Deflation Dollar Panic - No, Chicken Little, the Sky is Not Falling

Some, who are passionate about a deflation in dollar prices, are in a panic today.

Seems there have been rumors about the petro countries getting out of dollars. Supposedly secret meetings are occurring. In short, everyone is fed up with Bonzai Ben Bernanke and wants to unload their dollars for "real" money. Or so goes the rumor.

What is not rumor is that the dollar is going down at this moment. If the dollar depreciates relative to other currencies,  usually this means prices in dollars will go up. In other words inflation. Hence, the fear of deflation advocates. If you have inflation, obviously you're not having deflation.

One deflation newsletter today, to Guido's knowledge, has posted two articles denying this will happen, almost boarding on hysteria.

Well relax, you weak sisters, the dollar won't collapse today. Because it's already been collapsing over the last hundred years.

Since 1910, the dollar has lost over 98% of its' intrinsic value relative to goods and services. This has enriched the wealthy and demolished the middle class / income segment of the population. With the demolition of the middle class, democracy and basic freedoms are disappearing.

Coincidentally or otherwise, this all seemed to occur around the same time the Federal Reserve was created in 1913 to be America's "currency guardians". Now whether this is cause and effect, may be open to debate. But if anyone thinks the Fed or other Central Banks will be abolished, they are living in a myth. Like the Mafia, flu, and child birth. Like death and taxes, Central Bankers will always be with us, for better or worse.

The focus of people should not be on getting rid of Central Banks, but on getting better Central Bankers.

As for inflation / deflation this century, just look at the price of gold. It is up over four times in price from what it was at the turn of the century.

Various reasons have been given for this. But the simple explanation is that gold has become a substitute for currencies as a store of value. It's illogical and doesn't make any sense. But then it even makes less sense to  have any confidence in Bonzai Ben and his ilk.

Is this the time to buy gold? Right now, Guido wish he knew that for himself . I do own gold, and have been in and out of gold this whole century, trading with that 400% move up, and sometimes getting out when the price contracted. But never selling short and always getting back into this investment.  Right now I am not buying gold, because I already own it and am enjoying the paper profits.

To make money in a speculation / investment, one should be putting their bets down before the investment starts moving up, and especially before everybody starts getting excited about it. That's when the easy money can be made. And that's why gold was such a sure thing at the beginning of this century.

Right now, Guido is having trouble finding any more easy money. Perhaps, as some assert, this is because the Central Bankers have so messed up the markets. If so, it will pass.

As soon as that opportunity comes and Guido has put his money where his mouth is, I'll let you know dear friends.

"I got across Europe and came to America because I had a pocketful of gold coins." - A farmer in Wisconsin who immigrated after World War II.

< As always, this article is for information purposes only. It is not investment advice or in any other way a recommendation. Please read the disclosure at the bottom of this web page. >

Deflation Desperation - What Will be Banzai Ben's Last Kamakaze Raid

As previously stated on this website Sept 21 in A Tale of Two Fools, arguments about the meaning of money per se can be a waste of time. I mean, you might as well be trying to find the true purpose about Life, or what is the real meaning of Love. Every person has their own opinion, and in a sense every person is right.

However, what can be gained from these meditations, is perhaps a broader understanding of the world and its' environment. This is especially true if one is trying to make their money grow into more money. Whether investing or speculating < really the only difference between the two is your time horizon >, .the degree of one's success will depend on how well they have predicted / guessed what will occur in the future. Even if the predictions are completely wrong, the probability of  success may increase  by the time spent in trying to make these predictions.

That is the real usefulness in talking about whether or not the US, and indirectly the rest of the planet, will be going into a hyperinflation, or a deflation in prices.

A Mr. Practical on a website called Minyanville.com, makes it clear why he feels the Untied States will have a deflation. Basically, he thinks that with all the bad loans out there, a tremendous amount of  "debt destruction" will occur. This will then result in a shrinkage of the money supply, with an indirect result being a 40% rise in the US dollar vis a vis other foreign currencies.

This all has a certain logic to it. However, in what time frame this all occurs, Mr. Practical then gets very fuzzy in his forecasting. If he's talking about a 40%  rise in the dollar equally spread over 5 years, this is feasible and won't be a strain on the world financial system. If he's talking within the next 6 months, it will be catastrophic.

The flaw in Mr. Prac's thesis, I think, is that he may not be taking into account what overall economic effects will occur with the type of "debt destruction" he is predicting.  A tipping point, very quick in time, would occur, when everything financially started unravelling. Stock markets, bond markets, everything having to do with money, would go ballistically ape. It would make Oct 2008 seem benign.

If this actually started happening, a rapid deflation of prices, Banzai Ben Bernanke and his Fed stooges have one last ultimate weapon. They, indirectly, could issue a  million dollar check to every American citizen. This would result in a complete destruction of the American currency, which a hyperinflation does. Think this is ridiculous? Well, he hasn't been called Helicopter Ben for nothing. Just look at the crazy stuff he's done over the last year.

Actually this is not a new or innovative solution. The same thing occurred, with different details, during the ancient Roman Empire and in France during the early 1700s. The latest incident was last century when Weimar Germany hyperinflated in the early 1920s. The power elite of industrialists and Junkers were about to financially implode from all their debt. The government induced hyperinflation made this debt worthless and they survived. The loser was the German middle income class, who were completely wiped out. This made it possible for some wacko group to seize power ten years later. For more details, I suggest you read Emil Ludwig's 1934 biography Hindenburg.

The world financial / economic system is on a razor's edge. Very likely, control will be lost and a rapid shrinkage in prices will occur. At that time, Banzai Ben will do his Kamikaze Raid and intentionally crash the dollar. In the aftermath, a new currency will then be created.

So Mr. Practical may have his deflation. But if it occurs, it will be after a hyperinflation. Really, it's just a disagreement about which is first, the chicken or the egg. Whatever which way, they will both get devoured by a hungry wolf.

And this will be the last article about deflation / inflation. I don't think there can be any more useful benefit from further discussion.

"All money is a matter of belief." - Adam Smith

< This article is for information purposes only. It is not a recommendation or otherwise investment advice. >