The World is Awashed with Dollars

We are now at a point where the world is awashed with U.S. Dollars and the Dollar has become the largest bubble the world has ever seen.

It's a real shame that those who lost most of their money in the stock market and Real Estate bubbles, and are now finally selling out after these markets have already collapsed, are positioning themselves to get wiped out all over again through massive inflation.

We believe both the U.S. stock and housing markets are likely to fall another 30% nominally from these levels. However, priced in Gold, which is real money, they will likely fall 80% or more in the years ahead.

As the inflation being created today starts to work its way through the system, U.S. stocks and Real Estate will eventually start rising in value again, but Gold will rise at a significantly faster rate. Silver, we believe, could eventually start rising at an even faster rate than Gold.

Most of the money that is presently being created by the Federal Reserve is being hoarded during this temporary deflationary phase. As the government continues to bailout every bank in existence and pass larger stimulus's, all of the Dollars being squirreled away around the world will soon come out all at once.

With many retail stores in the U.S. liquidating their inventories and going out of business, there will be a lot less products available for purchase and combined with the storm of Dollars, prices of everything from food to clothing will go through the roof. The government, instead of dealing with the cause of rising prices, will likely institute price controls. This will only exacerbate the problem and lead to empty shelves.

We cannot solve problems that were created by getting into too much debt, by multiplying our deficits and getting into much larger amounts of new debt. It will be impossible to all of the sudden "mop up" the massive amount of Dollars being printed. We are practically guaranteed to see substantially higher interest rates in the future, that will raise the annual interest on our national debt to trillions of Dollars. The United States will have a choice to either default on its debt or create Hyperinflation.

The wealthiest countries in the future will be those who control all of the world's Gold production. The world's largest creditor nations, mostly Asian countries, will have the best chance of accomplishing this. There are some Gold and Silver stocks that could gain by thousands of percent in the years ahead. With GE, formerly the world's largest company, headed towards bankruptcy, companies like Newmont Mining and Barrick Gold could be on their way towards becoming the world's new largest companies of the future.

The only good thing that will come out of the upcoming inflationary crisis for our country: students that were conned into investing hundreds of thousands of Dollars for worthless college degrees will be able to easily pay off their debts. Hopefully they will learn how to become a Gold miner or a farmer, and produce real things for our country, instead of destroying wealth like those on Wall Street and in Congress have done.

Consumers do not defer purchases because prices fall moderately, it is putting the cart before the horse and not the actual operating logic in a deflation. Because any consumer can buy more of a good tomorrow if he saves instead, at all times, whenever the real interest rate on savings is positive, whether that takes the form of 0 return on savings and falling prices, or 3% returns on savings and stable prices, or 6% returns on savings and prices rising 3% a year. In any of those cases, it remains exactly and identically the same relation, that anyone can buy more stuff tomorrow if he defers his purchases. But nobody pretends that the existence of a positive real rate of interest necessarily drives all consumption to zero. It is absurd and a misunderstanding.

Time value is a primary and primitive phenomenon. Men prefer the services of goods today to those they have to wait to enjoy, naturally and not due to any movement in prices or any contractual opportunitities offer to them. Because that preference is always naturally there and operating, and regardless of the direction of movements in the price level, capital has value. It is, in fact, the specific origin of the excess of the value of capital goods over their immediate cost of production.

Consumption is not an evil that men have been seduced into engaging in by imaginary, nefarious forces. It is the purpose of economic activity. Deferring consumption in order to enjoy more later is not moralizing abstension for the sake of self denial or training of the will, it is a purely pragmatic affair for the sake of greater consumption tomorrow, or a greater security for a given level of ongoing consumption, against unavoidable fluctuations in income, success or failure of productive activities, etc.

The way in which deflation operates is quite different and the causal chain runs in the other direction, initially. When men raise their savings rate deliberately to defer consumption and ride out shocks to the whole productive system, and do so at the same moment when productive activities have proven less successful that usual, they necessarily drive the supply of savings higher at a time when the returns available to pay for it are low. They necessarily accept low returns on savings to do this. At the same time, their safety purposes in the matter cannot be achieved by taking large risks. Thus forms of investment perceived as safe are flooded with capital, while forms perceived as risky are starved for it (since they are showing recent losses at such times, etc).

Overall, it is a variety of trend following behavior, that is not a rational allocation but rear-view mirror thinking. Objectively the returns offered to riskier understakings are highest at that time, when no one is engaging in them and capital to do so is objectively plentiful. And conversely.

But it must run its course. The savings rate will tick up until men are satisfied with the new portion of their income being saved not spent. After that has happened, the higher returns available to riskier investments will begin to pay off, as demand stabilizes (the savings rate stops increasing). The gains from the higher savings rate from new capital available to all, are reaped in the first place by those brave enough to have taken risky positions despite the general smash, and not by the savers themselves. Gradually as that is realized and risk-taking spreads, portions of the overall rewards from higher savings will fall to the savers, as different investors bid to borrow their capital, and as savers agree to take some risks, etc.

The other way in which deflation hurts is simply by falsifying past plans and by reallocating real values away from new incomes to past nominal debts. Existing debt loads increase in weight, having been contracted at rates that expected modest nominal inflation instead. Mortgage rates e.g. were 6% because prices were expected to rise 3% and a real rate of 3% was required to call up the capital. When instead prices fall 3% a year instead, the real cost of the capital turns out to be 3 times what was anticipated when the loan was initially agreed (6% nominal plus the lender being repaid in more valuable money, instead of less). This would produce a large transfer from borrowers to lenders - but typically cannot be met and so produces a messy reallocation scramble instead, with some lenders getting 6 nominal plus 3 price change but other facing defaulting debtors who repay them nothing, or collateral worth 50% what it was worth before, etc.

Long dated nominal term contracts thus shift violently in real effects. But this happens not as a result of the sign of the change in the price level (negative for a deflation), it happens simply because the inflation forecasts of the contracting parties proved to be false. An unexpected inflation has precisely the same effects in the opposite direction, and can be just as damaging. (It leads to losses to holders of long term bonds rather than borrowers, but those have owners and other claimants themselves, thus all the usual default issues can arise in either direction).

Notice, though, that the problem above depends on the forecast being wrong over a material period. A momentary dip in prices followed by a return to their expected course has no such effects. Indeed, it is when men capitalize some short term trend, extrapolating it indefinitely, that large consequences appear for present values. Very often they are quite wrong to do so. Future prices are not going to drop 3% a year forever just because they dropped 3% last year. Instead, a better forecast is that year to year prices will be random with some slightly positive mean - and any long term contract will get a whole bunch of those randoms, sampled independently, and approximating that mean over the long run. If men kept that well in mind, most of the excesses of these short term fluctuations would scarcely matter.

Instead human psychology is such that men swing to extremes of optimism and pessimism based on quite recent experience, and project whatever just happened to them into the future indefinitely. Objectively, falling prices of houses or financial assets are reason to buy those assets, for example - they future returns from doing so have necessarily increased - and increases in their prices are reasons to sell them or buy less, instead. This is a clear mathematical law, yet men often do the opposite. It is pure pavlovian training. Recent pain outweighs reasoning.

It is not, in other words, a morality tale. It is largely a cognitive issue - and not a flattering one. The men involved are evil or corrupted. Too many of them are simply flat stupid and doing the wrong things, which won't help them very much. But it passes.

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