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Insolvent and Going Deeper

Wednesday, April 13, 2011, 5:45 PM

The US budget process is entirely out of control. By extension, its fiscal future is rather bleak.

All one has to do is back up two steps, entirely ignoring the meaningless budget scuffles currently ongoing in DC, to see that the federal government's fiscal situation is in complete shambles. In fact, as things currently stand in terms of spending and revenues, the US government is insolvent - its liabilities vastly exceed its assets on a net-present-value basis.

Yes, Obama has just laid out a plan that calls for cutting some $4 trillion of new, incremental deficit additions over the next 12 years, but this merely obscures the fact that the deficit will still grow by a rather hefty amount nonetheless. Plans from both sides of the aisle call for adding more debt but at a slower pace. True, that's progress of a sort, but not the type of progress you want to bring home to meet your mother.

For anybody who is even a casual student of history or has paid the slightest bit of attention to what has transpired for Greece, Ireland, Portugal, and other countries with an unrestrained tendency to spend more than they have, it is clear what the progression of events will be for the US.

First there will be a fiscal/funding crisis that will originate in the bond market, specifically the US Treasury market. Interest rates will shoot up, and either austerity will be imposed on the US in a rather unpleasant and draconian way (the bond market is rather remorseless), or it will be self-imposed (not very likely). My estimations indicate this process will begin before the end of 2012.

Next, if the US fails to heed the edicts of the bond market and tries to maintain spending in the face of rising interest rates or print its way out of trouble, the risks increase that the US dollar will suffer a major decline. Let's say that this process will begin a year after the start of the fiscal crisis.

That's all there is to it. A fiscal crisis possibly (probably?) followed by a currency crisis - all initiated by a leadership crisis.

How long it will take the markets to wake up to this simple progression is anybody's guess. Here we must fall back on a simple maxim that has served us well: Anything that is unsustainable will someday stop.

Last year, the US was not unique in its fiscal and economic woes.

This year, the US has distinguished itself by being the only advanced economy to increase its underlying budget deficit in 2011, according to the IMF.  

Quite pointedly, the IMF has been on something of a tear recently in pointing out that the US is heading in the wrong direction fiscally (and by extension monetarily) and risking a systemic crisis by pursuing an unsustainable path.

On March 20th, the IMF's John Lipsky delivered harsh words (at a forum in Beijing, it should be noted):

Lipsky Says Advanced-Nation Debt Risks Future Crisis as Yields Set to Rise

Mar 20, 2011

The mounting debt burden of the world’s most developed nations, set for a post-World War II record this year, is unsustainable and risks a future fiscal crisis, the International Monetary Fund’s John Lipsky said.

The average public debt ratio of advanced countries will exceed 100 percent of their gross domestic product this year for the first time since the war, Lipsky, the IMF’s first deputy managing director, said in a speech at a forum in Beijing today.

“The fiscal fallout of the recent crisis must be addressed before it begins to impede the recovery and create new risks,” said Lipsky. “The central challenge is to avert a potential future fiscal crisis, while at the same time creating jobs and supporting social cohesion.”

I am in full agreement with the assessment that the US is adding to, not subtracting from, the financial and fiscal risks that we face. Such are the wages of attempting to sustain the unsustainable in defense of a status quo that needs to be set on a shelf, an interesting curio of a time gone by.

We've already proven that there's a limit to how much consumptive, non-productive debt can be accumulated, yet the US is now all but isolated in its vain attempts to resurrect that model for one last fling.

The Looming Debt Crisis

The IMF has some hard data to back up its concerns and recently released a report in which it has produced a table that that captures the entire essence of the "grow or die" predicament facing not just the US, but the entire developed world.

There are a number of things to dissect in the table, so let's take them one at a time.

This first is that the total financing needs for the sovereign governments (only) of most of the so-called "advanced economies" has expanded between 2010 to 2011 from 25.8% of GDP to 27.0% of GDP (green circles). This means that even with the alleged recovery fully in place -- a statistical mirage in many respects -- the debt financing needs have grown larger, not smaller.

(Source)

It is so large that it bears repeating: The gross financing needs of the US and Japan are 28.8% and 55.8% of GDP for 2011, respectively. Those are staggering amounts, and they have, as predicted by any decent framework that combines weak leadership and debt-based money with declining net energy, only grown larger over the past few years.

Zeroing in a bit, we'll note that three nations are sporting fiscal deficits in excess of 10% of GDP (Japan, the United States, and Ireland), while the UK pulls in close behind with an 8.6% deficit (see red and orange colored squares).

How does one support such magnificent borrowing needs at reasonable rates without the explicit promise that growth will soon return? It's impossible, at least for very long. Who will buy all of that debt at ridiculously low rates?

The market's autonomous participants have already arrived at a conclusion, as evidenced by PIMCO's Bill Gross, et al.,selling off their entire Treasury holdings and even beginning to short the whole mess. They are betting that the answer is "only the central banks, and their time is running out."

Following up the report that produced the above table (among many others, some equally disturbing) the IMF has gone on a PR campaign to press the issue:

US Must Cut Massive Debt: IMF

April 12 2011

The International Monetary Fund Tuesday urged the United States to outline credible measures to reduce its budget deficit, pressuring the White House to detail plans to ratchet down record debt levels.

The IMF said while most advanced economies were taking steps to rein in budget gaps, two of world's largest economies — Japan and the United States — had delayed action to nurse their recoveries.

The fact that the IMF has decided to say that the emperor lacks a credible wardrobe tells us much about where are we in the arc of this story (Hint: near the end).

Our job is to figure out what the endgame looks like.

Conclusion

The US is on a fiscally unsustainable path and has almost entirely wasted the opportunity this crisis represented to get its house in order.

Obama, and whoever sits in the oval office next, has an enormously difficult task of explaining to ordinary people why the belt tightening that is to come applies to them and not to the banks that created the mess (and are feverishly handing out record bonuses as a result).

Given this constraint, and the general paralysis of logic that now grips DC, we can almost certainly expect that the resolution to the multi-decade game of kick-the-can will be a crisis of sorts. The IMF has weighed in with its very measured and dry, if not boring, recitation of the risks involved.

I admit to some affinity to their assessment, at the risk of letting my guard down, because they have finally conformed to the views I have been writing about for years. Debt-based money is in a bind. It's damned if we do and damned if we don't.

The only way out is to accept the idea that living standards have to fall to match the prior excesses, an admission that 'experts' agree is politically impossible in the US at this time.

Yet the conditions and risks remain, regardless of what experts think is doable.

The job of any primary bear market -- and we are in the mother of them all -- is to destroy wealth.

Your job is to preserve wealth. But buckle up; it's going to be a rough ride.  

My overall advice for what's to come remains: Convert your fiat money to useful things. True, gold doesn't earn any interest, but neither does money in the bank these days, and gold can't be devlaued away by reckless monetary policy. So holding precious metals for purchasing power preservation should be a fundamental part of your plans. And while there is real risk of a short-term deflationary downdraft in commodities as the Fed jawbones about ending quantitative easing, my general advice is anything that you expect to buy over the next year you should just buy now. What the heck, you'll use it anyways, and you just might buy it for a lot cheaper than later on.

Enjoy life, love your family, and note that the sun still rises, the birds still sing, and all of our human foibles will resolve themselves eventually. We've arrived at a peculiar point in history where attitude is a tangible element of your future wealth and paper money has become like fog on a warm morning.

Make of it what you will. My wish is that you enjoy the ride.

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64 Comments

thc0655's picture
thc0655
Status: Diamond Member (Offline)
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Posts: 1465
That covers all our options

That covers all of our options.  If the gov't would just do the right thing, we could minimize the coming pain and get ourselves on the right track for a sustainable future.  It's plainly obvious that They will not do anything close to the right things.  Like Dmitri Orlov said in Reinventing Collapse: just ignore the gov't; they won't do the right thing; make your own preparations.  If we could just wake up the American people to what's going on, they would stand up and make the gov't do the right thing.  That's not working either since most of our family and neighbors refuse to see what's going on.   That only leaves making our own personal preparations as best we can in the time we have.  Depressing, but better than being among the blind ourselves.

mark84price's picture
mark84price
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what are they really thinking?

Would be very interesting see the component parts of the personal investment portfolio's of Geithner and the Fed board. 

joemanc's picture
joemanc
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cmartenson wrote: my general
cmartenson wrote:

my general advice is anything that you expect to buy over the next year you should just buy now. What the heck, you'll use it anyways and you just might buy it for a lot cheaper than later on.

Enjoy life, love your family, note that the sun still rises and the birds still sing, and all of our human foibles will resolve themselves eventually. We've arrived at a peculiar point in history where attitude is a tangible element of your future wealth and paper money has become like fog on a warm morning.

Make of it what you will. My wish is that you enjoy the ride.

+1

I can't spend my money fast enough on "things". I only wish I had about 36 hours in a day and 10 hands. As I learned this past winter with the "snow rake crisis", you want to purchase, fix and take care of things before the masses do. Otherwise, there will be shortages and then lines to get stuff, if and when it does come in. Without sounding like an alarmist, make a list and go buy it, now, while you can.

Romans12.2's picture
Romans12.2
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We have been prepping it

We have been prepping it feels for ever (only 1 year) but drawing a blank right now....I need more lists!  Please tell me please what other things to buy.  What am I forgetting?

maaa's picture
maaa
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For Romans12.2 don't forget...

...to buy enough guns and ammo.

If marketing trends tell you anything, home security shotguns have been selling like snow shovels in a snow storm again, after a brief break in the action.

Also, the collectors are really collecting (beautiful cowboy guns, rifles everything special is going going going).

AR rifles are topping everybody's list, though.

Mary Kay at http://PersonalSecurityZone.com

 

 

Poet's picture
Poet
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Posts: 1889
Some Thoughts On Items

Not that I have all these. Not enough money, not enough space. However:

Nail clippers, podiatrist for ingrown nails, dentist for cavity fills and crown work, antibiotic ointment, Z-pacs (just in case of infection), band-aids, first aid kits, potassium iodide, Q-tips, cloth diapers, laundry detergent, garden tools (cheap trowels tend to bend, so either buy more or get the really strong ones), leather work gloves, leather shoes, bedliner paint to consider painting on the soles of your shoes to add wear, laundry buckets, washboard, clothes wringer, extra glass for window repair, black-out film and tape to prevent light from escaping out windows into the night like a beacon, clean-burning fuel to allow for warming up food or people without the attention visible/smelly woodsmoke attracts, a sound-proof outdoor box/enclosure for a generator, cut brush to allow lines of visibility from the house, candy, iodized salt, powdered milk made before Fukushima (if you are paranoid and want fresh milk produced before Fukushima, try looking for ultra-pasteurized organic milk with expiration dates before May 10, they'll keep past that time), condoms, cycle beads, solar calculators (mine still runs after 12+ years), slide rule, abacus, home schooling books, foot operated mechanical sewing machine, spare parts, hundreds of sewing machine needles, regular needles (in ancient China, some poor people made needles by hand rubbing small iron bars on stone), Viagra (to sell), cigars, cigarettes, cheap $1 lighters, matches, brass wood screws, nails, hand carpentry tools, zip ties, rope, clothes, disposable rain coats, rain coats, galoshes, $1 umbrellas, sturdier umbrellas, etc.

Poet

pinecarr's picture
pinecarr
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joemanc wrote:cmartenson
joemanc wrote:
cmartenson wrote:

My general advice is anything that you expect to buy over the next year you should just buy now. What the heck, you'll use it anyways and you just might buy it for a lot cheaper than later on.

Enjoy life, love your family, note that the sun still rises and the birds still sing, and all of our human foibles will resolve themselves eventually. We've arrived at a peculiar point in history where attitude is a tangible element of your future wealth and paper money has become like fog on a warm morning.

Make of it what you will. My wish is that you enjoy the ride.

+1

I can't spend my money fast enough on "things". I only wish I had about 36 hours in a day and 10 hands. As I learned this past winter with the "snow rake crisis", you want to purchase, fix and take care of things before the masses do. Otherwise, there will be shortages and then lines to get stuff, if and when it does come in. Without sounding like an alarmist, make a list and go buy it, now, while you can.

+1.  Thank-you for invaluable information scouting and analysis, Chris! 

Romans wrote:

We have been prepping it feels for ever (only 1 year) but drawing a blank right now....I need more lists!  Please tell me please what other things to buy.  What am I forgetting?

Romans, I remembered seeing a list of the "When SHTF these 100 things will disappear first", and googled it.  Here is a link to a site that has the list, and potentially additional useful info: http://www.shtfplan.com/emergency-preparedness/when-shtf-these-100-items-will-disappear-first_06032010 . [edit: Don't forget to check out their comments section as well; it looks like there may be some useful additions there]

Also, make sure you have gone through Chris's "What Should I Do?" series since he gives Chris-quality advice on top priority items/areas to be prepped in (including the "things that are useful to buy" for each).  See http://www.peakprosperity.com/page/what-should-i-do

SagerXX's picture
SagerXX
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joemanc wrote: I can't spend
joemanc wrote:

I can't spend my money fast enough on "things". I only wish I had about 36 hours in a day and 10 hands.

Second that!

Also, I could use a heftier supply of unallocated fiat. But I suppose I'd feel that way even if I had 10x what I do have. [grin]. Thanks as always for your thoughts Dr. Chris.

Viva -- Sager

JAG's picture
JAG
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It's Time To Raise Cash, Not Spend
joemanc wrote:

Without sounding like an alarmist, make a list and go buy it, now, while you can.

With respect Joe, and others, I couldn't disagree more. The "inflation" that you fear is just a product of market speculation. The majority of assets (including gold and silver) are showing super-exponenial price action, the hallmark signature of a bubble (see John Hussman's Anatomy Of A Bubble). This type of price action is produced by human nature (speculative trading), not macroeconomics. Buy spending instead of saving now, your buying into the bubble. If you want to be protected during a market trend-change (crash), you need to do the opposite of the "crowd."

The time to spend is when everyone else is trying to save, and the time to save is when everyone else is in a buying frenzy.

Best....Jeff

guardia's picture
guardia
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Re: It's Time To Raise Cash, Not Spend (and 'pop' goes China)
JAG wrote:

With respect Joe, and others, I couldn't disagree more. The "inflation" that you fear is just a product of market speculation. The majority of assets (including gold and silver) are showing super-exponenial price action, the hallmark signature of a bubble (see John Hussman's Anatomy Of A Bubble). This type of price action is produced by human nature (speculative trading), not macroeconomics. Buy spending instead of saving now, your buying into the bubble. If you want to be protected during a market trend-change (crash), you need to do the opposite of the "crowd."

The time to spend is when everyone else is trying to save, and the time to save is when everyone else is in a buying frenzy.

Best....Jeff

Aaaah! I'm going insane!

Plus the Chinese bubble seems to have gone belly up:
Chinese Real Estate Bubble Pops: Beijing Real Estate Prices Plunge 27% In One Month

You know what? I feel like I want to bury my head in the ground and just stop existing for a year or two (and maybe I'll perish in the process, which may not be an entirely undesirable outcome anyway...) Yell

Samuel

guardia's picture
guardia
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Weird morning in America

Dollar down, stocks down, everything else up... This probably explains it:
New unemployment claims surge to 412000

Samuel

Farmer Brown's picture
Farmer Brown
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JAG wrote: joemanc
JAG wrote:
joemanc wrote:

Without sounding like an alarmist, make a list and go buy it, now, while you can.

With respect Joe, and others, I couldn't disagree more. The "inflation" that you fear is just a product of market speculation. The majority of assets (including gold and silver) are showing super-exponenial price action, the hallmark signature of a bubble (see John Hussman's Anatomy Of A Bubble). This type of price action is produced by human nature (speculative trading), not macroeconomics. Buy spending instead of saving now, your buying into the bubble. If you want to be protected during a market trend-change (crash), you need to do the opposite of the "crowd."

The time to spend is when everyone else is trying to save, and the time to save is when everyone else is in a buying frenzy.

Best....Jeff

 

I agree with Captain Sheeple, for the most part.  It's a tough line to walk, knowing you must prepare (which entails spending) and having a very strong set of reasons for why things could get very cheap in the near future. Everyone has to make their own choices.

I do not see how inflation in commodities can last.  Wages (not to mention hiring) are not inflating with commodities, so the increase in commodities has to draw from spending in other areas.  It's basically a giant tax with not even the facade of services offered in exchange. 

Wall Street money can push commodities up all it wants, and it can push stocks up all it wants.  That does not mean real actual human beings are putting more in their pocket or are in any way better off.  Instead, the exact opposite is true due to to the price inflation in commodities burning holes in multiple consumer pockets. 

When Wall Street realizes this, Wall Street will "want" to go the other way, and when the fight is downhill instead of uphill, things come down in quite a hurry.

Just my 2 cents. 

 

Johnny Oxygen's picture
Johnny Oxygen
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Re: Weird morning in America

"Given the underlying downward trend, we are inclined to see it as a one-time fluke," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Nothing to see here, keep moving.

Aaarrggghhh

joemanc's picture
joemanc
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JAG wrote: The time to spend
JAG wrote:

The time to spend is when everyone else is trying to save, and the time to save is when everyone else is in a buying frenzy.

Best....Jeff

Jeff, you perma-deflationist you! Money mouth

Seriously though, can you give me an example of something that you feel where the price will drop? For example, I am spending money on insulation, improving my soil, and buying up a couple of years worth of firewood in advance. As far as I can remember, the prices of just those 3 things I listed have never gone down in price. In fact, a roll of R-13 insulation at Home Depot has gone up in price just since this past winter and the cord of firewood I purchased last year has gone up by $15. To me, anything that I can buy now that will make me more resilient and enegy efficient is worth purchasing now.

Helix's picture
Helix
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A race will be on shortly. 

A race will be on shortly.  It is clear to me that we will eventually move into a "soak the rich" tax mode.  Which is probably only fair since a large part of the current mess is directly attributable to them.

The race will be on becuase the rich have been, are currently, and will continue to vacuum up as much of America's wealth as possible and shift it out of the country and beyond the reach of the IRS.

And China, India, Brazil, etc. will be only too happy to help them with that program.

Mark_BC's picture
Mark_BC
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Another thing you may want

Another thing you may want to consider is setting up in another country. I am trying to nail down which ones would be the best bet. We have friends in Chile and it seems like the best out of South America so we have moved some assets down there. If SHTF I think New Caledonia would be as far away as you can get from any really bad things happening, like nuclear bombs.

I wonder if our countries will clamp down the borders and make it difficult to leave once things get bad.

sjdavis's picture
sjdavis
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joemanc wrote: To me,
joemanc wrote:

To me, anything that I can buy now that will make me more resilient and enegy efficient is worth purchasing now.

Joe, expressed that way, you're exactly right, but I don't think it's the "opposite end of the debate from Jeff."  For the most part, Jeff seems to focus on investment bubbles.  Resilience and energy independence are much different goals that maximizing ROI.  Sure you can buy more of what you need when prices are cheaper, but not having that seasoned cord of wood is of little help if your standard fuel is not available.

nickbert's picture
nickbert
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betting against the crowd
JAG wrote:
joemanc wrote:

Without sounding like an alarmist, make a list and go buy it, now, while you can.

With respect Joe, and others, I couldn't disagree more. The "inflation" that you fear is just a product of market speculation. The majority of assets (including gold and silver) are showing super-exponenial price action, the hallmark signature of a bubble (see John Hussman's Anatomy Of A Bubble). This type of price action is produced by human nature (speculative trading), not macroeconomics. Buy spending instead of saving now, your buying into the bubble. If you want to be protected during a market trend-change (crash), you need to do the opposite of the "crowd."

The time to spend is when everyone else is trying to save, and the time to save is when everyone else is in a buying frenzy.

Best....Jeff

While this is often good advice, IMO one must know when this trader's approach applies and when it doesn't.  If my wife and her family followed this advice in the early 90's in their country (and it was a capitalist economy by that time), they would have been screwed by holding onto their cash while everyone else scurried to buy up things before their money devalued further (which it did... a lot).  Same with the people in Argentina about a decade ago.  There are many other factors other than speculation at work, and there are certain assumptions with your approach that may not apply.  One of these is the assumption of everpresent availability of these goods.  Another is that it assumes a (relatively-speaking) smooth-running and open market economy.  I'm not saying you're wrong about some of the goods and assets were discussing, only that applying it as a blanket rule is not a recipe for success.  For example I may take this approach to real estate if/when the market tanks and buy up some property at the time when most others are trying to sell.  But at the same time I'm still buying lots of storable food even though the demand and the prices are crazy.

Sometimes, sometimes, the crowd actually knows what it's doing Wink

- Nickbert

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t.tanner
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Romans ...

Lists are great, and it's nice to have your essentials buttoned up for the foreseeable future, but skills are far more important.  If you're truly concerned, take a couple of basic survival classes from someone like Tom Brown, Jr.  You'll learn all about shelter, water, fire & food, which are the four requirements for continued human existence, and you'll become far more self-sufficient. 

A more nuanced approach would be to find a find a group of bright, talented folks who are creating a resilient & sustainable local community, then see where you fit in and what skills you'd need to bring to the table.  If things truly go to hell, you'll be better off with a real flesh & blood community than walled off in your own little compound.

Finally, some practical advice for today.  If you're on a well, as opposed to a municipal water system, spend the $1500 to $2000 to add a hand pump to the top of your well casing.  There are few things that will help more in an emergency that access to clean, fresh water, and you can buy a hand pump with hardware that will fit next to your submersible.  

 

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Ready
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nickbert wrote: Sometimes,
nickbert wrote:

Sometimes, sometimes, the crowd actually knows what it's doing Wink

 

What crowd are we talking about exactly?

Are your friends and neighbors and coworkers trying to quickly rid themselves of FRNs? Maybe I'm the oddball, but the only people I know who consider that as a strategy are the ones on this site who still have jobs.

Even with all the attention this site and Chris' book has gotten lately, I still think we are a minority.

Septimus's picture
Septimus
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Different countries

Hi Mark_BC,

You may want to consider New Zealand. They do have a fairly strict immigration process but it is one that my wife and I jumped through. We both now have residency permits. I am here and have been since early November and my wife is leaving tomorrow to be here on Sunday (yeah!!). The issues discussed on this site are only part of the reason we decided to move here, a lot of other factors are involved for us but, in hindsight, it is clear that our paths have been preparing us for whatever we are supposed to do over here for years. I am one of those people who do not really believe in coincidence, at least for life changing and profound events that have different threads from all kinds of directions all merging with one clear path to choose. So we are taking that path wherever it leads.

Anyway, NZ is a great place, I live in Wellington.

As far as being far away from anywhere and with a mch greater ability to support itself without totally plummeting back into third world status, I don't think NZ can be beat.

Excelsior,

Septimus

cmartenson's picture
cmartenson
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Ready wrote: nickbert
Ready wrote:
nickbert wrote:

Sometimes, sometimes, the crowd actually knows what it's doing Wink

 

What crowd are we talking about exactly?

Are your friends and neighbors and coworkers trying to quickly rid themselves of FRNs? Maybe I'm the oddball, but the only people I know who consider that as a strategy are the ones on this site who still have jobs.

Even with all the attention this site and Chris' book has gotten lately, I still think we are a minority.

This is exactly correct.  If you can walk into any random sample of 100 people and find more than 2 that now hold physical gold for investment purposes, you are in rare company.

Bubbles cannot be described by percent increases in price alone, there is a psychology at work as well, there has to be by definition.  Gold and silver are not even remotely close to that psychological territory yet.  They are miles away.

If we are to describe bubble by price movements alone then the S&P being up ~100% in the past year has to qualify I suppose.

Here are some other things that are up heftily over the past year.  Again, ask yourself how many people you know who are in for the ride on these items:

  • Cotton +145%
  • Silver  +126%
  • Coffee +114%
  • Corn + 110%
  • Oats +79%
  • Wheat +56%
  • Heating oil +52%
  • Pork bellies +32%

Either that's a lot of bubbles or something else is going on here.

nickbert's picture
nickbert
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Ready wrote:nickbert
Ready wrote:
nickbert wrote:

Sometimes, sometimes, the crowd actually knows what it's doing Wink

 

What crowd are we talking about exactly?

Are your friends and neighbors and coworkers trying to quickly rid themselves of FRNs? Maybe I'm the oddball, but the only people I know who consider that as a strategy are the ones on this site who still have jobs.

Even with all the attention this site and Chris' book has gotten lately, I still think we are a minority.

I wasn't being specific about any one thing or buying trend, just that sometimes (even if it's a minority percentage of the time) the crowd isn't wrong.  But since you bring it up, no I don't know anyone who is going whole hog into buying things with the primary motive of getting out of FRN's.  I myself am actually sitting on a fair amount of liquid cash for reasons of emergency preparedness and buying opportunities.  I'm long term negative on the prospects of the dollar, but it hasn't lost its usefulness yet.

I think you bring up a great point, though, in asking which crowd are we looking at.  If we were just looking at our community here, one would get the impression that everyone is piling into gold & silver.  But looking at the larger 'crowd' and the population as a whole, it is much the opposite... only a relatively small percentage are pursuing these things.  That gap is shrinking (especially with silver) and I see huge bubble potential in gold & silver, but as of this time there's still a huge difference in buying trends between the two 'crowds'.  As for which 'crowds' I pay attention to, I think it makes sense to look at the largest crowd that has the most potential influence (not necessarily current influence) over the market or asset I am thinking about.  And I think you're right, our 'crowd' here is not a representative sampling of that larger crowd, and making assumptions of overall market sentiment using our patterns of behavior here at this point would work against us in some cases.

- Nickbert

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jturbo68
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Better a year too early than a minute too late

 

Chris has often pointed out that when it is apparent that the ship is not going to right itself, the rush

to move from paper moniey to tangible items eill be very sudden.

 

People who are activley prepping now, are tryng to be ahead of that curve.

Because we wont be able to compete against the big money when that moment comes.

 

The question is : Is the Commodity inflation just another bubble, or is this run up different because people are losing confidence in the currency.

 

John

 

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Ready
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not really directed at you...

Hey Nick,

That was more meant for the Captain than yourself. Your quote was just handy, and you were responding to Jag's comment, so I grabbed it.

Sorry to put you on the spot.

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Ready wrote: Are your
Ready wrote:

Are your friends and neighbors and coworkers trying to quickly rid themselves of FRNs? Maybe I'm the oddball, but the only people I know who consider that as a strategy are the ones on this site who still have jobs.

Actually 77% of the population follows this strategy. it's called living paycheck to paycheck:

http://www.selectsmart.com/DISCUSS/read.php?16,786455,786455#msg-786455

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SteveW
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Posts: 490
Gold bubble
cmartenson wrote:

Bubbles cannot be described by percent increases in price alone, there is a psychology at work as well, there has to be by definition.  Gold and silver are not even remotely close to that psychological territory yet.  They are miles away.

My working definition of a gold bubble is historical from 1980. When folks are lined up around the block to buy gold at the Bank of Nova Scotia in Toronto again then I'll know we're pretty well at the peak.

 

Ready's picture
Ready
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PastTense wrote: Ready
PastTense wrote:
Ready wrote:

Are your friends and neighbors and coworkers trying to quickly rid themselves of FRNs? Maybe I'm the oddball, but the only people I know who consider that as a strategy are the ones on this site who still have jobs.

Actually 77% of the population follows this strategy. it's called living paycheck to paycheck:

http://www.selectsmart.com/DISCUSS/read.php?16,786455,786455#msg-786455

 

No doubt.

I don't think even most folks who DO NOT live paycheck to paycheck give any thought to  buying ahead on things like food or wood or invenstment in PMs. The ones who do, couldn't even if they wanted to.

We are not unique, but clearly in the minority.

 

Mark_BC's picture
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tanner, do you have any

tanner, do you have any specific sources for these hand pumps? I was looking into this a while ago but didn't turn anything up. Thanks.

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t.tanner
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Pumps

Both of these companies offer pumps.  You might want to do a little research and consult a plumber.  With the right set up, you may even be able to pump directly into your pressure tank, which will allow you to continue to use your faucets, shower, toilets, etc.

Speaking of toilets, you might want to stock up on t.p.  You can always use old newspaper or mullen leaves in a pinch, but t.p. would be worth it's weight in gold if it became scarce.  Of course, if inflation gets bad enough, you can always use $10 bills.

http://www.bisonpumps.com/

http://www.simplepump.com/


 

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Not a problem...

Ready-

Hey, not a problem.  You actually kick-started my brain regarding the differences in sentiment between the 'crowd' here and the larger crowd, something I'd meant to mention earlier but forgot, so it was a good thing.

- Nickbert

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Bubbles
cmartenson wrote:

Bubbles cannot be described by percent increases in price alone, there is a psychology at work as well, there has to be by definition.  Gold and silver are not even remotely close to that psychological territory yet.  They are miles away.

Hi Dr. M,

To begin, I think we need to define the word "bubble". I will borrow from Hussman:

What exactly is a "bubble?" Informally, we can think of a bubble as an advance in an asset's price to levels that are "detached from fundamentals" - essentially, the primary motive for investing ceases to be the expectation of future cash flows or consumption, and instead centers on the expectation of further increases in price.

Thus, it is the speculative component of price that creates the bubble dynamic; i.e. people invest in an asset because they believe the price will rise.  While I agree with you that stocks and commodities are in bubble-land, I can't understand how you think gold and silver are "miles away" from bubble-land. No asset has more speculation enveloping it than gold, and it's difficult for me to accept that this speculation is not a major component of its price action. 

Also, I think it's a mistake to assume that everyone must participate in a market in order for a bubble behavior to occur. During gold's previous bubble in the 70's, your statement "If you can walk into any random sample of 100 people and find more than 2 that now hold physical gold for investment purposes, you are in rare company." would have been just as valid as it is now, but that didn't stop investors from losing money on gold when it crashed.

You have frequently referred to the price action in commodities as a warning of imminent high-inflation, but historically such a move in commodities precedes a crash in price.

(link)

With Wall Street's history of profiting from the creation and bursting of asset bubbles, it seems more probable to me that this is just more of the same. 

With respect....Jeff

 

 

 

 

 

Broadspectrum's picture
Broadspectrum
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Cut Death and Destruction Spending by 50% or More

I get most of my news from the radio (KPFK Los Angeles a Pacifica station), then the internet, a little bit from TV, hardly any from newspapers any more. From most all the stories about "discretionary" budget talks I keep hearing, "Everything is on the table" But that is not true. Hardly anywhere or anyone or in any story content (except KPFK) mentions that the death and destruction industry needs to be cut dramatically, AKA military industrial complex.

Please check out this article

http://www.berkeleydailyplanet.com/issue/2011-03-30/article/37580?headline=Cost-of-Iraq-Afghanistan-and-Libyan-Wars-and-the-California-Tradeoffs

Cost of Iraq, Afghanistan, and Libyan Wars and the California Tradeoffs

By Ralph E. Stone
Sunday March 27, 2011

Bookmark and Share

The United States national debt exceeds $14 trillion and is climbing. Nearly 14 million Americans are unemployed, about 2.2 million in California. Americans continue to lose homes to foreclosure. Public health, education, social services, and police and fire departments are facing cutbacks. Yet, we can spend more than $1 trillion dollars in wars in Iraq, Afghanistan, and Libya. Yes, if we bomb and strafe Libya, we are at war with that country. Greed, uncontrolled corporate power, and our addiction to foreign oil have led us to perpetual war, and economic and moral decline.  

What is the cost of the Iraq and Afghanistan war so far and what are the tradeoffs? As of March 2011, 4,441 Americans have died in Iraq as have as many as 150,000 civilians, and another 4.5 million civilians have been displaced. In Afghanistan, 1,513 Americans have died and, although accurate counts are hard to come by, as many as 8,000 Afghan civilians have been killed and another 3.7 million refugees are internally displaced or living in neighboring countries.  

The cost of those who died in these wars is immeasurable, but the dollar tradeoffs can be calculated. 

The total dollar cost of the wars in Iraq and Afghanistan so far exceeds $1.171 trillion. The taxpayers in California will pay $21.8 billion for proposed total Iraq and Afghanistan war spending for FY2011. To place this figure in perspective, this money could have provided 7.5 million low-income people with healthcare for one year or 14.7 million low-income children with healthcare for one year or 7.8 million homes with renewable electricity -- solar photovoltaic for one year or 2.5 million Head Start places for children for one year or 283,672 elementary school teachers for one year or 234,012 police or sheriff's patrol officers for one year or 2.6 million scholarships for university students for one year. 

There are also societal costs not included in the $1.171 trillion figure mentioned above. A 2008, RAND Corporation study found that one-in-five Iraq and Afghanistan veterans suffer from post-traumatic stress disorder (PTSD) or major depression. The RAND study estimates the societal costs of PTSD and major depression for two years after deployment range from about $6,000 to more than $25,000 per case. The RAND study estimates the total society costs for two years range from $4 billion to $6.2 billion. If PTSD and depression go untreated or are under treated, there is the likelihood of drug use, suicide, marital problems, unemployment, and homelessness. There are an estimated 107,000 homeless veterans nationwide on any given night and another 1.5 million at risk of becoming homeless.  

Obviously we need to exit Iraq and Afghanistan so monies can be spent on desperately needed domestic programs and to prevent further expenses for veterans' assistance. We have an exit strategy for Iraq. President Obama has ordered the 138,000 U.S. troops in Iraq withdrawn in three phases. They'll leave major cities - including Baghdad, Mosul and Baquoba - by the end of June 2011. Combat operations will end by August of 2010 - leaving a force of up to 50,000 Americans, primarily to train Iraq's military. Supposedly, all U.S. troops will be out by the end of 2011.  

President Obama "hopes" that U.S. troops will start leaving Afghanistan in the summer of 2011. "Winning" in Afghanistan depends largely on Pakistan, our unreliable ally. Since 2001, the U.S. has given Pakistan about $22 billion in aid and then Pakistan refused to allow an audit on how the money was spent. That amount of money would almost erase California's budget deficit. Most of the money lined the pockets of Pakistani political and military leaders or was spent to fight an unlikely war with India, not as it was intended, to train and equip Pakistanis to fight al Qaeda.  

Remember, however, these exit strategies for Iraq and Afghanistan are targets only. Given the instability and corruption of both governments, these target dates are unlikely to be met.  

And in Afghanistan, President Hamid Karzai admitted that Afghanistan cannot win the war and was reportedly -- although he denied this -- seeking to broker a truce with the Taliban. The estimated $1 trillion in Afghanistan's reserves of iron, copper, cobalt, gold, and lithium makes the war more important and complicated. Will the Taliban give up so easily knowing it is worth the fight to control the country's immense potential wealth? 

In Libya, defense analysts estimate that the U.S. is spending $100 million per day. Just imposing a no-flight zone over the northern part of Libya could cost $400 million to $800 million for the initial strikes. It had also projected costs of $30 million to $100 million a week to patrol the area. Just one Tomahawk missile costs $1.4 million. More than 178 Tomahawk missiles were filed worth $250 million.  

We cannot continue these enormous war expenditures ad infinitum, especially with our faltering economy. The U.S. has lost its way.                   End of article

This is Broadspectrum again.  I get the impression that I am one of the few posters on this site that is pro peace because this aspect of  the "discretionary" budget talks is not brought up in discussions on this web site either, just like MSM.

JAG's picture
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Ready wrote: nickbert
Ready wrote:
nickbert wrote:

Sometimes, sometimes, the crowd actually knows what it's doing Wink

 

What crowd are we talking about exactly?

Are your friends and neighbors and coworkers trying to quickly rid themselves of FRNs? Maybe I'm the oddball, but the only people I know who consider that as a strategy are the ones on this site who still have jobs.

Even with all the attention this site and Chris' book has gotten lately, I still think we are a minority.

If only "our" crowd was interested in buying gold, gold wouldn't be in the $1400's. Don't look now, but the paper market is capsizing our boat.

We are no longer in the minority. 

Ready's picture
Ready
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JAG wrote:Ready
JAG wrote:
Ready wrote:
nickbert wrote:

Sometimes, sometimes, the crowd actually knows what it's doing Wink

 

What crowd are we talking about exactly?

Are your friends and neighbors and coworkers trying to quickly rid themselves of FRNs? Maybe I'm the oddball, but the only people I know who consider that as a strategy are the ones on this site who still have jobs.

Even with all the attention this site and Chris' book has gotten lately, I still think we are a minority.

If only "our" crowd was interested in buying gold, gold wouldn't be in the $1400's. Don't look now, but the paper market is capsizing our boat.

We are no longer in the minority. 

 

JAG,

With respect, you turn every conversation into an opportunity to call gold in a bubble. What was actually discussed was

Snow rakes

Wood

guns and ammo

Nail clippers

Antibiotics

etc. etc. etc.

To which you respond

JAG wrote:

The time to spend is when everyone else is trying to save, and the time to save is when everyone else is in a buying frenzy.

I think what us sheeple are trying to say is that we don't see a buying frenzy. People are hunkering down to ride things out, and folks with access to cash seem to be holding it.

This, while prices for stuff we need goes up:

http://www.clevelandfed.org/Research/data/US-Inflation/mcpi.cfm

and money velocity goes down

http://research.stlouisfed.org/publications/mt/page12.pdf

 

To me, this isn't a gold in a bubble argument. If gold is in a bubble, everything else is too.

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I don't think the typical

I don't think the typical definition of bubble applies to gold because it isn't an asset that returns a profit. It isn't real estate or bonds or stocks, whose inherent value depends on their rate of return. These asset classes can be rationally analyzed to determine whether they are in a bubble (in essence, the P/E ratios or similar things). But gold returns no profit, its only "return" is in future appreciation of price. From this, it can be seen that gold can never be in an official "bubble", since there is no metric with which to measure this bubble. Its price can indeed go up and down though.

Gold's price then is reflective of peoples' beliefs about how high the price of gold will go in the future, and that's it. Then you have to analyze what are the underlying economic fundamentals which would drive those expectations. In the face of a dollar which must go down in the medium to long term, then gold must go up. In a hyperinflation scenario gold could go up infinitely.

This could turn into a frenzy. This is why the Fed must continue to suppress gold and silver for the system to remain solvent. Once the precious metals get out of control the whole game is onver. Once the sentiment in the general populace clues in to the fact that dollars are worthless and the only reasonable way for the typical person to keep their money is to buy gold, the sky is the limit.

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spending cash

Thanks for a good article Chris.

Re: gold bubble ? I once heard a definition of a bubble. "Something is in a bubble when you don't hold a position in it, and it is in a bull market when you own it."  Forgot who said that.

I am buying a few things... but I am NOT trying to get rid of my Federal Reserve notes. Nicole Foss over at Automatic Earth says that there are still many inflated claims to underlying wealth that have yet to deflate. It is perhaps the governments excessive printing that is trying to offset all  assets from their future deflation. Maybe inflation will win out in the end.?? 

tangible wealth will win out over paper wealth in the end. Unless inflation eats it away through the slow burn. Catherine Austin Fitts says the slow burn will continue for quite a while. Slow and steady wins the race.

Just my 3 cents worth of thought (adjusted from 2 cents for inflation !)

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Posts: 162
Bubble

Jeff,

Gold is simply money, pull out some monetary history and read it. It's far from perfect, but a much finer choice than fiat dollars and the bubble treasury market. You have been consistently wrong about your deflationist stand for as long as I can remember. As I recall, you were even bragging about being out of PM's within the last few months. Have you ever read American Patriot's posts on gold over at Marketwatch? They look similiar to yours on occasion. 

With respect, dont you wish you would have had some silver over the last few months? Calling a white sheep black over and over does not make it black. We are certainly a minority in our views about spending dollars today and investing in precious metals...period. When yahoo news changes their front page stories from saving and paying down your debt to burning cheap money and buying gold we can team up. Chris described you as gnashing your teeth concerning real inflation way back when, sheeple need their teeth, so dont grind them down too far.

On a side note does anyone have any good info on the percentage of our debt rolling short term now? The fact that we are basically running the country on an ARM loan makes me particularly nervous.

Cheers, TJ

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Ready wrote: JAG, With
Ready wrote:

JAG,

With respect, you turn every conversation into an opportunity to call gold in a bubble. 

Ahhhh Rog, good point; sorry about that everyone.

I really didn't intend this to be a debate about gold. All I was saying is that I disagree with buying something out of fear that the price will rise. I should have left it at that.

Best....Jeff

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Poet
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War Is Making Us Poor
Broadspectrum wrote:

This is Broadspectrum again.  I get the impression that I am one of the few posters on this site that is pro peace... 

Broadspectrum

I think you may have more allies than you think.

Considering we have a budget deficit of $1.7 trillion, and about $800 billion of which is directly related to war in Iraq and Afghanistan, only a fool would say we should continue such disastrous and unnecessary spending... And considering how much we spend on foreign military bases throughout the world when a lot of those countries like Japan and Germany should really be paying us to be there...

I've mentioned before the War Is Making You Poor Act. Both Ron Paul and Dennis Kucinich signed up as co-sponsors. Too bad it went nowhere.

Poet

Ready's picture
Ready
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JAG wrote: All I was saying
JAG wrote:

All I was saying is that I disagree with buying something out of fear

That's sound advice right there.

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robie robinson
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Just having finished two

Just having finished two "simple pump" installs, I will vouch for their simplicity and,to me, obvious simplicity and durability. There is nothing that can break that I can't fix.

 

robie

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cmartenson
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JAG wrote: To begin, I think
JAG wrote:

To begin, I think we need to define the word "bubble". I will borrow from Hussman:

What exactly is a "bubble?" Informally, we can think of a bubble as an advance in an asset's price to levels that are "detached from fundamentals" - essentially, the primary motive for investing ceases to be the expectation of future cash flows or consumption, and instead centers on the expectation of further increases in price.

Thus, it is the speculative component of price that creates the bubble dynamic; i.e. people invest in an asset because they believe the price will rise. 

With all due respect to Dr. Hussman, whom I admire, that is a crappy definition of a bubble.  It defines momentum investing, Treasury bonds at negative real rates of return, and virtually the entire Nasdaq as "bubbles."  It's far too broad and restrictive at the same time.

Broad because it covers everything 'detatched from fundamentals' (everything gets that way both high and low from time to time; thus, too broad) and too narrow because it focusses only on price and excludes psychology and particiaption rates.  So, no, I reject the definition right from the get-go.

It's a non-starter for me.

ao's picture
ao
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everyone else is pro-war?!?
Broadspectrum wrote:

 

This is Broadspectrum again.  I get the impression that I am one of the few posters on this site that is pro peace because this aspect of  the "discretionary" budget talks is not brought up in discussions on this web site either, just like MSM.

Once again, I repeat the mantra, "Check the archives".  Actually, I think the vast majority of the human race is pro-peace.  I would speculate that it's only the 6% of sociopaths that might be pro-war.  I think, in order to have maximum impact, it's imperative that the most ardent, self avowed, pro-peace advocates make their appeal directly to those who are the most active in promoting war rather than preaching to the choir that is presently living in peace and just wants to continuing being left in peace.

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Fear

I fear that my dollar is going to continue losing buying power vs the things I need.. therefore I am buying Silver and Gold.  I am afraid for a very logical, well studied set of reasons.  Jag's backward looking chart of commodities and his aphorism about fear don't change my mind.  Jag's chart is just another argument for an eventual deflation... an ongoing discussion topic.  A backward looking chart does not help us deal with an endgame scenario, which I believe is coming. 

cmartenson's picture
cmartenson
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Jim Hannah wrote: I fear
Jim Hannah wrote:

I fear that my dollar is going to continue losing buying power vs the things I need.. therefore I am buying Silver and Gold.  I am afraid for a very logical, well studied set of reasons.  Jag's backward looking chart of commodities and his aphorism about fear don't change my mind.  Jag's chart is just another argument for an eventual deflation... an ongoing discussion topic.  A backward looking chart does not help us deal with an endgame scenario, which I believe is coming. 

Further, I would place more weight on a 200 year chart of prices if the measuring stick, money, was constant over that period.  It is not.

For most of that 200 year history gold and silver were the money and, as I hopefully illustrated in the Crash Course chapter on inflation, all prior epsiodes of inflation were undone precisely because there was a constant measuring stick.

Now?  Not so much.

All we have to go on is 40 years of constantly inflating history, dated to about, oh, say, approximately August 15th, 1971.

To me it is simply not credible to compare prices across those time spans because the money types were so completely different.  What's the difference between market behaviors under a hard money system and a fiat money system?  Night and day.  There are different rewards, different penalties, differnt enticements and different punishments.

Even more, we are now hitting some hard limits on several key commodities, something that has not ever been experienced globally before.

Sure, there will be a pullback in commodities someday, but not until the fiscal and monetary madness is brought under control.  That won't be this week.  Maybe next week?

:)

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Poet, that is a great list.

Poet, that is a great list.  It seems the meek shall inherit the earth.  I was a carpenter (non-union) for most of my adult life, and know firsthand that tradesmen have been considered, well...disadvantaged.  But reading your list makes me realize that people who are accustomed to working with tangible things, whose job security traditionally lasts until the job is complete (and whom are frequently paid commensurate with what was accomplished), will be at an advantage in the new world (hands pre-calloused, attitude pre-humbled).  The times are a changin'. 

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idoctor
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Posts: 1731
Pro: China's Hot Inflation

Pro: China's Hot Inflation Drives Gold to $2200 http://www.cnbc.com/id/42596474

Chatter on the Street Thursday had everything to do with just how high inflation fears could drive commodities especially after new data leaked onto the market.

Although Beijing won’t release official inflation data until Thursday evening (New York time), the advance numbers were hot.

According to Hong Kong's Phoenix TV, citing an unnamed source, China's annual rate of inflation in March hit a 32-month high - it's likely to be 5.3-5.4 percent.

And that has trader Brian Kelly focussed on gold

[GCCV1  1475.20    2.80  (+0.19%)   ]

. He thinks it could go to $2200.

Here's his thesis:

According to Kelly, when adjusted for inflation, the real rate of return for people in China with money in the bank after one year is negative. And if the numbers leaked are confirmed by Beijing, that trend grows more negative.

In other words, if you live in China and put savings in the bank for a year you lose money.

Kelly thinks that will drive investment demand for gold. "There's a tremendous amount of investment demand for gold coming from China," he says. But not only for things like gold ETFs or mutual funds. Kelly says in China "they also have gold savings accounts. Instead of saving in yuan you can save in gold."

So where does that $2200 price target come from?

"That last time the real rates went negative was in 2007," he says. "At the same time the spot price of gold ran 51% higher. If you take Thursday's closing price and add 51% you get to $2220 and ounce.

 

Some bubble IMHO....time will tell.

Mark_BC's picture
Mark_BC
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Posts: 402
Thanks for the links

Thanks for the links tanner.

Septimus, I was thinking of New Zealand too but I checked out their immigration procedures and it seemed a little onerous. I would probably have enough points though if I tried.

Actually, with the money we are making off silver right now I could quit my job and just go over there and try to stay long enough to get some kind of residency. Right now my job income is peanuts in comparison to our investment income, but it is security and who knows, maybe silver will reverse and go down.

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Subprime JD
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Posts: 562
Ive noticed lately that more

Ive noticed lately that more and more government big boys are saying statements to the effect that the country is broke.

James Baker, who served as secretary of the treasury said,

The United States of America, if we didn't have the dollar as the de facto reserve currency of the world we'd be greece.
I mean, we are broke, bankrupt, really bankrupt

http://www.subchat.com/otchat/read.asp?Id=763281

I heard Baker say this on CNN and I was in shock! Of course within 20 mins Baker was off the show and they put on some blowhard university professor claiming how he "thinks" things will continue to get better and how he "believes" that the deficit issue will be taken care of. Damage control for CNN after Baker called the USA broke lol.

Even in the comments section on Marketwatch, yahoo, cnn and cnbc you will see posts saying similar things said on CM re debt, fiat currency, bankruptcy, insolvency.

When a country has such a huge deficit, people begin to question not only where the money will come from, but what exactly that money is. People are beginning to learn that our money system is based on faith lol.

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