will not see internationalization of their currencies. In the absence of a strong dollar all that can be hoped for in world trade is an international unit of the 20 top currencies with a minimum of a 10 to 15 percent gold backing. Without that such a trading unit won’t work any better than the US dollar as a world reserve currency. China may be ready in 30 years, but we doubt it.

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