Milton Voosht

Why I See Long-Term Deflation

in real terms, true, demand is falling, so prices should fall under a system of fixed money supply. But if the money supply increases dramatically (acknowledging velocity of money issues, of course) , prices can nonetheless rise. The authorities are intent on increasing the money supply and thus creating inflation in order to bailout the banks and the homeowners (this will make the banks profitable allowing them to play the yield curve and lower the real debt load on homeowners, because their salaries and eventually their house values will rise relative to their debts, which are mainly fixed).

Most developing countries have probably spent half or more of the last fifty years in inflationary periods, even when in real terms their economies were often shrinking. Zimbabwe, anyone? If Zimbabwe and many other developing economy know how to create perpetual inflation, despite often shrinking economies, why should the US have a problem doing so?

There is no trick to creating inflation, the myth that it is difficult seems to be perpetuating through the memosphere because people don't understand basic economics. There is no limit to the money supply under a fiat monetary systems, if the authorities increase the money supply by sending out checks or buying up assets (which amounts to the same thing) using monetization (ie issuing new money out of thin air) prices would eventually rise, and the changeover can happen quite suddenly.

There really is no trick to this, yes demand is falling relative to supply, so prices must fall in real terms, but if we double the amount of money outstanding or triple it or more, then prices will rise again, same laws of economics apply. If there are more units of currency outstanding, then each good and service in the economy is worth that much less in terms of currency outstanding.

The government can create an infinite supply of money, there is no technical limit, if the government only has the will they can always create inflation by sending out checks or buying up assets. See Bernanke "Deflation, making sure it doesn't happen here"

Is It Time to Buy Gold?

It's pretty simple, actually. Inflation will come soon. Why? Because inflation is not complicated to create. It is easy if a central bank only has the will. What is the easiest way to creat inflation? Send checks in the mail to all taxpayers and monetize the discount. If every taxpayer in the country received a check for a thousand dollars, would that create inflation? What about ten thousand? A hundred thousand? This is not rocket science. You might say that they would never do that, but they already did last year and you dear reader likely received a check. Why cant they send bigger checks? No reason why they cant. Inflation is the goal here, its lowers the real debt load for consumers and homeowners, bailing out the banks, and allowing the banks to quickly recapitalize. But for it to work, the inflation must be a surprise, otherwise it gets priced into rising interest rates. So the best way to go about this for an entrepid central bank is to decry imminent inflation and at the same time inflate, by buying up assets, or sending checks, or recapitalizing banks or all of the above. Inflation is inevitable. And soon. Gold, being of fixed quanity relative to new supply must therefore go up, just like all other products of fixed supply and even most goods and services once surplus inventories are drawn down. So forget about gold as a currency for the moment, forget that every person on the planet already has some (or their girlfriend does, likely because they gave it to her). Forget that it is the only asset already sitting in the hands of nearly everyone on the the planet, the vaults of the central banks, and the investment accounts of the super rich. Even if gold does not return to its role of a fixed store of value officially, money supply relative to gold quantity guarantees that it must go up. And if the breakdown of Bretton Woods results in great currency disorder, the possibility exists that it will be remonetized. Which would push it up even more. Remember, most of human history and almost all of Western history, gold has been money(sometimes silver too). Every time people tried to use fiat, it failed. Now it is failing again. It is likely though not inevitable that countries will do what they usually do when fiat fails and return to gold. In the meantime, find me something else that is in fixed and limited supply, easily divisible, transportable and accepted everywhere as being good as gold (wait, it is gold!?) and I will safesure my purchsaing power there. So let me know. Thanks.