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What the Deflationist Campers Forgot to Put In Their Backpacks

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  • Tue, Jun 22, 2010 - 12:15am

    #1
    Davos

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    What the Deflationist Campers Forgot to Put In Their Backpacks

Here is the article I did in response to Bob Prechter’s interview this weekend on FSN. I’m NOT knocking Prechter, I think the entire Elliot Wave thing is fascinating. I’m NOT knocking the Deflationist. I wrote this to point out that it is a jungle out there and even the best of both camps miss things that can bight us.

In this interview what stuck out was the misnomer that currencies can’t be devalued. That is utter and absolute $&!!#@&%.

WHAT THE DEFLATIONIST CAMPERS FORGOT TO PUT IN THEIR BACKPACKS

The trick to camping is preparation. Nothing is worse than getting to the campsite and realizing that you forgot to put something in your backpack. Line to hang the food at night, an electric fence, pepper spray or a gun to keep safe from bears. A seasoned camper can usually substitute matches for a magnifying glass, or boiling water from a stream for drinking can take care of the forgotten water filter/pump. 

Leaves can, to some extent replace the roll of forgotten – well you know.

Personally I prefer preparation to Preparation H. 

What I think the Deflation Campers neglected to put in their backpack is ….

  • Tue, Jun 22, 2010 - 03:10am

    #2
    Peak Prosperity Admin

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    Re: What The Deflationist Campers Forgot to Pack…

Davos,

In the event of a overnight devaluation such as you describe, are you assuming that gold and silver will somehow be immune to this dramatic devaluation in purchasing power? If you want to prepare for hypothetical possibilities, you might consider that if the IMF/Fed undertook the nearly impossible task of replacing the world’s reserve currency, it might also take the relatively simple step of outlawing gold trade, or heavily taxing gold transactions.

The Mexico devaluation that you cited seems to be a bit of a stretch to me. Most of the world’s currencies are actually a derivative of the USD. I’m not sure its logical to extrapolate the circumstances of a third-world derivative currency and apply them to the primary global currency. Of course anything is possible, but its not realistic to prudently prepare for all possibilities. 

I know CM, yourself, and the majority of this community are confident that gold will protect purchasing power in a wide variety of possible futures. I’m not willing to put the majority of eggs in that basket. Human nature being what it is, the closest thing to a sure-thing is to bet against the illusion of a sure-thing. 

I enjoyed your piece, and as a fellow hiker, I know that long walks in nature are very conducive to the cognitive process. However, that gold-filled “inflationist” back pack of yours must be getting awfully heavy. Luckily mine is packed with $100 bills of thin-air cash. Laughing

Meet you at the summit my friend…..Jeff

 

  • Tue, Jun 22, 2010 - 03:29am

    #3
    Peak Prosperity Admin

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    Re: What The Deflationist Campers Forgot to Pack…

Hello JAG:

[quote=JAG]Davos,

In the event of a overnight devaluation such as you describe, are you assuming that gold and silver will somehow be immune to this dramatic devaluation in purchasing power? If you want to prepare for hypothetical possibilities, you might consider that if the IMF/Fed undertook the nearly impossible task of replacing the world’s reserve currency, it might also take the relatively simple step of outlawing gold trade, or heavily taxing gold transactions.

[/quote]

I agree and think that they could easily outlaw gold and or take it all so they have it all to back. Jewelry and numismatic gold I doubt they’d take.

[quote=JAG]

The Mexico devaluation that you cited seems to be a bit of a stretch to me. Most of the world’s currencies are actually a derivative of the USD. I’m not sure its logical to extrapolate the circumstances of a third-world derivative currency and apply them to the primary global currency. Of course anything is possible, but its not realistic to prudently prepare for all possibilities. 

[/quote]

Many people were invested in high paying interest bearing bank CD’s south of the border in Mexico. Many people in the US, a good majority from Texas and California lost life savings when this occurred. Any country, third-world/emerging or other can do this to shed debt. Argentina did this as well. Many countries have and likely will do this. I respect your view on this but my view is that this is very possible.

My point with Mexico was more to point out that the statement Bob made wasn’t factual. A country can and many have devalued currencies backed by nothing.

[quote=JAG]

I know CM, yourself, and the majority of this community are confident that gold will protect purchasing power in a wide variety of possible futures. I’m not willing to put the majority of eggs in that basket. Human nature being what it is, the closest thing to a sure-thing is to bet against the illusion of a sure-thing. 

[/quote]

Well, in this case (Mexico) a person holding his/her wealth in bullion could have exchanged it for any currency of his/her choice. A person holding 1,000 Old and now obsolete Pesos had one option – trade it in for 1 New Peso.

[quote=JAG]

I enjoyed your piece, and as a fellow hiker, I know that long walks in nature are very conducive to the cognitive process. However, that gold-filled “inflationist” back pack of yours must be getting awfully heavy. Luckily mine is packed with $100 bills of thin-air cash. Laughing

Meet you at the summit my friend…..Jeff

[/quote]Well, you might be able to use them for TP after you walk over my exhausted and dead body. LOL, take care my friend.

  • Tue, Jun 22, 2010 - 05:02am

    #4
    Peak Prosperity Admin

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    Re: WHAT THE DEFLATIONIST CAMPERS FORGOT TO PUT IN THEIR …

Interesting read. The points you listed for the Deflationistas simply asserted it for me while the other points didn’t take strong enough hold. We are seeing some tensions at the G20 where US wants to keep spending and some of the others are finally growing up to realize it can’t go on forever. I guess it’s a bit different for me up here in Canada. If you guys devalue we’ll probably follow. It’s hard to say since we’ve been working hard at diversifying our exports.

Throw in Peak Oil and it changes the dynamics. I don’t often see that being analysed in the (in/de)flation debates. Energy is and always will be the primary economic driver. We will keep hitting a hard and ever lowering energy ceiling anytime there is a chance at recovery. I don’t think the public will continue being happy with evermore stimulus and bailouts and might just have to accept that we’re in for some challenges. I have a strong feeling that we’re soon approaching a tipping point in awareness about energy issues and the fact the “sustainable growth” is an oxymoron. I feel like a lot of people are seeing what is happening in europe and hopefully learning from them perhaps even after they’ve suffered their own recent losses. With each crisis more and more people start paying attention. The Gulf is no different.

 

I don’t have much but in my backpack but so far I like a mix of about 30% CAD because this is where I live, 10% USD, 50% Canadian Maples (Au) and 10% Canadian Maples (Ag).  I consider my PMs long term savings and don’t worry about it one bit. I don’t gamble in the market (besides my pension which I cannot control and don’t have much hope for). Can’t afford to.

I prefer to pack light and put everything else into edible/medicinal perrenials, infrastructure, tools and skills. None of which I will ever worry about devaluation by TPTB Money mouth. But I guess I’m not camping anymore but setting up base camp.

  • Tue, Jun 22, 2010 - 08:45am

    #5
    Peak Prosperity Admin

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    Re: What the Deflationist Campers Forgot to Put In Their …

Davos, nice article. 

I agree whole heartedly with your point and actually try to live in this consumer and convinience society with a back-packers mentality & efficiency  – carry/use only what you absolutely need and improve the rest.

I’ve been following the discussions here on the site since the past year and a half and my feeling is the following:

– prepare ourselves on the worst-case scenario : asset value deflation (wages as well), inflation in commodity prices (due to peak oil)

– there will be new, unforeseen rules invoked by the powers that be; either IMF SDR’s as the new “reserve” currency or a new currency in  oil/energy units; new income tax regulations/ or tax regulations stripped, etc.

– And ask the following question:  who controls commodity prices?  Gold and Silver (ETFs and bullion prices) are determined by the London/NY spot prices. My hope for the future is that the major markets lose their grip and smaller off-line, local markets spring up.  And that prices are determined by their actual scarcity/abundance.

Happy trails!

  • Tue, Jun 22, 2010 - 11:49am

    #6
    Peak Prosperity Admin

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    Re: What The Deflationist Campers Forgot to Pack…

[quote=Davos]

[quote=JAG]

The Mexico devaluation that you cited seems to be a bit of a stretch to me. Most of the world’s currencies are actually a derivative of the USD. I’m not sure its logical to extrapolate the circumstances of a third-world derivative currency and apply them to the primary global currency. Of course anything is possible, but its not realistic to prudently prepare for all possibilities. 

[/quote]

Many people were invested in high paying interest bearing bank CD’s south of the border in Mexico. Many people in the US, a good majority from Texas and California lost life savings when this occurred. Any country, third-world/emerging or other can do this to shed debt. Argentina did this as well. Many countries have and likely will do this. I respect your view on this but my view is that this is very possible.

My point with Mexico was more to point out that the statement Bob made wasn’t factual. A country can and many have devalued currencies backed by nothing.

[/quote]

Davos,

Maybe Prechter’s statement is technically incorrect but I am not so sure it is totally incorrect.  How exactly would the USD devalue?  Would the President, Bernanke, or Geithner get on TV and announce it?   How would they enforce it?  The size of the USD market is incomparable to a third world pegged currency.  I doubt anyone really knows what would happen if such a thing occurred and for that reason alone, I can’t see it happening any time soon.  I think Prechter’s point is that in a western democracy, leaders might not be able to do as they please because they can become slaves to the political reality.  Maybe the teaparty movement will show if this is really the case.

Another factor that might make a difference is money creation.  Because all money is loaned into existence, hyperinflation ( if caused by an outright increase in the money supply ) seems highly unlikely unless the FED/Treasury do massive QE to make up for the credit deflation.  The world is saturated in debt right now and there just are no more good borrowers left.  Governments will continue to try and make up the difference but what happens when a debt auction fails?  Do you think they will quietly try and monetize it or do you think they will try and raise rates?

I really don’t know.  I still think this has to end in inflation but I am no longer convinced that we could not go through some severe deflation before we get there.

  • Tue, Jun 22, 2010 - 12:56pm

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    Re: What The Deflationist Campers Forgot to Pack…

[quote=goes211]

<snip>

Another factor that might make a difference is money creation.  Because all money is loaned into existence, hyperinflation ( if caused by an outright increase in the money supply ) seems highly unlikely unless the FED/Treasury do massive QE to make up for the credit deflation. 

<snip>

[/quote]

Just because all money is currently loaned into existence does not mean that it must always be this way. A wild card in the mix is that the US gov could certainly start printing money directly instead of printing bonds. It may be that a desperate gov will try somethng like this instead of going into the deflationary spiral that some believe is inevitable.

 Ken

 

  • Tue, Jun 22, 2010 - 01:10pm

    #8
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    Re: What the Deflationist Campers Forgot to Put In Their …

In the case of Mexico or a potential devaluation int he US, what happens to prices of goods and what happens to debt?   I read up a little on the Mexican peso crisis but am confused still how it’s in the interest of a government to do this or that the US could do it effectively.  

tom 

  • Tue, Jun 22, 2010 - 01:17pm

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    Peak Prosperity Admin

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    Re: What The Deflationist Campers Forgot to Pack…

[quote=goes211]

[quote=Davos]

[quote=JAG]

The Mexico devaluation that you cited seems to be a bit of a stretch to me. Most of the world’s currencies are actually a derivative of the USD. I’m not sure its logical to extrapolate the circumstances of a third-world derivative currency and apply them to the primary global currency. Of course anything is possible, but its not realistic to prudently prepare for all possibilities. 

[/quote]

Many people were invested in high paying interest bearing bank CD’s south of the border in Mexico. Many people in the US, a good majority from Texas and California lost life savings when this occurred. Any country, third-world/emerging or other can do this to shed debt. Argentina did this as well. Many countries have and likely will do this. I respect your view on this but my view is that this is very possible.

My point with Mexico was more to point out that the statement Bob made wasn’t factual. A country can and many have devalued currencies backed by nothing.

[/quote]

Davos,

Maybe Prechter’s statement is technically incorrect but I am not so sure it is totally incorrect.  How exactly would the USD devalue?  Would the President, Bernanke, or Geithner get on TV and announce it?   How would they enforce it?  The size of the USD market is incomparable to a third world pegged currency.  I doubt anyone really knows what would happen if such a thing occurred and for that reason alone, I can’t see it happening any time soon.  I think Prechter’s point is that in a western democracy, leaders might not be able to do as they please because they can become slaves to the political reality.  Maybe the teaparty movement will show if this is really the case.

[/quote]

They could easily say tomorrow, by announcement from Obama and Geithner that our dollar is now known as the “Old US Dollar” and they could hold up one “New US Dollar” and say, “Effective today these old dollars are no longer accepted by any bank, bring us 1,000 old dollars and we will give you 1,000 new dollars.

128 trillion of debt and unfunded liabilities would get wiped out leaving 128 billion of debt and unfunded liabilities. 

If someone had a mortgage of $1,000 a month it would be serviced with $1 new dollar, so a $100,000 dollar mortgage would be paid off in 100 months or with 100 bucks.

Really, it would just be a back-room deal with our external creditors to what we could get away with (how many old bucks to buy the new buck.) Other countries would have to do the same.

All transactions globally (about 80% of all transactions globally are done with the USD) would be pegged to the new dollar – or the world would drop the USD as the reserve currency.

[quote=goes211]

Another factor that might make a difference is money creation.  Because all money is loaned into existence, hyperinflation ( if caused by an outright increase in the money supply ) seems highly unlikely unless the FED/Treasury do massive QE to make up for the credit deflation.  The world is saturated in debt right now and there just are no more good borrowers left.  Governments will continue to try and make up the difference but what happens when a debt auction fails?  Do you think they will quietly try and monetize it or do you think they will try and raise rates?

I really don’t know.  I still think this has to end in inflation but I am no longer convinced that we could not go through some severe deflation before we get there.

[/quote]I honestly don’t know. We could. They could print. I think possibly Bernanke could use QE secretly (under the guise of Other Households) to purchase failed auctions hiding the true bid to cover ratio and make the “Bond Vigilantes” look like they were in the room up against a 900# gorilla leaving rates at 0.

The entire point of my write was just to point out that devaluations happen and could happen, ESPECIALLY in this day and time.

I didn’t want to get into a inflation/deflation debate with anyone, I just wanted to point out Precchter missed a point, a big point.

  • Tue, Jun 22, 2010 - 01:34pm

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    Peak Prosperity Admin

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    Re: What the Deflationist Campers Forgot to Put In Their …

[quote=Woodman]

In the case of Mexico or a potential devaluation int he US, what happens to prices of goods and what happens to debt?   I read up a little on the Mexican peso crisis but am confused still how it’s in the interest of a government to do this or that the US could do it effectively.  

tom 

[/quote]Hello Tom: I’ve asked myself that question. In all honesty, I think they are trying to do a slow gentle devaluation hoping it won’t go Wiemar or Zimbabwe on them. Either way the price of goods will be insane. If wages stayed pegged to new dollars and debt stayed pegged to old dollars it would be the equivalent to everyone getting all their debt paid off and I’m sure we’d have massively higher prices. The only certain thing I see is they are scr#wed no matter what they do.

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