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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: lurqer who wrote (10613)	12/18/2002 7:00:20 AM
From: Clappy	Read Replies (1) \| Respond to of 89467

I assume you were referring to this one instead of all ten posts. Message 18347970 I rearranged the format so it would be a little bit easier on the eyes. ==== 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 process 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. ==== -Clapper P.S. I sure wish he would have given me an idea as to what to invest in? Is there anything that won't deflate? I mean besides JW's head? <g>