Gold

From awgee's link:



<blockquote><B>A light goes on in Russell's brain</B>



-- Driving back from a restaurant last night we were listening to National Public Radio from China. They were interviewing many Chinese who had lost their jobs in the big cities and were heading back to be with their families in the country. We noted what terribly hard lives these Chinese lead. The problem the Chinese leaders have -- is to keep the populace employed or at least semi-content and not in a revolutionary mood.



I have been wondering why the Chinese government has been almost pleading with the Chinese people to buy and hold gold and silver. And it suddenly occurred to me that the Chinese government sincerely believes that gold and silver are heading substantially higher. The Chinese leaders want the Chinese people to benefit from any higher prices of the precious metals.



The idea is that if the people are happy and richer by holding gold and silver, the leaders will be that much safer. The one thing the leaders of the Communist party want is a peaceful, contented (and richer) population.



So far, the leaders of China have been very smart, and it occurs to me to tell my subscribers -- "Do likewise."</blockquote>
 
[quote author="awgee" date=1252789972]There is your end game.

I did not know that China had no social security or pension plans.</blockquote>


Neither did I, as I just equated "socialist" with cradle to the grave social services. so I googled and I <a href="http://www.dbresearch.com/PROD/DBR_INTERNET_DE-PROD/PROD0000000000196025.PDF">found this excellent research piece</a> from Deutsche Bank. granted, it's from 2006 and thus prior to the current recession, but I can't imagine the problems have gotten any better.



This is from the conclusion:

<blockquote>China?s pension system is facing many challenges, stemming from

demographics on the one hand and from structural deficiencies of

the system on the other. We have tried to shed some light on the

extent of the problem and assess possible ways to improve matters.

The usual recommendations given for reform are not easily put into

practice for various reasons. Therefore, in our view, what the system

needs first and foremost to become financially more viable is increased

transparency, improved confidence, and more mature

capital markets. These conditions have to be in place in order to be

able to increase coverage ? the best interim solution according to

our scenarios ? and to make the second (and third) pillar work.</blockquote>


They have a pension system, it's just going broke because they force people to retire by 60 and they don't have enough young workers to pay for the retiring ones.
 
I think the Chinese are the world's third largest consumer of gold, only a step behind India and the U.S. in demand partly because Chinese citizens were prohibited from owning the precious metal in any form until 1982. I don't know if you guys know this or not, but until 2007, only professional traders were able to buy and sell gold bullion, as individuals were forced to purchase via investment funds or to pay higher prices for physical gold through jewelry and coins.



The Shanghai Gold Exchange launched individual gold buillion trading nationwide around July 2007, a move that is expected to be an important source of future demand. While Gold turnover at the exchange reached 1249 tons in 2006, a 38 percent gain from the previous year, the new demand from individuals that will finally be able to buy bullion at more attractive prices could potentionally be a tremendous driver of gold prices.



The average Chinese workers save over 40 percent of his or her take-home pay, the highest savings rate in the world. Now that there is increasing concern about the skyrocketing Chinese stock market and real estate bubble popping (which i believe is propped up by new stlimulus money by the Chinese government), perhaps the Chinese will starting accumulating gold at a much faster rate than they have been doing already. The smallest move from new Chinese gold buyers can potentially send the gold prices to the statosphere.
 
<a href="http://globaleconomicanalysis.blogspot.com/2009/09/is-pent-up-inflation-from-fed-printing.html">http://globaleconomicanalysis.blogspot.com/2009/09/is-pent-up-inflation-from-fed-printing.html</a>



<blockquote>Inquiring minds are wondering about the possibility of "pent-up" inflation from the massive expansion money supply by the Fed. Our search for the truth starts with the question "Which Comes First: The Printing or The Lending?"



This is a critical question given the massive expansion of base money by the Fed as shown in the following chart.</blockquote>


Imagine a chart that is ballistic - straight up!



<blockquote>Since the beginning of the recession, the Fed has expanded base money supply from $800 billion to $1.7 trillion. Conventional wisdom suggests this money is going to come soaring into the economy at any second causing hyperinflation on the notion banks will lend out 10 times the amount of reserves.



So is this pent-up inflation just waiting to break out?



Hardly.



A funny thing happened to the inflation theory: Banks aren't lending and proof can be found in excess reserves at member banks.</blockquote>


Imagine another chart that is ballistic - straight up!



<blockquote>Banks are Insolvent, Consumers Tapped Out



Because of rising credit card defaults, commercial real estate defaults, foreclosures, walk-aways, and other bad debts,<strong> banks need those reserves to cover future losses</strong>.



In practice, banks are insolvent, unable or unwilling to lend. Moreover, tapped out consumers are unable or unwilling to borrow. As a result, Spending Collapses In All Generation Groups.</blockquote>


Not inflationary!
 
[quote author="no_vaseline" date=1253578429]<a href="http://globaleconomicanalysis.blogspot.com/2009/09/is-pent-up-inflation-from-fed-printing.html">http://globaleconomicanalysis.blogspot.com/2009/09/is-pent-up-inflation-from-fed-printing.html</a>



<blockquote>Inquiring minds are wondering about the possibility of "pent-up" inflation from the massive expansion money supply by the Fed. Our search for the truth starts with the question "Which Comes First: The Printing or The Lending?"



This is a critical question given the massive expansion of base money by the Fed as shown in the following chart.</blockquote>


Imagine a chart that is ballistic - straight up!



<blockquote>Since the beginning of the recession, the Fed has expanded base money supply from $800 billion to $1.7 trillion. Conventional wisdom suggests this money is going to come soaring into the economy at any second causing hyperinflation on the notion banks will lend out 10 times the amount of reserves.



So is this pent-up inflation just waiting to break out?



Hardly.



A funny thing happened to the inflation theory: Banks aren't lending and proof can be found in excess reserves at member banks.</blockquote>


Imagine another chart that is ballistic - straight up!



<blockquote>Banks are Insolvent, Consumers Tapped Out



Because of rising credit card defaults, commercial real estate defaults, foreclosures, walk-aways, and other bad debts,<strong> banks need those reserves to cover future losses</strong>.



In practice, banks are insolvent, unable or unwilling to lend. Moreover, tapped out consumers are unable or unwilling to borrow. As a result, Spending Collapses In All Generation Groups.</blockquote>


Not inflationary!</blockquote>


Not inflationary? Not yet! To say those dollars will never get out is ludicrous. Also, this is not the only issue weakening our currency.



The crowd is saying "eventual inflation concerns". It's reminiscient of the "modest cooling in the housing market" we've had the last couple years. The crowd gets squashed.
 
[quote author="matt138" date=1253606496][quote author="no_vaseline" date=1253578429]<a href="http://globaleconomicanalysis.blogspot.com/2009/09/is-pent-up-inflation-from-fed-printing.html">http://globaleconomicanalysis.blogspot.com/2009/09/is-pent-up-inflation-from-fed-printing.html</a>



<blockquote>Inquiring minds are wondering about the possibility of "pent-up" inflation from the massive expansion money supply by the Fed. Our search for the truth starts with the question "Which Comes First: The Printing or The Lending?"



This is a critical question given the massive expansion of base money by the Fed as shown in the following chart.</blockquote>


Imagine a chart that is ballistic - straight up!



<blockquote>Since the beginning of the recession, the Fed has expanded base money supply from $800 billion to $1.7 trillion. Conventional wisdom suggests this money is going to come soaring into the economy at any second causing hyperinflation on the notion banks will lend out 10 times the amount of reserves.



So is this pent-up inflation just waiting to break out?



Hardly.



A funny thing happened to the inflation theory: Banks aren't lending and proof can be found in excess reserves at member banks.</blockquote>


Imagine another chart that is ballistic - straight up!



<blockquote>Banks are Insolvent, Consumers Tapped Out



Because of rising credit card defaults, commercial real estate defaults, foreclosures, walk-aways, and other bad debts,<strong> banks need those reserves to cover future losses</strong>.



In practice, banks are insolvent, unable or unwilling to lend. Moreover, tapped out consumers are unable or unwilling to borrow. As a result, Spending Collapses In All Generation Groups.</blockquote>


Not inflationary!</blockquote>


Not inflationary? Not yet! To say those dollars will never get out is ludicrous. Also, this is not the only issue weakening our currency.



The crowd is saying "eventual inflation concerns". It's reminiscient of the "modest cooling in the housing market" we've had the last couple years. The crowd gets squashed.</blockquote>


Where are they going to get out? Show me some data showing banks on a lending spree!



In that case, the crowd is expecting massive inflation. It's me and Mish and about four other people banging the deflation gong. Everybody else is screaming like it's 1980.



I saw in another thread you were promoting raising the Fed funds rate to fight "inflation" that DOESN'T EXIST so we can cause another particularly nasty recession.



Did I get that right?
 
[quote author="no_vaseline" date=1253608414][quote author="matt138" date=1253606496][quote author="no_vaseline" date=1253578429]<a href="http://globaleconomicanalysis.blogspot.com/2009/09/is-pent-up-inflation-from-fed-printing.html">http://globaleconomicanalysis.blogspot.com/2009/09/is-pent-up-inflation-from-fed-printing.html</a>



<blockquote>Inquiring minds are wondering about the possibility of "pent-up" inflation from the massive expansion money supply by the Fed. Our search for the truth starts with the question "Which Comes First: The Printing or The Lending?"



This is a critical question given the massive expansion of base money by the Fed as shown in the following chart.</blockquote>


Imagine a chart that is ballistic - straight up!



<blockquote>Since the beginning of the recession, the Fed has expanded base money supply from $800 billion to $1.7 trillion. Conventional wisdom suggests this money is going to come soaring into the economy at any second causing hyperinflation on the notion banks will lend out 10 times the amount of reserves.



So is this pent-up inflation just waiting to break out?



Hardly.



A funny thing happened to the inflation theory: Banks aren't lending and proof can be found in excess reserves at member banks.</blockquote>


Imagine another chart that is ballistic - straight up!



<blockquote>Banks are Insolvent, Consumers Tapped Out



Because of rising credit card defaults, commercial real estate defaults, foreclosures, walk-aways, and other bad debts,<strong> banks need those reserves to cover future losses</strong>.



In practice, banks are insolvent, unable or unwilling to lend. Moreover, tapped out consumers are unable or unwilling to borrow. As a result, Spending Collapses In All Generation Groups.</blockquote>


Not inflationary!</blockquote>


Not inflationary? Not yet! To say those dollars will never get out is ludicrous. Also, this is not the only issue weakening our currency.



The crowd is saying "eventual inflation concerns". It's reminiscient of the "modest cooling in the housing market" we've had the last couple years. The crowd gets squashed.</blockquote>


Where are they going to get out? Show me some data showing banks on a lending spree!



In that case, the crowd is expecting massive inflation. It's me and Mish and about four other people banging the deflation gong. Everybody else is screaming like it's 1980.



I saw in another thread you were promoting raising the Fed funds rate to fight "inflation" that DOESN'T EXIST so we can cause another particularly nasty recession.



Did I get that right?</blockquote>
I'm not sure if you included me in the deflation gang, but I still think the risk of deflation outweighs the risk of inflation today and will do so for at least the next 12-18 months. I know the Fed is printing money like it is going out of style but the money is not making it back into the economy at this point. Banks are still shell shocked and are licking their wounds, besides they are preparing for the next wave of asset writedowns from the Option ARM wave along with commercial real estate. Inflation will not become a significant risk until the banks start opening the lending tap (along with employment increasing and capacity utilization increasing) and that's not going to happen for at least the next 2-3 years. I'll say this much, if the FED were to pull back all of its quantitative easings and other programs along with the stimulus programs stopping today I would bet the economy falls flat on its face. All the stimulus and printing money is just propping up the economy for now.
 
[quote author="awgee" date=1253610412]Lending by banks is unnecessary for monetary and/or price inflation.

The Fed is printing currency and buying treasuries at an unprecedented rate. The Treasury does not store dollars in capital reserves. It is spending it faster than it can acquire it and the extra currency is moving directly into the general economy.

Give me a couple of minutes and I will find the dollar amount of Ts the Fed has been buying with currency electronically created out of thin air.



<a href="http://www.zerohedge.com/article/federal-reserve-accounts-50-q2-treasury-purchases">Federal Reserve Accounts for 50% of Q2 Treasury Purchases</a>

<a href="http://www.zerohedge.com/article/auction-week-sponsor-deficit-buy-us-treasuries">Auction Week: Sponsor The Deficit, Buy US Treasuries</a>

<a href="http://www.zerohedge.com/article/41-billion-pomo-closes-consisting-86-2009-issues-market-ramps-clockwork">$4.1 Billion POMP Closes, Consisting of 86% in 2009 Issues, Market Ramps Like Clockwork</a>: As an aside of interest, I have a friend who trades based solely on POMO.

By the time anyone recognizes price inflation, it will be too late to do anything about it. And once it becomes recognizable, the Chinese are gonna get pissed and they <strong>WILL</strong> start dumping.</blockquote>
Lending by banks may not be necessary for monetary and/or price inflation, but it is the fuel that would feed that inflation fire. Remember, it's all about the multiplier effect of bank lending that increases money in circulation. Unless the FED begins to accept collateral from you and I for such things as our TVs or watches at a 0.25% interest rate, only a small amount of the money that the FED has printed has found it's way into the economy. I would argue that the credit destruction is probably pretty close to the amount of money the FED has pumped into the system.
 
If the Fed (Greenspan) printed a trillion dollars with low interest rates and FCBers buying our Treasury bonds.



Then the banks who lent out a trillion dollars (Goldman, MS, Bear Stearns, WAMU, IndyCrap, Lehman, Skank of America, Countryfried, and all the other "lenders" who no longer exist). And then those banks wrote off more than a trillion dollars... and, continue to write off billions...



And then the Fed pumps in another trillion dollars...



Can someone please explain to me how this is inflationary?



Here is the basic math:



+$1T

-$1.5T

= -$.5T

+ $1T

= +$.5T



Banks are not lending, they need the money more than they want to lend it out. I am so confused... Because I don't see inflation... the $.5 trillion added is not getting to the end user... the consumer... and since it is not getting to the end user it is not inflationary. Add in the fact that banks are STILL writing down "assets" and especially commercial RE related assets, then all I see is deflation.



Am I naive? You can pump all the money you want, but as long as the banks make it disappear with write downs as fast is it is pumped out does not equal inflation. This is beyond residential RE... it is CRE, Farm RE, Credit Card debt, Auto Loans... and so... so... much more... is being written down... or dollars disappearing. Where are they going? Help me understand how this is inflationary.
 
[quote author="graphrix" date=1253632546]If the Fed (Greenspan) printed a trillion dollars with low interest rates and FCBers buying our Treasury bonds.



Then the banks who lent out a trillion dollars (Goldman, MS, Bear Stearns, WAMU, IndyCrap, Lehman, Skank of America, Countryfried, and all the other "lenders" who no longer exist). And then those banks wrote off more than a trillion dollars... and, continue to write off billions...



And then the Fed pumps in another trillion dollars...



Can someone please explain to me how this is inflationary?



Here is the basic math:



+$1T

-$1.5T

= -$.5T

+ $1T

= +$.5T



Banks are not lending, they need the money more than they want to lend it out. I am so confused... Because I don't see inflation... the $.5 trillion added is not getting to the end user... the consumer... and since it is not getting to the end user it is not inflationary. Add in the fact that banks are STILL writing down "assets" and especially commercial RE related assets, then all I see is deflation.



Am I naive? You can pump all the money you want, but as long as the banks make it disappear with write downs as fast is it is pumped out does not equal inflation. This is beyond residential RE... it is CRE, Farm RE, Credit Card debt, Auto Loans... and so... so... much more... is being written down... or dollars disappearing. Where are they going? Help me understand how this is inflationary.</blockquote>
Post of the month graphcakes...love the back-of-the-napkin math. haha You hit the nail on the head, all the printing of money is getting stuck at the banks to shore up their balance sheets and to allow them to lend the reduced amounts that they currently lending. Just image if the FED didn't lower interest rates, didn't print these trillions of dollars, and didn't backstop all that bank/I-bank/Fannie & Freddie debt and deposits....it wouldn't be pretty. All those dollars that have been destroyed through the writeoffs have gone to dollar heaven. haha
 
[quote author="graphrix" date=1253632546]

Can someone please explain to me how this is inflationary?

</blockquote>


There was very little produced that justified the expansion of the monetary supply. Unless you count innovative financial products.
 
[quote author="graphrix" date=1253632546]If the Fed (Greenspan) printed a trillion dollars with low interest rates and FCBers buying our Treasury bonds.



Then the banks who lent out a trillion dollars (Goldman, MS, Bear Stearns, WAMU, IndyCrap, Lehman, Skank of America, Countryfried, and all the other "lenders" who no longer exist). And then those banks wrote off more than a trillion dollars... and, continue to write off billions...



And then the Fed pumps in another trillion dollars...



Can someone please explain to me how this is inflationary?



Here is the basic math:



+$1T

-$1.5T

= -$.5T

+ $1T

= +$.5T



Banks are not lending, they need the money more than they want to lend it out. I am so confused... Because I don't see inflation... the $.5 trillion added is not getting to the end user... the consumer... and since it is not getting to the end user it is not inflationary. Add in the fact that banks are STILL writing down "assets" and especially commercial RE related assets, then all I see is deflation.



Am I naive? You can pump all the money you want, but as long as the banks make it disappear with write downs as fast is it is pumped out does not equal inflation. This is beyond residential RE... it is CRE, Farm RE, Credit Card debt, Auto Loans... and so... so... much more... is being written down... or dollars disappearing. Where are they going? Help me understand how this is inflationary.</blockquote>


When you build a straw house as you have done, there is nothing inflationary about it.

Reality would entail acknowedging the differeces in M0, M1, M3, and MZM and the different effects they have.











As you build it, there will be no inflation, so no worries. No need to plan for inflation.

Just curious. Remember the summer of 2006? Remember the folks all saying re prices could not come down? And their reasons why?
 
I'm with awgee, inflation is coming. Some areas will see deflation first, specifically agriculture and retailers, as inventories adjust to match the decreased demand from unemployment and fear-based frugality. But inflation is coming, whether the banks lend or not because the government is going to pump that money into the economy directly via the StimPak, of which very little has actually been spent. By this time next year (election season) this country is going to be awash in government cash that bypasses the banks and gets injected directly into the local economies.
 
Where are they going to get out? Show me some data showing banks on a lending spree!



In that case, the crowd is expecting massive inflation. It's me and Mish and about four other people banging the deflation gong. Everybody else is screaming like it's 1980.



I saw in another thread you were promoting raising the Fed funds rate to fight "inflation" that DOESN'T EXIST so we can cause another particularly nasty recession.



Did I get that right?</blockquote>


The crowd understands there will be EVENTUAL inflation, just as they understood we might have a MODEST cooling in house prices. I feel price increases will happen sooner and much higher than we are all expecting - no numbers needed, the tin foil hat is blocking the government scrambling of my brain allowing clear thought. If we see deflation, that's great! We should be experiencing massive deflation right now, I completely agree. We are in a deflationary economic environment. But CPI is around 0. Why? Unfortunately, we have a government (who has been consistently wrong about a lot of stuff - either really dumb or flat out lying) fighting free market forces. Prices should be falling much further and we would all benefit from a purchasing power standpoint. But we won't, why? Why do we fear a deflationary boogie man?



In a recent speech to the company google, Mish stated that gold does well in a deflationary environment and is not an inflation hedge. Wow. He claims to study Austrian Economics, free market stuff, but obviously doesn't understand it well enough. Mish does have some valid points but I feel he underestimates our situation.



A lot of the stuff we buy and use comes from where? US? Not likely. Is there anybody who thinks the dollar is fundamentally strengthening anytime soon? Good luck.



And finally, the particularly nasty recession/depression has already been created. Raising interest rates is the best thing we could possibly do right now as we will experience the pain/cure right now and reach economic equilibrium allowing true growth sooner. REad the book AMERICAS GREAT DEPRESSION by Murray Rothbard, I will loan it to you, and you will no longer have faith in Keynesianism nor our government being able to fix our "already created" recession.
 
[quote author="matt138" date=1253760042]REad the book AMERICAS GREAT DEPRESSION by Murray Rothbard, I will loan it to you, and you will no longer have faith in Keynesianism nor our government being able to fix our "already created" recession.</blockquote>


Thanks, but I'll pass. I don't read books by crackpots. His influence is partially to blame why we are in this mess.



<a href="http://en.wikipedia.org/wiki/Murray_Rothbard">http://en.wikipedia.org/wiki/Murray_Rothbard</a>



<em>Murray Newton Rothbard (March 2, 1926 ? January 7, 1995) was an American intellectual, individualist anarchist,[1] author, and economist of the Austrian School who helped define modern libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism".[2][3] Building on the Austrian School's concept of spontaneous order in markets, support for a free market in money production, and condemnation of central planning,[4] Rothbard sought to minimize coercive government control of the economy and considered the monopoly force of government the greatest danger to liberty and the long-term wellbeing of the populace.[5][6][7]



Rothbard concluded that taxation represents theft on a grand scale, and "a compulsory monopoly of force" prohibiting the voluntary procurement of defense and judicial services.[5] He also considered central banking and fractional reserve banking under a fiat money system a form of institutionalized, legalized financial fraud, antithetical to libertarian principles and ethics.[8][9][10] Rothbard opposed military, political, and economic interventionism in the affairs of other nations.[11][12] Rothbard wrote over twenty books before his death in 1995.</em>



I thought the Chicago School crowd had lost thier minds, this guy takes the cake.
 
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