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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (49846)	1/16/2006 12:27:57 AM
From: glenn_a	Read Replies (1) \| Respond to of 110194

((given that gold does well at extremes, hyperinflation and deflation how pray tell does gold price action tell you a damn thing?)) Mish, I think this is a very interesting point/question. I don't think one can assess the likelihood of deflation/inflation against any store out value outside the overarching geopolitical calculus. That is, who has the guns. Put another way, what issuing monetary authority/political regime is in a position to coercively enforce or reneg on their monetary obligations, and who benefits/suffers as a result of these decisions? For instance, Nazi Germany defaulted on their debt obligations because it was in the interest of the German industrial elites to do so, at the expense of largely US debt holders (of course, as usual the Prescott Bush's of the world were sheltered from this default). Furthermore, by the later decades of the 1930's, they had rebuilt their military capabilities (as a result of US loans) to reneg on their debt obligations and not suffer a military response (until the outbreak of WWII) as a result. OTOH, Nigeria or Argentina, for example, or any other nation beholden to the IMF in the past couple of decades, have typically not in a position to reneg on their debt obligations, and thus typically experience a combination of a collapse of their currency AND deflationary impacts on their local economy. Presently, their are simply too many outstanding US monetary claims (or as Russ puts it, old maid cards) for the US to ever repay these at their current representational value. AND, the US has a lot of guns, so to speak. On this basis, I would look for the US to both (i) reneg on some portion of their existing debt obligations, and (ii) inflate existing debt obligations. At the same time, the laboring and middle classes have taken on a significant debt burden, that it will be in the interests of the industrial and financial elites to enforce, as they represent future IOU's for labor and productive capacity. These financial obligations it will be in the elites interest to enforce IMO. Thus, I would look for selective application of both inflationary, deflationary policy, combined with selective default on existing monetary obligations. This makes for a very precarious and volatile global monetary regime, and in this environment, I believe gold will perform relatively well (although again, the Wizards will "gear" the situation and create volatility for their own benefit wherever possible I am sure). I think bond_bubble makes a similar case for GSE default moving forward in his latest post. I wish I could assess the situation less cynically, and I must admit at times I am embarrassed to be a child of the human race. But there it is. Thoughts? Glenn