The attempt to create inflation, or better yet the attempt to reinflate has proven quite succesful over the recent months when it comes to asset prices. Commodities, equities, high yield bonds and other 'risk' assets have risen exponentially, as have interest rates on treasuries and mortgages. This Januari we've received a clear signal however that this trend has stalled. This isn't just a pull back and there's a very good reason for that. That reason is the huge amount of debt that's already present in the form of sovereign debt, household debt, corporate debt and many other forms. This debt provides us with a ceiling in the inflation that can be created and the percentage that interest rates can rise. Whenever global interest rates rise too high too fast this will reinitiate the deflationary trend. I believe that we've reached that point in Januari and that markets have reacted correspondingly.
Why do you need us to provide detail? They've been doing it for the past 20 years. Google up some recent history.
The US has been setting world monetary policy. When they dropped the rates, it forced everyone else to also drop rates. Countries are linked, old story.
Higher taxes and monetization (weak USD) result in the same Armageddon. 75% of the American economy is consumption. Higher taxes mean less disposable income. Monetization means a weaker USD = higher commodities. That's a double tax on the US consumer in a shit economy running a 1.2 Trillion dollar budget deficit. In order to first begin to pay down the debt, we must first incur NO Debt. Even if we allocate another 700 Billion per year (higher taxes), to "pay off" the debt, the debt is still growing at 500 Billion a year because the budget deficit is 1.2 Trillion a year !!!!! The only option is quantitative easing. Just straight print and pay. Even if the FED suppresses bonds, this is a currency crisis and inflationary Depression. Basically, in order to maintain current spending AND pay off the debt via monetization, the FED would have print off another ~2 Trillion a year, just to widdle down the debt at 700 Billion a year (halve the debt in 10 years). 2 Trillion a year, over-and-above what the FED already monetizes. Here's the math: 3.8 Trillion budget for 2011. 2.6 Trillion in Federal Revenues. 1.2 Trillion budget deficit 700 Billion for debt principle paydown. In order to pay down the debt, the FED must monetize all new debt + 700 Billion pay off in principle of existing debt = 1.9 Trillion in monetization. What happens do the US Dollar then? Gets flushed = rampant inflation = inflationary recession/depression, housing crash.
Canadians and Americans can open a bank account in China, fund it in CAD or USD, and convert. Repatriating is more difficult. I've got internet banking and can e-wire funds from my Canadian account to China, while in Canada. Nice. Helps to know people in the export biz to repatriate large sums. So I've heard. It's the money going out China (tries) to put the brakes on. Not in.
All I'm saying is two fundamental problems arise with this: Indefinite low rates + a global recovery = massive USD inflation. Will global bond holders remain steadfast in the US Treasury market when they're hemorrhaging money at 150$ oil +? If they do, it just means oil is going 250$. How much pain will US debt owners take before they hit their uncle point? There's a limit, no matter how much faith the world has in the dollar. This spells an inflationary depression and currency crisis for America. Low rates cannot stay forever during recover. Otherwise, it's a redux of the 70's or Japanese blowup. There's no way out. Inflationary Depression, deflationary Great Depression, or Default. The problem is inflationary depressions have to go through deflationary depressions to "heal". Inflation than necessary deflation is way more destructive than just deflation. Schiff is saying Bernacke will just do a Zimbabwe and never get to the deflation part.
I agree. Schiff got it really wrong in 08. My guess is he doesn't understand credit destruction properly and that deflation moves currencies.
Public and *Private* debt is THE reason why interest rates must stay low, indefinitely. This is why we'll eventually get a currency crisis. There's too much debt on either side, and simply can't be serviced when it refinances higher. Print and spend into oblivion. Jimmy Rogers, Faber, and Schiff are right. Yuan-demoninated assets, commodities, metals. Hate to say it, but this is the play. The only point of contention is whether this is the end or we get one more recovery, debt bubble, then crash.
Schiff is a hard core gold bull who views gold as money and stocks as a hedge against his scenario of global currency debasement and economic collapse. So he hedges gold while conventional wisdom dictates gold is the hedge.
Interesting. Thanks. Schiff rationalizes dollar strength with the flight to quality argument, which is true. But only partly true. He's well-versed in the process of credit creation and yet subsequently passes up the deflationary effects of negative loan creation on dollar strength only to talk up "new money" printed to boost the gold rationale, albeit with net smaller M3. It's disingenuous, he talks his book, obviously, and got burned in 08. Another example is capital formation. Under a hard money system, capital comes from savings (his mantra, which is true). But under a fiat-fractional reserve system, capital comes from debasement. Theft of value from the other guys wallet via printing. He doesn't acknowledge this either. Anyway, Schiff knows all this. Still, he's a great communicator, and once those pitfalls are known, very worthwhile to listen to. Faber is the most sophisticated of the three (Rogers, Schiff, Faber) simply because his presentation of credit growth/destruction is made transparent in his analysis. Unlike Rogers and Schiff who's conclusions are right (hyperinflation), but their long-hand is wanting.