A Financial Storm Approaches

Financial Storm

It is so easy for a country to print money… Said another way, it is so easy for a government to create inflation.

Because it’s so easy, nobody believes that DEFLATION – the opposite of inflation – is possible.

But it is

Financial StormEarlier this week, Republican politicians proposed a bill that would limit the powers of the Federal Reserve.

We are all for limiting the powers of government… But if the Fed’s powers are limited, its ability to print money would be limited… If this happens, persistent deflation could be an outcome – and that could trigger a financial storm that nobody is expecting.

“The most likely path of the Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off deflation,” Jim Rickards writes in his excellent book The Death of Money. However, “the Fed may reach the political limits of printing.”

This is a scary thought for the Fed.

“Deflation is the Federal Reserve’s worst nightmare for many reasons,” Rickards explains. The new bill proposed by the Republicans is an example of the Fed reaching the political limits of money printing.

For one, “Deflation increases the value of government debt, making it harder to repay. If deflation is not reversed, there will be an outright default on the national debt, rather than the less traumatic outcome of default-by-inflation.”

Even worse, deflation “feeds on itself and is nearly impossible for the Fed to reverse.”

If deflation actually takes hold, how can we get out of it?

Rickards explains it: “The only way to break deflation is for the United States to declare, by executive order, that gold’s price is, say, $7,000 per ounce, possibly higher.”
Deflation can be broken when the dollar is devalued against gold, as occurred in 1933 when the United States revalued gold from $20.67 per ounce to $35.00 per ounce… If the United States faces severe deflation again, the antidote of dollar devaluation against gold will be the same, because there is no other solution when printing money fails.”

To be clear, Rickards isn’t actually predicting deflation…

He says we’re in an epic battle between inflation and deflation… where the government desperately wants to create inflation.

Conventional wisdom dictates that the government will succeed in creating inflation. But Rickards’ book describes an eye-opening, credible argument on deflation could actually take hold.

The actions this week by House Republicans suggest that Rickards is right – there is a legitimate risk that the Fed “may reach the political limits of money printing.”

We highly recommend you pick up  The Death of Money… It will open your eyes…

Death of Money


“The world is witnessing a climactic battle between deflation and inflation,” Jim Rickards writes in his excellent new book The Death of Money.
“It is just a matter of time” before this battle comes to a head.

inflation_vs_deflationAt some point, the U.S. economy will experience “an earthquake in the form of either a deeper depression [from deflation] or higher inflation, as one force rapidly and unexpected overwhelms the other.”

Which one will win? And what are the potential outcomes? Rickards goes over each of those in his book…

Inflation is the easy one to understand… For the most part, the government creates this one… by “printing” trillions of dollars.

Deflation is less easy to understand… For starters, we “have no living memory of it.” The last episode of persistent deflation was in the Great Depression. Rickards calls deflation “the Federal Reserve’s worst nightmare.” For one, deflation “increases the value of government debt, making it harder to repay.”

Because of fear of deflation, the Fed can’t stop its money printing. If it did stop, “deflation would quickly dominate the economy, with disastrous consequences for the national debt, government revenue, and the banking system.”

Which will win – inflation or deflation?

Rickards explains that “the most likely path of Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off deflation.” The Fed assumes it can later deal with inflation that it might create.

I agree with him. Governments have proven for centuries that – while they might be pretty bad at most things – one thing they’re pretty good at is creating inflation through printing money.

The easy conclusion is that inflation will win… but many times, the easy conclusion isn’t necessarily the right one.

In his book, Rickards builds a strong case for how deflation could win as well.

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death of money

Whether inflation or deflation wins this battle, Rickards makes a strong case for a higher gold price.

If inflation wins, then it will take more paper dollars to buy an ounce of gold. And if deflation wins, then the price of gold will move higher to break that deflation…

The only way to break deflation is to declare by executive order that gold’s price is, say, $7,000 per ounce… the purpose would be not to enrich gold holders but to reset general price levels. Such moves may seem unlikely, but they would be effective… there is no other solution when printing money fails.

Our money is on inflation winning the battle – ultimately – but we think it could take a few years for the clear winner to emerge. In the meantime, we are likely to see short terms swings between deflation and inflation.


Inflation is Severely Understated

If you repeat something completely inane enough times, do people, even economic writers, believe it?

Please consider the Bloomberg article Price Slowdown for Cars, Baby Clothes Raises Fed Concerns.

Five years into the U.S. economic expansion, inflation shows little sign of picking up as prices rise more slowly for goods and services from automobiles to medical care, complicating the Federal Reserve’s drive to guide the economy away from the precipice of deflation.

The personal consumption expenditures price index, minus food and energy costs, rose 1.2 percent in 2013, matching 2009 as the smallest gain since 1955. Of 27 categories of goods and services in the gauge, 18 showed smaller price increases over the past two years, according to data compiled by Bloomberg.
The slowdown has been broad-based, with durable goods such as autos, nondurables like clothing and services including health care all playing a role. Fed policy makers are on guard to keep such disinflation from morphing into outright deflation, a persistent drop in prices that prompts households to delay purchases in anticipation of even lower costs and leads companies to postpone investment and hiring.

Deflation Definition
In the following discussion the term “deflation” means a drop in consumer prices (even though that is a miserable definition).

I use that definition for point-of-discussion purposes only, simply to show the ridiculous nature of widely held beliefs.

Deflation Theory
A persistent drop in prices prompts households to delay purchases in anticipation of even lower costs” say the authors of the above article.

I have heard that theory expressed hundreds, if not thousands of times. A reality check is in order.

Reality Check Questions

    1. If price of food drops will people stop eating?
    2. If the price of gasoline drops will people stop driving?
    3. If price of airline tickets drop will people stop flying?
    4. If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
    5. If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
    6. If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
    7. Will people delay medical expenses if prices drop?
    8. If your child has a birthday next week, will you hold off buying him a present because the price of toys will be cheaper next month?
    9. If your lease is up and you have to move, can you wait six months in anticipation of better prices? Two months? One Month?
    10. If deflation theory is accurate, why are there huge lines at stores when prices drop the most?

Bonus Question

Other than meaningless examples like waiting a few days for known sales, can anyone come up with any consumer item that people will delay purchasing simply because prices are falling? 

Opposite View
Except in cases of extreme inflation or hyperinflation, I take the opposite view. I propose people will delay purchases if prices are too high and/or they think they cannot afford something.

Take the worn-out coat as an example. If prices are too high, some will consider making that coat last another year.  Perhaps they get the coat, but not the hat they also wanted.

Unless wages keep up, people can only spend what they make or what they can get credit for.

Where’s the Evidence?
I cannot come up with a single consumer item that people will routinely delay purchasing simply because prices are falling. Can you?

Is there any hard evidence that shows people significantly delay purchases (other than asset purchases) when prices fall? (Please don’t respond with insignificant delays ahead of pre-announced sales or year-end car clearances).

Even if people did delay consumer purchases (which they don’t), why would it matter? Can People delay forever?

Asset Prices
Asset prices, especially financial assets and real property, are another story.

People, especially those in debt, will indeed delay purchasing real estate if they expect better prices next year. History also shows people are reluctant to buy stocks and bonds if they fear lower prices.

Both of those are significant, but neither is represented in the CPI.

Corollary: People like bull markets in equities and bonds no matter how ridiculous the price.

PEs to Consider
Amazon: AMZN : The PE of Amazon is 592, Valuation is $160 Billion
Linked In: LNKD :
PE of Linked In is 837, Valuation is $23 Billion
Facebook : FB:
Facebook PE is 106, Valuation is $165  Billion
Priceline : PCLN :
PE of Priceline is 36, Valuation is $64 Billion
Hertz : HTZ:
PE of Hertz is 37, Valuation is $12 Billion
Starbucks : SBUX :
PE of Starbucks is 483, Valuation is $57 Billion
Boston Beer (Samuel Adams) : SAM :
PE of Boston Beer is 43, Valuation is $3 Billion

At current earnings, investors in Amazon will have to wait 592 years for a positive return on earnings. More realistically, they would have to wait forever because Amazon does not pay a dividend.

In the above list, the only company that pays a dividend is Starbucks, and it is a paltry 1%.

The only thing those companies have going for them is investors are willing to bid up asset prices to preposterous heights.

Why Inflation is Severely Understated
Krugman and others lord it all over those who predicted massive price inflation. I did too, and still do!

Along with Krugman, I laugh at those expecting a huge outbreak of “price inflation”. Unlike Krugman, I understand what is going on.

The fact is, we currently have massive inflation. However, instead of inflation being visible in the form of higher consumer prices, inflation is visible in the form of asset price bubbles.

To see inflation, all you have to do is open your eyes and look at lofty valuations of stocks and bonds.

Deflation Coming Up
Don’t hold your breath waiting for a surge in “inflation”. We already had it. Instead, expect various equity and corporate bond bubbles to implode.

With the busting of various bubbles, asset prices will drop, and so will credit marked-to-market on any loans banks made on those asset bubble.  So rather than expecting a huge surge in inflation, I expect deflation in terms of credit and prices.

Misguided Fed Policy
In an absurd attempt to prevent price deflation on consumer goods, the Fed has spawned asset bubble after asset bubble, each with a greater amplitude.

Given exceptionally poor jobs and wage growth, the very thing consumers need to survive is falling prices!

Yet, the Fed tries to prevent just that, all based on the idiotic premise “A persistent drop in prices prompts households to delay purchases in anticipation of even lower costs“.

Feel Good Effect
Bubbles make people feel wealthy, and that exuberance spawns all sorts of poor economic decisions about what people can afford.

When asset bubbles collapse (as they always do), that’s when people finally realize they spent too much and pull in their shopping horns.

Those expecting a huge pickup in price inflation, a spike in US GDP, or a big boom in housing, all based on misguided perceptions of “pent-up housing demand” or equally misguided theories about “excess reserves”, fail to understand how Fed boom-bust and bank-bailout policies preclude such outcomes.

The Fed’s attempt to spur inflation in a deflationary world causes the very thing the Fed fears most (an economic slowdown caused by a collapse in asset prices). In turn, a collapse in the valuation of assets causes bank losses and reduces desirability and even ability of banks to lend.

The Fed is fighting the wrong battle. It’s a collapse in asset prices (not consumer prices) that will restrict bank lending and cause consumers to hold off on consumer purchases.

Return of Deflation

The current “feel-good” effect will not last forever, look out below when it wears off. Deflation, in terms of consumer prices, asset prices, and credit will return.
Misguided Fed policy ensures that outcome.

Submitted By: Mish’s Global Economic Trend Analysis

What the Price of Gold is Telling Us

Unlimited money-printing from the Federal Reserve. Unlimited euro-printing from the European Central Bank. Japan’s central bank is printing more yen. The Bank of England is in the fray as well, announcing even more pound-printing.

And yet, as you can see from this chart, the price of gold has not even bettered this year’s March high at roughly $1,802, nor last year’s November high at the $1,823 level.

Despite all the money-printing, gold has not even made new highs above those levels.

All that money-printing, and gold is nearly $150 below its all-time record high.

So where’s the beef? Where’s the evidence that gold is now headed to $5,000?

Where’s the evidence that all that money-printing is overpowering the credit contraction that’s occurring nearly worldwide?

Where’s the evidence that inflation is about to break out to the upside and send the U.S. economy into hyperinflation?

There isn’t any.

In fact, gold is telling you exactly the opposite: That more debts are about to be liquidated than the central banks can offset with money-printing.

That inflation has not yet broken out to the upside.

That there isn’t even record demand for gold right now. Demand is actually slumping.

There is no evidence that that gold has embarked on its next leg up to $5,000-plus an ounce.

I am NOT change bullish on gold until spot gold has closed above $1,823 an ounce on a weekly and monthly basis. That will be the signal that gold’s next leg up is beginning.

Until then, gold remains highly vulnerable to a move back down to the $1,400 level, perhaps even a tad lower.

Until then, gold remains highly vulnerable to the kind of action we saw recently in crude oil. Crude oil, with all the geopolitical tension with Iran and in the Middle East — coupled with all the money-printing — should be soaring, right?

Well, dead-wrong. The price of oil collapsed, plunging more than $9 a barrel — 9.4 percent, in a matter of days.

Or gold may end up looking like the rout that occurred in the grain market, where soybean prices plunged 8.4 percent — despite nearly everyone remaining wildly bullish on food prices.

I am bullish on gold prices over the long term.

The question of the day remains: With all the money-printing going on, why hasn’t gold broken out yet?

Why is gold below its March 2012 and November 2011 highs?

The reasons are simple:

  1. First, money-printing means absolutely nothing when most of the money being printed is merely ending up sitting in banks. The banks are not lending and, instead, that money is parked back with the Federal Reserve in the form of excess reserve deposits, for which the Federal Reserve is paying 0.25% interest to the banks!
  2. Second, all that money-printing means nothing when consumers aren’t interested in adding to debt by increasing their borrowings and credit lines … and the velocity of money, or its turnover, is virtually non-existent.

    Ditto for corporations that are conserving cash and largely paying down or refinancing debt rather than taking on new debt.

  3. Third, all the money-printing means practically nothing when Europeans are still scared to death the euro will fail, and are pulling their money out of European banks like there’s no tomorrow; some $465 billion in capital has fled the euro region in the past three months alone.

Money-printing by itself means nothing. If it did, gold would already be at new record highs. And it’s not.

The dollar would already be at record lows. And it’s not.

Crude oil would be soaring. And it’s not. Most other commodities would also be soaring. They’re not, either.

All the conditions necessary for the next leg up in gold and commodities are not here yet.

So if you think it’s a no-brainer now that gold is taking off to the upside like so many investors and analysts do think, I urge you to be skeptical and very, very careful.

When Leverage Fails


While it is playing out in slow motion, the demise of Ponzi finance continues.  I never imagined that the extend and pretend, delay and “prey”, smoke and mirrors efforts of central banks around the world would have worked into mid-2012. I have learned a lesson. I do not know when the true financial collapse will occur – this year or ten years from now.  I have stopped trying to guess and am focused on preserving what wealth I have left.

It is clear that the banks (both private and government) are extracting as much wealth as possible from the pockets of global citizens before the end game. The demise of the developed world’s currencies, financial systems and economies is set in stone, just as your fate is sealed when you slip below the event horizon of a black hole.  This time the black hole is capital and income destruction, runaway welfare states, crony capitalism, regulation, taxation and endless money printing… a toxic cocktail of wealth destruction.

A depression has been written into law in the United States by the progressive (aka socialist) Congress of 2008 to 2010 in the form of permanent government expansion (20 to 25 percent per year) via the stimulus bill, Obama Care and finally Dodd Frank.

100 million dollar rules

These bills are wrapping themselves like pythons around the U.S. economy and squeezing the life out of it via 80,000 pages of new regulations a year (sold to the highest bidder and the biggest campaign contributors, poorly written in haste by unelected bureaucrats  who have no experience in the industries and businesses they are regulating.

These regulations are central government nationalizing the private sector by stealth and directing economic activity to crony capitalists. Crony capitalists gain these monopolies through regulation; they can behave like any monopolist by providing less to the public for a higher cost. This is the Congress and Executive Branch paying-off special‐interest campaign supporters.

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
~ Ludwig von Mises

“The central irony of financial crisis is that while it is  caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending”.
~ Lawrence Summers

Of course, today’s governments have chosen the last route, money printing, as have those who have gone before them. None have succeeded in creating prosperity through debt accumulation and inflation. The coming collapse will destroy Keynesian Economics and expose fiat currency.

Eighty investors out of a hundred will LOSE most, if not all, of their wealth. The other 20% will gather that wealth to themselves through foresight, a solid understanding of financial history and applied Austrian Economics as outlined by Ludwig Von Mises, Frederic Hayak and Bastiat.

This crisis is the greatest financial opportunity of our lifetime – if you’re prepared. The Great Depression provided the basis for some of the greatest fortunes in the world, and this time the opportunities are many times greater. History is repeating. You just need to open your eyes and mind.