Consider_this

Why Oil and Gold Are Headed Much Higher

The market determines how much ammo the Fed have.

The interest rate available to buy treasuries is the signal the world uses to determine how much it believes the US can sustain in future debt load.

When that belief ends, interest rate will be forced up, and the FED runs out of ammo.

If the economy is still not in job-gains, income gains mode by then, this will reset interest rates on ARMS just when the populace can least afford it. The mother of all default will be here. GD here we come.

Why Oil and Gold Are Headed Much Higher

SWRichmond,
"You can try to be academically clever about it and say "we're just printing enough to replace that which was destroyed" but that doesn't change the fact that you can't print value."

We were at 1USD=1CAD; *THAT* was when there was too much money in the system. That's the old story.

Now we're at the stage that there's not enough money in the system to repay the debts being settled. That's today's story.

When the debts are settled, it's not that someone "hold"s the cash, ready to spend and dilute your "value" -- we just went from negative to less negative. At least the system still runs. That's next year's story.

At some point all the debts/loans/excess liquidity provided by the Fed will have to be vacuumed back, but only when the economy resumes it's upward climb. That's the story in 5-10 years. The acts of Fed today will act as a drag in future.

That's assume the Fed succeeds. Else, it'll exhaust it's ability to buffer the debt's damage, and we'll end up with GD.

How is this inflationary? How is this printing value? This is smoothing out the curve. The "value" is already spent. The "saving power" is coming from future gains. Fed isn't creating or destroying anything.

Once the Fed exceeds the market's perception of future gains, it effectively runs out of ammunition to save us. Interest rates on treasuries will climb. If by then we're not out of the woods with deflation yet, god help us.

Why Oil and Gold Are Headed Much Higher

silkarsie:

No doubt there is some manipulation the the oil and gas, but you can only use that argument so far. Not the dramatic falls we've seen.

The real story to Oil/Gas has been the decline in DEMAND as the global economy slowed down. Go look at any oil/gas demand chart or the miles driven by car owners. That's your main driver for the price declines. Demand is dropping, like a rock.

Supply will take some time to come down, in the meantime, because it's not that quick for supply to react, and demand is still *falling*, price has to fall.

Changing margin requirements will only tie up more capital in the oil markets. It will actually make hedging and price discover more expensive (as you need to put more money in, money that have interest rates cost to it) and make it less liquid.

Notice during all the climb UP or DOWN, we don't have rationing or refinery halting production -- that's precisely because of the extra liquidity provided by the oil market itself.

Is it perfect? No. Can it be manipulated? Yes. Look at some days when it can go 10% in a day and that's someone big doing some trade; but over time, it does discover the real price.

Can houses be made artificially high? Yes, but not over the long run.

Why Oil and Gold Are Headed Much Higher

I meant

"Now imagine what's "draining" the money from the economy *WASN'T* a prior interest-rate mistake, but actually what's happening today"

in my reply to Iknoknot.

Why Oil and Gold Are Headed Much Higher

SWRichmond,

Another way of saying this in case you didn't understand:
"Trying to print capital debases all the money that currently exists and dilutes capital."

Capital was already destroyed during the bubble years. Money is in the process of vanishing because the debts have to be settled/recognized.

Fed did not destroy these. It's trying to spread out the pain so that it's not acutely on a few companies and instantaneous. It will not be able to remove all pain, but if it can spread it out over years, and leave a system in pain but still functioning, then we have hope of recovering eventually.

The alternative is systemic failure and say bye bye to all your precious capital anyway.

"You are the one who posted this gem earlier in this thread: "When someone borrows $100 and spends it, that $100 is no different that if someone earns $100 and spends it.""

As far as the economy is concerned, it doesn't care. How much of the salary that was paid to you borrowed? Did you know? Does it even matter to you? How much of Walmart's INCOME is due to borrowed sources? Does it even matter at checkout cashier to Walmart?

Debts and leverage affect FUTURE money availability, not when they're being created.

Why Oil and Gold Are Headed Much Higher

SWRichmond:
"This is a ridiculous statement that totally ignores the way money and leverage work. It completely ignores the realities of what capital is; money can be printed, but capital cannot. Trying to print capital debases all the money that currently exists and dilutes capital."

The Fed's goal is price stability, not stability of the value of savings or the value of capital.

You need to understand that these action is merely to help the market get over it's extreme movements.

Fed's action today is NOT the cause of the mess we're in right now, the inconsiderate buildup of debt was the cause, not Fed's action today. The Fed is fighting it.

If you're angry because what the Fed is doing will erode the value of capital or the value of savings, I got news for you: Your "value of capital" was already toast anyway when the world went into over-spending mode the last decade.

You think your savings means anything when it has already been lent out, spent, and is now sitting around as a bad debt on some books?

If the banks are forced to *RECOGNIZE* everything instantly, say good bye to your so called "capital" and "savings". You/your company/your paycheck will go to a bank and get NOTHING out. If this point hasn't hit home with you with so many bank failures, fund failures and emergency withdrawals, queues at banks, etc -- NOTHING WILL.

Besides, what the Fed is doing is minuscule compared to what's happening in real life with the debt mountains. Picture putting out a fire with a cup. It has very limited leverage.

The danger/anger/fear shouldn't be that we'll get massive inflation, it should be that the Fed will lose this fight and we get massive DEFLATION.

The money's that seems to be "pumped" into the system cannot be viewed independently. It would seem huge. But looked collectively at the debts we're talking about, then it would seem small/minuscule.

I would be too happy if the Fed can actually trigger inflation, that would actually signal they're winning, but all their kitchen-sink action only revealed how much bigger the fires are and the market still go down.

Dow was 14000 in beginning of the year, it's now 8000 -- and the crisis wasn't a DOW over valuation to begin with, it was houses.

Why Oil and Gold Are Headed Much Higher

iknowknot:

"when the sideline cash jumps back into these markets (houses/stocks) become valuable again, won't the printed money still be out there?"

The answer is maybe.

Currently, there are a lot of bad debt on the books of pretty much everybody; banks, companies, funds. Think of these as negative money, or anti-money. You may ask how did we get these negative money: the answer is that these are money already spent in the last 5 yrs. Already used to build something or purchase something. That thing is probably some home or car or merchandise. So the money is already spent, but the debt are unpayable and is acting as a drag on the economy.

When the fed is pumping cash into the system, what they're doing is trying to reset the equation, so that these bad debts don't end up clogging the system. Another way of thinking about the same thing, is that the Fed is assuming the debt on behalf of these bad books, not all of it, but enough of it that the system itself still works.

In that perspective, it's not like there's a lot of extra cash sitting around, printed by the Fed. Instead, the books were negative to begin with, so we're adding enough so that they're not so negative anymore.

Don't forget, there is a LOT of debt out there, far greater than what the Fed can reasonable do, but what they're trying to achieve is to prevent the complete seizure of the system, not total destruction of the debts.

Thus, only if they did overshoot it, would there really be extra cash to cause inflation. There's a time lag effect, as well as a market psychology effect too, so it is possible to overshoot it, but to claim that we'll DEFINITELY go into hyper mode ignores the fact of the real size of the debt mountain, as well as the Fed's eventual reversal of it's monetary policy into tightening mode.

Another way to think about the same thing:

Pretend we *DON'T* have a crisis. Everything is net "neutral" in terms of economy. Now pretend the fed is doing exactly what it is doing now.

Of course we'll put in so much money into the system, that inflation will go through the roof, market interest rates will fly.

Then the Fed will be forced to "rein in" the crazy rates/inflation and raise Fed interest rate. The net effect is to drain the money from the economy.

Now imagine the two steps are done in reverse. (A)Draining money first, then (B) pumping money later... In that scenario:

You can't claim that the pumping of the money in step (B) itself is inflationary. The bigger picture is that the pumping of money is merely offsetting the over-drain in step A. Precisely because there's a time-delay depending on how things act, it is possible for B to catch up and cancel out the deflation before it has a chance to make a lasting effect on the economy. In a perfect scenario, the world would know no better and only experience minute fluctuations, but that never happens.

Now imagine what's "draining" the money from the economy was a prior interest-rate mistake, but actually what's happening today, where huge mountains of debts are being destroyed due to a different factor. Thus, you get into today's scenario.

So to claim that there will be a mountain of cash sitting around to inflate Gold/etc again, is not understanding how much bad debt we actually are dealing with that in the first place.

Japan tried to print like crazy, *WAYYY MORE* than what the Fed is doing today, several *TIMES* their GDP, and they weren't able to stop deflation that is still occurring 18 years into their deflation.

Why Oil and Gold Are Headed Much Higher

This is exactly like trying to drive a huge vehicle, with high latency gears/wheels where the wheels are stuck on conveyor belts running backwards.

If the conveyor belt wins, we go backward towards deflation.

If the wheel wins but with too much momentum, we fly forward towards hyperinflation.

If the wheel just barely balances out the conveyor, we'll get equilibrium or slow growth.

Why Oil and Gold Are Headed Much Higher

All the comments are making it WAYYYYY more complicated than it has to.

This is the story:

If the Fed can print money fast enough and have it reach the pockets of main street at the same rate that money is vaporizing from the economy due to debt collision, then we have equilibrium and nothing happens.

If printing money to reach pockets is slower than evaporation, we get depression; how much less determines how deep depression.

If printing money to reach pockets is somehow greater than evaporation, we get inflation; how much inflation determine how hyper it is.

IMHO, too many unknowns for anyone to make a reliable prediction. Plus, the whole situation is dynamic and not static: we can reach depression side for a few months, the reach inflation side for a few months, then equilibrium and back to depression, etc.

To predict HYPERINFLATION or GD is to know in advance whether the force of debt is greater than the force of printing press and cash distribution network.

Also remember, it is possible that we get neither GD or HYPER.

Why Oil and Gold Are Headed Much Higher

Goldbugs constantly point out the flaws in fiat; usually because of those very well written, half-fear-mongering and half-truth articles written by (guess who?) people who want to sell you gold.

I will ask you to consider the flaws in a true gold-based economy as well.

It's too inflexible. If everything has to have a fixed basis on a finite resource, it forces an "order of wealth" on nations and economies; and forces old ideas/economic-structu... to be cemented in place and be unable to change. It also encourages war (economic as well as physical) as opposed to economic cooperation.

Take an example, in a gold-backed world, if a nation owns 90% of the world's gold supply, what incentive does it have to lend or cooperate with the rest of the world who has 10%? The gain/loss risk is simply too great. It'll be best to sit around in their own 90% of gold and not budge in any economic discussion/negotiation...

In the real world, economic activity is too often a non-linear and non-associative activity. You don't always have gain/loss, you can often have gain/gain or sometimes loss/loss. Fixed-asset currencies instantly discount these other outcomes and everything is a gain/loss in that lens.

Also gold-backed economy isn't immune from the flaws of fiat either: What happens if we discover a rich gold vein? What happens if a space shuttle discover one of our planet's moon is full of gold and is mine-able? You're right back to fiat now, plus with a significant portion of global effort directed to gold mining activity (which is wasteful and doesn't help feed anyone)

I call it progress to go to fiat. Does it have flaws? Of course, as goldbugs will tell you what they are, but it's flexibility is also real.

In a fiat world, savings is not absolute (not cast in gold/weighed in gold); But think about it, so is the real world. I cannot claim my savings is sacred no matter what happens to the world's production capacity and economic situation. The ultimate indicator of my savings and wealth has to be balanced against what the rest of the world can produce/do and what resource we have.

In the scenario where I'm the nation with 90% savings ownership, you bet I am still incentivized to help my fellow nations because my savings can disappear due to default or inflation if my fellow 10% gets desperate enough. In this view, the rich is scared of the poor, and the poor is scared of the rich -- exactly how an economic cycle should be.

One can absolutely spend too much, but one can also save too much! The flexibility with fiat is to be able to adjust the system so that the it benefits savers or spenders AT THE RIGHT TIME and encourage the correct behavior for the good of the economy.

If we have too much savings, or if we have too much production; then we need to punish hoarding of money by debasing interest rate.

Alternatively, if we have too little savings, or if we have too little production, then we need to punish non-important expenditures by raising interest rate.

The system itself isn't broken; the important thing is who's at the helm.

After the world's economy recovers (and it will recover), we'll be studying the reason why our system is so flexible in schools in years to come.

Why Oil and Gold Are Headed Much Higher

SWRichmond:

"They are clearly indicating their intentions to do whatever it takes to zombify the banks and prevent insolvency from being declared. Suspending mark-to-market is another in-your-face telltale sign."

I would be more than happy if they're able to inflate us out of the problem, but I seriously doubt they can.

Now the other reason why you'll want to horde gold, beyond inflation, is a complete collapse of something big: Governments, Currency itself, Civilizations (I would question whether owning gold helps here) or the world banks.

Based on your assertion (that I agree) that it's very obvious that the world's government will not let it end where we'll have no banks (coordinated bailout, guarantees, sometimes even at the risk of the country's GDP itself) or no currency (coordinated interest lowering, coordinated money swaps, continued support for some kind of stable currency system); *PLUS* the result that we're looking at massive cutbacks/budget crunch/job reduction; i.e. all forms of deflation. I question WHY you think Gold will go up.

Unless your assertion fails, that the govt cannot maintain banks, currency or governments -- but the path to government failure isn't instant, it is paved with drastic steps like massive selling of all govt gold (happening now), outlawing PM trading and confiscation BEFORE the government will fail. What makes you think Gold ownership will survive that?

Plus, if the government ultimately fails, then police, military and law fails. The word "own" in the term "owning gold" may need to be enforced by your own private army. Who's going to respect your property rights?

Why Oil and Gold Are Headed Much Higher

SWRichmond,

I never said we can run long on credit or that credit spending is a good thing for USA. I just wanted to assert the matter of fact that we're in a deflationary period because credit destruction = money destruction as far as the economy is concerned.

Thus, it's not entirely a sure bet that we're going to face hyperinflation or deflation. It depends if mountain of debt wins this economic battle, or the govt's massive inflation/bailout.

On the chance that this coin toss actually lands on the EDGE OF THE COIN, we may get a smooth recovery without either case; but I've pretty much dismissed that at this point. It'll take someone with almost prescient knowledge to achieve that, and we don't have someone with that much intelligence leading.

On the question of "Where does one hide his stored value when this is happening right before one's eyes?"

My bet is, a well diversified portfolio. Not the ones a stock analyst will recommend you, but the kind that looks like this:

1. Some farmland/seeds, even small farm animals
2. Some way of being off the grid, electrically, water wise and sewer wise
3. Some gold and guns, ammunition
4. Some stocks in companies that are deflation resistant: have no debt, ideally pharma or utilities.
5. Some stocks in companies that will benefit if hyperinflation occurs: companies that have a front-of-the-economy-t... EPS, low ideally-fixed-cost structure and a high long term debt load that's not maturing soon: Oil and Gas, Google, etc.
5. A little of each major currency or diff countries govt bonds
6. Go into training/certification to maintain your job competitiveness or switch industry.

But these will only work if you already have a significant sum of wealth to preserve; otherwise you're better off just staying "moderate" and not take extreme positions and ride out the whole thing.

Why Oil and Gold Are Headed Much Higher

SWRichards:

"OMFG. You lost me right there dude. After that, if you told me 2+2=4 I'd check it myself."

Looks like I have to explain the economic effect of borrowed money.

The two sources of money, whether borrowed or earned, does not matter to the retailers, and ultimately, both acts "like cash" in the real economy.
(Scenario 1)

Person A borrows $100, spends it at Walmart.

Person earns $100, spends it at Walmart.

Walmart as a result have income of $200, which makes it happy and employs $180 worth of people/jobs. It's stocks make $10, and Govt taxes make $10. This is why economy will end up with $200 worth of "money effect".

Notice the essence of story stays the same if I change the story this way:
(Scenario 2)

Person A borrows $100, pays person C (to do some work). Person C earned $100.

Person B still earns $100 (lets say from completely non-borrowed sources; say he/she is a local farmer and grew food on farms he already own 100% with no borrowed capital).

Walmart would still get the $200 income in the end.

Now lets focus on credit destruction cycle:

Scenario 1:
A year passed,

Person A loses ability to borrow the next $100 this year.

Person B still earns $100 (lets assume this, in the real world, in a recession, Person B's earning may be impacted)

For no fault of it's own management or marketing or sales team, Walmart will find that it earns $100 compared to $200 last year. (50% decline) It's horrified, but is now forced to lay off it's employees. Probably from $180 worth of jobs to like $90 range. Government taxes go down to $5; Stocks earnings down to $5.

This is why credit destruction causes actually destroys money in the economy. Another way of thinking the same thing, is that the $200 dollar year is actually borrowing demand/income from the future, but that still doesn't change the fact that *now we're in this future*, there's less money in the system!

This is why, with less money, how can we support a commodity bubble? Answer is only temporarily: As long as rate of increase fear in is > than rate of decrease of money. If at any time we've maxxed out fear, or the decrease of money is high enough, even PM must go down.

Also, I don't buy the argument that COMEX isn't accurate. Buying something at retail is always more expensive (sometimes significantly so, esp for something that needs expensive security to tow/store) than buying something at bulk. And if it's so lucrative as you say, you can always hold a COMEX contract to maturity and receive the actual delivery; the big boys can MAKE money off it if what you say is true.

What's likely happening is that the real PM price is indeed declining at the wholesale level, and retail is just behind (using stocks bought when the price was high).

Why Oil and Gold Are Headed Much Higher

GoldWize:

1) Massive increase in money supply
+
2) Lowered interest rates
=
3) Increased inflationary pressures.

= investors running to gold and oil as a safe haven.

**********************...
You're forgetting the other side of the equation:

A. We're facing massive de-leveraging of investments and credit destruction:

When someone borrows $100 and spends it, that $100 is no different that if someone earns $100 and spends it. Now if both exists in the economy, then we have $200 in the economy. Now we're running the credit cycle in reverse, (above story: think -$100 as its either paid back or lost from someone's capital) as the credit crisis unwinds -- *SO MONEY IS BEING DESTROYED*

Just to re-emphasize how big the leverage is, it's not just the obvious capital ratios of banks or investor's margins, but the hidden leverage in mortgages (currently imploding), derivatives (up to 54 trillion CDS nominal value, 600 trillion nominal if you include all derivatives). These are already on-course to vaporize trillions of capital and credit in future.

B. Printing money recklessly (or outright monetizing debt, or other unsterilized Fed activity) is actually: DEFLATIONARY in the current environment! No doubt we have a lot of defaults on our hand, but don't forget we also have a huge mountain of performing-debts being serviced!! If you print money recklessly, even people/companies who could currently service their debt will find their interest rate going through the roof and cause a new wave of defaults-- now you've magnified the deflation effect multiple times!

C. We're losing jobs! Earning power of people are going down! This is very deflationary and there's less money in the economy as a result.

So your (1+2+3) have to compare to my (A+B+C) and then we'll know who wins.

Couple of food for thought:

1. Japan, an economic superpower, couldn't inflate itself out of a deflationary spiral lasting 14 years (and counting).

2. If governments could regulate their way out of deflation, then histories would never have deflations. See 1830, 1870, 1930, examples in France, China, etc.

3. This is a massive collision of two awesome powers of the world:
Government on one side, and mountains of debt on the other. (many times the world's GDP). It's like a battle of Superman vs XMen. Don't rule out either side until the end. I wouldn't be so sure to place my bets if I were you. The swings and dislocations will be huge as this unravels.

People who're "SURE" about hyperinflation, please be aware of these counterpoints before you take a position. As always, take extreme caution in this environment.