my e-mail roundtable provided some feedback to the article and i added my two bits, all in reply to original query of a friend
just out from send-tray
hello tony, the boyz on my e-mail roundtable, mostly of the austrian bent in so far as economics are concerned, stipulated, and i believe correctly, that
(i) inflation/deflation are monetary goings-on, as opposed to increase/decrease in prices of any particular baskets of goods (i.e. food and energy can increase in price, homes can crater, but if money supply is increased, we have, by definition, inflation);
(ii) debt pile is not money, even as its increase can increase prices of all that matters, be they food, energy or homes, or education etc etc;
i figure that we will have inflation as long as central banks exist and money is not backed by designated ratio to something, anything that cannot be printed.
I also reckon that regardless of how much 'money' is printed, whether it translates to loans or not, we will suffer as we did, differing by degrees, what zimbabwe got hit with, and argentina ended up doing every so many years, namely, 'inflation of everything we need, and deflation of all that we have", unless we are positioned gun-ho 100% biased towards the exactly appropriate asset, by definition not wise and hardly possible.
i do, however note that yielding real estate that are absolutely cheap is always good to accumulate, and gold often times does better during dire monetary deflation, because gold is money, and of the highest quality, and is immune to central banks printing, officialdoms borrowing, and wastrel electorates clammering for spending; but gold can be and often was confiscated.
the-privateer.com
The Gold Confiscation Of April 5, 1933
From: President of the United States Franklin Delano Roosevelt
To: The United States Congress
Dated: 5 April, 1933
Presidential Executive Order 6102
and so how good the paper gold is when stored in london and new york is an issue.
i have also attached a few reads (gold and economic freedom - alan greenspan, gibsons paradox - laurence summers) that should matter, as background to what important-enough folks actually think of gold as opposed to their usual spew that it is barbaric, as well as a feel-good puff piece on gold's shadow price by qb partners, plus two charts of the share market when valued against gold over time, indicating the obvious, that gold is dirt cheap.
see below comments from my e-mail roundtable:
player #1 stated:
a good deflation hedge is imo a combination of the highest rated government bonds, gold and cash (1/3d of assets in each).
with the government bond portion one must carefully choose nations that are unlikely to go bankrupt or be tempted to default on their obligations in the near future.
a comment on why gold should be included: gold is money. the real price of gold (its purchasing power) thus rises strongly during periods of deflation. note that the world's stock of gold only grows by 1,5% p.a. - which is in contrast to the much faster growth of paper monies (in case of a deflationary scare, central banks can be relied upon to let their printing presses run 24/7, and as we have seen, the governments of the world are so far quite capable of not only replacing the private sector debt that is being paid back, but actually going one step further and creating even more fresh debt).
the beauty of this allocation is also that in the event of the other extreme of monetary disorder arriving (very high or even hyper-inflation), the gold portion should do very well too, and hedge the then doomed allocation to government debt efficiently.
the one third to be kept in cash can come in handy when it becomes obvious which forces will prevail (deflationary, i.e., market forces, or inflationary, i.e. govenment intervention forces). that will be the time to allocate the cash to either more government bonds or more gold or gold stocks.
lastly, there will be no real deflation as long as central banks exist. there may be periods of falling prices, and periods of what can be termed a 'deflation scare', but the central banks will not allow the money supply to actually contract. even during Japan's deflationary era, the money supply never once contracted (alas, it grew only very slowly, and the collapse in outstanding private sector debt and the strong public demand for cash balances proved to have deflationary effects).
player #2 figured:
This article starts with the premise that credit is money (or more to the point debt instruments are money) and goes from there (credit contraction -> long term reduction of purchasing power -> lower prices). But I don’t agree with the initial premise. Debt instruments aren’t money… you can’t go into the store and buy something with a corporate bond or 10-year treasury. Yes, debt instruments can be used as collateral for loans, but that’s not the same as being a medium of exchange itself – because the fact that it’s a loan shows that you still have to borrow the medium of exchange from someone else. (Put another way if debt instruments were money you wouldn’t have to borrow actual money against them).
So… I think the whole thing is based on a flawed initial premise. On the topic, I’ve never gotten a good answer to this: if credit is actually money, and if credit growth correlates with price inflation, then why did the big runup in credit growth from 1980ish to now coincide with a decline in the rate of goods price increases? And similarly the goods price inflation of the 70s coincided with lower credit growth (and, wouldn’t you know it, higher monetary growth).
player #1 added:
you are perfectly correct. if i lend you $100, credit in the economy will have increased by $100, but the money supply will remain exactly the same.
there is however nevertheless a correlation between debt growth and money supply growth, as the central bank-led fractionally reserved fiat money system tends to create new money from thin air when new credit is extended by the commercial banks (since they are only fractionally reserved, they lend out more money than they have in deposits, and this money then becomes someone else's deposit, and so forth). therefore, a net repayment of outstanding debt would, in this particular system, lead to a decline of the money stock. this is however not something to be overly concerned with, because there is no government on earth that is not implementing Keynesian deficit spending policies, which is to say that the decline in private sector debt outstanding is more than balanced out by the increase in government debt.
as to 'why did prices not rise during the period of high debt growth' (which was concurrently a period of extremely high money supply growth), it needs to be mentioned that rising prices are only one of the possible effects of monetary inflation (besides, it is not true that prices did not rise - the government's CPI statistics notwithstanding. asset prices rose extremely fast for instance, and so did all prices of goods and services not subject to import price deflation; also, in some industries, productivity growth actually exceeded money supply growth over the period in question - e.g. in computers, telecommunications, and other hi tech industries).
the biggest harm that has been done by this vast increase of debt and money was the major misallocation of resources it furthered.
one of the reasons why the present bust has been so hard on the jobs market is that so many economic activities did not create any wealth, but actually consumed wealth instead.
these 'bubble activities' could only exist because of monetary pumping, and all it took to derail them was slightly tighter policy stance adopted be the Fed from 2003 to 2007 (marked by a small rise in rates, and a fairly sharp deceleration in money supply growth).
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