Glen Neely suggests that gold may have a spike in the short term and then fall to below $200 as the market also plunges. Someone at another board asked how stocks, bonds, and gold could all fall at the same time. This was my response...
Global deflation.
What started in Japan over 12 years ago is now spreading to the rest of the world and I can attribute it to 2 factors. Debt is the primary factor. It's not
only the USA (though we are the prime victims of this now), but most major developed countries at this point are built on debt. The more there is, the
worse off the situation and right now, I think we are at the breaking point. The only good debt is that based on real backing with an interest that is
equal to or less than the rate of inflation, but these days it is so highly leveraged, there isn't even enough money around to cover a fraction of the debt
that is out there and interest rates are almost always higher than inflation rates. If I had $10 and loaned it to you with the expectation of getting only
$10 back (with zero inflation), the situation is a zero sum game and it cancels out on both sides. But nowadays, a bank can hold $10 in cash and
loan out $200 based on that cash. There is no real source for that money and then the bank expects that back with interest which grows that $200
into even more...all based on $10 in cash. The equation increasingly becomes imbalanced with no real solution as there is no money to back the
debt, not to mention the interest. Eventually the money system will catch up to this game and implode because it is so imbalanced it can't keep up. I
think we're on the edge of that cliff where the break point lies. The only temporay fix is to inflate everything else around you to make the debt appear
smaller in terms of the value of everything else while keeping interest rates low. After all, the original debt is fixed in value. That's why the FED is
trying so damn hard to create inflation by pumping the system full tilt with dollars. By diluting the dollar pool, you devalue it and cause the value of
everything else to cost more in terms of real dollars. If you borrow $500 to buy gold, you have a 1 to 1 relation of debt to assets. Inflate everything
around to twice the value and you original debt remains at $500 but you now have $1000 of hard assets. The debt is now only 1/2 the assets value
and appears to be a smaller problem. However, the root of the problem is still there. DEBT. And it doesn't go away, but rather becomes hidden until
the debt level increases to the level where it becomes a problem again, only now it's an even bigger problem, espcially when debt is leveraged like it
is now. Once debt passes the break point, deflation runs the engine as debt turns into default and there's no more money around to chase after
goods and services of any kind. Not stocks, not bonds, not precious metals...nothing. The fact that this is happening around the world all at once now
makes it a problem to big to solve and deflation will take root. Money and credit is destroyed and thus, there isn't enough to go into gold either, though
it will probably be one of the last to deflate as at least gold represents tangible wealth with a true backing unlike any paper currency and most will
flock to it as a safe haven until they have to sell gold as well to pay down debt or possibly even make a living if there are fewer jobs around.
The second factor is that the entire earth is becoming one global economy and there are lots of imbalances here as well which need to be evened
out. Think about it. A company in the US selling widgets would have to pay their employees $20 an hour because our economy demanded it. But
then comes along globalization and the same company now faces competition which reduces the price of goods which is passed along as lower
wages. Deflation. That same company then realizes it can pay someone half the same salary if they move to a poorer country. The same job now
pays less than $10 an hour and the product also becomes cheaper to pass along the savings to the consumer which in turn increases competition.
Deflation. The whole proces has been going on for years now as competition increases around the world and companies continue to move their
production lines to countries with cheaper and cheaper wages. Until the entire global economy smoothes out, this process will continue in a slow
motion deflation that has actually been on going for quite some time. However, when you consider the average American makes about 30k a year
compared to a less thn $100 a year in some of the poorest countries, we have a long way to go to smooth things out. Only the rich have been able to
keep up as everyone else keeps up with debt that we now already know has no long term solution.
In the end, debt has been used for 2 reasons, for true assets or for services. The latter is the most dangerous. Think about it...you charge a $50
dinner on your credit card. Once that dinner is eaten it is gone...nothing to show for that $50 and you still owe $50 plus interest. It's an acceleration
factor in the side of the equation that becomes imbalanced. The other side of debt is hard assets like homes cars, etc. When the debt equation
implodes, money is destroyed. Thus, money is no longer buying hard assets and the value of all hard assets, including gold, devalues until an
equilibrium is once again found.
At this point, global deflation looks inevitable and rich developed countries will have the most to lose. |
