There have been quite a few threads on Elitetrader on the related topics of gold / inflation / deflation. This post summarises my thoughts on these topics.
Main influences:
Chris Martenson
http://www.chrismartenson.com/
http://www.youtube.com/user/ChrisMartensondotcom
Author of the "Crash Course" which covers various obstacles that will face the earth's population now and in the next 20 years. These include an exponentially growing money supply in a finite world, human overpopulation, peak oil and overuse of the earth's natural resources.
Marc Faber
http://www.gloomboomdoom.com/
http://marcfaberblog.blogspot.com/
http://www.youtube.com/user/MarcFaberChannel
Jim Rogers
(My understanding is that he thinks Asian countries will do better than the US in the coming years)
Michael Shedlock
http://globaleconomicanalysis.blogspot.com/
(Strong believer in deflation)
Where are we now?
* Significant decline in equities from mid-2007 to March 2009.
* S&P 500 rose by over 60% from the intraday low of 666 in early March 2009 to September 2009.
Despite the recession, total US debt / GDP ratio still remains at levels that are
(1) similar to that seen in 2007 and
(2) higher than 1929.
Why is US debt still at 2007 levels despite the recession?
Despite reduced levels of debt for consumers and businesses (seen by either debt repayment and/or debt default), the US govt has increased their borrowings in order to keep the US economy afloat.
Where to from here? (part 1)
There are some commentators (look at articles on 321gold.com for example) who strongly believe that the US will experience high inflation or hyperinflation in order to print away this debt.
Likewise there are some analysts (Mish Shedlock, Hugh Hendry) who believe that the US will experience deflation, and that the debt will be reduced mainly be defaults.
To be overly simplistic, letâs assume that these are the only two possible outcomes.
Evidence
Inflationists will point to the rising US Dollar gold price, ultra-low Federal Funds rate and powerful people (Bernanke, Geithner) who will take extraordinary measures (and incur extraordinary amounts of US debt) in order to support failing businesses and support economic growth.
Deflationists will point to:
*declining high (and rising) unemployment / underemployment,
*declining wages,
*steady inflation expectations,
*bond bull market, with a 10-year yield well below 3.50% and 2-year yield well below 1%,
*money supply numbers declining,
*insolvent banks, banks unwilling and/or unable to lend,
*consumers / businesses unwilling to borrow and low money velocity.
Mish and Hendry also argue that despite the best efforts of Bernanke and Geithner, their actions are insufficient to keep the economic growth party going.
Where to from here? (part 2)
In a hypothetical market free of government interference, I would readily side with the deflationist camp, because in the absence of the extraordinary actions taken to support failing businesses (mainly financial companies, but also companies in other industries), the US economy would be in much worse shape.
So the question then turns to the effectiveness of the actions of Bernanke and Geithner.
As mentioned previously, the actions of Bernanke and Geithner have reduced the severity of the recession. In this respect their actions have been effective.
Although the stockmarketâs 60% plus rise since March has CNBC presenters frothing at the mouth and declaring this the start of a brand new bull market, most Treasuries yields formed a double top in June 2009 and August 2009 and have been declining steadily since then.
It is important to remember that in 1930 the stockmarket experienced a similar 50% plus bounce before it hit new lows later in the year, and kept on falling in 1931 and 1932.
It is important to remember that the Japanese stockmarket experienced a similar 50% plus bounce in the early 1990s, however the Nikkei is at about 10,000 today, still 75% below the peak seen in 1989.
For these reasons, it is reasonable to expect that deflation will be the prevailing trend; that the actions of Bernanke and Geithner, while extreme, are not sufficient to beat the deflationary storm engulfing the US. Hugh Hendry, for example has stated that he believes that the US should be printing close to $10 trillion to buy various securities in order to fight deflationary forces.
But wait, thereâs more
Letâs assume Iâm right, and that the stockmarket resumes its secular bear market, and that the S&P 500 falls below 1000, below 900, below 800, below 700. Letâs also assume that a few mid-size banks (not considered too big to fail) go under, and economic contraction (ânegative growthâ) continues, and unemployment rises above 15%. In this type of situation itâs reasonable to expect at least a small possibility of Bernanke and Geithner implementing additional measures in an attempt to support the economy. Ultimately these measures would result in a higher US govt debt burden.
This is essentially Marc Faberâs view (http://seekingalpha.com/article/163919-marc-faber-equities-safer-than-dollars). In the Bloomberg interview mentioned in this article, Faber argues that the US authorities will continue to print more and more money, and that in the coming decade the US Dollar will implode.
Investment choices
In a deflation scenario (absent additional government support), stocks will decline significantly, and gold will probably also decline, but probably by an amount less than equities.
In a Marc Faber scenario (additional government support), stocks will continue to rise, and gold will do even better.
Either way, my view is that you donât need to be right with regards to the inflation / deflation debate. All you need to know is that in the coming decade, gold (in US Dollars) will outperform US equities.
Main influences:
Chris Martenson
http://www.chrismartenson.com/
http://www.youtube.com/user/ChrisMartensondotcom
Author of the "Crash Course" which covers various obstacles that will face the earth's population now and in the next 20 years. These include an exponentially growing money supply in a finite world, human overpopulation, peak oil and overuse of the earth's natural resources.
Marc Faber
http://www.gloomboomdoom.com/
http://marcfaberblog.blogspot.com/
http://www.youtube.com/user/MarcFaberChannel
Jim Rogers
(My understanding is that he thinks Asian countries will do better than the US in the coming years)
Michael Shedlock
http://globaleconomicanalysis.blogspot.com/
(Strong believer in deflation)
Where are we now?
* Significant decline in equities from mid-2007 to March 2009.
* S&P 500 rose by over 60% from the intraday low of 666 in early March 2009 to September 2009.
Despite the recession, total US debt / GDP ratio still remains at levels that are
(1) similar to that seen in 2007 and
(2) higher than 1929.
Why is US debt still at 2007 levels despite the recession?
Despite reduced levels of debt for consumers and businesses (seen by either debt repayment and/or debt default), the US govt has increased their borrowings in order to keep the US economy afloat.
Where to from here? (part 1)
There are some commentators (look at articles on 321gold.com for example) who strongly believe that the US will experience high inflation or hyperinflation in order to print away this debt.
Likewise there are some analysts (Mish Shedlock, Hugh Hendry) who believe that the US will experience deflation, and that the debt will be reduced mainly be defaults.
To be overly simplistic, letâs assume that these are the only two possible outcomes.
Evidence
Inflationists will point to the rising US Dollar gold price, ultra-low Federal Funds rate and powerful people (Bernanke, Geithner) who will take extraordinary measures (and incur extraordinary amounts of US debt) in order to support failing businesses and support economic growth.
Deflationists will point to:
*declining high (and rising) unemployment / underemployment,
*declining wages,
*steady inflation expectations,
*bond bull market, with a 10-year yield well below 3.50% and 2-year yield well below 1%,
*money supply numbers declining,
*insolvent banks, banks unwilling and/or unable to lend,
*consumers / businesses unwilling to borrow and low money velocity.
Mish and Hendry also argue that despite the best efforts of Bernanke and Geithner, their actions are insufficient to keep the economic growth party going.
Where to from here? (part 2)
In a hypothetical market free of government interference, I would readily side with the deflationist camp, because in the absence of the extraordinary actions taken to support failing businesses (mainly financial companies, but also companies in other industries), the US economy would be in much worse shape.
So the question then turns to the effectiveness of the actions of Bernanke and Geithner.
As mentioned previously, the actions of Bernanke and Geithner have reduced the severity of the recession. In this respect their actions have been effective.
Although the stockmarketâs 60% plus rise since March has CNBC presenters frothing at the mouth and declaring this the start of a brand new bull market, most Treasuries yields formed a double top in June 2009 and August 2009 and have been declining steadily since then.
It is important to remember that in 1930 the stockmarket experienced a similar 50% plus bounce before it hit new lows later in the year, and kept on falling in 1931 and 1932.
It is important to remember that the Japanese stockmarket experienced a similar 50% plus bounce in the early 1990s, however the Nikkei is at about 10,000 today, still 75% below the peak seen in 1989.
For these reasons, it is reasonable to expect that deflation will be the prevailing trend; that the actions of Bernanke and Geithner, while extreme, are not sufficient to beat the deflationary storm engulfing the US. Hugh Hendry, for example has stated that he believes that the US should be printing close to $10 trillion to buy various securities in order to fight deflationary forces.
But wait, thereâs more
Letâs assume Iâm right, and that the stockmarket resumes its secular bear market, and that the S&P 500 falls below 1000, below 900, below 800, below 700. Letâs also assume that a few mid-size banks (not considered too big to fail) go under, and economic contraction (ânegative growthâ) continues, and unemployment rises above 15%. In this type of situation itâs reasonable to expect at least a small possibility of Bernanke and Geithner implementing additional measures in an attempt to support the economy. Ultimately these measures would result in a higher US govt debt burden.
This is essentially Marc Faberâs view (http://seekingalpha.com/article/163919-marc-faber-equities-safer-than-dollars). In the Bloomberg interview mentioned in this article, Faber argues that the US authorities will continue to print more and more money, and that in the coming decade the US Dollar will implode.
Investment choices
In a deflation scenario (absent additional government support), stocks will decline significantly, and gold will probably also decline, but probably by an amount less than equities.
In a Marc Faber scenario (additional government support), stocks will continue to rise, and gold will do even better.
Either way, my view is that you donât need to be right with regards to the inflation / deflation debate. All you need to know is that in the coming decade, gold (in US Dollars) will outperform US equities.