lance sjogren

The End of Gold, Part Three

And the other thing:

I do not buy the notion that deflation is an inexorable process that can't be stopped.

Print enough money and I guarantee you will lick deflation.

And, I also guarantee that the Fed will do that up the yin yang, and we will have heavy inflation, not deflation.

The End of Gold, Part Three

By the way:

Inflation will also help with the housing crisis. Real estate prices are still too high. But it is a big problem for them to fall in nominal dollars because it puts more and more people underwater on their mortgages.

If you devalue the dollar, however, then real prices for real estate can continue to go down even as nominal dollar prices of real estate stabilize.

Basically, it means you are devaluing the debt held by creditors until it has declined enough in value that the debtors are able to make the payments on their mortgage and other debt.

And creditors should be happy as well, because they are better off getting 50% back than losing 100%.

The End of Gold, Part Three

I don't subscribe to the hyperinflation scenario.

I believe the US will devalue the dollar about 50% over the next 4 years, and then work extremely hard to strengthen the dollar so that it doesn't fall further.

A 50% devaluation of the dollar will wring out a lot of excesses in the system. The mountain of debt of different forms (govt, consumer) that the US currently has is far too big to pay off. There are two alternatives, one is for the US simply to default, the other is to devalue the dollar to the point where our debt burden becomes manageable. The latter is the obvious course. That is the cours the treasury and Fed are embarked on even if they probably would never say so and may not even be aware that is what they are doing.

Gold should do well over the next 3-5 years. Once the dollar stabilizes at its lower level then gold will probably flatten out or decline slightly.

The Coming Dollar Deflation

I guess I would concur though that the US dollar is not toast.


It is more like an uncooked piece of bread sitting in an electric skillet that is shut off but connected to a timer.

The big question is, what is the setting on the timer? March 2009? July 2011? December 2008?

The Coming Dollar Deflation

And I wouldn't agree with Bailey's contention that there is a "consensus" that the dollar is toast.

However, the view does seem to have more adherents than before. Some of the "don't worry be happy" CNBC crowd who used to seem to think that ludicrous claims by economic officials that we have a "strong dollar policy" constituted an actual "strong dollar policy". Some of those commentators seem to have snapped out of their stupor.

The Coming Dollar Deflation

Some have pointed out that we currently are seeing a bubble in US Treasuries.

I would say it probably is more appropriate to say that the US dollar is in a bubble.

It has been pointed out by those who have studied bubbles that one characteristic of a bubble is for the asset in question to be rising in price even in the face of a flood of supply on the market. Exactly what is happening with US dollars, and perhaps most other fiat currencies.

The dollar bubble will pop. I do not know when, but I would expect sometime next year.

The Coming Dollar Deflation

By the way: Mr. Bailey contends there is a shortage of dollars.

Yes, but we have big printing presses and it costs very little to print more dollars.

And our economic officials have made it clear that they will print as many dollars as it takes to see that we do not have deflation.


As people often point out- you can print dollars (or any fiat currency for that matter) but you can't print oil or gold.

The Coming Dollar Deflation

The doomsters missed the short term bubble in the dollar, no doubt about it.

However, long-term, despite deleveraging I believe the US will still be up in its eyeballs in debt.

Are the trillions of dollars in T-bills held by foreign governments being deleveraged? Of course not. They expect to be paid back on those at some point, and in US dollars.

And the national debt. Can we just deleverage it away? I think not.

Yes perhaps some debt will get wiped out, some mortgage debt and so forth.

Still, in my opinion, the US will still be up to our eyeballs in debt. And we are taking on a lot of new debt in order to jumpstart the economy.

Can this debt ever be paid back in STRONG US dollars? I sincerely doubt it. But it can be paid back by printing US dollars.

I believe the doomsters got the US dollar right on the long-term, but were spectacularly wrong on missing the fact that short-term people would cling to US dollars even though they know that long-term they are going to be trash.