Monday, May 28, 2012
SBSS 29. The End Of The Inflation Deflation Debate
I strongly believe that we will have a hyper inflationary depression, but if we do have a deflationary depression, the cure is still the same, gold and silver. In either a inflationary or deflationary case, the unsustainable fiat world stops and the entire complex, debt based, system collapses. There will be no functioning currency, no functioning economy, no international and domestic trade, no earnings to value stocks, no rents to value properties. Then there are the very real and very dangerous social consequences of this collapse, riots, starvation, disease and war. The entire paper wealth of the world will implode in either case. The only choice they have is to how long and how much energy are the Elite going to put into sustaining the unsustainable?
The only thing that will be left standing is stuff that has REAL tangible, intrinsic value. Things that people need to live like food, water, and guns. Commodities will have value, but most will get destroyed since so much of their wealth is determined by credit and trade. Without a functioning economy, what is corn in Iowa worth if there is no market that will buy it, or worse how do they plant the corn if they cannot buy the seed from Monsanto or get the fertilizer or fuel to harvest and transport the crops?
Gold and silver need nothing to show their value. They are worth something simply because they are rare and have uses. Actually a collapsing credit market may actually catapult gold and silver by eliminating the major players that have held gold and silver down through paper manipulation schemes. It may also help the gold and silver market as people lose faith in all other paper assets and rush into the very small precious metal market.
Say we do have a grinding deflation, and the nominal price of gold and silver goes down. The REAL purchasing power of the metal can actually go up in value as all other credit/debt based assets collapse. For example if we get a market that has no credit available or mortgage rates are 24% and only for available for shorter, more rational terms like 10 years, what do you think the value of your house will be relative to silver. What would the economy and the job market be like if someone could afford that property? What do you think that would do to the thousands of other properties that are going to be flooding the market? What do you think of all of that debt tied to it? What do you think that is going to do to the property taxes as towns become desperate to find money? I could see a house that was once sold for $300,000 only sell for $30,000. Silver on the other hand might go up, because of the rush into real tangible value, but let us say it does go down in price from $30 by 70% to $9. The ratio to buy that house went from 10,000 ounces of silver to buy that house to 3,333. A huge increase in REAL purchasing power during a deflation. And if we have that kind of crushing deflation, people will walk away from their houses in magnitudes more than what we have already seen in the 2008 housing crisis. I believe that we will actually see more significant increases in REAL purchasing power in the more predictable hyper inflationary depression.
Can we finally move on from this inflation/deflation debate and just say that either way, the paper debt paradigm is done? Bonds, will not save you as more money is thrown on to the fire to keep the economy going, destroying the real inflation adjusted returns of the bond. Bonds will not be paid if nations default and we have seen even the highest rated bonds are junk in reality. This is not a shift from equity to debt markets, it is a shift from paper wealth to real wealth. Nothing will stop this train and only those that can see it coming will be able to prepare for it.