Dr. Doom's prediction U.S. will suffer Zimbabwe-like hyperinflation fuel for gold bulls?

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Dr. Doom's prediction U.S. will suffer Zimbabwe-like hyperinflation fuel for gold bulls?

http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/05/2...

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

I think what is going on in the former Soviet Bloc might have more leverage on this, especially if it goes systemic.

Baltic collapse repercussions

and while depegging might be what they have to do, the result will be a dagger struck at the heart of already-deeply-wounded european banking.
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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Faber and Peter Schiff were on Glenn Beck's show today.  I wanted to watch, but just after Faber started to speak a thunderstorm went over and I lost satellite for 20 minutes or so.  That might have been interesting if Beck was able to pull his head out of his a__  long enough to conduct a rationale interview.  It's a shame how far the msm has degenerated.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

So if we end up with hyperinflation, any thoughts on how long it lasts?  And how do we finally get out of it?  I''ve heard it said that it finally  "burns itself out".  What does that mean?

How does one best prepare for the possibility, besides purchasing things you will need in advance, and owning gold?  Also, is the idea then to sell some gold at the super inflated price, or hang onto it for whenever a new currency, or newly valued currency is issued?

Thanks for any input.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

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Also, is the idea then to sell some gold at the super inflated price, or hang onto it for whenever a new currency, or newly valued currency is issued?

That's a very good question I often asked myself.  Chris said in a podcast a while back that when land gets to the point that an acre is in the handful-of-ounces of gold per acre price, that that would be a good indicator that we've dropped back to historical norms.  As an aside, he also said gold might/could go down if bonds went up significantly.  Bonds are going up right now, but gold hasn't dropped - in fact it's risen.  I'd watch carefully for a further rise in bonds and the potential that gold could take a temporary beating as people leave gold and head into return-paying bonds.That would be a good buying opportunity for more gold.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

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And how do we finally get out of it?

The example of Zimbabwe may be instructive.  I saw a piece on the country last night suggesting that it has started on its way to recovery at least partially because it has abandoned its currency.  Only USD's and S. African Rands are accepted in trade now.  IOW, they accept more stable currencies. 

It's odd, given our concerns about the USD, to see that it is still accepted as the reserve currency is some corners of the world.  It may take more than our current economic problems to dislodge it from that status.  I think the possibility of hyperinflation may be a bit overblown.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

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It's odd, given our concerns about the USD, to see that it is still accepted as the reserve currency is some corners of the world.  It may take more than our current economic problems to dislodge it from that status.  I think the possibility of hyperinflation may be a bit overblown.

I wish you were right, but all evidence points to the contrary.  The $ is still the reserve currency because we have not entered the final throws of the currency meltdown that is on its way.  Do not underestimate the amount of dollars that are out there, in central banks throughout the world, and the habits and beliefs that have been formed after 70 years of reserve currency status.  Remember, that only the US's ability to pay back it's debt is what stands in the way of continued currency health and a complete meltdown.  Our debt to GDP is already well above WWII levels, most of our production has been exported for debt, leaving meaningless service jobs that don't produce anything, our personal savings are non-existent, as opposed to WWII we now have unfundable entitlement programs that consume 2/3 of our budget, and opposed to WWII-1970's we are the world's largest debtor instead of the world's largest creditor.

If we had a credit score as a country, it would be well below the dead-beat level.  It only takes one generation of bad habits to bankrupt a nation.  The same thing happened in England from 1920 to 1940.  It's about to happen to us.  Be prepared.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Patrick,

I don't disagree that we will have high inflation, we just don't know enough to assume we'll have hyperinflation.  Schiff opined that we still have time to stop quantitative easing before hyperinflation becomes inevitable.  Faber disagreed, saying that we have already gone too far.

But, no matter which comes to pass, our options are the same.  Buy PM's or other currencies while the USD still has value.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

I follow Schiff and am currently reading his Crashproof.  Howevver, short of Andrew Jackson and Warren Harding rising from the dead, putting Obama in a straight-jacket and dunce cap and sitting him in the corner, dissolving the Fed, and ending our welfare state, I do not see how it is possible for the gov to stop quantitative easing.  Until we are willing to accept the pain that will come without government programs and services, the printing will go on.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

No need to worry.

In his column today, superstar economist Paul Krugman says that the current fears of inflation are politically motivated nonsense. He states that the real danger is deflation. http://www.nytimes.com/2009/05/29/opinion/29krugman.html?_r=3

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

You can watch Glen Beck's Peter Schiff and Marc Faber interview here:

www.youtube.com/watch

-- Rob

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Because I have been so confused about precisely what inflation is, I consulted my handy-dandy copy of Barron's Dictionary of Finance and Investment Terms.  That definition is in total:

Quote:
rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market-in other words, too much money chasing too few goods.  Moderate inflation is a common result of economic growth.  Hyperinflation, with prices rising at 100% a year or more, causes people to lose confidence in the currency and put their assets in hard assets like real estate or gold, which usually retain their value in inflationary times.  See also cost-push; demand-pull inflation.

What I find interesting is that this definition says nothing at all about the supply of money.  (nor do the definitions of cost-push and demand-pull for that matter)  They all have to do with prices being affected by supply and demand of goods and services.  IOW, its not a monetary phenomenon at all.

Of course, I don't have the experience or knowledge to make any grand proclamations about what exactly printing money has to do with inflation, but the argument that printing money is by definition inflation seems to fly out the window.  And, it makes Krugman's interpretation more credible.  After all, there really isn't a functional increase in money supply if that money isn't in circulation.  Further, I recommend the discussion by the heavy weights of the financial world, Whitney, Stiglitz, Welch and Sarkozy, found at the Bloomberg.com site today.  I don't know to post the URL here or I would.

In final analysis, I am brought up short a bit and need to do some more research to figure out for myself what is actually going on and whether the gov't activities are aggravating the problem or not.  These are perilous times economically, and I think I may be fooling myself to reflexively conclude that some very bright people (Bernanke, Geithner, Paulson, Summers, Obama, et al.) don't know what the hell they're doing.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

The rise in prices of goods and services is a consequence of inflation.  The other definition is confusing cause with effect.  Rising prices is just rising prices.  But do prices go up (or down) as a result of demand, or monetary policy?  That is the question.  The tech and housing booms were infationary, in that prices rose as a direct consequence of easy credit, not due to normal supply/demand factors.  How else do you explain an 80% rise in home values over six years, while demand (per capita income) dropped 1.5% and supply (new homes built) increased 6%?  Easy, the banks created the credit (or debt) through loaning the money into existence.  Basically these financial institutions weren't anywhere near sufficiently capitalized to cover the many bad loans/bets they made.  They were called on this when income simply could not sustain the debt.

Now, one has to wonder: how would the US$ look right now if there had been a sufficient increase in income levels to service the debt?  This has to be the main reason why it was Bush policy to give handout freebie stimulus checks directly to the taxpayer.  Because by the time they figured out what was going on with the subprime mess, it was too late.  They couldn't wait for a trickle-down effect; money had to be put in consumers' pockets ASAP!

Obviously this was a desperate measure fraught with unintended consequences, like a spike in oil prices.  All this meddling by .gov and its handmaiden, the Fed, is bound to fail in a free market system.  You can't dictate to the economy from above without evolving into a totalitarian socialist state.

That said, the Fed's policy is to inflate the debt away.  This is made crystal clear by their illegal buying of bad MBS paper, the purchasing of new Treasury debt, and overpaying on outstanding Treasuries, among other things.  This is money created out of thin air that has to go somewhere.  Maybe commodities?  Maybe equities?  Who knows.  But it's not enough to counter the deflationary forces underway.

My theory is that cash is king, for now.  But it's difficult to say what kind of impact trillions of dollars in foreign debt has.  But if there's any real economic recovery (not these phony "green shoots"), beware the impact of inflation!  I believe there's something to the argument that you don't want to be sitting in cash when indeed we do hit rock bottom.  Because that is the point when prices will be cheapest, and probably the point at which the Chinese decide to spend their reserves en masse, bidding up the price on anything that isn't nailed down.  That might be a good time to pull out that cash underneath your mattress and buy gold.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

The US is just too big to fail like the big banks were perhaps. I would think that hyperinflation in the USA will end up being a world wide crash in the purshasing power of all currencies. The whole potential debacle could be avoided or softened if  the USA and the rest of the world began gradually to deliberately slow  down the rate of money supply growth and debt creation and of course along with that the consumption of all natural resources.

I'm not holding my breath.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Alex Szczech wrote:

No need to worry.

In his column today, superstar economist Paul Krugman says that the current fears of inflation are politically motivated nonsense. He states that the real danger is deflation. http://www.nytimes.com/2009/05/29/opinion/29krugman.html?_r=3

Great article Alex, thanks for the link. 

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

mikek31

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The rise in prices of goods and services is a consequence of inflation.  The other definition is confusing cause with effect.  Rising prices is just rising prices.  But do prices go up (or down) as a result of demand, or monetary policy?  That is the question. 

I think you have it precisely backward.  According to definitions I have been able to find:

http://en.wikipedia.org/wiki/Inflation

Quote:
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] When the general price level rises, each unit of the functional currency buys fewer goods and services; consequently, inflation is a decline in the real value of money—a loss of purchasing power in the internal medium of exchange which is also the monetary unit of account in an economy.

http://www.investorwords.com/2452/inflation.html

Quote:
The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a dollar is going to fall because a person won't be able to purchase as much with that dollar as he/she previously could.

http://www.investorglossary.com/inflation.htm

Quote:
Inflation is a broad increase in prices. In practical terms, inflation means goods and services are being valued as more desirable than money.

I was somewhat confused because I didn't take into account the corollary of a rise in prices, that is the loss of relative value of the currency or medium of exchange.  Cost-push and demand-pull are descriptive terms of two causes of inflation, but I don't think they are exclusive because a relative decrease in the value of money is effectively the same thing as an increase in price.  The relationship between prices and value of money is what defines inflation and/or deflation.  Your examples, demand and monetary policy, may cause that relationship to change, but they are not themselves inflation or deflation.

This might all seem a bit picky, but for me understanding precisely what the almost overwhelming number of economic terms mean is key to understanding how the economy works.  Confusion of terms can be used by those with political agendas to twist the debate, and I like to be aware of when someone is trying to manipulate me.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Doug wrote:
I like to be aware of when someone is trying to manipulate me.

Based on your posts, I'd say someone already has.  Price inflation and monetary inflationary are two different things. 

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Patrick Brown wrote:

I follow Schiff and am currently reading his Crashproof.  Howevver, short of Andrew Jackson and Warren Harding rising from the dead, putting Obama in a straight-jacket and dunce cap and sitting him in the corner, dissolving the Fed, and ending our welfare state, I do not see how it is possible for the gov to stop quantitative easing.  Until we are willing to accept the pain that will come without government programs and services, the printing will go on.

I think your forgetting one of our biggist problems is defense spending around the world. We cannot sustain the Roman empire we have created. We need to close bases, remove troops from battle zones and stop the endless black hole of secret military projects. Of course we need to rein in domestic spending. Of course none of this will happend until we get campaign reform and kick out all the lobbyists. They will not give up their profits in areas like drugs, medical, military programs, as they continue to spend for the candidates new elections. The only way this will happen is when the American people demand it or vote out the present two party system. That is if there is a fair voting system still?

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Hyperinflation, can it happen again?

http://globalresearch.ca/index.php?context=va&aid=13673

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

investorzzo wrote:
I think your forgetting one of our biggist problems is defense spending around the world. We cannot sustain the Roman empire we have created. We need to close bases, remove troops from battle zones and stop the endless black hole of secret military projects. Of course we need to rein in domestic spending. Of course none of this will happend until we get campaign reform and kick out all the lobbyists. They will not give up their profits in areas like drugs, medical, military programs, as they continue to spend for the candidates new elections. The only way this will happen is when the American people demand it or vote out the present two party system. That is if there is a fair voting system still?

Military spending takes 1/3 of the budget while the welfare state takes 2/3's.  Still, I agree with you.  We have become the Roman empire and both welfare spending and military spending need to be decimated if we are to have any chance of surviving.  If I was a booky at Vegas, I would be happy to give 1:100 odds on that.  Our system is broken.  The lobbyists have "won".  I look forward to collapse because that is what it will take for us to regain control of our own country.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Military spending takes 1/3 of the budget while the welfare state takes 2/3's.  Still, I agree with you.  We have become the Roman empire and both welfare spending and military spending need to be decimated if we are to have any chance of surviving.  If I was a booky at Vegas, I would be happy to give 1:100 odds on that.  Our system is broken.  The lobbyists have "won".  I look forward to collapse because that is what it will take for us to regain control of our own country.

Well said Patrick. I have said this same thing for a long time. The only problem I have with this is the hard working responsible people will suffer greatly also. The lazy ones that have always taken the "free ride" so be it. Sadly this collapse will take decades to sort out & for the dumbed down crowd to understand (if they ever will) what really happened.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Patrick

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Military spending takes 1/3 of the budget while the welfare state takes 2/3's. 

So, you're defining bridges, harbor maintenance, roads, national parks, national forests, regulation of a wide range of activities, security, taxation, environmental activities, interstate commerce, governmental operations, international relations and lots more that don't come to mind at the moment as welfare state?  Whether the Federal gov't's support of each of these areas may or may not be wise, trying to conflate them all as part of the welfare state is a bit strained.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Doug, you're getting mixed up in definitions.  I believe the Webster's definition of inflation is simply an expansion in the money supply.  Rising prices and speculative bubbles are simply the result.  Inflation can follow, or precede a rise in price (otherwise determined by normal market fluctuations of supply and demand).  You have to understand that money or credit is in fact debt.  When debt is written down or paid, money is extinguished, otherwise known as deflation.  In theory you can inflate to mitigate deflation, but in practice it's impossible (unless you have perfect, totalitarian control of the economy) since the money never goes where it needs to.  And in the end you only guarantee ever greater problems.  People here in this forum are trying to figure out what kinds of unintended consequences are likely to result.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Doug wrote:

mikek31

Quote:
The rise in prices of goods and services is a consequence of inflation.  The other definition is confusing cause with effect.  Rising prices is just rising prices.  But do prices go up (or down) as a result of demand, or monetary policy?  That is the question. 

I think you have it precisely backward.  According to definitions I have been able to find:

http://en.wikipedia.org/wiki/Inflation

Quote:
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] When the general price level rises, each unit of the functional currency buys fewer goods and services; consequently, inflation is a decline in the real value of money—a loss of purchasing power in the internal medium of exchange which is also the monetary unit of account in an economy.

This might all seem a bit picky, but for me understanding precisely what the almost overwhelming number of economic terms mean is key to understanding how the economy works.  Confusion of terms can be used by those with political agendas to twist the debate, and I like to be aware of when someone is trying to manipulate me.

Check a bit further.  The definition inflation mentioned above is the Keynesian definition, Check out the Austrian definition.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

doug wrote:

So, you're defining bridges, harbor maintenance, roads, national parks, national forests, regulation of a wide range of activities, security, taxation, environmental activities, interstate commerce, governmental operations, international relations and lots more that don't come to mind at the moment as welfare state?  Whether the Federal gov't's support of each of these areas may or may not be wise, trying to conflate them all as part of the welfare state is a bit strained.

Doug,

You are right I did lump everything into rather large groups, but take a look at the pie-chart below.  SS and Medicare take a whopping 44% right off the bat.  I said 2/3 went to the welfare state.  OK, maybe I exagerated. 

Most of the categories you point to are responsibility of the States, not the Federal government.  Obviously some are responsibility of the Federal government:  interstate roads, security (isn't that military?), intnl relations (State Dept) and national parks. 

But if you take a look at the other categories, you'll find that many of them are welfare-related.  "Mandatory" I would take to include the Depts. of Education, Energy, Labor, Health and Human Services, Housing and Urban Development, and Agriculture (and anything else that has mandatory, budget-item funding) which I consider all to belong in the welfare category and unnecesary.  Education should be left to the States, and the others are just special-interest serving arms of the government.  That brings us to 54%.  Then we have "Other Discretionary" - I have no idea what that is, but I would be shocked if it didn't include some sort of hand-out money.  Then we have the interest portion of the budget that corresponds to welfare.  Add that in and we're approaching 60%. 

As for military, according to this (which came from http://en.wikipedia.org/wiki/United_States_federal_budget) that comprises 21%.  I'm sure it's more than that, as a good portion of "Other Discretionary" is also used to fund wars. 

I do believe there are legitimate purposes for Federal spending, but ours has grown well past not only what I would argue what it was founded for, but in more practical terms, what we can afford.  And, military and welfare programs are the vast majority of the spending we allow our government to engage in.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Ragnar_Danneskjold

Quote:
Based on your posts, I'd say someone already has.  Price inflation and monetary inflationary are two different things. 

http://en.wikipedia.org/wiki/Monetary_inflation

Quote:
Monetary inflation is the term used by some economists to differentiate direct inflation in the money supply (or debasement of the means of exchange) from price inflation which they view as a result or necessary outcome of the former. Originally "inflation" was used to refer simply to monetary inflation, whereas in present usage it often refers to price inflation.[1] The Austrian School of economics makes no such distinction, maintaining that monetary inflation is inflation, there being no difference between the two.

Quote:
The monetarist explanation of inflation operates through the Quantity Theory of Money, MV = PT where M is Money Supply, V is Velocity of Circulation, P is Price level and T is Transactions or Output. As monetarists assume that V and T are determined, in the long run, by real variables, such as the productive capacity of the economy, there is a direct relationship between the growth of the money supply and inflation.

I think that in general usage, inflation refers to price inflation.  Monetary inflation, as I understand it, refers simply to expansion of the money supply.  As explained above, monetarists define M&P as having a direct relationship as that's how the equation works.  But, that isn't clear to me. or I'd dare say, the vast majority of those who have used the term inflation in daily conversation.  Not surprisingly, there must be a great deal of confusion on the subject.  That's why I originally posted.

I think this goes to Krugman's point, though, that the extra printing of money doesn't affect inflation (presumably price) if that money is not in circulation.  As we've seen, the banks are just re-capitalizing with that freshly minted cash, not loaning it out.  Hence, its not in circulation and therefore not inflationary, or real inflation as defined by the Austrians.

Now, Ron Paul apparently views inflation solely as monetary inflation (expansion of money supply):

http://www.lewrockwell.com/paul/paul354.html

Quote:
Inflation, as the late Milton Friedman explained, is always a monetary phenomenon.

Of course that was two years ago, so he may have rethought that definition by now.

My take so far is that monetary "inflation" is a possible contributing factor to price inflation, but, as you say, they are not the same, contrary to what the Austrians say.  Perhaps it would be helpful if you explained how you distinguish between the two.  It doesn't surprise me that I don't know everything related to economics, I'm not a professional.  I'm just trying to understand it.  And, if indeed I've been manipulated, I'd like to know how.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Doug wrote:
you're defining bridges, harbor maintenance, roads, national parks, national forests, regulation of a wide range of activities, security, taxation, environmental activities, interstate commerce, governmental operations, international relations and lots more that don't come to mind at the moment as welfare state?

I would say yes, if those activities serve no productive purpose, produce little or no benefit, and/or are done without any concern for cost, which is very common with government spending.  Many of the activities you noted could be viewed as nothing more than "make work" projects....move pile of sand from location A to location B, reverse (or maybe nature does it), repeat.  Replenishment of beach sand after a hurricane comes to mind.  Bridges to nowhere.  Most government spending may as well be used to pay people to masturbate for all the good it does.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Patrick Brown wrote:

Quote:
It's odd, given our concerns about the USD, to see that it is still accepted as the reserve currency is some corners of the world.  It may take more than our current economic problems to dislodge it from that status.  I think the possibility of hyperinflation may be a bit overblown.

I wish you were right, but all evidence points to the contrary.  The $ is still the reserve currency because we have not entered the final throws of the currency meltdown that is on its way.  Do not underestimate the amount of dollars that are out there, in central banks throughout the world, and the habits and beliefs that have been formed after 70 years of reserve currency status.  Remember, that only the US's ability to pay back it's debt is what stands in the way of continued currency health and a complete meltdown.  Our debt to GDP is already well above WWII levels, most of our production has been exported for debt, leaving meaningless service jobs that don't produce anything, our personal savings are non-existent, as opposed to WWII we now have unfundable entitlement programs that consume 2/3 of our budget, and opposed to WWII-1970's we are the world's largest debtor instead of the world's largest creditor.

If we had a credit score as a country, it would be well below the dead-beat level.  It only takes one generation of bad habits to bankrupt a nation.  The same thing happened in England from 1920 to 1940.  It's about to happen to us.  Be prepared.

This isn't pre war Germany, and there is unlikely to be a complete meltdown in the currency. The term hyper inflation is bandied about with gay abandon, or, DARE I SAY, extreme enthusiasm, when we are simply heading for extreme inflation. There's a difference. The dollar could lose half of it's value, relative to gold, or even 80% of it's value relative to gold. It could lose half of it's value relative to the yen, euro, remnimbi (if they ever really depeg) and it still wouldn't be a Weimer scenario. It would just be a really lousy highly inflationary scenario. Inflation like this would so crush demand that the balancing deflationary forces would help check it's downward spiral.  But man, are we going to be poor.

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Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

I've been trying to understand the deflation/inflation debate for some time.  Right now, this is how I understand it:  The credit bubble was so large that most any amount of printed money (at least what the fed can do at this point of time) infused into the system will cause a rise in prices.  In addtion, the Velocity of Money (the often overlooked factor in the equation) has slowed down--which is deflationary.  So at least for the near future--it's deflation (the exception may be in the price points for commodies).  However, there will come a time when the demand for dollars will end (probably triggered through the bond market).  This will trigger an increase in the Velocity of dollars like nothing the world has ever seen.  Those with dollars will try to dump them for tangible assets causing hyper-inflation.  This will happen due to the Velocity more than the infusion of more dollars.

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Doug
Status: Diamond Member (Online)
Joined: Oct 1 2008
Posts: 2714
Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

Paul Tustain of Bullion Vault sent me this email:

Dear BullionVault user,

Not for the first time the Financial Times says we are "nuts" - a
word which all too often follows on from "gold" in the financial
media.

I should rise above this sort of thing. What does it matter if the
FT thinks me nuts? But I find I'm irritated, both for myself and
on the collective behalf of successful gold investors. I don't
think we deserve to be called "nuts" after our gold has for 6
years so consistently outperformed all those other serious
investment classes so diligently analysed on Wall Street and in
the City.

Gold continues to strengthen against the Dollar. Faint hopes of a
swift "V-shaped" recession are dwindling, which is hardly
surprising. Global economic activity up to 2007 was driven by rich
world consumers buying things even they couldn't afford. In the US
alone they have since lost about $12 trillion of private wealth -
$120,000 per family. Judging by estimates published in The
Economist this should induce a demand slump of about $500 billion
per year, for 10 more years.

That means a typical family will be cutting back spending at the
rate of $5,000 per year for a decade. So our economies will stay
shrunk, threatening deflation.

To combat this governments are trying to engineer some inflation.
Deficit spending here, quantitative easing there, and zero
interest rates everywhere; with all of it geared to stimulating
more production in a world already suffering over-capacity. This
is where they step into dangerous territory.

Retail prices inflate in an overheating economy when there is a
supply shortage of consumer goods. Because demand outstrips supply
the producer has the whip hand, and he exploits it by asking more
money for his goods. But look around you today and you will see
there is no supply side shortage in the world economy. So if we do
get inflation it's not going to be because of overheating.

Hyper-inflation, on the other hand, has little to do with supply
side shortages and overheated economies. It happens when a
currency dies. Once the realization grips savers (not consumers)
that their money is losing its purchasing power then they exit
money and look for better stores of value.

So while 'normal' inflation is driven by consumer-pull for goods,
hyper-inflation is driven by saver-push of money, and this
explains a big qualitative difference between inflation and hyper-
inflation.

Modest inflation through undersupplied goods has a negative
feedback because new supply pulls prices back, bringing the
economy back to equilibrium. Hyper-inflation does the opposite.
Once it starts it suffers a positive feedback by encouraging more
and more savers to dump cash. What starts as a trickle accelerates
into an unstoppable torrent of savings pouring into circulation.

The unusual problem we now have is that after using cash rescues
to protect the overcapacity in our economies we are not going to
be able to create normal, controllable, supply-shortage inflation.
It's increasingly likely that the only style of modest price rises
which the central banks can engineer will be the trickle which
precedes a hyper-inflation.

Indeed, what caused the Financial Times to wheel out the old "gold
nuts" phraseology was the strange case of last week's bond
markets. Bond prices - the best proxy for the future value of cash
- were falling when they should have been rising. The markets are
telling us that cash 10 years forward is becoming less valuable.
This is a hint of savers losing faith in their currency.

And why wouldn't they? Their deposits will pay them no interest
for the foreseeable future. Inflation and tax will eat into their
savings. The economy looks mired in recession. Governments, which
are now welcoming devaluations as a trade benefit, are deep in
debt and are toying with hyper-inflationary policies like
quantitative easing. It all points to the inflationary transfer of
the government's enormous debt into plummeting values for
depositors' cash and investors' bonds.

An insight - courtesy of Bill Bonner - suggests what could soon
happen. There is an $11 trillion bond mountain, which is $96,000
of issued US Dollar bonds per US family. With total federal
obligations now reaching above $63 trillion, this is the polar
icecap of contemporary finance, and it holds the bulk of the
savings of two generations, all denominated in dollars which are
frozen solid until their redemption date. If the Fed gets what it
wants, then a modest dose of inflation now will forestall a
depression. But inflation will heat that icecap and make the bond
market more jittery, and at exactly this point the Fed says it
will reverse its QE policy and sell bonds back into the market,
because this is how it plans to get cash back out of circulation
to control the inflation it has created.

Choose your poison: The trickle of excess QE cash or the trickle
of excess bond redemptions, both in a world of over-supply. It
seems all roads lead to inflation. Don't assume it will be the
manageable kind.

Kind regards,
Paul Tustain
Director, BullionVault

Obviously Tustain has a dog in this fight, but his distinction between how hyperinflation is caused and how garden variety inflation is caused is interesting.  I haven't seen that distinction made elsewhere.

doug

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Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1496
Re: Dr. Doom's prediction U.S. will suffer Zimbabwe-like ...

[agitating]This isn't pre war Germany, and there is unlikely to be a complete meltdown in the currency. The term hyper inflation is bandied about with gay abandon, or, DARE I SAY, extreme enthusiasm, when we are simply heading for extreme inflation. There's a difference. The dollar could lose half of it's value, relative to gold, or even 80% of it's value relative to gold. It could lose half of it's value relative to the yen, euro, remnimbi (if they ever really depeg) and it still wouldn't be a Weimer scenario. It would just be a really lousy highly inflationary scenario. Inflation like this would so crush demand that the balancing deflationary forces would help check it's downward spiral.  But man, are we going to be poor.

You can argue we won't have "hyper" inflation and I guess it just depends on what your definition of "hyper" is.  A 50% or 80% devaluation vs. gold is pretty bad, whether you consider it "hyper" or just plain-vanilla inflation.  As for this not being pre-war Germany, the Germans didn't know they were in pre-war Germany either, so I don't know how relevant that is.  Years from now, we may look back and say we we're not in pre-_____ USA, as we argue about something else.

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