This is odd because deflation of assets - from houses to stocks - is the big issue now. Could this fall in bonds indicate that after this period of deflation, the multi-trillion dollar attempts to rescue the banking system will knock deflation concerns out of the picture and put inflation back on the map?

This is all beginning to look like one of the greatest boxing contests in the history of economics. In the deflation corner, we have potentially the greatest contraction of credit ever.

In the inflation corner we have the largest concerted government bail out/injection of capital ever. The audience watches with bated breath to see which will be the eventual winner, while the cross-fire wipes out your assets, left, right and centre.

Precious metals

The only way to protect yourself is with gold and silver. The bond market is the biggest market in the world. If money floods out and heads for that other perceived safe-haven of precious metals, we should see huge price rises as the gold and silver markets are much smaller.

If the bond markets collapse the wider consequences will dwarf those of the US property market. A collapse could mean a run on the dollar, and hyper inflation. This is frightening stuff. Consider Jens O. Parsson’s Dying of Money: Lessons of the Great German & American Inflations, (Wellspring Press, 1974):

“Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle.

“In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of al traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”

Banking crisis phase

In the 1930s the banking crisis that produced the Great Depression went in three phases: first, the credit crunch and initial bank failures; second, a bond market crash; and finally a flight to precious metals as depositors left the banks.

Who is to say history will not repeat itself and that this is just another case of deja vu all over again?

Peter J. Cooper

http://arabianmoney.net/

-- Posted Wednesday, 15 October 2008 | Digg This Article