INFLATION/DEFLATION DEBATE

I thought I would post on a topic that’s sure to stir some dander, mostly because I just needed something to clean the comments.

My thoughts are and have been for a while that in a purely fiat system deflation isn’t an inevitability, it’s a choice.

The only time we’ve seen real deflation was in the 30’s and that was because the dollar was anchored to gold (money supply was constricted). I know many will immediately jump on the Japan bandwagon but Japan didn’t really experience deflation. Prices didn’t collapse like they did in the 30’s (a true deflation). They stagnated (except real estate and stocks which were in a bubble), mostly because Japan funded their bailouts with internal savings. They never actually resorted to quantitative easing. If they had prices wouldn’t have even stagnated

The only other time than the 30’s that we’ve seen real deflation was in late `08 to March `09.

Many have the view that we will experience deflation first then inflation, but I would point out we already did. We just went through the deflation part of the equation in 08/09. That was true deflation. Prices for virtually everything were collapsing. It lasted for 9 months.

Just like Roosevelt did in the 30’s, Bernanke stopped deflation dead in its tracks by massively inflating the money supply. If deflation is an inevitability how could that possibly have happened?

I’ve heard all the ridiculous theories that without credit expansion we can’t have inflation (actually total credit is expanding almost exponentially as the government has taken over where the consumer has left off). I’m sorry they don’t hold water. Almost across the board we have had massive inflation in virtually all asset markets since early `09. All without the banks lending. Obviously the liquidity that Ben has forced into the market has landed in the financial markets first.

Let me say this again because it’s important. As long as a country is willing to destroy it’s currency deflation isn’t an option. The key in that statement is “the willingness to destroy the currency”.

If deflation starts to get a toe hold again the government could simply print money and mail out checks to every man, woman, and child. Does anyone think in that scenario deflation is possible? Of course it’s not.

The deflationist’s will argue that the government can’t, or won’t, do that. Hey they have to make that assumption because obviously deflation isn’t possible if the government just starts mailing free money to everyone.

But the fact is that they can and they will, actually they already have…twice. They were called rebate checks. Anyone who thinks it won’t happen again if deflation starts to rear it’s head is just kidding themselves.

In a purely fiat system deflation is a choice. I would say it’s pretty clear that the government is willing to sacrifice the currency to keep deflation at bay and they have been doing so ever since 2001.

For me to buy the deflation theory one would have to explain how Ben could have stopped the worst deflationary spiral in a mere 9 months and you will have to explain to me how deflation can possibly survive another bout of free money (more tax rebates or whatever they choose to call them next time).

162 thoughts on “INFLATION/DEFLATION DEBATE

  1. Anonymous

    Hi Gary,

    Until there is some decisive development in that front, the rebuttal to the inflationist argument will always be the bond market. If the value of the currency is being debased (or expected to debase), why would bond buyers accept a three percent yield in depreciating currency for 10 years? Where is the tightness in productive capacity or in labor markets that would lead to too many dollars bidding up too few goods and/or services?

    I’ve been long PMs since the end of 2008, but those will always be nagging questions to me until they are answered. πŸ™‚

  2. Marc

    Didn’t Bernanke actually say that he would print money if needed to counteract deflation?

    I believe this was in one of Gary’s earlier posts.

    I believe, like Gary, that the Fed will stop at nothing to prevent deflation. If the Fed sees deflation they will act. A government that does not act, right or wrong, quickly becomes an ex-government.

  3. DG

    I agree that deflation is a choice for fiat-currency governments. But here’s a question: If the government creates two trillion dollars and three trillion is destroyed (housing prices; bankrupt malls, etc.) is that inflationary? Also if the money multiplier is less than one (velocity is super low) how does that factor in? If the government prints money and that money is thrown into a fireplace (or stuffed in a mattress), what then? I agree that we will probably have inflation some day, but timing is everything. People have been predicting the collapse of the bond market for years now. The question is when? “Someday” is not an especially useful actionable comment.

    As for deflation first, we may have another bout of it if the sovereigns go broke, and then, and only then, would the government print again. Why print if it is not necessary, and it is deflation that will scare them into printing again (just like in ’08/’09). That argues for deflation first, and then the government’s inflationary response to it, rather than” preemptive” printing before another bout of deflation.

  4. Keys

    Again with the bond market. Are you kidding me? Look the quick and easy answer is that people are irrational. Who in their right mind would ever accept 1%, 3%, or 5% in a long-dated bond? Better off in cash than to risk your capital, even if you believe in deflation; the potential of being wrong is not 0%. If you are right 3% return, if you are wrong, capital loss in your bonds of up to 50% in long dated bonds. Even if deflation were real, bonds are not worth the risk. Bonds are not like stocks.

    More so, the stupid bond argument does not factor in any other risk, such as default, liquidity, maturity. Which again is a bunch of nonsense, but only to mention since the deflationist seems to only follow the equation of (1+r)(1+I)=(1+N). Equations are a product of an observation, not a proof.

    Bonds are in a bubble because like all pyramid schemes people keep buying. Once the top guy goes, “what the *))* am I doing”, the deck of cards falls apart.

  5. Anonymous

    If deflation were real, bonds would most certainly be worth the risk. Putting appreciating cash into an investment that delivers a stream of that appreciating cash plus the principal at maturity couldn’t be a sounder investment.

    Liquidity is not an issue for U.S. treasuries, probably the most liquid security in the world. Default risk wouldn’t seem to be a factor if it hasn’t affected the price of Japanese bonds, where the debt-GDP ratio is twice that of the U.S. The majority of the federal budget is not (yet) devoted to debt service.

    If the quick and easy answer to the low rates of the bond market are that people are irrational, that might be less than comforting to those of us who have invested in a relatively useless hunk of shiny metal that pays no dividend. Perhaps it is the bond holders who win the rationality prize. Bonds are a a multi-trillion-dollar market … that’s a lot of irrationality suspending disbelief in inflation. I ain’t saying bonds will rally forever, only that they’ve shown little sign of failing with two years of QE under our belt.

    Now perhaps the bond market is being artificially supported by some semi-stealthy QE2 program. If bond prices remain stable while the value of the dollar continues to fall (both in other currencies and in hard-asset purchasing power), that notion gains more credibility, imo. For now, it still looks like at most a stalemate to me.

  6. Frank

    If Lennar spends 100k on some useless land out in the desert near Hesperia which even jackrabbits shun, and spends another 100k on subpar labor, some OSB and stucco and then sells it for 500k to some sucker. The sucker borrows 520k to buy the houses (and cover closing costs) from Downey Savings and Loan (RIP).

    This money has then been created and paid to Lennar who then goes on to spend this money on other projects, etc., etc.

    Then one or two years later Mr. Sucker has stopped paying the Option ARM mortgage because even the teaser intro rate was too much. The real value of the house has plummeted to 300k (at best) and DSL is facing hundreds of similar situations and the FDIC is knocking on their door.

    Then what? Well, the money is already in the system. The only real effect is that the system grinds to a halt. No more creating money out of thin air, no more building houses out in the desert. No more contracting jobs, no more OSB sold, etc. Yes, the housing sector is contracting.

    But this is not deflation.

  7. khalid

    “Japan funded their bailouts with internal savings. They never actually resorted to quantitative easing.”
    You keep saying that…
    but March 01 to March 06, the BoJ initiated a pretty hardcore QE program.
    The central bank even bought stocks.
    Gary’s ideas of what constitutes deflation or inflation is plain man-in the-street type stuff. I’m willing to bet 5 KG’s of my gold that if I pulled 100 people off the streets in Europe or the US and asked them about the dollar and the US’s government’s finances, a minimum 80% will say the exact things Gary keeps on saying. In no way are those view contrarian. They’re pretty much standard urban legend stuff (the stuff about what the Fed does) or simply misinformed and barely researched in any deep way.
    Gary keeps saying the Government or Fed is “printing” and that somehow devalues the currency, neglecting even to discuss in any remotely meaningful sense how that’s true in the current global monetary and financial system and could possibly lead to a destructive rocketing in prices of goods.
    The notions in your post befit banana republic systems today or systems before Bretton Woods I.
    Gary still can’t show give us the example of a modern (G7) country (that doesn’t include Russia) that’s experienced hyperinflation.
    This fear of inflation is one of the most played out themes that big money institutions have been feeding the masses forever. It’s yet another ruse and there’s nothing original about it…
    @ Frank:
    I appreciate your definitions and ideas of inflation and deflation, but really, I don’t see how those ideas have any practical value in determining where the markets and more importantly, the economy, are heading. So do you fear hyperinflation as well?
    Mish is readable because one can actually test whether his theory is right in the real world.
    People, whoever they are, are buying government bonds. Period. Even without QE, that’s happening. And that’s just one piece of the evidence that monetarily, we are in deflation since 2007.

  8. Anonymous

    DEFLATION! Who cares!
    Gold looks like it will be testing 1160 again today. Today we slice through this level for a probe well under 1150. You beartards had your chance to sell is now slipping away.

    troll

  9. Gary

    Folks quoting the bond market nonsense is the same thing as saying that the Fed won’t print, but the Fed has and is printing. The Fed’s balance sheet is still growing by 10 billion a week.

    If someone can logically answer me how we could possibly have deflation if the government hands out free money then I might buy the deflation scenario.

    Just saying they won’t because it supports your thesis isn’t really an argument. It’s kind of like a three year old using the “just because” argument.

    Like I said in a purely fiat monetary system deflation is a choice. It really doesn’t matter whether 1, 2, or 10 trillion dollars get destroyed the Fed can add as many 0’s as they want and they can easily print whatever amount of money it takes to offset money supply destruction.

  10. Anonymous

    Dollar crashing right through 82 this morning. G you were exactly right on that one. The dollar bulls aren’t looking to smart right about now.

  11. khalid

    Gary:
    I have enormous respect for your market nous. But I must say that I find your core fundamental theory you ultimately base buying PM’s on flawed… and to be wanting.
    You mentioned government has taken over credit, fine.
    But if government credit expansion/ growth is up 2 TRILLION annualized, then PRIVATE growth in CREDIT< which was running at about 4 trillion dollars a year, is now in the negative.
    Deep in the negative, easily -2 trillion dollars a year.
    So this cliche’d obsession with the deficit and national debt is absurd.
    I’m not saying current fiscal and monetary policy is right or wrong. I’m just not sure everyone has their premises and facts right.
    Just because everyone says something all the time (the deficit/debt is unmanageable), etc. doesn’t make it true.
    I’m pretty bearish on the global economy so I’m long dollars and long gold.
    One more thing you like to say is BB did whatever, succeeded in stopping this deflationary spiral, which it seems to you was only the massive crash in commodity prices, by “printing”.
    I think Justin mentioned some time ago, that maybe we’d bottomed anyway, regardless of what the Fed and other CB’s did.
    I find your idea that somehow central banking action “aborted” this or that cycle absurd.
    What makes that any different from the PPT theory that you despise as well?
    Nothing against you, I’m just trying to coax more meaningful details out of you, a better illustration of what you think is happening fundamentally, because where I stand, it betrays a total lack of understanding of banking and the financial system. I think you are misinformed on this particular topic. Monetary policy.
    I don’t know exactly what’s going on myself, but I’m speculating that USD and gold are the way to go. But you on the other hand seem sure as hell about what you think is going on. It makes me suspicious that your view may actually be dead wrong.

  12. Gary

    Well if you think I’m wrong then why would you buy gold?

    The government has been debasing the currency for 9 years now. It is the only way to support asset prices since we have no new industry for real produtivity.

    I think they will continue down their chosen path. Will it eventually lead to hyperinflation? Who knows. It certainly will if governement continues to pile debt on top of debt and then chooses to service it by printing instead of defaulting.

  13. Anonymous

    Just plunged 7 bucks to the 1160 area. Look for a penetration of the 1160 area early today. Much lower in gold folks.

    troll

  14. Anonymous

    I really do not like the way gold is acting here. GLD looks like crap. There is nothing good to look at here. Lower we will go.
    You bulls must still be sleeping!
    I know you are hoping you wake up and gold is 100 higher. Haha

    troll

  15. Gary

    BTW I already listed a whole slew of countries that have experienced hyperiflation. Trying to qualify it by geogpraphy is kind of meaningless. Hyperinflation happens because a certain set of conditions come together no because of whereon the globe a country sits.

    Trying to say that the US will not experience hyperinflation because it hasn’t happened in a long while (yes the US has been through tow hyperinflations in its history) Is kind of like saying housing prices will never fall because they never had before.

    The US is walking down the path that leads to hyperinflation. Is it here now? Of course not. And maybe just maybe the next new industry will be invented and come on line in time to allow us to grow our way out of our debt problem. Who knows!

    At the moment I don’t see it, although I tend to think it will come from the biotech industry.

  16. Anonymous

    Troll boy I think I’m going to have to buy today just based on you alone. If you are this emotional about gold it has to be the bottom.

  17. Keys

    5% investment in a bond is not smart if you believe in deflation. Even if the real rate is -20%, you still only manage to beat a cash holding position by 5%.

    But what is the risk of being wrong? Say you take a 30 year bond with a coupon of 5%, where the yield is at 5%. You would buy this bond at par, so say $1000. And if deflation is correct your purchasing power would go up mostly due to your dollar denominated holding, not your small 5% yield. But say you are wrong, and rates fly high, and we hit bond rates of say 15% due to a bond bubble bust based upon a lack of faith in the US. Your bond of $1000 would fall into the $300-400 range. Strip bonds would be even worse.

    And the longer this low interest rate environment gets, expect the fundamental picture to get worse as the US gov keeps increasing deficit spending, and when it catches up I would definitely not be on the deflation side. The gov is borrowing at cheap rates, increasing its debt, and short-term interest rates are so low they could 5x and still be in the range of normal.

    I am not thinking today or tomorrow, but the environment in unsustainable and sometimes it takes some time for people to wake up.

    If the only arguement that can be used for deflation is the bond market, there is no argument. You need to try something else.

  18. Anonymous

    When is troll boy going to cover his short trade in stocks, or did I miss something?

    I don’t recall him mentioning it, and the way he likes to babble, I’m sure he would have said something.

  19. Justin

    I’ve said this before but all you have to do is look at the structure of the market to determine what the real threat is. If the dollar goes on to make new lows and the bond market ends its 30 year bull market it’s inflation, otherwise we are still in a deflationary environment. It’s that simple so guessing whether the Fed will print or not is just a coin toss. You can come up with a million reasons either way why this or that will happen. Personally I believe the Fed has less power to destroy the currency than most people believe. Look at the strongest third party in politics right now, the Tea Party. They are all about government spending restraint. It’s hard to see an out of control printing press with that type of political movement brewing. I’d at least wait for another big market collapse so the government at least has a reason to do something, if they did it right now they would look insane since they have already been saying we are in a recovery.

  20. Anonymous

    Keys,

    I think we all understand what happens to fixed-income investments in an inflationary environment. It’s bad. Which is why the bond market is the argument (as well as the labor market) for deflation right now.

    Describing what might happen (inflation will wipe out bonds) doesn’t really bridge the gap from what is happening (bonds are bid). If I hear you right, your position is essentially that bonds are a bubble. Very possibly, but that’s usually when the Keynes line about irrationality and solvency is trotted out.

    Interesting to note that equity yields seem to be getting competitive with bonds. Strange times indeed.

  21. Anonymous

    As a result of this site, I’m making my second purchase of gold today.

    I thank those that have provided so much information.

  22. Gary

    Justin,
    Tell me anyone you know, Tea party, democrat, republican or independant that would complain about getting a check from the government.

    The government started by giving the checks to the banking system, and people are complaining about that, but if need be they could hand them out to everyone and I think I’m a good enough judge of human nature to say with complete confidence that no one will complain πŸ™‚

  23. Keys

    My point about bonds is simple. The yield is too low to be justified in any risk-averse environment, deflation included.

    If you believe in deflation, your cash holdings will do most of the work to increase your purchasing power. Why would anyone lock in a bond purchase at a couple %, instead of holding cash? Not worth the risk, since there are tons of other risks out there. Heck even opportunity cost is one. Even if we have deflation, bonds are still in a bubble. Unlike stocks, bonds can only go higher if we believe in negative interest rates at this point. There is no place but down for these things. At least with oil at 145, GS could say 250, 300…whatever, but with bonds, they can’t go up higher.

    So if you argue deflation, stop using the bond market is my point. Give me something else.

  24. Anonymous

    To be honest, Gary, I actually do think the Tea Party would complain. The notion of government blanketing the landscape with free money would probably stick in the craw of what is largely a libertarian movement, albeit one that struggles for coherence at times.

    Anyway, be careful out there. Troll predicted (among other things) the miners would roll over today. πŸ˜‰

  25. Gary

    Do you think they would then send their check back? πŸ™‚

    If you answer yes to that one then I have some ocean front property here in Vegas I’d like to sell you.

  26. Anonymous

    I’m sure they would not. πŸ™‚

    But the more serious point is that they represent a strain of political resistance to the project being undertaken in the first place.

    Fiscal restraint, particularly now, doesn’t strike me as particularly inflationary.

  27. Anonymous1

    Keys said: “Look the quick and easy answer is that people are irrational. Who in their right mind would ever accept 1%, 3%, or 5% in a long-dated bond”

    Japanese Investors have for over a decade had 1.5% long bond rates….. and their debt-to-GDP numbers are worse than the US. Should Germany and Japan have lower rates than the US? No. The most popular trade in the world is “sell US bonds, rates have to go up.” Yet everyone continues to be wrong. Expect to see the 30 year at 2.5% in your lifetime.

  28. Keys

    Anon1,

    Just because people are dumb enough to keep buying stuff doesn’t make it smart. 2.5% yield, okay! If that were to happen, things would be even worse. Stupid is stupid. If bonds go even higher, and hence rates lower, all we are doing is going from insane to f*cking insane. Either way not a justification for deflation; use something else.

  29. Anonymous

    Keys,

    Low bond yields aren’t a justification for deflation, they are a consequence of it.

    Since you don’t seem to like hearing about the bond market, what is your view on the inflationary signals (or lack thereof) emanating from the labor market.

  30. Anonymous1

    Gary said “the Fed can add as many 0’s as they want and they can easily print whatever amount of money it takes to offset money supply destruction.”

    Then why haven’t they? Total debt in the US is still contracting even AFTER factoring in the 1-2 trillion in increased debt the past two years from the public sector. Just look at the Z1 report.

    Money is not moving because demand is not there. They could print $10 trillion – but if the money does not move – it will not matter. If they sent each American $10,000 – most of that money would go to deleverage debt – not buy. The bond market is right on this one. 2.5% 30 year rates will be here in our lifetimes.

  31. D

    whatever the case may be i know private equity investors aren’t touching companies right now because we can’t discount future earnings potential and the asking-price of would-be sellers is in the sky.

    i also know that in some states the property taxes exceed the funding cost on real estate, so…

    i also know that in DC the government IS actually slashing programs to cut/redistribute money.

    it’s also a fact that every tax payer will see a significant tax increase come 1/1/11: incomes, entitlements, dividend, capital gains.

  32. Anonymous1

    Keys –

    Not worth the risk? A 2.5% long bond yield is a 30% principal gain from here.

    Well worth the gain from a “risk-free” (term used lightly) investment.

  33. Anonymous

    Do Not buy here!!!!
    This is not a good entry point.
    Wait for the big kabash soon.
    You guys need to have a little patience here.
    You hair-trigger buyers beware.

    troll

  34. Anonymous1

    Troll –

    Gold has MAYBE room down to 1150 which is the 200 day MA……. I think I’ll look to start scaling in to more.

    60% gold and 40% cash………

    Need to get that to 75/25 soon. 1150-1160 is the spot.

  35. Anonymous

    Sounds like a good plan to me. Lets be quite honest here as I have said this before. I am long term bullish on gold. There are many ways to position oneself for the coming bubble blow-off in gold.
    I just happen to be short for now..
    I will be taking the shorts off soon I hope and then probe the long side. Just not yet.

    troll

  36. Anonymous

    All this inflation/deflation talk is making me sleepy. You guys are gonna force me to take my nap early today if you keep it up. πŸ™‚

    Can’t we all agree that whether we have inflation or deflation, gold is a long?

  37. Anonymous

    Scaling in at 1150 is a good plan to you? This can’t be the same troll who shook his angry fist at the world and confidently predicted all gold longs would be puking their bullion to him at 1000.

    Just as well. That other guy was a bore.

  38. Anonymous

    today is FIRST POSITION DAY for the gold contract; the shorts have until 5:15pm (or whatever it is in gary’s time πŸ™‚ to kill as many contracts to the downside as they can.

    i don’t think the low is in yet and we will be about $20 lower later today.

    –time zone guy

  39. Anonymous

    gc is 1165 right now which means 1145 is target; that should be the low;

    -time zone guy

  40. Justin

    Gary,

    People will of course accept free government money if they start sending it out. Heck, I even got the $8000 new buyer credit. I sold my house in 2006, rented for 4 years, and became a “new buyer” 6 months ago. What a joke, but if they want to make a good deal on real estate even better I’ll take it.

    But right now the average American is struggling with a debt problem, so it’s all on the government to create this inflationary holocaust people are worried about. Right now people in general are carrying around wheelbarrows full of IOUs instead of wheelbarrows full of cash.

    I think the Anonymous poster made some good points about Japan. Obviously by taking cues from price action in Japan’s markets, an investor would have avoided believing in inflation there even with their government going into deep amounts of debt in an attempt to solve the problem. I suggest traders here do the same thing, take cues from the market to figure out what the problem is. The bond and currency markets will tell you when there is a problem.

  41. Daniel

    7.29.2010
    This whole Inflation/Deflation Bond Prices argument is rampant in the investment community. thought I would pass this along. My bet is with the Austrian Economist.

    The 10 Year Yield Bet

    Economist David Rosenberg and investor Marc Faber have wagered a bottle of scotch whisky on whether U.S. 10-year Treasury yields can go lower than 2 percent:

    “If I lose the bet, I buy him a bottle of Cutty Sark, and if I win, I want a bottle of Dalwhinnie”

  42. Anonymous

    Beanie posted this exact same post on his site.

    Where’s the proof that deflation has been stopped?

    Where’s the proof? There is no proof. We certainly DO NOT have inflation and the outlook from the Fed on inflation is decreasing at a decreasing rate.

  43. Gary

    Gary_UK here again.

    Just taking a moment away from watching the markets remarkable strength. And preparing for the next leg down in Gold…hell, I might even short it to hasten it’s fall, just for kicks.

    Goldbugs never hear of Japan then Gary?

    Another amusing post from you, I am gradually realising you are a nutty goldbug, pure & simple.

    The bank of Japan has been printing money over the past 15 years, see if you can work out whether they’ve had deflation or inflation?
    To do that, first take your head out of the sand.

    I’m not going to waste my time explaining why that is, but do some reading, you’ll work it out. For Japan, now read THE WHOLE WORLD.

    Goldbugs, crazy little guys, I do love you all.

  44. knifecatcher

    For me to buy the deflation theory one would have to explain how Ben could have stopped the worst deflationary spiral in a mere 9 months and you will have to explain to me how deflation can possibly survive another bout of free money

  45. Keys

    Pointless for me to continue to argue at this point.

    If you truly believe rates will go to 2%, go for it. But you have become a risk-seeker (gambler) at this point. You are buying your 2004 house for 300k, knowing that you can’t afford it, and only hope to flip it to another guy for 400k. The deck of cards will fall. I am not interested in short-term trades without fundamentals attached to them. Eventually you will lose with strategies like that. I hope Joe public and Sally outsider keeps buying them bonds, the quicker the long-term rates get to 0%, the quicker that last guy will say “what the heck am I doing”, and then the last guys will lose their shirts. Everybody thinks they can get out in time, but when everybody sells at the same time, its not pretty.

    I am joining nap boy now…

  46. Justin

    Where is the evidence that Ben stopped the market collapse? How about low prices stopping a collapse. That is the only thing that ever stops crashes. Banning short selling and all other sorts of gimicry does not stop crashes. Bernanke is almost a mythical figure to a lot of people it seems, but I think in reality he just doesn’t have the power that most believe.

  47. Anonymous

    From propaganda channel CNBC:

    “Stocks erased gains Thursday after a Fed official said the central bank may have to take the crisis-era measure of buying government debt if prices stay too low for too long.”

    So that’s who’s buying this crap! Sure, rates might go lower if Ben Shalom Bernanke keeps the shells moving fast enough, but either way gold is going much, much higher.

    Nap boy retiring for a few hours, long gold, and resting easy.

  48. Anonymous1

    Keys said -“I am not interested in short-term trades without fundamentals attached to them.”

    So you obviously have some type of model that tells you where rates should be based on fundamentals, so I ask, where should rates be? Based on your fundamental analysis, you are doing the hardest thing in trading and calling the bottom in rates.

    Here is some flipper math for you. Japan has WORSE fundamentals than we do, and for us to get to their level of interest rates, long bond prices would have to increase OVER 100%….. and then stay there for 11 years.

    We don’t have a bubble in bonds yet son. When everyone HAS to own them, and CNBC talks about it being the only good investment, then you can get short them. Until then, 96% of investors hate them.

    That smells like higher bond prices to me.

  49. Anonymous

    We now have Wrong-way UK, as well as wrong-way TK.

    Keep laying out those shorts, fellas, you might even be right for a couple days.

  50. Justin

    Who knows where prices would or would not have gone without QE. The fact that stocks dropped 70% in a matter of months was probably a good reason for a rebound though.

  51. Anonymous

    A 70% drop is a good reason for a rebound, but a 550-handle, yearlong rebound suggests more than just a relief of oversold conditions. Something fundamental shifted, I believe, whether it was Fed easing, emerging market resurgence, or some combination of a hundred different factors.

    The Fed might be over-credited as you suggest, Justin, but they still pull the strings on the world’s reserve currency. I think the response had quite a bit to do with the rebound.

    As for what effect it will continue to have, all we can do is wait and see.

  52. Anonymous

    Gary_UK’s post might have coincided with the market’s LOD. If he has the power to make gold fall by entering his own short, I admire his plate discipline.

  53. Frank

    I wonder how many times that I need to repeat this, Japan never increased its money supply significantly over the past 18 years. Look at the data.

    What Japan did do was follow standard Keynesian deficit spending, which was funded by internal bond sales at very low rates.

    Ben Bernanke does not share the Japanese inhibition to destroy the currency if necessary.

  54. Anonymous

    Wrong way UK said,
    “hell, I might even short it [gold] to hasten it’s fall, just for kicks.”

    Go ahead. If the results are anything close to the way you schooled the stock market, I’ll be able to retire in 2 weeks. LOL!

  55. LowTax

    I tried to answer Justin and the other deflationists in the last post but blogger ate my post.

    This idea of using bonds as an indicator of inflation in today’s market is a red herring. There are three big reasons to distrust bonds. The first is shown in this chart:

    http://blogs.ft.com/money-supply/files/2010/04/grk-govt-bds-all.png

    Notice that it only took a few months for the all-great-and-wise bond market to explode and fall apart when the shit hit the fan. Same thing could easily happen to Japan and the US in time. There are no central banks to bail us out like Greece was. We either maintain confidence in our debt Ponzi or we don’t. When we don’t, the result will be the same.

    The second reason has to do with underhandednes and mendacity. In other words: lying. The fact of the matter is that you can’t say the bond market is predicting low inflation WHEN UNCLE BEN IS BUYING UP BONDS LIKE THERE’S NO TOMORROW! He’s purposely driving rates lower and private holders are dumping into his bid. This will continue for years so the signal is tained by his filthy hands!

    The third reason is that gold IS NOT WELL CORRELATED WITH INFLATION. Yes, it spikes when inflation spikes, but more often than not it is a hedge against uncertainty and we have plenty of that today boys and girls. The banking and soverign debt systems are about as unstable as you can make them and gold will not go down until all of that goes away. Anybody willing to predict when that will be? No? I didn’t think so.

    So enjoy the bull market ride folks and be weary of bearded men telling you all is well.

  56. Rosabarba

    Thanks for the post, LT.

    I would think Greece is not a very good analogue for either the US or Japan. The latter two have power over the currencies in which they issue their bonds. Greece did not.

    I don’t think anybody is questioning the fact that the Fed is buying bonds. The question is the degree to which this ostensibly inflationary action is offset/overcome by deleveraging elsewhere in the economy. The inflationists say, You bet, the deflationists say, No way (or at least, Not yet), and so the argument comes down to which metrics you find most compelling.

    For something so dynamic and complex, there’s no lack of certainty among diametrically opposed opinions.

  57. Gary

    Anon1,
    Total debt is not contracting it is expanding almost exponentially. The governement has taken over where the average consumer left off.

  58. LowTax

    Rosabarba, I agree, we have lots of power over our currency. However, that has little to do with the underlying problems that ARE shared between us and the Greeks (as well as other indebted nations). When all is said and done, SOMEONE has to buy the massive quantity of debt we are putting out. And having control of your currency does nothing to offset the weight of that debt, UNLESSS you use it to inflate it away. Yes, we have a reserve currency, for now. But all of that stands on that single legged stool called “confidence.” Lose that, and BOOM!

  59. Gary

    We are getting off topic a bit. The question I posed is that it is impossible to experience deflation in a purely fiat monetary system AS LONG AS THE GOVERNMENT IS WILLING TO DESTROY THE CURRENCY.

    No one has bee able to refute that yet as far as I can see. Unless you can show me some way deflation can happen in the face of a government handing out free money the deflation argument just has no foot to stand on.

  60. LowTax

    Rosabarba, one more thing. Regarding the dirty signal we get from bonds, I assume by your statement that you agree that it is dirty. The only thing in question is to what degree. Given the complexity of the problem, I doubt anybody can have any serious confidence one way or the other – hence my shunning of bonds as a trustworthy signal. I don’t see the point of using it if you can’t even be sure to what degree it is tainted by the Fed.

    One other wrinkle – the bond market, both in the US and globally, is orders of magnitudes bigger than the stock market (never mind gold, that’s a drop in the bucket). All that money has to flow somewhere and it can’t go into gold or stocks without insane price pressures. That means the only game in town is BETWEEN NATIONS. When Greece blows up, people flee their bonds and go into the US’ bonds, for example. That is not a sign of deflation in the US, it is a sign of default in Greece. This leads me to believe that this is yet another form of tainting of the bond signal – fear from the outside driving our bonds lower, since the US has the biggest and most stable bond market historically. It is a refuge and profits accordingly.

    We should be very leery of simplistic measures of inflation, deflation and certainly of debt quality – it’s all up in the air right now. Which means gold will go up!

  61. LowTax

    You are correct Gary – deflation is a policy choice. I think the source of the argument is to what extent this is happening. My personal belief is that the Fed, like the Japanese, are doing a reasonbly good job of printing just enough money to offset the deflation, and not much more. That means there really shouldn’t be too much inflation for quite some time. Probably not until they try and withdraw some of it – they will do it too late and too slowly, letting inflation climb.

    The other wrinkle, I think, is that the money being pumped in does not get distributed very evenly. Since private credit growth is locked up, the money if flowing mostly through big institutions (receipients of the Fed’s buying spree) and the Government that has been shoveling out stimulus money left and right.

    It is my belief that the institutional money is flowing into stocks and other speculative “investments” and not the general economy. Hence, you are correct that those assets will continue to rise.

  62. Justin

    LowTax,

    The chart you put up is what I’m talking about. You can clearly see the trend change and that is the signal their is a problem. Until then you’re betting against the market and you are wrong and losing money.

    Gary,

    You have no absolute proof the government will print us into oblivion either. Bernanke said he would use helicopters but politicians don’t always tell the truth, do they? Remember read my lips no new taxes.

    That’s why I listen to the market and ignore everything else, including theories and opinions.

  63. Rosabarba

    LT,

    One check on the “dirtiness” of the bond signal would be dollar strength. On that score, the inflation case seems to have the edge at the moment.

    Gary,

    As a rhetorical proposition, I don’t disagree that the monetary authority has the power to destroy the value of the currency, basically by definition. The Fed has incontestably expanded its balance sheet and assumed a huge tranche of previously private debt. To say they’ve done so where the private sector “left off” implies the private sector hasn’t offset this by deleveraging, and that strikes me as the crucial question. The measure of revolving credit (credit card debt) has been contracting since the crisis started, to mention one example.

    Going forward, the question is the degree to which the Fed and Treasury will maintain and/or increase inflationary policies to overcome the forces of deflation. You have been quite clear you believe it has and/or will. Myself, it seems to me the market (which holds the only vote that counts πŸ˜‰ is still making up its mind.

  64. Anonymous

    LT’s chart clearly shows that Greek bonds were they’re greatest right before they blew up, and it was just a few months for the transition to occur. Like LT, I find that far too risky, even though Justin thinks he’ll have plenty warning.

    It appears to be an issue of different time-horizon trading.

  65. Keys

    Why would you wait and look at price action, when the fundamental story was known years in advance. Why would you stand by a life boat on the Titanic, knowing that the Titanic will sink.

    I don’t trade, so I don’t understand the in and out test with fire. (I invest, so I do put money to work) Bonds are set to explode at some point; that is all I need to know. I won’t short them, because I don’t know the timing well enough. So the rates could continue to fall, but I don’t swim when I see sharks. Get real. It’s like watching Jaws and getting pissed off with the movie, because who in their right mind would go in the water knowing people were getting eaten. Well I guess they are all in the bond market now. That is an easy bubble friends, and an easy one to avoid.

    Anon1 asked me for a number before. My guess answer is 6% give or take. If you go back in history, two factors in terms of interest rates have been observed when empires fell. Very low interest rates and very lower interest rates for war. We are going back millenniums by the way, not decades. Human nature doesn’t change. I could be wrong about 6% but something like that, but too low causes devastating effects, as we know. Too high stiffens growth.

    Getting back to Gary’s topic. The only way I could ever see deflation take hold with a Fed willing to print, is if the money that was printed never got into circulation. That would imply if the Fed gave out rebate checks, the entire society gave them right back and decided to starve instead. Or if giving corporations a chance to spend free grant money, they refused.

  66. Keys

    Why would you wait and look at price action, when the fundamental story was known years in advance. Why would you stand by a life boat on the Titanic, knowing that the Titanic will sink.

    I don’t trade, so I don’t understand the in and out test with fire. (I invest, so I do put money to work) Bonds are set to explode at some point; that is all I need to know. I won’t short them, because I don’t know the timing well enough. So the rates could continue to fall, but I don’t swim when I see sharks. Get real. It’s like watching Jaws and getting pissed off with the movie, because who in their right mind would go in the water knowing people were getting eaten. Well I guess they are all in the bond market now. That is an easy bubble friends, and an easy one to avoid.

    Anon1 asked me for a number before. My guess answer is 6% give or take. If you go back in history, two factors in terms of interest rates have been observed when empires fell. Very low interest rates and very lower interest rates for war. We are going back millenniums by the way, not decades. Human nature doesn’t change. I could be wrong about 6% but something like that, but too low causes devastating effects, as we know. Too high stiffens growth.

    Getting back to Gary’s topic. The only way I could ever see deflation take hold with a Fed willing to print, is if the money that was printed never got into circulation. That would imply if the Fed gave out rebate checks, the entire society gave them right back and decided to starve instead. Or if giving corporations a chance to spend free grant money, they refused.

  67. LowTax

    Anon, exactly right. Justin has shown himself previous to be a “trader.” I am not. I have a day job and don’t have enough time to keep a watchful eye on things. That chart shows a clear panic, massively driving down the price of bonds on a daily basis. Notice that the yield on the 2yr more than trippled in about 5 months. Justin, do you realize what kind of price action that implies?? I have no wish to use that as a signal – kind of like looking down the barrel of someone elses’ gun to see if it’s loaded. No thanks.

  68. Anonymous

    Keys said, “The only way I could ever see deflation take hold with a Fed willing to print, is if the money that was printed never got into circulation.”

    That is just what the deflationists have in mind when they see $1T of excess bank reserves parked at the Fed. If the banks can’t/won’t lend it out, the only other inflationary avenue is for the government to print and spend. It is already doing that. The question remains: Is it enough, and will they keep at it?

  69. Gary

    Why would they stop?

    They have been doing everything in their power to halt the bear. The next logical step if deflation gets a toe hold would be to mail out checks. They have already donw it twice what would make one think they won’t do it again?

  70. Keys

    Gary’s question was

    “The question I posed is that it is impossible to experience deflation in a purely fiat monetary system AS LONG AS THE GOVERNMENT IS WILLING TO DESTROY THE CURRENCY.”

    His question implied that the government will do everything in its power to destory the currency. In such an environment how can deflation exist. My answer was if and only if, as a possibilty, every single time the gov printed money and gave it to somebody they didn’t use it. Beyond that, thinking about it, the gov would have to be refused contracts from the private sector as well.

    If Ben is fixed on destroying deflation, he has all the power in the world to do it.

    If you are asking do I believe Ben will continue to do so, the answer is of course YES.

  71. Anonymous

    Justin might want to consider who is going to buy his bonds from him as well. It’s clear people are leaving that game, when several here will no longer consider the long side of treasuries, and same with the likes of Marc Faber, Jim Rogers, etc.

    Better hope the Fed is still in their buying their own paper, b/c that is about the only real buyer left. Who knows how much longer bonds rally, and I agree the odds are better that they continue higher for awhile, but when the music stops it’s only gonna be Shalom Bernanke, Bill Gross, and Justin in the room.

  72. Anonymous

    Nap boy won’t be getting long bonds. I’m not interested in catching the last 10 minutes of a decade long party.

  73. Justin

    LowTax,

    Your chart shows a massive bottoming pattern from 2002-2005 on Greek bonds, and that is where the trend actually changed. The meltdown from 08-09 caused a retest of that trend change. Clearly before the meltdown greek debt yield was trending higher.

    It all depends on your time frame and position size what you are willing to hold a trade or investment until. Basically the only reason anybody ever gets forced out of the market, is they have no concept of position size and their time frame is forever. So when the market has a periodic big swing in the wrong direction to which they are invested they panic after a huge loss, and never get back in for fear of taking a huge loss again. That’s the only way people ever get beat for good so that’s why I don’t do that.

  74. Anonymous

    Gary,

    To the question, “Why would they stop?” I suppose one answer would be politics.

    The Europeans are so politically averse to inflation they’ve opted for austerity for the time being. The congressional Republicans at least like to sound like they’re cut from a similar cloth, and if they take the House this fall perhaps they will try to follow through. The much-discussed Japanese flip-flopped throughout the 90s between stimulus and deficit fighting. Even the Federal Reserve board has its dissenters, though they’re obviously in a minority.

    Lots of Ifs, I realize. I’m not saying that how it *will* play out here, only answering your rhetorical question with a hypothetical answer. πŸ™‚

  75. Gary

    The Fed isn’t governed by political reasons. The board members aren’t placed by public election.

    The Fed mandate is to support economic growth and promote price stability. For the last 10 years they have shown they are willing to sacrifice price stability in favor of economic growth.

    Since the Fed balance sheet continues to grow by 10 billion a week it would seem they still put economic growth ahead of price stability.

    I have to say I don’t see any compelling evidence that they are all of a sudden going to reverse course after 10 years.

  76. Gary

    Hey Tim (I doubt this is the real Tim),

    I never ever short bull markets. I’ve gotten kicked in the teeth too many times to make that mistake ever again.

  77. khalid

    OMG!!!
    The mythical PPT.
    The mythical gold manipulators.
    And now we have the mythical currency manipulators at the Fed.

    Oh, BTW, the Fed does not buy “their own paper”.
    QE means they buy the Treasury’s paper.
    JUST LIKE JAPAN DID FOR SO MANY YEARS.
    And I don’t get this point of Japan somehow “internally funding” their own debt.
    America funds its debt internally as well as with foreign money. That’s a structural feature of the world financial system, also an adjunct consequence of its geopolitical might.
    Ya’ll forget this is the reserve currency. There WILL NOT be an alternative for DECADES.
    I’m not a fan of central banking or central bankers, but I think it’s goddamn hilarious that your average Shmoe thinks he can manage a monetary system, and a nation’s finances.
    And no, managing a nation’s finances is nothing like managing your personal finances.
    And it’s definitely not the hair of the dog “common wisdom” they throw at us about the deficit and national debt.
    Gary for the millionth time, government can expand credit 100% more and still not make up for the private deleveraging that’s taken and taking place. Private debt is contracting to totally negate any credit picked up by the government.

  78. Anonymous1

    LOWTAX Said: “The fact of the matter is that you can’t say the bond market is predicting low inflation WHEN UNCLE BEN IS BUYING UP BONDS LIKE THERE’S NO TOMORROW! He’s purposely driving rates lower and private holders are dumping into his bid. This will continue for years so the signal is tained by his filthy hands!”

    So if the reason rates are low is cuz Benny is buying bonds, and he will continue to do this for years…… where does that leave rates years from now?

    Fake buying or real buying – it doesn’t matter. Bonds have a bid, and as you say, will continue that way for years.

  79. Anonymous

    Reasonably good chance that the dollar index bottomed today, so the timing of this nonsensical debate is perfect.

    Bernanke may or may not be willing to destroy the currency, but he clearly does not operate in a vacuum. People don’t like having their currency destroyed and we are a long ways off from being an Argentina. Do you not understand the advantages of USD as a reserve currency?

  80. Anonymous

    Khalid likes Kool aid, and still thinks Shalom Bernanke and Timmy Geithner don’t work together.

    Shell game, Khalid, and nothing more.

  81. Gary

    Well if that’s the case then how is total debt expanding?

    Don’t forget the money drain from the real estate market has been for the most part plugged by the change in mark to market so the biggest source of deflation simply isn’t there anymore.

    You are still making an erroneous assumption (my opinion) that money supply can’t grow without credit exapansion when I’ve clearly shown that it can and has…twice now.

  82. Anonymous

    Sorry, Gary, I was a bit unclear. When it comes to politics and the Fed board, I don’t mean external politics (though I think that can have some impact), but rather politics among the members of the board. Hoening is obviously in the minority (perhaps an army of one at that level of the Fed) … the point is simply that inflation/deficit fears might stay the hand at the printing press at some point.

    Again, hypothetically. πŸ˜‰

  83. Anonymous1

    Gary Said:

    “Anon1,
    Total debt is not contracting it is expanding almost exponentially. The governement has taken over where the average consumer left off.”

    Gary, we have had this discussion before. Check the Fed Funds Z1 report:

    http://www.federalreserve.gov/releases/z1/current/z1.pdf

    Page 10 in the document which is page 17 of the report. Line 1.

    Them looks like lots of negative signs to me, even with the $1.5 trillion in government debt.

    Gotta get your facts straight before you make a claim of something as a fact.

  84. Gary

    Does anyone else find it funny that gold in a downtrend looks “terible” but the dollar in a downtrend looks like it bottomed?

  85. Anonymous

    Why was the US stepping in to buy Greek debt? How many Americans care if Greece went belly up? So why do ALL central bankers care if Greece goes down?

    Because they own you, even if you don’t know it, and it’s already one world government, save a few kinks to be worked out (forced austerity, for example, as if the average Greek or American is responsible for no-doc loans, etc)

    Khalid is watching too much CNBC! πŸ™‚

  86. pimaCanyon

    Gary,

    Thought provoking article and discussion. In the comments, you wrote “The government has been debasing the currency for 9 years now.”

    Actually the government has been debasing the currency for nearly 100 years. Nothing new about the last 9. The Fed Reserve banking system has destroyed 97 percent of the value of the dollar since its inception nearly 100 years ago.

  87. Anonymous1

    Keys said: “Getting back to Gary’s topic. The only way I could ever see deflation take hold with a Fed willing to print, is if the money that was printed never got into circulation.”

    Well my friend – it is happening and has been happening that way. The banks got billions….. yet they aren’t lending it. Corporations are sitting on MASSIVE cash holdings, yet they aren’t spending it.

    The key to Gary and all other inflationists view is whether the velocity of money picks up. If Bernanke gave each of us $1 billion in rebate checks – but we all just put the money under our mattress, would we still get the hyper inflation he speaks of? Nope. Printing doesn’t create the inflation alone. Printing that gets circulated does. As of today, that just isn’t happening.

  88. Daniel

    Anon1– that is immense pressure building up once the lending starts. gold and other commodities sniffing that pressure out already!!

  89. Anonymous1

    Gary said: “Someone needs to repost the link to the debt clock so the anon can watch debt spiralling upwards.”

    Debt clock? That shows you don’t get it Gary. That is the national public debt spiraling….. but the consumer debt clock is dropping faster. Why won’t you look at the Z1 report and admit you are wrong here?

  90. Anonymous

    “If Bernanke gave each of us $1 billion in rebate checks – but we all just put the money under our mattress, would we still get the hyper inflation he speaks of? Nope.”

    BS. Sure you would get inflation, unless you think nobody would realize it’s worthless and buy something else.
    Do you really think nobody has figured that out, and the free money isn’t finding a better home? More importantly, once the gentleman’s promise to keep it in the mattress gets broken by a few, that the damn won’t break?

  91. Anonymous1

    Daniel –

    But until it does, it’s not inflation. And it could take years, decades even.

    Again – just look at japan’s banks. All the money in the world to lend, but no one to borrow.

    America’s savings rate is now at 4% – not good for the inflationists side of the argument.

  92. Anonymous

    Yeah, the greedy banks are just holding onto that money, even after accounting rules were “relaxed” to shore up balance sheets.

  93. khalid

    NO, I don’t drink Koolaid, but I’ll tell you this.
    Paulson and Bernanke sure looked like clowns during congressional hearings two years ago. But do you know who the bigger fools and louts were?
    The congressmen, who barely have a bare minimum understanding of the financial system and of money. I include the esteemed Ron Paul and Alan Grayson.
    My point is who are we to judge Ben Bernanke and others this way, or to assume he’s the most powerful figure in the world. A figure that can “destroy” the world’s reserve currency. Who are people like the ones on this board, who think they are more intelligent or wiser than them?
    This kind of talk is as deserving of my contempt as is any conspiracy talk of the PPT or gold manipulation.
    I’m aghast that Gary doesn’t see it.
    And no, the Dollar Index, even if it does break March 2008 lows, it’s not the end of the world for the Dollar and not lending any credence to the “inflationary hypothesis”.
    Why? Several reasons:
    In March 2008 interest rates were much higher, the commoditity complex was rocketing up higher and higher, stocks much higher, central banks all over the world tightening ostensibly to nip inflation in the bud.
    So you call what we have nowadays inflation?
    I should know all this because my ass got reamed shorting the Aussie Dollar (a super risk currency) against the Yen and Dollar. As soon as I stopped my trade the commodity complex and currencies collapsed.
    Even a lot of these miners Gary talks about. Forget GDX and SLW, most of them are WAY below 2006-7-8 highs.
    A lot of those are silvers.
    So excuse me if I don’t see how current risk asset prices are indicating inflation… People are conflating a successful “price reflation”, possibly a temporary phenomenon in this cyclical bull market, with inflation, which it seems to me no one has a handle on what it actually is.
    Anyone here know the fundamentals of Ireland?
    Why the hell has Ireland NOT gone to hell in a hand basket??!!?
    Part of the reason is they belong to the EURO bloc being managed by central bankers trying to manage a currency fundamentally far worse than the USD!

  94. Anonymous1

    Anon 2:12 said: “BS. Sure you would get inflation, unless you think nobody would realize it’s worthless and buy something else.”

    Key word there is WOULD. Sure eventually you might. Eventually we will run out of oil too and the price might be $500 per barrel. Question though is will it happen in your lifetime, and if not, are you positioned for an event that you are certain of but that which may not happen in your lifetime?

    2.5% on the 30 year will happen in your lifetime. Fight the 30 year trend if you want.

    Gary always talks about getting on board the secular trend and holding on. Gold has been doing that for 9 years. Bonds have been doing it for 30 years. Why would we call for the 9 year trend to continue and the 30 year trend to end right here?

    Interesting logic if you ask me.

  95. khalid

    So re Ireland…
    Could it be that central banking actually works??? And saved that country’s ass from something that comes close to a Great Depression?

    But how come they got saved? When it’s people like us who know better than supposed “clowns” like JC Trichet and others.
    Gary is fond of talking of stimulus in the US.
    I don’t have the figures right off the bat, but Germany’s stimulus alone probably dwarfs Bush and Obama’s on a per capita basis.
    So you tell me the dollar is being destroyed.
    How come oil and copper arent’ double 2008 peak levels??
    I just don’t get it.

  96. Nap Boy

    Nap boy here chiming in. Either way, GOLD goes higher, so why all the fussin’ and a feudin’?

    Great traders take the easiest trades, leaving the need to look genius out on the curb. Somebody on this site said it perfectly today, that gold goes up with uncertainty, and one thing we definitely have is uncertainty!

  97. khalid

    Excellent point about the secular trend, Anon 2:18

    The other thing is this:
    Bonds are by no standard in a bubble. If anything people are underinvested in bonds, and absolutely HATE them, as evidenced by Keys on this board.
    No one is looking at 2.5 annualized. But they sure will if commodities collapse (contingent on bubble collapse in China), and when stocks resume the secular bear trend…

  98. Anonymous

    “Key word there is WOULD. Sure eventually you might. Eventually we will run out of oil too “

    I’d bet some greedy banker MIGHT just put that free money into something real long before we run out of oil.

    Let me ask you, how long would it take you to figure out you better put YOUR free check in something real?

    Big difference between people not wanting credit, and having free checks in their hands.

  99. Anonymous1

    khalid said: “So you tell me the dollar is being destroyed.
    How come oil and copper arent’ double 2008 peak levels??”

    Because khalid – they base everything on “it’s coming.” Everyone is a market seer and get’s certain that they know for sure what will take place, regardless of the fact that decades of history show otherwise. We all know the US is about to die, the dollar will crash, and hyper-inflation will hit……. just no one knows when.

    IT’S COMING!!!!

    BS – I know. I prefer to own gold and cash. I’m doing just fine and will do just fine no matter who wins out.

    I just don’t have the stomach for Gary’s erudite comments that all folks who think deflation is possible are idiots when “$12 trillion is sloshing around and debt is going up exponentially.”

    Those are all emotion and fear inducing statements that probably sell subscriptions and get others to become cult like followers. But they are not backed up with numbers.

    My bet – this forum thread will get taken down in the next week/months to “save space.” I showed Gary this stuff 4-6 months ago, yet those statements are all gone, and the claims remain.

  100. LowTax

    Anon says:

    “Fake buying or real buying – it doesn’t matter. Bonds have a bid, and as you say, will continue that way for years.”

    True, but when there is only one buyer, when he stops, it will go from 2.5% to infinity overnight. No thanks.

    Justin:

    If you can see a bottoming pattern in the chart of Greek bond rates, then a retest of the lows in ’08 and then trade on all that, more power to you.

    It’s not for me. I traded for 15 years using position size and proper stops, and I made a little money. But it’s a drop in the bucket compared to riding a bull. My returns on the gold bull so far have left my previous trading in the dust. If you’re good at it, go ahead and keep doing it – but most of us here at Gary’s place are long term investors who don’t trade and have no wish to.

    By the way, it would take some serious guts to take a position on the ’08 retest on the Greek chart. I don’t think I’d have the brass.

  101. Anonymous1

    Anon at 2:30 said: “Let me ask you, how long would it take you to figure out you better put YOUR free check in something real?”

    Well – if history is an example, most of the Bush tax cuts went to pay off debt. People are loaded with debt and plastic gadget junk they don’t need. In the current environment, do you think they will go buy more junk they don’t need, or pay down the debt on the junk they have so they can keep it?

    The numbers show – scenario 2 is winning.

  102. Anonymous

    Khalid,

    You think Ireland is out of the woods? Man, you better dump your cable subscription. You’ll always be late listening to CNBC puff-clowns.

    You sound like a mouthpiece for the criminals at the Fed. You must be a HUGE fan of the World Bank and IMF then?

  103. Anonymous

    Well anon1, I can assure you what everybody I know is going to do with the free money, and it’ll be a race to who can do it the fastest.

    You just stuff your’s in the mattress a few weeks and everything will be ok.

  104. Anonymous1

    Inflationists on the board keep talking about the government printing money and sending checks. I think that is funny at the moment since the world thinks recovery is here.

    Look how hard it was to get the unemployment benefits extended. Almost didn’t pass. Yet that is the equivalent of a rebate check that is ongoing. Those people are down and out, yet it almost didn’t pass. Not much appetite for rebate checks here. Will need the market to puke again before that happens.

    And a lot of good those checks to unproductive millions has been so far eh? Are those who are without jobs taking that free money and buying new IPads? Nope – they are using it to live and pay down money they owe.

    It’s a secular trend shift folks – don’t fight it.

  105. khalid

    Dude 2:37
    Read what I actually write.
    I’m not a fan of policy makers or central banking or central bankers.
    And I did not say Ireland is out of the woods. I said they got saved and didn’t go to hell in a handbasket.

    LT:
    “True, but when there is only one buyer, when he stops, it will go from 2.5% to infinity overnight. No thanks.”
    There will never be just one buyer. It’s impossible.
    It can’t be. Now I’m thinking of taking a small long term position in TLT because I see people really hate bonds at current levels.
    The world parks its money in one of two places in America, for structural reasons: Bond market, or equity market. Structural mainly means that there is only one nation in the world considered the most stable with the deepest markets that can accomodate global savings.
    If peak oil or whatever (like our mythical hyperinflation) causes a barrel of oil to hit 2,000 or 10,000 dollars, what will OPEC do with the cash?
    They will just park the cash in the USA. I don’t entertain other currencies, certainly not China’s. You can’t change the global reserve currency overnight.
    That’s not changing anytime soon. Possibly not in our lifetimes.

  106. Nap Boy

    That’s a good point. Nap Boy took his $8000 home buyer tax credit and bought extry junk silver b/c it isn’t enough to buy gold.

  107. Rosabarba

    Well, Gary, since in your post you set out to “raise some dander,” I’d say, “Mission accomplished!”

    As a comment cleaner, though, you were less successful. I suggest you start a new thread on the immigration debate. πŸ™‚

  108. Anonymous

    A reserve currency can remain a reserve currency, just not worth as much.

    If money continues to leave paper for gold or other hard assets, ALL paper can lose value even if one is more owned than the others.

  109. Anonymous

    Anyone seen or have access to data to do an overlay of the most recent and emerging bull markets / bubbles? Would be interesting to see how the trajectories line up for tech stocks vs. housing vs. gold vs. bonds all starting from time zero of their respective bull markets.

    It seems fairly obvious why one would skew their preference towards the 9-year gold secular trend vs. the 30-year bond secular trend. The longer the uptrend the more volatility and downside risk.

    I do agree some of the canonical “bubble” signs for bonds may not be readily apparent (e.g. I can’t buy a bond from a vending machine) so it’s hard to call a top just yet. But the everyperson has certainly channeled a ton of money into bonds indirectly through their own or their company’s mutual funds. Virtually everyone is taught that bonds are the “safe” and “conservative” investment. We’ve certainly had panic buying as well during the bouts of stock market volatility over the past couple of years.

    So if you believe all strong secular bull markets end in a bubble, and look at these same signs with respect to gold, it makes it a whole lot easier to buy into the long-term gold over bonds even if returns will take longer to materialize.

  110. Anonymous

    The immigration law being overturned is more proof the citizens (and any borders, not just Americas don’t matter.) It’s already one world government, just stupid Goyim don’t yet know it.

    The dollar is the one world currency for now, but that doesn’t mean it keeps it’s value.

  111. Anonymous1

    Anon at 2:54 said: “It seems fairly obvious why one would skew their preference towards the 9-year gold secular trend vs. the 30-year bond secular trend. The longer the uptrend the more volatility and downside risk.”

    In theory it would seem like that – but can you back that up with fact? If longevity of a trend means it is more risky, then should we all sell our gold and buy stocks instead? Gold is in a 9 year uptrend, and stocks are in a 1 year uptrend. By your logic then, gold is much more risky than stocks here…..

    See the error in that logic?

  112. Anonymous

    I wonder how many dollars Kim Jong Il and Hugo Chavez have printed, besides our loyal, most humble government servants?

    They sure do change the paper frequently these days with all the new security features. I wonder if those are just to instill confidence?
    When I was younger, I never bumped into or saw a fake US bill, but in the last 15 years or so I’ve run across a few. Luckily, I saw they looked funny, and asked for another. Come to think of it, they all look like funny money nowadays.

  113. Anonymous

    Well look at virtually every bull market bubble chart and see the longevity/risk dynamic at play.

    As for buying into the “1 year secular stock bull”, the operative word is ‘secular’. Stocks have been in a secular bear. Now perhaps stocks make higher highs and higher lows in near future and so we can all point back to last year as the bottom of the secular bear. I for one don’t mind waiting for that to bear out, especially when history has shown that these bull market bubbles easily run into the decades in terms of length (or 3 in the case of bonds).

  114. John V.

    Gary,
    You’ve mentioned in many nightly reports that the gold bull will most likely end in a final blow-off top. What do you think may happen to gold after that blow-off top? What level would you guess it will fall to after that?
    Thanks

  115. Anonymous

    Oh, and as Gary points I too believe secular market shifts are driven by a change in fundamentals and not lines on a chart. So in my mind it’s extremely difficult to argue that fundamentals have shifted in stocks’ favor. With respect to gold vs. bonds, current fundamentals certainly support both secular trends in the near-term, but it’s much clearer to me how the fundamental story for bonds breaks down before it does for gold. But again that’s not to say there is not money to be made riding what’s left of the bond bull, I just think it’s going to be harder to make money there than in gold over the medium-long term.

  116. khalid

    A reserve currency can remain a reserve currency, just not worth as much.

    If money continues to leave paper for gold or other hard assets, ALL paper can lose value even if one is more owned than the others.
    Reserve currency means the vast overwhelming portion of all the world’s debt is Dollar denominated. At the end of the day, you need some kind of “paper” for the global economy to keep growing.

    OK forget the above and just assume the Dollar is viewed as trash as are American long bonds or 10 Yr paper. What in the world will the EM nations do with their glut of savings? It’s insanity to buy currencies like pound or Euro, you may say. So what about the commodity currencies backed, not literally, of course, by hard assets, natural resources.
    Well let’s say you got 5 trillion in global reserves.
    What do you do with them? Buy up the world? Buy up “stuff”? Buy up American land?
    That would just be speculation. Because once something fundamental goes “bad” as it sure can in China where we’ve got a speculative frenzy in real estate going on, what do you think would happen to the value of resource commodities?
    If commodities gain 100% from here I will bet my ass the banks will stupidly start to lend against commodity related assets, and then we’d just be exacerbating current deflationary forces. Nasdaq bubble, RE bubble, commodity bubble.
    There’s only so much you can buy (and hope it won’t ever devalue) outside of Treasuries, which serve the crucial purpose of funding America.
    Also there’s also only so much you can ALLOW to sell to the Chinese and others with savings surpluses, like ports, etc. Remember Dubai got rejected by Congress several years ago. (I’m sure Dubai’s thankful the deal never went thru back then, or…. even more debt to deal with today.)
    That’s the global dilemma and the Chinese or anyone else can’t do much about it.
    That’s all “structural”.
    Who were the American geniuses who came up with this system (likely accidentally)?
    BTW, i believe the reflation trade (risk-on trade, borrow low yield currency buy anything pays better than that) since March 2009 is carry trade-related.
    I might be wrong about this carry-trade thing but in no way do I believe it’s related to inflation in any meaningful sense of the word.

  117. Anonymous

    How is it that Tim Knight is always 125% short with 200 short positions and when the market rallies he happens to be long something as a hedge. Does it mean he used 200% of his trading account to get in all the positions, longs included? I would love to be able to learn how to create extra money out of thin air as well. Can anyone teach me the secrets of Helicopter Tim?

  118. Peter Parker

    I believe in Santa Claus, but prolonged deflation is something I can’t even come close to seeing as possible.

    Dirty debate though!

  119. Keys

    If your going to quote me, take the full context of what I am saying. Twice I have been mis-quoted. Unless you want to debate the intentions of my words…yes.

  120. Anonymous

    I love the idea that people will pay down debt with any extra stimulus money. What makes one think that somebody smart enough to pay down debt, won’t instead buy some gold and bury it, being they already bailed out banksters and credit scores no longer matter?

  121. Anonymous

    Khalid says “At the end of the day, you need some kind of “paper” for the global economy to keep growing.”

    But you said it wasn’t growing. I agree the real economy is going to contract in a big way for many years, but the numbers on the paper can still have extra zeros.

  122. khalid

    But you said it wasn’t growing.
    I did say that. I just meant to say that the growth required to generate the number of jobs required is only possible with fiat.
    As opposed to currency backed by gold, say.

  123. Natanarchist

    Total reserves

    http://research.stlouisfed.org/fred2/series/TOTRESNS?cid=123

    Adjusted monetary base

    http://research.stlouisfed.org/fred2/series/BOGAMBNS?cid=124

    longer term

    http://research.stlouisfed.org/fred2/series/AMBNS?cid=124

    M2 Long Term

    http://research.stlouisfed.org/fred2/series/M2NS?cid=29

    If we ever see any of these graphs turn down, then we will know the policy is deflation. I will not be holding my breath. 6 months here, a year there or so there, all deflationary events get erased with more money.

  124. Anonymous1

    yeah – well you are presenting only one side of the debate…… how about pulling up the velocity charts and the loan outstanding charts.

    Money is there – but it’s not making it in and around the economy.

    It’s a straw man argument.

  125. Anonymous

    Argentinians have been through several currency crisis, so they also feel the dollar is a reserve currency.

    Then again, they realize paper can get cut by 2/3 of it’s value overnight, so don’t count on them holding dollars dear for too long, once people start heading for the exits.

  126. Anonymous1

    Sure it can….. and right now it’s going down.

    As I said before – money printing can go on to where we print $10 trillion an hour.

    But until it makes it into the economy, it won’t matter.

    End demand has to be there, and right now – it’s not. Until employment strengthens – it won’t.

    Stagflation is the most likely outcome in all of this. Rising prices for real life and falling asset prices. Which is why gold and cash or gold and treasuries is the only strategy that will work in the short and intermediate term.

    No one talks about stagflation. It is the hardest environment in which to invest.

  127. Gary

    Whew I knew this was going to be a spirted debate when I posted it but that just made me dizzy***

    John,
    When the bull comes to an end it can and will drop drastically. All parabolic moves do. Then we will have an echo parabola that will fail to make new highs. After that a long slow bear market for many decades.

  128. Anonymous

    I don’t think stimulus works, but looks like we need more. I’ll welcome the free money, and buy more gold (or junk silver).

    Pay down debt? Nahhh. I might even whack up my credit cards to buy yet more REAL money, then tell the banks to stuff it.

    I’m done paying off the debt criminals made in my name, just like the tens of thousands of people squatting in homes they defaulted on.

  129. Anonymous1

    Your scenario only exacerbates the problem. Each dollar that was lent was levered up from the fractional banking system. Each dollar that doesn’t get paid back – has a multiplier effect in the opposite direction, just as the money when it was created had a multiplier effect to the up side.

    Gold and cash or gold and treasuries. 2.5% long bond will be seen in our lifetimes.

    So will 2/1 Dow/Gold ratio.

    Gotta own both. Its the ONLY two markets that have been in long term (more than 5 years) bull markets.

  130. Anonymous

    Anon1 says “It’s a secular trend shift (paying down debt) folks – don’t fight it.”

    And the next secular trend shift is realizing only a fool would pay off loans made from criminal bankers that have already been made whole.

    It doesn’t have to be gold, but intelligent individuals are buying real assets of all kinds (PM’s, but also tractors, agricultural land (hobby farm prices have not lost a dime in this Depression), etc…you get the picture. Best part is smaller farms are still cheap!

    “value” will NOT be found in the paper dollar, my friends.

  131. Anonymous

    anon1 says “Your scenario only exacerbates the problem. “

    Agreed, but it’s not my problem any longer, is it? I have the gold, silver, and food.

    Gold might not go up in nominal terms, but what does that really mean? I only care about real value, and gold along with the others mentioned above are fine by me. 10 years ago I wouldn’t entertain these thoughts, now I’m committed. Secular change, anon1, don’t fight it.

  132. LowTax

    I can’t keep up with all the comments! πŸ™‚

    Khalid, you are correct, the US bond and equity markets are king – I noted that myself in this same thread. You are also correct regarding the advantages of a reserve currency – no argument on either count. Also, I do not hate bonds in any way, i just see more risk there in the long run and prefer the returns of gold and miners.

    As to the stability of our bond market, my argument continues to be that we remain the best looking horse in the glue factory. I personally believe we have crossed the threshold of debt sustainbability / that we have borrowed more than we can pay back. I am including the off-balance sheet debt of SS/Medicare/Medicaid, etc. Given the amount of deflation that is occuring, we will remain stagnant for many years to come – the Fed will simply keep us afloat, they are unlikely to ignite hyperinflation.

    However, this will only work for so long because the outlays are growing far faster than the receipts and this is going to get much worse in the near future with state and local governments about to collapse. When that much debt starts to hit the auctions, the only way rates can remain the same is if the Fed becomes the primary buyer and renders the rest almost meaningless. For all intents and purposes, they will be the only buyer and at that point our reserve currency status will collapse. Other nations are not forced to use the dollar, they can make deals today with almost any currency or real asset. Dollars just make it easier.

    I think you are correct in stating that this will take some time, but I’m not willing to wait around for it to happen given the instability of the system right now. Besides, lookin at the 30 year bond price (only one I have handy) you’ve gained about 16% over the last three years, plus a little bit of yield. Meanwhile, I’ve made 41% on SLW, my main holding. Bonds? Eh.

  133. Anonymous1

    Anon at 5:12

    Not fighting anything. I have owned gold probably longer than you have been investing son.

  134. Anonymous

    You like to resort to calling others “son”, as if you know them.

    With nobody feeling the desire or need to pay taxes, even less with jobs to do so, where does that leave your bonds?

    There’s no fool like an old fool, son!

  135. Anonymous

    And just b/c you owned gold throughout the 80’s and 90’s doesn’t mean you’re a genius, if you know what I’m getting at.

  136. Anonymous

    I’m just pulling your chain, anon1, and it’s all in good fun. Hope you feel the same. Might as well speak while free speech is still kind of allowed. πŸ™‚

    Seriously, my best advice is to get a small farm and learn to grow/raise your own food, while putting the rest in metals like gold, silver, and lots of lead. No matter inflation/deflation, I’ll be fine and happy. Even if gold goes to $50,000 oz, I realize I’ve really only preserved purchasing/trading power. The time to “get rich” has long since passed for anybody walking today.

    Anyway, have a good night, and I wish you well.

  137. Anonymous

    dollar index / gold
    As Gary has noted, these things move in waves. It is about time for a DX up and GLD down move.

    As for the debt clock, how does that stack up against the GDP/Debt ratio of Japan? Ah, that’s right, Japan has a much higher relative debt than we do. Despite this, the yen continues to strengthen. Look at the yen chart for yourself!

  138. Anonymous1

    Anon at 6:09

    Au Contraire – where does that leave your hyper-inflation scenario in the face of that kind of debt destruction.

    Think next time before spouting

  139. Natanarchist

    Anonymous1:

    The point of the long term graph is to show that the MS and Base will continually go up. Yes velocity is low, and its not the first time. The point is all deflationary events will be met with more money.

    As for stagflation, that was my prediction on this blog 3 years ago, and I said the same thing again last week. Its like the 70’s again..we are living our last 30 years in reverse..haha..

  140. Anonymous

    One element of the deflation effects highlighted in this debate seems to be dollar destruction through debt default. I think a little empirical deduction should be applied to that argument.

    In order to destroy a dollar thru debt default you need to earn the dollar lend the dollar and then fail to recoup that dollar some times after a lengthy struggle to exhaust all options – eg restructuring. Dollar destruction thru debt default is a hard and lengthy process.

    Dollar creation to cause inflation to counter the above deflation requires: a printing press – (lots of) paper and ink, the willingness to print. This looks to me a very easy process.

    Finally, you can keep printing indefinitely but there is only so much debt to destroy – so given the above, deflation caused by dollar destruction is easily countered by the printing press.

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