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The Screaming Fundamentals For Owning Gold

Updated 2014 edition
Friday, April 4, 2014, 9:44 AM

This report lays out the investment thesis for gold. Silver is mentioned only where necessary, as a separate report of equal scope will be forthcoming on that topic. Various factors lead me to conclude that gold is one investment that you can park for the next ten or twenty years, confident that it will perform well. Timing and logic for both entering and finally exiting gold as an investment are laid out in the full report.

The punch line is this: Gold (and silver) is not in bubble territory, and its largest gains remain yet to be realized; especially if current monetary, fiscal, and fundamental supply-and-demand trends remain in play.

Introduction

In 2001, as the painful end of the long stock bull market finally seeped into my consciousness, I began to grow quite concerned about my traditional stock and bond holdings. Other than a house with 27 years left on a 30 year mortgage, these paper holdings represented 100% of my investing portfolio. So I dug into the economic data to discover what the future likely held. What I found shocked me. It's all in the Crash Course, in both video and book form, so I won't go into that data here; but a key takeaway is that the US is spending far more than it is earning, and supporting that gap by printing a whole lot of new money.

By 2002, I had investigated enough about our monetary, economic, and political systems that I came to the conclusion that holding gold and silver would be a very good idea. So I poured 50% of my liquid net worth into precious metals, and sat back and waited.

So far so good.  But the best is yet to come... unfortunately.  I say 'unfortunately' because the forces that are going to drive gold higher in current dollar terms are the very same trends that are going to leave most people, and the planet, much worse off than they are now.

Part 1: Why Own Gold?

The reasons to hold gold (and silver), and I mean physical bullion, are pretty straightforward. So let’s begin with the primary ones:

  1. To protect against monetary recklessness
  2. As insulation against fiscal foolishness
  3. As insurance against the possibility of a major calamity in the banking/financial system
  4. For the embedded 'option value' that will pay out handsomely if gold is re-monetized

Monetary Risk

By ‘monetary recklessness,’ I mean the creation of money out of thin air and the application of more liquidity than the productive economy actually needs. The central banks of the world have been doing this for decades, not just since the onset of the 2008 financial crisis. In gold terms, the supply of above-ground gold is growing at  1.7 % per year, while the money supply has been growing at more than three times that yearly rate since 1960:

Over time, that more than 5% growth differential has created an enormous gap due to the exponential 'miracle' of compounding.

Now this is admittedly an unfair view, because the economy has been growing, too. But money and credit growth has still handily outpaced the growth of our artificially and upwardly-distorted GDP measurements by a wide margin.  Even as the economy stagnates under this too-large debt load, the credit system continues to expand as if perpetual growth were possible.  Given this dynamic, we continue to expect all the resulting extra dollars, debts and other assorted claims on real wealth to eventually show up in prices of goods and services.

And since we live in a system where money is loaned into existence, we also have to look at the growth in credit, as well.  Since 1970 the US has been compounding its total credit market debts at the astounding rate of nearly 8% per annum:

This desperate drive for continuous compounding growth in money and credit is a principal piece of evidence that convinces me that hard assets, of which gold is perhaps the star representative for the average person, are the place to be for a sizeable portion of your stored wealth.

Negative Real Interest Rates

Real interest rates are deeply negative (meaning that the rate of inflation is higher than Treasury bond yields). This is a forced, manipulated outcome courtesy of central banks that are buying bonds with thin-air money. Of course, the true rate of inflation is much higher than the officially reported statistics by at least a full percent or possibly two, and so I consider bond yields to be far more negative than your typical observer.  Historically, periods of negative real interest rates are nearly always associated with outsized returns for commodities, especially precious metals. If and when real interest rates turn positive, I will reconsider my holdings in gold and silver, but not until then. That's as close to an absolute requirement as I have in this business.

Dangerous Policies

Monetary policies across the developed world remain as accommodating as they’ve ever been. Even Greenspan's 1% blow-out special in 2003 was not as steeply negative in real terms as what Bernanke engineered over his more recent tenure. But it is the highly aggressive and ‘alternative’ use of the Federal Reserve balance sheet to prop up insolvent banks and to sop up extra Treasury debt that really has me worried. There seems to be no way to end these ever-expanding programs, and they seem to have become a permanent feature of the economic and financial landscape.  In Europe, the equivalent is the sovereign debt now found on the European Central Bank (ECB) balance sheet.  In Japan we have prime minister Abe's ultra-aggressive policy of doubling the monetary base in just two years.  Suffice it to say that such grand experiments have never been tried before, and anyone that has the vast bulk of their wealth tied up in financial assets is making an explicit bet that these experiments will go exactly as planned.

Chronic Deficits

Federal fiscal deficits are seemingly out of control and are now stuck in the $1 trillion range. Massive deficit spending has always been inflationary, and inflation is usually gold/silver friendly. Although not always, mind you, as the correlation is not strong, especially during mild inflation (less than 5%). Note, for example, that gold fell from its high in 1980 all the way to its low in 1998, an 18 year period with plenty of mild inflation along the way. Sooner or later I expect extraordinary budget deficits to translate into extraordinary inflation.

Banking System Risk

Reason #3, insurance against a major calamity in the banking system, is an important part of my rationale for holding gold.

And let me clear: I’m not referring to “paper" gold, which includes the various tradable vehicles (like the "GLD" ETF) that you can buy like stocks through your broker. I’m talking about physical gold and silver because of their unusual ability to sit outside of the banking/monetary system and act as monetary assets.

Literally everything else financial, including our paper US money, is simultaneously somebody else’s liability. But gold and silver bullion are not. They are simply, boringly, just assets. This is a highly desirable characteristic that is not easily replicated.

Should the banking system suffer a systemic breakdown, to which I ascribe a reasonably high probability of greater than 1-in-3 over the next 5 years, I expect banks to close for some period of time. Whether it's two weeks or six months is unimportant; no matter the length of time, I'd prefer to be holding gold than bank deposits.

During a banking holiday, your money will be frozen and left just sitting there, even as everything priced in money (especially imported items) rocket up in price. By the time your money is again available to you, you may find that a large portion of it has been looted by the effects of a collapsing currency. How do you avoid this? Easy; keep some ‘money’ out of the system to spend during an emergency. I always advocate three months of living expenses in cash, but you owe it to yourself to have gold and silver in your possession as well.

The test run for such a bank holiday was recently tried out in Cyprus where people woke up one day and discovered that their bank accounts were frozen. Those with large deposits had a very material percentage of those funds seized so that the bank's more senior creditors, the bondholders, could avoid the losses they were due.

Most people, at least those paying attention, learned two things from Cyprus:

  1. In a time of crisis those in power will do whatever it takes to assure that the losses are spread across the population rather than taken by the relatively few institutions and individuals that should take the losses.
  2. If you make a deposit with a bank, you are actually an unsecured creditor of that institution; which means you are legally last in line for repayment should that institution fail.

Re-monetization Potential

The final reason for holding gold, because it may be remonetized, is actually a very big draw for me. While the probability of this coming to pass may be low, the rewards would be very high for those holding gold should it occur.

Here are some numbers:  The total amount of 'official gold,' or that held by central banks around the world, is 31,320 tonnes, or 1.01 billion troy ounces. In 2013 the total amount of money stock in the world was roughly $55 trillion.

If the world wanted 100% gold backing of all existing money, then the implied price for an ounce of gold is ($55T/1.01BOz) = $54,455 per troy ounce.

Clearly that's a silly number (or is it?). But even a 10% partial backing of money yields $5,400 per ounce. The point here is not to bandy about outlandish numbers, but merely to point out that unless a great deal of the world's money stock is destroyed somehow, or a lot more official gold is bought from the market and placed into official hands, backing even a small fraction of the world's money supply by gold will result in a far higher number than today's ~$1,300/oz.

The Difference Between Silver and Gold

Often people ask me if I hold goldandsilver as if it were one word. I do own both, but for almost entirely different reasons.

Gold, to me, is a monetary substance. It has money-like qualities and it has been used as money by diverse cultures throughout history. I expect that to continue.

There is a slight chance that gold will be re-monetized on the international stage due to a failure of the current all-fiat regime. If or when the fiat regime fails, there will have to be some form of replacement, and the only one that we know works for sure is a gold standard. Therefore, a renewed gold standard has the best chance of being the ‘new’ system selected during the next bout of difficulties.

So gold is money.

Silver is an industrial metal with a host of enviable and irreplaceable attributes. It is the most conductive element on the periodic table, and therefore it is widely used in the electronics industry. It is used to plate critical bearings in jet engines and as an antimicrobial additive to everything from wall paints to clothing fibers. In nearly all of these uses, plus a thousand others, it is used in vanishingly-small quantities that are hardly worth recovering at the end of the product life cycle -- so they often aren't.

Because of this dispersion effect, above-ground silver is actually quite a bit less abundant than you might suspect. When silver was used primarily for monetary and ornamentation purposes, the amount of above-ground, refined silver grew with every passing year. After industrial uses cropped up, that trend reversed, and today it's thought that roughly half of all the silver ever mined in human history has been irretrievably dispersed.  

Because of this consumption dynamic, it's entirely possible that over the next twenty years not one single net new ounce of above ground silver will be added to inventories, while in contrast, a few billion ounces of gold will be added.

I hold gold as a monetary metal. I own silver because of its residual monetary qualities, but more importantly because I believe it will continue to be in demand for industrial uses for a very long time, and it will become a scarce and rare item.

NOTE: PeakProsperity.com reserves its deeper analysis for our enrolled members, which is usually contained in Part 2 of our reports. Given the importance and widespread interest in this particular topic, we are exercising the rare exception to make Part 2 (below) available to the public.

Part 2: Supply & Demand Are Shockingly Out Of Balance

Gold Demand

Gold demand has gone up from 3,200 tonnes in 2003 to 4,400 tonnes in 2013, and that's even with a massive 800 tonnes being disgorged from the GLD tracking fund over 2013 (purple circle, below):

(Source)

Note the dotted red line in this chart: it shows the current level of mine production. World demand has been higher than mine production for a number of years.  Where has the additional supply come from to meet demand?  We'll get to that soon, but the quick answer is: it had to come from somewhere, and that place was 'the West.'

A really big story in play here is the truly historic and massive flows of gold from the West to the East, with China being the largest driver of those gold flows.

China

Alasdair McLeod of GoldMoney.com has assembled the public figures on China's cumulative gold demand which, notably, do not include whatever the People's Bank of China may have bought. Those are presumably additive to these figures unless we are to believe that the PBoC now purchases its gold over the counter and in full view (which they almost certainly do not).

Using publicly available statistics only, it's possible to calculate that in 2013 China alone accounted for more than 2,600 tonnes of demand, or more than 60% of total demand or, as we'll soon see, almost all of the world's total gold mine production:

(Source)

Of course China has a lot of money to spend, a long and comfortable relationship with gold as a legitimate asset to hold, and has to be very pleased by the repeated bear raids in the western markets that drive the price of gold down, even as gold demand has surged to record highs as a consequence of these lower prices.

Of course the big risk in all that Chinese demand for gold is that China may stop buying that much gold in the future for a variety of reasons.

One could be that the Chinese bubble economy finally bursts and people there no longer feel wealthy and so they stop buying gold.

Another could be that the Chinese government reverses course and makes future gold purchases illegal for some reason.  Perhaps they are experiencing too much capital flight, or they want to limit imports of what they consider non-essential items.

Who knows?

I do know that Chinese demand has been simply incredible and, keeping all things equal, I expect that to continue, if not increase.

India

India, long a steady and traditional buyer of gold, saw so much buying activity as a consequence of the lower gold prices that the government had to impose controls on the amount of gold imported into the country, even banning imports for a while:

(Source)

Central Banks

Another factor driving demand has been the reemergence of central banks as net acquirers of gold. This is actually a pretty big deal. Over the past few decades, central banks have been actively reducing their gold holdings, preferring paper assets over the 'barbarous relic.' Famously, Canada and Switzerland vastly reduced their official gold holdings during this period (to effectively zero in the case of Canada), a decision that many citizens of those countries have openly and actively questioned.

The UK-based World Gold Council is the primary firm that aggregates and reports on gold supply-and-demand statistics. Here's their most recent data on official (i.e., central bank) gold holdings:

(Source)

Note that the 2009 data is lowered by slightly more than 450 tonnes in this chart to remove the one-time announcement by China that it had secretly acquired 454 tonnes over the prior six years, so this data may differ from other representations you might see. I thought it best to remove that blip from the data. Also, the data for 2012 and 2013 must also be lacking official China data because the last time they announced an increase in their official gold holdings was in 2009. 

In just 2013 alone, the gap between China's apparent and reported gold consumption was over 500 tonnes and the Chinese central bank, for a variety of reasons, is the most likely candidate to have absorbed such a quantity. If true, then China alone increased its official reserves by more than the rest of the world combined in 2013.

The World Gold Council puts out what is considered by many to be the definitive source of gold statistics, which are the source data for the above chart. I do not consider the WGC to be definitive since their statistics do not comport well with other well reported data, but let's first take a look at what the WGC had to say about gold demand in 2013:

(Source)

The big story there, obviously is that investment demand absolutely cratered even as jewelry and coins and bars rose to new heights. And nearly all of that investment drop was driven by flows out of the GLD investment vehicle. That is, gold was chased out of the weak hands of mainly western investors and into the strong hands of Asian buyers who wanted physical bullion and jewelry.

This huge drop in total demand, led by plummeting investment demand, fits quite well with the 15% price drop recorded in 2013. So the WGC tells a nice coherent story so far.

But the problem with this tidy story is that it simply does not fit with the above data about China's voracious appetite for gold, let along India's steady demand and rising demand in Europe, the Middle East, Turkey, Vietnam or Russia.

The summary of the fundamental analysis of gold demand is

  • there is a huge and pronounced flow of gold from the West to the East
  • there is rising demand from all quarters except for the hot money GLD investment vehicle (which I have never been a fan of)
  • all of this demand has handily outstripped mine supply which means that someone's vaults are being emptied (the West's) as someone else's are rapidly filling (the East's)

Now about that supply...

Gold - Supply

Not surprisingly, the high prices for gold and silver in 2010 and 2011 stimulated quite a bit of exploration and new mine production. Conversely, the bear market from 2012 to 2014 has done the opposite.

However, the odd part of the story for those with a pure economic view is that with more than a decade of steadily rising prices, there has been relatively little incremental new mine production.  For those of us with an understanding of depletion it's not surprising at all.

In 2011 the analytical firm Standard Chartered calculated  a rather subdued 3.6% rate of gold production growth over the next five years based on lowered ore grades and very high cash operating costs:

Most market commentary on gold centres on the direction of US dollar movements or inflation/deflation issues – we go beyond this to examine future mine supply, which we regard as an equally important driver. In our study of 375 global gold mines and projects, we note that after 10 years of a bull market, the gold mining industry has done little to bring on new supply. Our base-case scenario puts gold production growth at only 3.6% CAGR over the next five years.

(Source - Standard Chartered)

Since then, the trends for lower ore grade and higher costs have only gotten worse. But the huge drop in the price of gold in 2011 and 2012 was the final nail in the coffin and resulted in the slashing of CAPEX investment by gold mining companies.

Of course, none of this is actually surprising to anyone who understands where we are in the depletion cycle, but it's probably quite a shock to many an economist. The quoted report goes on to calculate that existing projects just coming on-line need an average gold price of $1,400 to justify the capital costs, while green field, or brand-new, projects require a gold price of $2,000 an ounce.

This enormous increase in required gold prices to justify the investment is precisely the same dynamic that we are seeing with every other depleting resource: energy costs run smack-dab into declining ore yields to produce an exponential increase in operating costs. And it's not as simple as the fuel that goes into the Caterpillar D-9s; it's the embodied energy in the steel and all the other energy-intensive mining components all along the entire supply chain.

Just as is the case with oil shales that always seem to need an oil price $10 higher than the current price to break even, the law of receding horizons (where rising input costs constantly place a resource just out of economic reach) will prevent many an interesting, but dilute, gold ore body from being developed. Given declining net energy, that's that same as "forever" as far as I'm concerned.

Just like any resource, before you can produce it you have to find it. Therefore the relationship between gold discoveries and future output is a simple one; the more you have discovered in the past, the more you can expect to produce in the future, all things being equal. 

This next chart should tell you everything you need to know about where we are in the depletion cycle for gold, as even with the steadily rising prices between 1999 and 2011 (going from $300 and ounce to $1,900), gold discoveries plummeted in 1999 and remained on the floor thereafter:

(Source)

Here we see that the 1990's decade saw quite a number of large discoveries that are currently in production but which were not matched in later years. Since it takes roughly ten years to bring a mine into full production following discovery, it's fair to say that we are currently enjoying production from the discoveries of the 1990's. Future gold production will largely be shaped by the discoveries made since then.

In other words: expect less gold production in the future.

Meanwhile, there will be more money, more credit, and more people (especially in the East) competing for that diminished supply of gold going forward.

Let's take another angle on gold supply, but which circles back and supports the above chart showing fewer and smaller discoveries in recent years.

The United States Geological Survey, or USGS, keeps a mountain of data on literally every important mined substance. I think it's staffed by credible people, doing good work, and I've yet to detect political influence in their reported statistics.

At any rate, the latest assessment on gold reveals that their best guess for world supply is that something on the order of 52,000 tonnes of reserves are left. Which means that, at the 2012 mining rate of 2,700 tonnes, there are 19 years of reserves left:

(Source)

This doesn't mean that in 19 years there will be no more new gold to be had, as reserves are always a function of price; but it gives us a sense of what's out there right now at current prices.

As much as I like the folks at the USGS, I will point out one glaring discrepancy in their data as a means of exposing why I think these reserves, like those for many other critical things like oil, are probably overstated.  And that story begins with South Africa (highlighted in the table above with the blue dotted line.)

There you'll note that, at 6,000 tonnes, South Africa has the second largest stated country reserves. However, according to official South African data, they claim to have an astonishing 36,000 tonnes of reserves.  Which is right? 

Neither as it turns out.

First, the true story of South African gold production is completely obvious from the production data. It's a story of being well and truly past the peak of production:

(Source)

And not just a little bit past peak, but 44 years past; down a bit more than 80% from the peak in 1970.  The above chart is simply not even slightly in alignment with the claims of the South African government to have 36,000 tonnes of reserves. But pity the poor South African government which knows that gold exports represent fully one third of all their exports. Of course they will want to claim massive reserves that will support many future years of robust exports.

Instead, the South African production data can be modeled by the same methods as any other depleting resource and one such analysis has been done and arrived at the conclusion that there are around 2,900 tonnes left to be mined in South Africa.

(Source)

The analysis is quite sound; and the authors went on to point out that the social, economic, energy, and environmental costs of extracting those last 2,900 tonnes are quite probably higher than the current market value of those same tonnes. If they are extracted, South Africa will be net poorer for those efforts. This is the same losing proposition as if it took more than one barrel of oil to get a barrel of oil out of the ground - the activity is a loss and should not be undertaken.

For lots of political and economic reasons, however, gold mining will continue in South Africa. But, realistically, someone in government there should be thinking this through quite carefully.

The larger story wrapped into the South African example is this: perhaps there are 19 years of global gold reserves left (at current rates of production), but I doubt it.

Instead, the story of future gold production will be one of declining production at ever higher extraction costs -- exacerbated by the 80,000,000 new people who swell the planet's population every twelve months, the hundreds of millions of people in the East who enter the ranks of the middle class annually, and trillions of new monetary claims that are forced into the system each year.

And this brings me to my final point of this part of the public part of this report.

Scarcity

If we cast our minds forward ten years and think about a world with oil costing 2x to maybe 4x more than today, we have to ask ourselves some important questions:

  • How many of our currently-operating gold and silver mines, or the base metal mines from which gold and silver are by-products, will still be in operation then?
  • How many will simply shut down because their energy costs will have exceeded their marginal economic benefits?

After just 100 years of modern, machine-powered mining, all of the great ore bodies are gone, most of the good ones are already in operation, and only the poorest ones are left.

By the time you are reading stories like this next one, you should be thinking, Why are we going to all that trouble unless that's the best option left?

South African Miners Dig Deeper to Extend Gold Veins' Life Spans

Feb 17, 2011

JOHANNESBURG—With few new gold strikes around the world that can be turned into profitable mines, South Africa's gold miners are planning to dig deeper than ever before to get access to rich veins.

The plans raise questions about how to safely and profitably mine several miles below the surface. Success would mean overcoming problems such as possible rock falls, flooding and ventilation challenges and designing technology to overcome the threats.

Mark Cutifani, chief executive officer of AngloGold Ashanti Ltd., has a picture in his office of himself at one of the deepest points in Africa, roughly 4,000 meters, or 13,200 feet, down in the company's Mponeng mine south of Johannesburg. Mr. Cutifani sees no reason why Mponeng, already the deepest mining complex in the world, shouldn't in time operate an additional 3,000-plus feet deeper.

"The most critical challenges for all of us in South Africa are depths and depletion of reserves," Mr. Cutifani said in an interview.

The above article is just a different version of the story that led to the Deepwater Horizon incident. Greater risks and engineering challenges are being met by hardworking people going to ever greater lengths to overcome the lack of high quality reserves to go after.

By the time efforts this exceptional are being expended to scrape a little deeper, after ever smaller and more dilute deposits, it tells the alert observer everything they need to know about where we are in the depletion cycle, which is, we are closer to the end than the beginning.  Perhaps there are a few decades left, but we're not far off from the day where it will take far more energy to get new metals out of the ground compared to scavenging those already above ground in refined form.

At that point we won't be getting any more of them out of the ground, and we'll have to figure out how to divvy up the ones we have on the surface.  This is such a new concept for humanity -- the idea of actual physical limits -- that only very few have incorporated this thinking into their actions.  Most still trade and invest as is the future will always be larger and more plentiful, but the data no longer supports that view. 

We are at a point in history where we can easily look forward and make the case for declining per-capita production of numerous important elements just on the basis of constantly falling ore grades. Gold and silver fit into that category rather handily. Depletion of reserves is a very real dynamic. It is not one that future generations will have to worry about; it is one with which people alive today will have to come to terms.

The issue of Peak Cheap Oil only exacerbates the reserve depletion dynamic by adding steadily rising energy input costs to mix. Should oil get to the point of actual scarcity, where we have to ration by something other than price, then we must ask where operating marginal mines slot onto the priority list. Not very highly, would be my guess.

Part 3: Protecting Your Wealth With Gold

For all the reasons above, it's only prudent to consider gold an essential element of a sound investment portfolio.

In Part 3: Using Gold to Protect Yourself In Advance of the Greatest Wealth Transfer of Our Lifetime we detail out the specifics of how much of your net worth to consider investing in gold, in what forms to hold it, which price targets are gold and silver most likely to reach, and which eventual indicators (likely years away) to look for that will signal that it's time to sell out of your precious metal investments.

The battle to keep gold's price in check is truly one for the ages. Not because gold deserves such treatment, but because the alternative is for the world's central planners to admit that they've poorly managed an ill-designed monetary system of their own creation. As a result, price manipulation is an additional important factor to be aware of, and to address in your accumulation strategy.

Make sure you're taking steps today to ensure that the purchasing power of your wealth is protected, if not enhanced, when the trends identified above arrive in full force.

Click here to access Part 3 of this report (free executive summary, enrollment required for full access).

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24 Comments

sand_puppy's picture
sand_puppy
Status: Diamond Member (Offline)
Joined: Apr 13 2011
Posts: 1131
Wow. Lots of people reading your piece this morning

That's the only reason I can think of. wink

Chappy Dave's picture
Chappy Dave
Status: Member (Offline)
Joined: Apr 4 2014
Posts: 1
The Future of Gold as Money

Doesn't this future scarcity of gold argue against it's use as money? As world population increases and thus the absolute quantity of the worldwide sum of all goods and services produced, wouldn't the world money supply need to increase proportionately in order to keep prices stable?

thc0655's picture
thc0655
Status: Diamond Member (Offline)
Joined: Apr 27 2010
Posts: 1169
Welcome ChappyDave!

That issue is easily resolved by letting the price of gold float on world markets (Google "freegold"). As the price of gold rises it makes room for more currency, if that's what's really needed.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2155
Chappy Dave..

You are in luck... because what you seem to be worrying about is that Gold, in it's role as money, might undergo a bit of deflation... in other words, less Gold (money) chasing more goods.  What happens in this event, unless the central planning Alchemists decide to print more Gold... is that the buying power of a given bit of Gold actually increases.  I know this sounds weird, and the TV has been telling you that deflation is bad, but it is only bad if you are a banker who has been been pushing exponential fiat debt growth for decades on end, leading to levels of debt that cannot, will not, ever be paid.  In that case, you don't want deflation to make money more scarce... because that makes debt even harder to pay.  

Even with the amount of new Gold decreasing... Gold has the highest stock to flow ratio of any commodity.  It is the best money that can't be printed, and there is nothing wrong with prices going down a bit every year, instead of up a bit every year.. right?

http://www.zerohedge.com/news/2014-04-04/deflating-deflation-myth

Submitted by Chris Casey via the Ludwig von Mises Institute,

The fear of deflation serves as the theoretical justification of every inflationary action taken by the Federal Reserve and central banks around the world. It is why the Federal Reserve targets a price inflation rate of 2 percent, and not 0 percent. It is in large part why the Federal Reserve has more than quadrupled the money supply since August 2008. And it is, remarkably, a great myth, for there is nothing inherently dangerous or damaging about deflation.

Deflation is feared not only by the followers of Milton Friedman (those from the so-called Monetarist or Chicago School of economics), but by Keynesian economists as well. Leading Keynesian Paul Krugman, in a 2010 New York Times article titled “Why Deflation is Bad,” cited deflation as the cause of falling aggregate demand since “when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.”

Presumably, he believes this delay in spending lasts in perpetuity. But we know from experience that, even in the face of falling prices, individuals and businesses will still, at some point, purchase the good or service in question. Consumption cannot be forever forgone. We see this every day in the computer/electronics industry: the value of using an iPhone over the next six months is worth more than the savings in delaying its purchase.............

Wildlife Tracker's picture
Wildlife Tracker
Status: Gold Member (Offline)
Joined: Jan 14 2012
Posts: 403
Interesting trends in silver

Spock's picture
Spock
Status: Member (Offline)
Joined: Apr 4 2014
Posts: 2
The Future of Gold as MoneyE

That's a good question and worthy of an actual article on it. I only wish I had that much time. 

Coins, like everything else nowadays have been dumbed down over the centuries, especially the last century. Carrying a pocketful of coins now is more misery than opportunity or more technically, small coinage take more energy to carry than their energy purchasing power. Silver and gold coins of old going all the way back to the Ancient Greeks at the Dawn Of Coinage in around 500 BC allowed people of that time and later to carry a tradeable fortune in their pocket (or in their mouth as some chose to do -- just don't sneeze).

The Attica Owl which was the first important coin of its time and worth approximately 1,000 of today's dollars. It was approximately 17 grams of silver or 1/2 ounce, each one hand stamped at the mint and circulated widely around the Mediterranean for a few hundred years. Gold coins of similar weight were generally valued at 10 times that of silver (later moved to around 17 times silver, roughly matching the ratio that exist in the earth's crust.) These kinds of values existed for at least 50 generations (how far back can you trace your roots?) High-value coins worked well during this 2000+ year history, at least until their PM content became was by the government mints, while paper money of old has just historical value now and paper values have proven to always eventually collapse, over and over. The marvel is how people were talked into the current system about 100 years ago knowing that this system will also eventually fail.

Since the establishment of the Fed, the ides is that there isn't enough precious metal, or in particular, silver and gold for coins, has been pushed. The value of each coin would merely become vastly greater and make many sources of modern banking profits and government taxes obsolete, hence the gradual dumbing down of coin value expectations. People still need small coinage so copper and bronze, over the ages, have filled that niche and going forward these or other metals perhaps could undoubtedly be used for this purpose.

Bankers measure wealth in computer bits. They print on precious metals what they are worth in a vain hope to convince people that an ounce of gold in the form of a gold eagle is only worth $50. It is ironic - even funny how they put artificially low numbers on rare gold or silver coins and practically limitless numbers on valueless paper or the debased metal coins. This is to make it virtually impossible to carry large amounts of money in coins and force peoples' wealth into banks for safekeeping(?) and money movement. Even now, there exists a rare coin market that enables people to minimize the footprint of their wealth with even rarer high-value coinage. High-value coinage is better for the people than the current low-value coinage that exists now as it reflects true value rather than the whim of your treasury/fed. Just as importantly, it gives people the usually safer option of not storing their wealth in a bank where confiscation has become an ever increasing possibility. Note that money in your hand represents more value than money in a bank - especially today with negative real rates of return at banks or in t-bills.

The population of the planet increases approximately 1% per year, which coincidentally is roughly the same as the increase in above ground gold so the argument is moot a second time. The counter argument to this is that gold mines are on the decline but remember what higher prices would mean to mining output.

Normally people are told not to invest in PM's to profit, just for wealth preservation. When a market is so clearly manipulated, and pushed so low, I now buy for profit, not just wealth preservation, and I buy on margin. I think the pre-manipulation idea of not buying for profit is no longer good advice and will not be the case until the gross manipulation stops. If PM's rose to fair value, I would look elsewhere for investments (probably solar and food companies). Gold is only a Griffin good precisely because it is being manipulated. I would venture to say that at market prices there would be far far fewer buyers. Notice to Fed : you're no longer fooling anybody with your fake PM prices. Chinese are taking advantage of the Once in a Lifetime Great Western Half Price Precious Metals Sale. Bad for us but good for them or any individual with foresight.

The treasury and the fed would love for you to have low-value coin expectations. I hope these few words help raise yours. 

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QUESTION AUTHORITY?

Aloha! Questions?? 

1-Why does the US Treasury insist on pricing our gold reserves at $42.22 when all other governments use spot price?

2-From 2001-2006 unemployment rate was low and the economy was booming and interest rates were at 5%+ so why did the gold price rise?

3-Why is it prior to GLD CNBC did not care about gold?

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100% monetization of gold

Chris,

Don't you think that if gold was monetized that the entire stock of the gold in the world would be a more suitable number for calculating a gold price that would be needed to satisfy the current global money supply.  Depending where you look (amount of gold in the world) there seems to be between 155-177K tons of gold.  So in your calculation, that means that central banks hold roughly 20% of all gold in the world.  So, that would put the price of gold just over $10,000 oz., which I think is completely plausable.

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100% Monetization

mikekep wrote:

Chris,

Don't you think that if gold was monetized that the entire stock of the gold in the world would be a more suitable number for calculating a gold price that would be needed to satisfy the current global money supply.  Depending where you look (amount of gold in the world) there seems to be between 155-177K tons of gold.  So in your calculation, that means that central banks hold roughly 20% of all gold in the world.  So, that would put the price of gold just over $10,000 oz., which I think is completely plausable.

Yes, sure that makes some sense, but where would 'they' get all that that gold?

I would suggest that there will have to be some measure of buying that gold by 'them' along the way, otherwise how would they get it?

If they tried a global seizure, that would have to involve all the countries, in some sort of coordinated new world order sort of an event.  I just can't see it. 

So this leaves buying....which is what central banks have been doing, at least some recently, and I would suggest they'd have to do a lot more.    Once the holders of gold know that the central banks are trying to 'corner the market' they'll simply wait for higher prices.  After all, it's just printed out of thin air.  At some point you could see the authorities getting frustrated and attempting things like capping the price and making it illegal to trade for a higher amount.

And then after noticing that the black market for gold was still thriving, they's go for some form of confiscation which would really have to be a 'sell it to us now at this price or else!' kind of moment, complete with compliant mainstream media pumping out various forms of anti-gold propaganda like the use of gold by terrorists or whatever bogeymen du jour exist at that point in time.  

I think we here at PP will have plenty of time to step aside of the later ham-handed attempts and divert our gold holdings into different and productive assets.

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Financial War of Musical Chairs Is Underway – Here’s How to Play
What is taking place around the world these days is analogous to the children’s game of Musical Chairs.
 
Right now most everyone is happily going round and round at the beginning of the game but in their heart they all know that at at some point soon, the music will stop and that if they don’t have a chair to sit in, they will be out of the game!
 
I see Precious Metals (PM's) as being the chairs and, when the current financial music stops, those without PM's will be left holding nothing but paper money and history is full of examples of paper money suddenly becoming worthless!
 
Excerpted from my own article, which includes links to a number of backup articles, is posted here:
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SeniorD
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Have You Done A Visual Reality Check Lately?
I urge everyone to look around while asking yourself, "Am I seeing things getting better or worse?", instead of just depending upon M$M to constantly remind you that everything is just wonderful...
 
Seen from the wealthy Bankers perspective, anyone that converts flat money into PM's is their financial enemy and therefore must be publicly ridiculed, least they encourage others to do the same, because every bit of Gold the little people have is yet more Gold that they want for themselves!  
 
Another thing that these wealthy Bankers are also very concerned about the internet which they see as a two edged sword, that they must wield carefully in order to use it to increase their financial income while at the same time insuring that it is not used to organize opposition against their monitory policies.
 
 
Here are two link comments that speak to the above:
 
 
 
Excerpts from my comment posted here:
 
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Can PM's Act As Financial Insurance And If So, How?
1.)  The Global "Economy" is now but a biased shadow of what it was a decade ago as the Central Banks continue to print money overtime and enable their countries Ultra Wealthy to sell Gold using naked shorts, which has the effect of scaring small to medium investors into selling their PM's because of fear and/or need.
 
As the numbers of those with money to spend continually decline, thanks to current monetary practices, the "Global Economy" will continue to collapse, which at some point in the near future cause the current fiscal version of the fiscal-musical chairs game to end with those only holding flat money left out of PM's recovery!
 
I view PM's, like I do insurance, you purchase it because if something unexpected happens, you don't want to pay the entire bill for it yourself.  Yes, until that something happens you are paying for your insurance (think not making any money from the money invested in PM's), but that amount is small compared to what you might lose should disaster strike (dramatic loss in value of flat money) which would then require you to accept a huge reduction in the value of your portfolio.
 
What percentage of your income do you spend on Insurance?
 
 
2.)  Let us compare insurance to PM's.
 
You purchase insurance because if something unexpected happens, you don't want to pay the entire bill for it yourself.  Yes, until that something happens you are paying for your insurance (you do not make any money from the money invested in PM's while you hold it), but that amount is small compared to what you might lose should disaster strike (consider a dramatic loss in value of flat money) which would then require you to accept a huge reduction in the value of your net worth ( loss to your portfolio because you have no gains in the value of your PM's to offset the loses to your flat money.
 
What percentage of your income do you spend yearly to "own" Insurance?
 
Perhaps the same percentage should be used for your PM holdings in your portfolio!
 
Because how many readers consider having no insurance as prudent?
 
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Much More Gold To Be Found, As Soon As Its Value Rises

Spock - I'd like to mention that the Oceans of the world contain vast amounts of Gold (plus other PM's and/or Rare Earth Minerals) which are dissolved in the seawater.  This Gold can be mined (or actually filtered) from the seawater but it is now still too expensive to do so.  Note: The Koch Brothers have already experimented doing this, since they own a large business that produces filtering media.  Imagine a large floating solar powered ship that uses its electric pumps to suck up seawater that contains more than average amounts of dissolved PM's in it and then after filtering out the PM's from seawater, pumps it overboard through a pipe back into the ocean a short distance away from the location currently being worked!

As the easy to mine deposits of Gold ran out, miners shifted to more difficult/expensive to mine deposits, which made the price to mine the Gold increase, along with its value.  If traditional mining becomes hugely expensive, then at some point shifting to removing Gold from ocean water will then pencil out.

I believe that as the amount of Gold that is held by the public goes down, the likelihood of using it being used (again) as a monetary standard increases dramatically, since then those Central Banks and Governments holding most of the Gold could then make out like bandits by re-converting our non based flat money back into a currency that is actually based again on Gold and quite probably all other PM's.

I have added "quite probably all other PM's" because then Silver and the other PM's could then fill the gap if the amount of Gold is not "enough" to provide a stand-alone monetary standard.  It is also possible that in the near future that Gold is always held in vaults and only the other PM's would be "traded" since Gold's future value would make it too valuable, to be actually carried about, much like owning a very large diamond, which are only displayed and never worn in public!

BTW: Since your name is Spock, you might be interested to know that In the future, since mankind may start to mine the Moon and/or asteroids in outer space, you can be sure that if a new extraterrestrial source of any of our PM's and/or Rare Earth Minerals are discovered, the Bankers in charge of the Worlds PM's would be among the first to not only know about it but also profit from it.  This fact alone my very well be one of the most important reasons for Governments to support their space efforts, even though it would never be mentioned in M$M.

Excepts from a soon to be released article:

The Future Of Liquid And Extraterrestrial Precious Metals Or Other Commodities 

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My Blog left off after "One of the more important times"

My Blog left off after  "One of the more important times to suppress the price of gold would be when..." even though I was logged on as a Member.  Was that the conclusion of the Member's Only Report or was there some additional part of this blog that I was unable to access for some reason.  Really enjoyed this report and wanted to insure I got though all of the available info.

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Good points all. My father

Good points all.

My father wanted to take flooded mines, add acid, then plate out the pm's. This might be more efficient than just using ocean water as the solution would be richer. You can't filter it out - at least not in any way I have heard of, you need electricity to extract it but that is easily done. 

Of course, until fair market prices are allowed, this is just more science fiction.

Good luck with your article, I look forward to reading it.

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how to get money/cash/dollars when you sell your PM's

Chris,

I have about 20% of net worth in physical PM's held offshore in non-bank institutions.

I don't think I will ever liquidate any back into fiat currency, but never is a long time.

if I need to, assuming there are now capital controls, banking restrictions, etc... (which will surely come if the dollar is losing value) how will I be able to "cash in some PM's" and get currency back.  I see that as a major issue.

I know this is really hypothetical, but quite frankly I can see this scenario occuring....soon.

Nobody is talking about this issue.

Thanks for all you do. Dave

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Capital Controls

buckeye78 wrote:

Chris,

I have about 20% of net worth in physical PM's held offshore in non-bank institutions.

I don't think I will ever liquidate any back into fiat currency, but never is a long time.

if I need to, assuming there are now capital controls, banking restrictions, etc... (which will surely come if the dollar is losing value) how will I be able to "cash in some PM's" and get currency back.  I see that as a major issue.

This is not an unrealistic or overly hypothetical concern.

When you are most going to want access to your PMs is when the world financial system is most likely to be dysfunctional if not inoperative.

I always recommend that people keep the bulk of their 'insurance gold' in the same country in which they live.   you might keep a little outside to spread things around and diversify somewhat, but as far as I am concerned, by the time my domestic gold is no longer providing the security I seek, I really doubt that I'll be in any mood or position to strike off to a different country because everything will be so uncertain.

As always, be sure to do your planning and preps a year early, not a day late.

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Jim H wrote:

Jim H wrote:

http://www.zerohedge.com/news/2014-04-04/deflating-deflation-myth

Submitted by Chris Casey via the Ludwig von Mises Institute,

The fear of deflation serves as the theoretical justification of every inflationary action taken by the Federal Reserve and central banks around the world. It is why the Federal Reserve targets a price inflation rate of 2 percent, and not 0 percent. It is in large part why the Federal Reserve has more than quadrupled the money supply since August 2008. And it is, remarkably, a great myth, for there is nothing inherently dangerous or damaging about deflation.

Deflation is feared not only by the followers of Milton Friedman (those from the so-called Monetarist or Chicago School of economics), but by Keynesian economists as well. Leading Keynesian Paul Krugman, in a 2010 New York Times article titled “Why Deflation is Bad,” cited deflation as the cause of falling aggregate demand since “when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.”

Presumably, he believes this delay in spending lasts in perpetuity. But we know from experience that, even in the face of falling prices, individuals and businesses will still, at some point, purchase the good or service in question. Consumption cannot be forever forgone. We see this every day in the computer/electronics industry: the value of using an iPhone over the next six months is worth more than the savings in delaying its purchase.............

See once again I find myself unpleasantly surprised by the conclusions over at Mises.org. I really do not understand how any thinking person can publish this stuff. Let’s break this down:

And it is, remarkably, a great myth, for there is nothing inherently dangerous or damaging about deflation

Really? See this goes against everything I thought I knew about economics. Although no one likes inflation, and I am certainly not advocating inflationary monetary policy, but it has to be said that deflation IS damaging, and likely catastrophic in a wage labor economy.

Why?

Because economies search for equilibrium, equilibrium in prices, but more importantly equilibrium between aggregate demand and production capacity, e.g. employment. If aggregate demand gets out of step with production capacity- people get fired. People that are fired cannot exchange wage labor for wages, and therefore cannot eat or support their families.

Keynesian Paul Krugman, in a 2010 New York Times article titled “Why Deflation is Bad,” cited deflation as the cause of falling aggregate demand since “when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.”

Yes, this is right- and a well-known and long recognized implication of deflation. People don’t buy depreciating assets as a general rule, preferring instead to wait until price stability occurs for what I hope are obvious reasons.

But now we get to what has to be the very pinnacle of utopian blindness:

Presumably, he believes this delay in spending lasts in perpetuity. But we know from experience that, even in the face of falling prices, individuals and businesses will still, at some point, purchase the good or service in question. Consumption cannot be forever forgone.

No, consumption cannot be forever gone. But the jobs- in real time- can. The very instant aggregate demand drops off, the layoffs begin. What advise does Mr. Casey offer workers at Caterpillar for example when they lose their jobs due to a drop off in production? Shall they wait two years until the appropriate market signals occur that justify rehiring? In the meantime how do they eat? And if this occurs not just in one company affecting a few hundred workers, but across many industries affecting hundreds of thousands, if not millions of workers?

How it is that such simple, common sense connections can be fastidiously overlooked, time and time again? The article goes on to “debunk” the myth of declining profit margins, stating that production costs drop too in deflationary periods- true enough. But not not one word about the catastrophic impact on job loss- not one. But of course lots of crowing and lamenting about a gold standard and “sound money”

I wonder if it has occurred to any of these “analysts” and newsletter carnival barkers that however distasteful the Federal Reserve’s actions are, and they are distasteful, that they are far better than the alternative? Has Mr. Casey or anyone at Mises.org ever considered the widespread calamity that would ensue if the vagaries of the so-called (wage labor) free market were left to their own devices? For example, if home prices were to drop precipitously have they considered the massive layoffs that would occur near instantaneously in the construction (and finance) job market?

Of course not, THAT does not sell newsletters.

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Deflation nation?

Deflation...lovely in theory but as DK describes, terrible in practice...as in beyond bad. The usual suspects support it though. The salt of the earth, the independent iconoclasts, the self made visionaries...and a whole lot of dim bulbs who haven't managed to sort out what it would mean for them if the financial wheels ground to a hault. 

Inflation is nasty but a severe deflation would be nastier, by far. Much of the U.S. already looks like a rotting third world country.  If real inflation doesn't  kick in soon, the U.S. will have the strongest currency on the planet, with the social climate of Haiti. 

The typical pro-deflationist loves to clear his throat, puff up like a rutting frigate bird and declare that a good depression would "clear out all the dead wood'! Well, bring it on. A good depression and a starving populace with pitchforks would do some serious brush clearing of the  Schiff newsletter crowd.  Gotta clear out the deadwood!!

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The experience curve

I guess I'm having trouble buying the gloom and doom that would come with a "nominal" deflationary system.  Having spent all of my working life in the electronics industry, I can say that we have seen consistent "deflation" in the cost of electronic components for decades.  This is well documented and probably most famously known as a corollary to "Moore's Law."  During the 1990's when cellular telephony was starting and growing worldwide, the total global volume of cell phones doubled EVERY year, and the cost (and selling price) of a "basic" phone went down by about 30% every year.  Did people defer their purchase decisions, waiting for prices to drop?  OF COURSE they did.  But in spite of that, there were still THAT MANY more buyers every year making the decision to purchase which drove the increase in annual volumes to double each and every year.  And this wasn't an aspect of just the first few years which had low volumes; it proceeded from 50,000 units per year all the way up to almost 1 Billion handsets per year (current handset volume sales are a little shy of 2B units per year).

So were companies firing people because of these deferred purchases?  Nope.  They were hiring as fast as they could to keep up with increasing demand. 

And if you wonder why a cellphone isn't almost free, with this sort of dynamic going on, it's simple:  The phone you buy now has MUCH more capability than those simple phones of 20 years ago.  And that's the challenge of basically every industry that experiences these kinds of experience curves.  A similar situation exists in cars.  Why does the car you buy today cost more than the one in 1980?  Because now you are forced by the government to have ABS, air bags, better emissions, better crumple zones, better economy, etc. AND the marketeers have convinced you that you NEED cruise control, a great stereo, GPS/Navigation, power windows, power door locks, power steering, air conditioning, etc., etc.

But I think the most important factor in this deflationary system to consider is this: The reduction in costs is BECAUSE the increased volume has enabled manufacturers to invest in lower cost ways to make these products.  If the volume wasn't there, the cost/price reductions wouldn't be there either.

So, increased demand that exceeds supply drives growth which drives DOWN prices, which increases demand which drives growth, which drives down prices...

I'm missing the part where it causes workers to be fired.

Keith

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The Future of Gold As Money

Between 1800 and 1913(when the Fed arrived on the scene), the U.S. population increased by over 100 million, the dollar was backed by gold (in fact was a gold certificate, or literal receipt for gold), and the rate of economic growth was considerably greater than what was produced by the TRIPLING of the the national debt just since 1995. One reason is that advances in technology, recycling and productivity tend to reduce prices. The idea that we can surreptitiously increase our money supply with a press and no one else will notice it and do likewise is a fantasy.

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Aloha! Questions??

Caution: The following answers may produce rage, anxiety and gnashing of teeth. Those with digestive disorders may not wish to proceed further.

1. This is so, in the event that authorities seize your gold reserves, they are only required to credit your account $42.22 per oz. (this is in jest, but I could swear just such treatment of seized $20 Gold Eagles has occurred)

2. A few years ago, a broker who shall remain nameless was running an ad that read "ETF: Everything Trades Free." I could not help wondering, if ETF's were such a great deal, why customers could buy them (but not stocks) commission-free. The explanation may be in the fine print which clearly indicates that only the largest holders have any chance of redeeming their ETF's for physical. Humans apparently share over 98% of their DNA with mice- but even the dumbest mouse is not fooled by a picture of a piece of cheese.

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KeithM1116 wrote: I guess I'm

KeithM1116 wrote:

I guess I'm having trouble buying the gloom and doom that would come with a "nominal" deflationary system.  Having spent all of my working life in the electronics industry, I can say that we have seen consistent "deflation" in the cost of electronic components for decades.  This is well documented and probably most famously known as a corollary to "Moore's Law."  During the 1990's when cellular telephony was starting and growing worldwide, the total global volume of cell phones doubled EVERY year, and the cost (and selling price) of a "basic" phone went down by about 30% every year.  Did people defer their purchase decisions, waiting for prices to drop?  OF COURSE they did.  But in spite of that, there were still THAT MANY more buyers every year making the decision to purchase which drove the increase in annual volumes to double each and every year.  And this wasn't an aspect of just the first few years which had low volumes; it proceeded from 50,000 units per year all the way up to almost 1 Billion handsets per year (current handset volume sales are a little shy of 2B units per year).

So were companies firing people because of these deferred purchases?  Nope.  They were hiring as fast as they could to keep up with increasing demand. 

And if you wonder why a cellphone isn't almost free, with this sort of dynamic going on, it's simple:  The phone you buy now has MUCH more capability than those simple phones of 20 years ago.  And that's the challenge of basically every industry that experiences these kinds of experience curves.  A similar situation exists in cars.  Why does the car you buy today cost more than the one in 1980?  Because now you are forced by the government to have ABS, air bags, better emissions, better crumple zones, better economy, etc. AND the marketeers have convinced you that you NEED cruise control, a great stereo, GPS/Navigation, power windows, power door locks, power steering, air conditioning, etc., etc.

But I think the most important factor in this deflationary system to consider is this: The reduction in costs is BECAUSE the increased volume has enabled manufacturers to invest in lower cost ways to make these products.  If the volume wasn't there, the cost/price reductions wouldn't be there either.

So, increased demand that exceeds supply drives growth which drives DOWN prices, which increases demand which drives growth, which drives down prices...

I'm missing the part where it causes workers to be fired.

Keith

I think this is right for the most part. Increased productivity, economies of scale, and increased competition certainly serve to drive costs downward- no disagreement here. As technology increases additional features and functionality are added to a wide spectrum of products, which is another kind of bonus to the consumer, more functionality, and the same or even lower prices.

But all of these examples you cite clearly consider increasing aggregate demand, not decreasing demand.

The concern as stated in previous posts is not in the supposed virtuous cycle of free market capitalism, where these characteristics are well known, but rather, is what happens when aggregate demand declines.

There is a component of deflation that can and does create a decline in aggregate demand, which is very dangerous. In any comparison of inflation or deflation, there are both winners and there are losers. In a deflationary price cycle, consumers are the winners, at least superficially. In an inflationary cycle, debtors are the winners.

The problem is that many of these proclamations (such as the Mises article) wish to stop the discussion when a winner is identified (especially if it can be connected to free market ideology) and proclaim that all bases have been covered and gloss over any negative effects. The negative effects of deflation occur in two spheres, first, in declining wages, the second in reduced borrowing as it becomes disadvantageous for businesses to borrow money for expansion or for new ventures.

Turns out all those low cost cellphones and IPads are made in China, by labor that is paid on the order of $1.60/hr. Large scale offshoring creates downward pressure on prevailing US wages, and we can observe the effects of this globalization by acknowledging that wages have been either stagnant or in decline for more than 20 years. So the workers are not so much being fired, they are just not being hired in the first place, unless you happen to work for FoxConn in mainland China.

US workers facing a declining wage environment have reduced discretionary income. Marginal utility theory tells us that consumers will shift income from shoes to cell phones, for example, when prices get far enough along the preference curve, but increasing demand is only valid in an expanding wage environment, otherwise they are just shifting expenditures from one commodity to the other. It gets worse if wages are actually declining (as they are now) as the available pool of income is shrinking. Result: reduced aggregate demand.

By the same token, businesses are reluctant to borrow money in deflationary times as the interest costs consume a greater percentage of buying power in deflationary times. This curtails job growth, as businesses are cautious about any expansion plans and are not likely to hire to support a declining market.

And let’s not forget consumer debt, regardless of any preference curves and theories of marginal utility, a consumer with an overhang of debt is not going to be buying anything, again contributing to a drop in aggregate demand.

The sum of these factors is quite destructive, and in fact, workers are either not hired, or fired.

Declining prices of commodities often mean declining wages. And, significantly, it also can mean declining profits for the companies engaged in these price reductions. As the largest component of COG is labor for many if not most commodities, declining prices means the money has to come from somewhere, be that machine automation (fewer jobs) off shoring (lower labor burden) or just staff reductions-there are no free lunches.

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darbikras wrote: I wonder if

darbikras wrote:

I wonder if it has occurred to any of these “analysts” and newsletter carnival barkers that however distasteful the Federal Reserve’s actions are, and they are distasteful, that they are far better than the alternative? Has Mr. Casey or anyone at Mises.org ever considered the widespread calamity that would ensue if the vagaries of the so-called (wage labor) free market were left to their own devices? For example, if home prices were to drop precipitously have they considered the massive layoffs that would occur near instantaneously in the construction (and finance) job market?

Of course not, THAT does not sell newsletters.

I agree. the keynesians try to solve the deflation / unemployment problem by forever trying to exponentially increase consumption and then by default, production which they think will keep everyone employed. But since they understand nothing about how economic production actually works, they don't understand why this approach is doomed to fail in a world of limited resources to support that production and enable consumption at low pices

The Austrians basically have no solution and bang in their drums about how an unfettered free market will provie people with the freedom to increase production on their own accord via supply and demand forces, a la Schiff's fishing proverb in which people "produce" fish with nets! Wow, that must be quite a net! They have an even poorer understanding of how economic production works than the Keynesians do. 

The thermoeconomists, to which I subscribe, understand that the solution is instead to reduce week to account for robots stealing jobs so that unemployment remains low. Along with this, replace income tax with a wealth tax ttargets the billionaires because in a world that cannot grow, wealth concentration will doom society. Then constitutionally ban banking and interest payments. Institute a government issued, non debt based, non interest bearing currency. Right there, problem essentially solved. 

Sent by iPhone in the Mexican desert, excuse any typos. 

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