-- Posted Tuesday, 24 June 2008 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Tuesday, June 24, 2008
“Phenomenally accurate forecasts”
Over the weekend, I posted a link to a Chicago Tribune article with a deflationary subtext about how Americans have been cutting back on lattes and sundry other small pleasures. I copied a few pen-pals on this, including Mish Shedlock, Jas Jain, Bob Bronson and iTulip founder Eric Janszen, the only inflationist in the group. In the e-mail donnybrook that followed, Eric exhausted Mish’s patience with his standard schpiel, so in tag-team fashion, I took over for Mish. Immediately below, for your interest, are salient excerpts from the exchange I had with Eric. Please note that the dialogue is not entirely sequential, since all of my comments followed Eric’s last e-mail. I have posed some questions below that he therefore has not had a chance to answer. Nor will I provide him with the opportunity to do so in this space, since my debates with Eric have a way of running on forever. So, I have given myself the last word -- I hope without having edited Eric too punitively. I have also generously embedded links wherever Eric sought to buttress his argument with previously published material.
The discussion begins with my rebuke to his notion that Japanese gold bugs fared poorly during Japan’s long deflationary wallow.
Gold in Japan
Rick: Better you should ask how the yen performed relative to all other classes of yen assets. Answer: Just fine. Gold in fact has always done relatively well as an investable during deflationary times. Still, as a hard-core deflationist, I have my doubts that the POG will get to Sinclair’s promised land above $5000 oz.
Eric: The yen performed well because the yen is not a reserve currency, the Japanese experienced a hyperinflation after the war, so protecting the yen was more important than preventing deflation. In contrast, the Fed is throwing the dollar under the bus to prevent deflation.
Rick: You’ve used a devious verb tense here, Eric: "is throwing." In fact, the Fed has already shot a more-than-$1 trillion wad without succeeding at inflating much of anything other than consumables.
Eric: Please take another look at the Argentina example. The relationship between the dollar and gold now for the US is similar to the relationship between the peso and the dollar for Argentina in the late 1980s.
Argentina ‘Irrelevant’
Rick: Argentina's relevance is zero. The world's investment assets -- currently deflating like a hot air balloon hit by a Howitzer shell -- were never priced in pesos.
Eric: Deflation in domestic peso terms, yes, inflation in dollar terms, yes also. Today US wage rates are 50% cheaper in euro terms than a few years ago -- great if you are a European company paying employees in the US. Asset prices are falling in dollar terms but crashing in euro terms; US real estate is wildly cheap if you are a European. Wage rates increased in Argentina during their inflation but an American company could buy labor in Argentina for pennies on the dollar. US wages are deflating against commodities priced in dollars, and domestic commodity prices, to the extent that these are determined by imports, are continuing to inflate.
Rick: To ask this question for perhaps the sixth or seventh time, how long can prices for imports continue to rise if Americans can no longer afford to buy stuff? In any event, where do you see this trend leading? Concerning wage deflation, no argument from me. Do I now infer that the only thing needed to bring you into the deflation camp is falling prices? That's surely happening in residential real estate. Or do you perhaps believe that that component of deflation is isolated and will spread no further?
Eric: Oil not gold is the ultimate money as it is the critical input to everything else.
Rick: Agreed, that oil is even better than gold right now as the currency of the realm. But I suspect that the marginal demand for oil, now that it's above $130/barrel, is falling at rates significantly higher than the 2% figure you've cited below -- enough, I would warrant, to bring about a global economic collapse. That would be deflationary in the extreme, of course, and the effect would be epochally exacerbated by the throttling of recycled petrodollars.
Eric: Everything is deflating against oil. This event is widely misunderstood as a demand shock. Oil demand in OECD nations has declined to 2% annual growth since 2004 as oil prices doubled then doubled again. As China and oil producers are starting to reduce subsidies, demand will fall some more... we'll see how long the oil kelptocracies and Chinese totalitarian state continue with that program -- government give-aways is all they have to maintain political legitimacy. Meanwhile, producers have demonstrated that they intend to keep more of the oil they have left in the ground, so in spite of politically motivated assertions to the contrary they are not increasing supply but cutting it faster than demand is falling. This is, of course, inflationary. We call it Peak Cheap Oil.
Rick: I have no qualms about assuring my subscribers that Gold is all but certain to hold its purchasing power not only relative to all other classes of assets, but relative to anything that you would care to call money.
Gold at $1,500?
Eric: Gold is an international currency. As governments print to reflate economies, the value of their currencies deflate against gold. My theory since 2001 is that this process will eventually take gold to $2500. Needless to say, that was contrarian back when gold was trading at $270. At $900 we have new entrants with very deep pockets to take us to the next stage of the market: “Gold prices may rise to $5,000 an ounce as investors seek to protect themselves against accelerating inflation, said Schroder Investment Management Ltd., which oversees $277 billion of assets globally." [Click here for link].
Rick: I’ve never felt completely confident predicting $5000 gold in a world that will be quite broke. Also, I am mystified as to why gold has not already soared above $1,000. It's not as though anyone believes Paulson or Bernanke when they talk up the dollar. Anyway, China's currency will be ascendant when the world emerges from the coming Depression, and by then the Chinese will have no more need for official gold than Europe or U.S. have had in several generations.
Eric: If funds keep throwing billions at the gold market, and CBs become net buyers, who knows maybe we'll get to $5000. The paradox is that they guys who created this mess are the same guys who are now struggling to maintain the purchasing power of all the money they made. The rest of us are collateral damage.
C-Note = $1 Bill
Rick: Even more certain is that, on a day in the not-too-distant future, Americans will realize that the hundred dollar bills they carry in their wallets are fundamentally and intrinsically worth no more or less than the $1 bills. I can’t tell from your writing whether you understand this, but if you do, it should disabuse you of the notion that the economy is somehow going to continue to muddle along. Muddling is one thing we deflationists all strongly agree cannot continue for much longer.
Eric: I have no illusions that the US economy can muddle along. For a quick summary of my positions, I recommend: [click here for link to USA, Inc. Common Shares: Long or Short? ; here for link to A Financial Market Crash is a Process, Not an Event ; and here for The Myth of the Slow Crash]
Rick: Concerning deflation and its symptoms, there is little I would care to add to the story I linked from the Chicago Tribune (which you have yet to acknowledge and presumably did not bother to read). When middle-class America cuts out lattes and starts refilling soda-pop containers, that is not inflation, or stagflation, or hyperinflation; it is a small step toward Depression, when almost nothing pleasurable, or that we currently take for granted, will be affordable.
Eric: I did read it. Substitution always occurs during inflations. See [click here for link].
Tomorrow: Part 2, in which Eric at long last states succinctly what he expects to happen, and what he means by “inflation.”
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Saving America
We don’t have any easy answers, but we’re hoping to hear from readers with ideas about how to return the U.S. economy to health. The person who submits the best essay on the topic What Will Save America will receive not only a scholarship to the Hidden Pivot seminar, but also unlimited access to post-graduate tutorial sessions held each week during market hours. The value of this package is $1,150, and just two days into the competition we’ve received no fewer than four submissions, including one today that argues that Americans need, more than anything else, to get serious about diet and exercise.
Essays should be 750 words or less and must be received at this e-mail address by no later than July 15. For details about the Hidden Pivot seminar and comments from those who have taken it, click here.
Our own idea about how to save America is to become a global leader in energy. A solution that works for the whole world would be a triumph for Yankee know-how on a par with the invention of the automobile assembly line. To stimulate thought on this topic and others, we will be presenting occasional guest commentaries by people with backgrounds in science and engineering. Economists need not apply. In the meantime, we welcome any contributions at the e-mail address linked above. We’ll print the best of them once the competition has concluded next month.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Tuesday, 24 June 2008 | Digg This Article | Source: GoldSeek.com
