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Deflation, deflation, deflation that’s all I can see ahead, we’ve all just been told we are getting a 3% pay rise this year and that’s for a company that’s doing OK…

So I, like many, will be cutting back; more shops and services will go to the wall, they will have to slash their prices to get enough business to survive that pressure will work its way right back down the chain and we will start a deflationary spiral…

 

On Saturday I was in a pound shop and noticed a pound seems to buy more there than it did a couple of years back…

 

People on here say the government will never allow deflation to happen but they are already getting flack due to their current borrowing, imagine if they really let loose with borrowing to counter deflation, they would get such bad press they would be out of power for a generation..

 

So it’s deflation people! Move your wealth into cash; you’ll be able to buy so much more with it in a couple of years!

 

 

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Deflation, deflation, deflation that’s all I can see ahead, we’ve all just been told we are getting a 3% pay rise this year and that’s for a company that’s doing OK…

So I, like many, will be cutting back; more shops and services will go to the wall, they will have to slash their prices to get enough business to survive that pressure will work its way right back down the chain and we will start a deflationary spiral…

 

On Saturday I was in a pound shop and noticed a pound seems to buy more there than it did a couple of years back…

 

People on here say the government will never allow deflation to happen but they are already getting flack due to their current borrowing, imagine if they really let loose with borrowing to counter deflation, they would get such bad press they would be out of power for a generation..

 

So it’s deflation people! Move your wealth into cash; you’ll be able to buy so much more with it in a couple of years!

 

If deflation it is how come M3 is running at 15% in the US. Think I'll stick with my inflation hedges, thanks...

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If deflation it is how come M3 is running at 15% in the US. Think I'll stick with my inflation hedges, thanks...

 

As I understand it, M3 includes 2-year notes - but nothing of a longer maturity.

 

M3 will expand as long as people who would previously have lent at 3,5 or 10 year maturity decide that there is too much uncertainty to tie their cash up for that long.

 

If we accept deflation as being the hypothesis, I see expanding M3 to be entirely consistent...

 

Sell your endowment; transfer your pension to cash; ditch your un-leveraged shares expecting a major market slump - all these expand M3... but they don't increase spending... people just sit nervously with highly liquid capital and the rest of the system scrambles to de-leverage.

 

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Simply stated:

 

There is an exceedingly high probability that when gold gains significant value as the singular currency of preference there will be NO repeat of the 1980 scenario.

 

There are Two Types of Inflation:

 

Cost push

Demand Pull

 

Increased interest rates can soften the power of Demand Pull Inflation by acting to slow down the pace of business activity, but has no power at all as the present inflation is caused by “Cost Push” as increased short term rates simply add to the costs. Business is not recovering and credit problems are spreading, making hawk talk nothing but talk.

 

We do not control Asian economies that will continue to grow, even if at a lower rate of gain. The cost of materials has suffered a severe reaction in a severe up trend, but is far from being in a bear market as financial TV now declares. Global destruction of demand as applied to crude is just a tad too extreme to be applied to the world energy situation.

 

If the US Fed were to embark on a program of inflation fighting utilizing short-term interest rates, under present monetary conditions they would trigger a transition from a severe recession into a world-class depression. Hawk talk makes good press and neat spin, but to those few that understand, it is rank crap.

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There is an exceedingly high probability that when gold gains significant value as the singular currency of preference there will be NO repeat of the 1980 scenario.

 

I'd have taken you more seriously with a substitution of "if" for "when" - though even that is extremely far fetched, in my view.

 

If the US Fed were to embark on a program of inflation fighting utilizing short-term interest rates, under present monetary conditions they would trigger a transition from a severe recession into a world-class depression. Hawk talk makes good press and neat spin, but to those few that understand, it is rank crap.

 

I don't think that central bank rates make as big a difference as you suppose. I think they primarily relate to the relative values of currencies in today's global economic environment - the international money markets providing the actual funding. I think that a non-fluctuating exchange rate is the cause of monetary expansion. This doesn't necessarily cause inflation of goods for consumption - but it will cause spiralling non-portable asset prices.

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Good reply by I got from VedantaTrader on HPC:

 

I wrote this a while back...and posted it on anothe thread somewhere. The same goes for the sterling, and the UK. The biggest point that people are missing is that the UK and the US are net debtor nations? Can anyone give me an example of a net debtor nation who didnt try to inflate? The two great deflations of this century were from net creditor nations. The rules are different for the UK. Yes there will be a destruction of credit in the UK, however, the demand for sterling is dropping which is inflationary. We can see the value of sterling being eroded and dumped for the last 6 months. Foreigners are holding 170 Billion in UK Gilts. I think they will sell them, alot of them anyway, when they realise how bankrupt the country is. Perhaps, we will have falling prices in goods produced purely in the UK ( cant think of too many that dont have raw reources imported from abroad),and credit items will deflate yes...however, goods we competete for on the global market place will only go to the moon for the UK. The gap between imports and exports is about 25% per month, right now. That is about a billion pound deficit each month. This is offset with gilts, government debt issuance, which goes into spending on inefficient public services. It is also offset with portfolio flows and investment in our capital markets. I don't see this as a great environment for stock markets in the UK...any sharp reduction in demand in the short term financial accounts could lead to a real currency crisis in the sterling. When we are only 27& self sufficient in food, we are now net importer of oil and gas. This means all this sterling is being lost in the FX market just to cover these basic needs. The demand for sterling is dropping and will continue to drop. This is inflationary. It will be stagflationary infact. The sterling has nothing backing it, even if the UK government wanted to. If they raise rates, it will lead the country at a personal and country level to be insolvency, so sterling will be dumped anyway. By lowering rates, they will offset a sterling carry trade which will weaken the sterling, unlike Japan we are debtors, not creditors, we have nothing to offset the carry trade like Japan has. Japan were receiving interest payments on their credit, and were supplying goods to the world. The Uk has nothing to back the sterling, apart from Browns government debt, gilts backed by Nothern Rock as collateral...and manufacturing makes up 6% of the economy. We have an over burdened welfare state, which puts a huge strain on our taxes...and the list goes on...

 

 

The debate between inflation and deflation has been raging now for a few years. The debate on this forum has also led to two different camps of thought. Some on this forum believe we are having deflation and others believe we are going down the inflation route.

 

I am most certainly in the inflation camp. And I want to outline the reasons why I see this as inflation and not a deflation. It is my opinion. The inflationist could be wrong…However, I am confident in my own decisions and it has become clear to me for a quite a long time the path the world is going down. The pieces of the jigsaw are falling into place.

 

My stance is quite thorough and it will take quite a lot of space to put across my point of view. So for that reason, I am going to split it into a few different parts, which I hope will clarify where I’m coming from…

 

Part one is going to take a look at the main player in the central banks, the FED, namely Ben Bernanke.

 

Part One: Our path to Inflation via Ben Bernanke and the FED.

 

Ben Bernanke and his colleagues at the FED have written numerous research papers detailing the actions they could take and consider during times of risk to the financial stability of the US and world economy. I have read through most of them and for me they extol many reoccurring themes throughout. By dissecting Bernanke’s and the FED governors papers we acquire certain clues, regarding the type of monetary policies the FED could carry out during times of a pending recession or a systematic risk to the financial system.

 

Bernanke has spent his whole intellectual career studying the effects and causes of deflation. His PhD thesis was on the subject of The Great Depression and the causes of the resulting deflation.

The other bulk of his work is on the Japanese deflation following the bust in 1990. He strongly believes that deflation can be prevented with a “determined” government, and any deep recessions can be bypassed.

 

However, Bernanke’s work on Japan is misguided in my view. He is searching in the wrong places. Japan did print a lot of money that is for sure. However, Japan was the biggest net creditor nation in the world, they were able to print money, as their money printing was more than offset by the interest payments on their huge credit layout to the rest of the world.

 

Also Japan was and is still is a hugely efficient exporting machine. They were receiving money back into the economy via their large exporting trade account surplus. In other words they had other fundamentals backing the yen.

 

On the other Bernanke’s study of the Great Depression overlooks this point. In 1930, the US was the largest creditor nation, they were a self-sufficient economy. They produced all their oil and energy needs within their own borders.

Today the US is the largest net debtor nation of all the past net debtor nations put together, they have massive liabilities to the rest of the world. 70% of the world’s savings are now the America’s liabilities.

They import 70% of their oil and energy requirements, and 60% of their needs come from abroad. At today’s oil prices nearly 900 billion USD are leaving the US shores into OPEC countries. This is putting a tremendous strain on a currency that already has crippling liabilities.

The FED so far has prevented their much feared deflation by taking onto their balance sheet rotten banking assets in exchange for Treasuries. Anyone who reads the banks balance sheets can see that the losses on all these liabilities are more than their equity worth. In effect the FED have prevented the bankruptcy of the entire US banking system. So by postponing these losses the FED have enabled and encouraged the banks to free up the credit markets marginally. Credit expansion is still running at 7% per year. This is far from deflationary. The multiplier effect of fractional reserve banking makes this all the more inflationary.

The only thing that has prevented direct monetization of this process so far has been that the rest of the world has been prepared to monetize that for them by maintaining the USD peg by buying treasuries and printing their own money to buy USD. However, we are now seeing a reduction in demand for Treasuries. These countries have been monetizing the FED debt at the expense of double digit growth inflation. The end game will come for the USD as this appetite for US treasuries bonds continues to decline. The world’s inflation cannot go on indefinitely. All inflations end eventually. When that happens the US will go into a severe inflation, as they will no one left willing to monetize their debt, possibly hyper-inflation followed by a severe deflation. Deflationist will get their deflation. That will be the end game.

We already have seen the utterances from China who wants to increase their gold reserves from 1% (which is the lowest in the world of any country) to 3-5%. The civil unrest from the stage two inflation that the rest of the world is in, will prompt a change in attitude from these governments and central banks. It is when this happens that the end game for the USD will occur.

Already Bernanke is creating a carry trade environment for the USD. Treasury bills are now paying a much lower rate than the inflation rate.

However, the US cannot raise interest rates. All kinds of defaults at a personal level and a banking level are occurring. The bank system is barely functional even with interest rates at 2%. If the FED raise interest rates, it will mean that the country at a personal level and a government level will default on their debt liabilities. With higher interest rates the US interest payments on their debt would only be half covered by annual GDP.

Either way, in a severe deflation if the US raise interest rates, the USD will collapse anyway, as they won’t be able to pay up on their liabilities. By cutting interest rates to zero or keeping them at 2%, the USD will continue to weaken. Unlike Japan, they have liabilities and no credit coming in. Unlike Japan, they can’t offset money printing with credits and exports. The labour market in the US is 80% service orientated and 13% government employed. The economy is phoney and has been built on debt. It is interesting to note that Bridewater Associates did a study that showed that if the US savings rate returned to normal, US GDP would drop by 8%,leading to a collapse of the service sector employment and rising unemployment, causing a larger default rate in personal liabilities and government liabilities, due to the already huge fiscal deficits. A Great Depression style collapse by any stretch of the imagination.

Another important point with Japan is that Japan was not fighting a 3 trillion USD war.

 

 

I have come to the conclusion that Bernanke’s policies are inflationary in the extreme. After his study on the Japanese deflation he comes to the conclusion that the Japanese government and central bank didn’t provide aggressive enough stimulus packages to stimulate aggregate demand within the domestic economy. He believes the BOJ ran out of ammunition when they cut the interest rate to Zero. Bernanke thinks the FED faced with a similar situation could use more “unconventional methods” to stimulate spending within an economy.

 

His obsession with preventing deflation is unrelenting. Bernanke believes that consumer spending and positive inflation are the back bone of growth in an economy, and any fall in aggregate demand that could lead to a recession should be fought with aggressive monetary policy and unconventional measures…In a 2002 paper entitled “Deflation: Making sure it doesn’t happen here”, he writes,

 

I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

 

By Bernanke’s own definition, Deflation is “a general decline in prices”, and it is caused by

 

Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.

 

In other words it is a fall in consumer spending. It is when people decide to hoard cash and keep it in their bank accounts, until “prices stop falling” Deflation of course feeds in itself. The more people reduce spending the more prices fall, then people hold off longer, and prices keep falling.

 

Bernanke talks about the problem when interest rate policy as he calls it heads to the “zero bound level” In a severe deflation he states this could very well happen and the Fed would have no problem with cutting interest rates to zero if necessary. In a 2003 paper entitled, “An unwelcome fall in inflation” Bernanke writes

 

In my view, though recognizing that such an action imposes costs on savers and some financial institutions, we should be willing to cut the funds rate to zero, should that prove necessary to provide the required support to the economy.

 

However, despite this open admission Bernanke that he would be prepared to cut the rate to zero, it still doesn’t mean that aggregate demand can be stimulated this way. After all, his study of the Japanese deflation led him rightly led him to the conclusion that aggregate demand and domestic spending in Japan were not evoked by keeping the interest rate at zero. His whole study was on how a central bank could increase demand in a deflation, even when the interest rate was at zero. The policy tools Bernanke suggests using in this situation are a mixture of fiscal and monetary. In his 2003 paper Bernanke writes,

 

As I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation.

 

So what are some these more unconventional measures Bernanke refers to when the interest rate falls to zero. He clearly believes that the FED have the right tools to prevent deflation. In his paper “Preventing Deflation, he writes,

 

As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

 

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

 

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

 

So it would seem we have a central banker who has a lot of unconventional monetary policy plans up his sleeve when the interest rate is at zero.

The problem Bernanke saw in Japan was that the central bank could lend money and provide liquidity to the banks, but the banks would not lend the money, and the public would not spend the money, hence causing a further reduction in aggregate demand.

However Bernanke in another two of his papers states how this problem could be overcome to stimulate inflation in bond prices, equities and other assets. Bernanke states that the FED could take virtually any other asset onto its balance sheet in exchange for a loan. The FED could in other words loan money into existence to liquefy the system. In a 2005 paper Bernanke claims,

 

In the United States, the Federal Reserve currently lends only to depository institutions. But in contrast to the limited type of securities the Federal Reserve can purchase, it can accept as the security for a loan virtually any security that the Federal Reserve Banks themselves deem acceptable. And in fact, the Federal Reserve accepts mortgages covering one- to four-family residences; state and local government securities; and business, consumer, and other notes. These notes can be open market securities such as corporate bonds and commercial paper or can be commercial and industrial loans extended by banks, for example.

 

Strangely enough the FED have stayed true to their word regarding the above statement, as they already taken billions of MBS onto their balance sheet as collateral.

 

The other policy the FED could use to overcome the problem of how to stimulate consumer spending, comes from Bernanke’s infamous paper that earned him the title of “Helicopter Ben” To quote the paper Bernanke writes…

 

In ordinary circumstances, monetary policy exerts its stimulative impact in part through increasing the financial wealth of the public -- such as producing capital gains in bond and equity markets. If, at the zero bound, the Federal Reserve had already taken what actions it could to raise bond and equity prices, it might look to other tools it has to increase the public's wealth. One tool commonly attributed to the Federal Reserve, at least in theory if not by the Federal Reserve Act, is that of conducting "money rains."

 

Money rains are a clean way to study theoretically the effects of increases in the supply of money. In practice, it seems a bit difficult to envision how the Federal Reserve could literally implement a money rain -- that is give money away either through directly disbursing currency to the public or by disbursing it through the banking system. The political difficulties that are likely to arise from the Federal Reserve determining the distribution of this new wealth would be daunting.

 

And for me the last two monetary tools are the most frightening and scary…How can he get people to spend money?

 

No one would be willing to hold any asset that pays a negative nominal rate, as long as zero-interest money is available as a store of value. The strategy for eliminating the zero bound, therefore, is to make money pay a negative nominal interest rate, by imposing some type of "carry tax" on currency and deposits.

 

It's easy to envision such a system with regard to deposits at the Federal Reserve or transactions deposits at banks; for the most part, the technology to implement such a system is already in place. A tax or fee on Reserve deposits of 1 percent per month, for example, would mean that those deposits, in effect, pay a nominal interest rate of roughly minus 12 percent.

 

The technological difficulty lies mainly in imposing such a tax on currency. In the 1930s, Irving Fisher of Yale University, one of the greatest [sic] American economists,proposed such a system, in which currency had to be periodically 'stamped', for a fee, in order to retain its status as legal tender. The stamp fee could be calibrated to generate any negative nominal interest rate that the central bank desired.

 

In other words the FED could take money of you in theory by taxing money you have in your bank account. This is absolutely crazy talk. He goes on to say that if the FED couldn’t stimulate demand and consumer spending this way, then the FED could resort to other measures. Amongst these would be cutting taxes and “monetizing the tax cuts”, creating a “consumption tax” and then the direct monetization of goods and services. This is what Bernanke calls the “Goods and Services Solution”. He writes

 

The strategy can be implemented, however, by coordination with fiscal policy-makers. The Federal government, for example, could purchase goods and services and finance the purchase with new debt, which the Fed in turn would buy -- in technical terminology, the Fed would 'monetize' the resulting debt

 

So there you have it. The FED has already taken a pile of worthless mortgage backed debt onto their balance sheet. They have announced to the world that they are prepared to devalue the USD. In the time the FED cut interest rates from 5.25% last August to 2% the USD has declined steeply, and the price of oil has more than doubled. Another fiscal stimulus cheque is in the pipeline and they have provided an implicit guarantee on the trillions of dollars of debt of Freddie and Fannie. These policies are quite scary. There is always a lag time between pumping this volume of money into the system and the resulting inflation. By next year I think inflation will shift up a gear or two.

 

That still leaves us with the question, how will that effect us in Northern Ireland, and the UK economy. The US is the largest economy in the world. The USD is the reference currency of the world.

 

The UK’s biggest trading partner is the US. The UK also has a massive trade with other countries that are the US’s biggest trading partners. The US’s largest trading partners usually follow a similar monetary policy as the US, in order to stop their currencies rising rapidly against the USD and the other trading partner’s currencies of the US. If these countries didn’t follow a similar path then it would affect their trade with the US negatively, as their goods and products would become less competitive with other nations. Can anyone find me example when the UK has followed a different monetary path than the US over the last 35 years.

 

I have heard the argument that gold and oil has went up in all currencies including sterling, so therefore it couldn’t be the reason that the price rises in food and energy have been due to USD devaluation. The answer to this is that, other countries have been creating money also, and debasing their own currencies, just not as much as the USD. However, all paper money is losing its value against hard assets, and this is a trend I can continuing in the medium and long term.

 

It is for this reason, that I think it is wise to begin to drip feed our salary’s into different assets such as food, gold, silver, energy and perhaps other more stable currencies.

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Good reply by I got from VedantaTrader on HPC:

 

I replied to this (at some length) on HPC... it was a good thread - fairly balanced.

 

I disagree with VedantaTrader's assessment of Bernanke, and I definitely disagree about "investing" in food, gold, silver and "energy" (in the sense of stockpiling oil, at least!) - and would love to be able to determine what the 'stable' currencies actually are... there doesn't seem to be much consensus.

 

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I replied to this (at some length) on HPC... it was a good thread - fairly balanced.

 

I disagree with VedantaTrader's assessment of Bernanke, and I definitely disagree about "investing" in food, gold, silver and "energy" (in the sense of stockpiling oil, at least!) - and would love to be able to determine what the 'stable' currencies actually are... there doesn't seem to be much consensus.

 

Sorry Steve, it just that this statement seems a little..... dogmatic. I mean say you were pretty sure, but not completely sure, that commodities would not be a good investment, would you not buy a little of them just to reflect your quota of uncertainty? Or are you completely certain? :)

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Sorry Steve, it just that this statement seems a little..... dogmatic. I mean say you were pretty sure, but not completely sure, that commodities would not be a good investment, would you not buy a little of them just to reflect your quota of uncertainty? Or are you completely certain? :)

 

I disagree that it is "wise to begin to drip feed our salary’s into different assets such as food, gold, silver, energy and perhaps other more stable currencies" - and about that I'm completely certain.

 

This doesn't mean that I think that no-one who does this will make money... just as I don't think that everyone who plays roulette will loose. This, however, doesn't make playing roulette a "wise" decision.

 

I'm not a fan of precious metals or commodity investment - and I explain this as being a 'religious preference' - in the sense that I don't expect to be able to convert others, rather than because I've derived it from scripture or follow some cult. Gold has never enriched anyone - except by selling it; it pays no dividend unless lent... and, frankly, as it is no longer money - there's scant demand to borrow a cumbersome metal bar... so, it no-longer serves any useful purpose... beyond an anachronism. The same goes for silver - though that has some interesting chemistry and industrial application beyond being a wildly expensive electrical conductor and neck-decoration for chavs. Platinum has some interesting properties (as a catalyst in fuel cells and to manufacture catalytic converters for cars) - but I suspect such demand is already priced-in. Of course, it would be worth keeping an eye out for any spectacularly successful looking technology that stands to shift trends in worldwide demand.

 

I buy commodities for consumption - nothing more. If I were planning a business venture that needed lots of a commodity - I'd consider a future - or, maybe, options to assist with cost planning. I don't see commodities as being investable... The GSCI, for example, scared the hell out of me when I realised that "investment" in it allowed a manager (who potentially doesn't have my best interests at heart) to switch from owning commodity-backed futures to long OTC derivatives at will... the upshot of this is that a handful of bankers will know when the GSCI is going to crash - and can profit from that! This is not my idea of a good investment.

 

I recognise that precious metals have risen spectacularly in recent years - but we have to remember that this was at a time of loose credit... where the cash rich desperately searched for assets that would allow them to benefit from further credit expansion. As opposed to being a hedge against inflation, I see precious metals as being a slightly lagging barometer of credit expansion. Sure enough, in recent months, the price of gold has fallen from its all-time (?) high of ~$1000. I only see it going higher if someone crazy decides to accept it as collateral for loans at 100% (or more) of its value... or a religious mania drives people to crave it for some reason I utterly fail to comprehend.... or if economic conditions give rise to an environment in which even more people have even more cash than they know what to do with. It seems an unlikely prospect to me.

 

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I disagree that it is "wise to begin to drip feed our salary’s into different assets such as food, gold, silver, energy and perhaps other more stable currencies" - and about that I'm completely certain.

 

This doesn't mean that I think that no-one who does this will make money... just as I don't think that everyone who plays roulette will loose. This, however, doesn't make playing roulette a "wise" decision.

 

I'm not a fan of precious metals or commodity investment - and I explain this as being a 'religious preference' - in the sense that I don't expect to be able to convert others, rather than because I've derived it from scripture or follow some cult. Gold has never enriched anyone - except by selling it; it pays no dividend unless lent... and, frankly, as it is no longer money - there's scant demand to borrow a cumbersome metal bar... so, it no-longer serves any useful purpose... beyond an anachronism. The same goes for silver - though that has some interesting chemistry and industrial application beyond being a wildly expensive electrical conductor and neck-decoration for chavs. Platinum has some interesting properties (as a catalyst in fuel cells and to manufacture catalytic converters for cars) - but I suspect such demand is already priced-in. Of course, it would be worth keeping an eye out for any spectacularly successful looking technology that stands to shift trends in worldwide demand.

 

I buy commodities for consumption - nothing more. If I were planning a business venture that needed lots of a commodity - I'd consider a future - or, maybe, options to assist with cost planning. I don't see commodities as being investable... The GSCI, for example, scared the hell out of me when I realised that "investment" in it allowed a manager (who potentially doesn't have my best interests at heart) to switch from owning commodity-backed futures to long OTC derivatives at will... the upshot of this is that a handful of bankers will know when the GSCI is going to crash - and can profit from that! This is not my idea of a good investment.

 

I recognise that precious metals have risen spectacularly in recent years - but we have to remember that this was at a time of loose credit... where the cash rich desperately searched for assets that would allow them to benefit from further credit expansion. As opposed to being a hedge against inflation, I see precious metals as being a slightly lagging barometer of credit expansion. Sure enough, in recent months, the price of gold has fallen from its all-time (?) high of ~$1000. I only see it going higher if someone crazy decides to accept it as collateral for loans at 100% (or more) of its value... or a religious mania drives people to crave it for some reason I utterly fail to comprehend.... or if economic conditions give rise to an environment in which even more people have even more cash than they know what to do with. It seems an unlikely prospect to me.

 

 

Oh yes, your views seem perfectly rational and coherent ...... from a theoretical perspective :).

 

Yet wouldn't you agree that economics and money is a very practical thing and therefore practical reason as opposed to theoretical reason may serve us better? What I mean to say is markets do what they do... for example...first they chase gold up... then they chase it down... all manner of things are chased about. Also, they seem rather unstable at the moment. Therefore, would it not be prudent for someone to put 10-20% into commodities/metals, no matter their personal opinions/prejudices on the matter?

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Oh yes, your views seem perfectly rational and coherent ...... from a theoretical perspective :).

 

Yet wouldn't you agree that economics and money is a very practical thing and therefore practical reason as opposed to theoretical reason may serve us better? What I mean to say is markets do what they do... for example...first they chase gold up... then they chase it down... all manner of things are chased about. Also, they seem rather unstable at the moment. Therefore, would it not be prudent for someone to put 10-20% into commodities/metals, no matter their personal opinions/prejudices on the matter?

 

It's not just a theoretical perspective, it's a religious perspective - it relates to what I think is "right".

 

"Markets do what markets do" is a market fundamentalist perspective - and rigorous analysis shows it to be a remarkably risky stance (a conclusion related to my 'hardcore mafz' in the Chris M thread). If investment is about all manner of things chasing each other about, one has to ask if it matters what the things are. If it doesn't matter, either you must either have identified and rejected all ponzi (like) schemes - or consider them to be OK. I think they're unethical since they only enrich one participant at the expense of many others who are deceived about the value of their purchase/investment. Pragmatically, ponzi schemes are profitable if you are near enough to the origin to be paid many times - but far enough away that you're not on the hook when the scammed victims come hunting with pitch-forks (or send the police on their behalf.) I consider ponzi schems to be unethical - and wouldn't knowingly participate... partly because I expect to be scammed - and party because I don't want to enrich myself by exploiting others - even if the risks could be mitigated.

 

No, I don't think it would be prudent for anyone to invest in commodities or metals - any more than I think it would be prudent to feed 10-20% of earnings into a fruit machine, or on bets at "the dogs". Some will prove to be "winners" in the fullness of time - but this 10-20% of the average investor's wealth, I believe, could have been better invested elsewhere. Prudence is about matching assets with liabilities... if you are liable for the supply of commodities - it makes sensible to hold futures. A future for anyone else is as much of a liability as it is an asset - but gives no economic advantage. An OTC long is nothing but a bet - if that's your thing, why not stake it at the bookies - it will be no less enjoyable... and you are less likely to be exploited by unscrupulous insider traders. If owning gold makes you happy... be my guest... you can have what should be my 'fair' share - I've no use for it.

 

I've come to the opinion that a lot of what matters when it comes to investment falls down to belief. At the risk of sounding "all spiritual" - there is only one thing that is really valuable - debt. I don't much care for jewels and precious metals... they don't enrich me... that I'm "owed" - however - definitely does have value... as do my own rights and freedom. There is only one non-trivial asset I want to possess - a decent house... and it was the prices of these that lead me to question the money supply and credit. A house remains the only asset I care about - and my aversion to debt the only current obstacle. What you might find bizarre is that - if I could buy a house I find acceptable for cash, I wouldn't care if it became unsaleable and lost 100% of its collateral value. I don't want to borrow against it... but this will not affect the extent to which it will enrich me to have a stable base from which I can start to establish the life I want. A decent house and a monster-mortgage simply won't help... I'd be too old and frail to make use of it before I'd be free to do so.

 

So, in summary, yes... it is just personal opinions/prejudices - but I think it would be a foolish person who ignores morality... such short-cuts often have a way of biting back all too viciously.

 

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It's not just a theoretical perspective, it's a religious perspective - it relates to what I think is "right".

 

"Markets do what markets do" is a market fundamentalist perspective - and rigorous analysis shows it to be a remarkably risky stance (a conclusion related to my 'hardcore mafz' in the Chris M thread). If investment is about all manner of things chasing each other about, one has to ask if it matters what the things are. If it doesn't matter, either you must either have identified and rejected all ponzi (like) schemes - or consider them to be OK. I think they're unethical since they only enrich one participant at the expense of many others who are deceived about the value of their purchase/investment. Pragmatically, ponzi schemes are profitable if you are near enough to the origin to be paid many times - but far enough away that you're not on the hook when the scammed victims come hunting with pitch-forks (or send the police on their behalf.) I consider ponzi schems to be unethical - and wouldn't knowingly participate... partly because I expect to be scammed - and party because I don't want to enrich myself by exploiting others - even if the risks could be mitigated.

 

No, I don't think it would be prudent for anyone to invest in commodities or metals - any more than I think it would be prudent to feed 10-20% of earnings into a fruit machine, or on bets at "the dogs". Some will prove to be "winners" in the fullness of time - but this 10-20% of the average investor's wealth, I believe, could have been better invested elsewhere. Prudence is about matching assets with liabilities... if you are liable for the supply of commodities - it makes sensible to hold futures. A future for anyone else is as much of a liability as it is an asset - but gives no economic advantage. An OTC long is nothing but a bet - if that's your thing, why not stake it at the bookies - it will be no less enjoyable... and you are less likely to be exploited by unscrupulous insider traders. If owning gold makes you happy... be my guest... you can have what should be my 'fair' share - I've no use for it.

 

I've come to the opinion that a lot of what matters when it comes to investment falls down to belief. At the risk of sounding "all spiritual" - there is only one thing that is really valuable - debt. I don't much care for jewels and precious metals... they don't enrich me... that I'm "owed" - however - definitely does have value... as do my own rights and freedom. There is only one non-trivial asset I want to possess - a decent house... and it was the prices of these that lead me to question the money supply and credit. A house remains the only asset I care about - and my aversion to debt the only current obstacle. What you might find bizarre is that - if I could buy a house I find acceptable for cash, I wouldn't care if it became unsaleable and lost 100% of its collateral value. I don't want to borrow against it... but this will not affect the extent to which it will enrich me to have a stable base from which I can start to establish the life I want. A decent house and a monster-mortgage simply won't help... I'd be too old and frail to make use of it before I'd be free to do so.

 

So, in summary, yes... it is just personal opinions/prejudices - but I think it would be a foolish person who ignores morality... such short-cuts often have a way of biting back all too viciously.

 

As for morality, what I find immoral is that the hard earned savings of the middle classes is in real danger of being wiped out. I am not saying that the money we have honestly worked for will definitely be wiped out but that there is a real risk of this due to many factors you are no doubt aware of ad nauseum on this site and others. Given this risk, surely it is sensible to look for some insurance where you can find it.

 

When I say “markets do what they do” I do not mean to suggest there are certain fundamental economic laws underlying market behavior but rather it is just behavior per se, that is, the behavior/psychology of a “ship of fools” as they first chase this then that. I see no point in exhibiting such “misbehavior” in my life. I will choose the assets that will suit me best and stick with them. Like yourself, I seek to own debt free property. Yet to acquire the most basic of human needs I feel that I will very much need to live by my wits. Sadly, many people, due largely to a gullible faith in the system, are being led like lambs to the slaughter; victims of the largest [probably unconscious] ponzi scheme ever known. Once this credit crisis really starts to get going we may see many of those over-leveraged bankrupted. What I find immoral and corrupt is the formulation of policies by our so called leaders which have encouraged mostly decent people into an untenable position. Then again, maybe this is too harsh and they also are just fools.

 

As for property, I also could not care less about its nominal value, whether it rose or fell. This obsession will prove to be the downfall of many. I only care about the nominal price in so far as I can pay it at some time. Putting some funds into monetary metal may help me to do that. Perhaps it will not. There are no certainties in life. But money or metal will only ever be a means to an end.

 

I remember reading about a man who went fishing every day and met his friends in the evening. A businessman tried to convince him to upgrade and start a small fishing business. The man asked why he should do that. “To make money” answered the businessman. “And what would I then do with all that money”, the man inquired. Well, you could then retire.... and go fishing everyday.......……………

 

Seems the man is already wealthy.

 

 

 

Edited to add: The fact that the economic machinations of the day are failing goes far to restoring my faith in a just universe. :)

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As for morality, what I find immoral is that the hard earned savings of the middle classes is in real danger of being wiped out. I am not saying that the money we have honestly worked for will definitely be wiped out but that there is a real risk of this due to many factors you are no doubt aware of ad nauseum on this site and others. Given this risk, surely it is sensible to look for some insurance where you can find it.

...

Edited to add: The fact that the economic machinations of the day are failing goes far to restoring my faith in a just universe. :)

 

This is the the thing about morality: "two wrongs do not make a right."

 

When it comes to insurance, I'm interested by the Islamic outlook - i.e. that traded risk is immoral. I'm not entirely sure that is true - but I do think that insurance that is an imperfect fit for the risk of concern is poisonous. There is a real risk that not only do you suffer the consequence of the risk you wish to hedge - but you also loose the cost of insurance. There's also an issue with a culture of protection - which can lead to a perverse situation by which insuring against a risk makes that outcome more, not less, probable.

 

Where the risk is deceptive activity within financial services, I fail to see how buying protection from financial services will help. The only real protection is to demand transparency and insist that criminal activity is prosecuted. Everything else is either pointless or counter-productive.

 

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This is the the thing about morality: "two wrongs do not make a right."

 

When it comes to insurance, I'm interested by the Islamic outlook - i.e. that traded risk is immoral. I'm not entirely sure that is true - but I do think that insurance that is an imperfect fit for the risk of concern is poisonous. There is a real risk that not only do you suffer the consequence of the risk you wish to hedge - but you also loose the cost of insurance. There's also an issue with a culture of protection - which can lead to a perverse situation by which insuring against a risk makes that outcome more, not less, probable.

 

Where the risk is deceptive activity within financial services, I fail to see how buying protection from financial services will help. The only real protection is to demand transparency and insist that criminal activity is prosecuted. Everything else is either pointless or counter-productive.

 

In the first place, the grand ponzi scheme had in a sense corrupted all of society, and people are responsible to a certain extent for their debt trap in so far as they are free agents and susceptible to all sorts of vice such as greed. In the second place, an economic crash, though bringing a lot of pain, will sweep the old over-debted system away and enable a new system which is more just and rewarding to a new generation [regeneration]. Imagine the alternative; future generations enslaved to increasing debt. Nahhh.... the universe is just. :rolleyes:

 

 

 

 

I was referring to monetary metal as insurance against the financial system. Wouldn't insure myself against the financial system through the financial system... though I hear that some risk managers are doing this.

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I was referring to monetary metal as insurance against the financial system.

 

I have extreme discomfort at this idea. Precious metals are not money - and haven't been for some time. While I fully understand the notion of "specie" that, historically, was something that could be used to hold the issuers of "paper money" to account - this was at a time when precious metals were money... precious metals today do not have that status... we will never again be taxed in gold - gold will never become legal tender. In this context, while gold seems to react to monetary expansion as it did in times gone by - I strongly suspect this is only because it is a common misconception that gold is a hedge against inflation - which, paradoxically, makes gold a hedge against the fear of inflation.

 

A long time ago (when I was far too young to understand) I heard gold being discussed - and there was a comment that "In times of crisis, people rush to what they believe in - for some that's gold, for some that's property - for others it is religion." This makes a lot of sense to me. While I'm thinking about exotic financial instruments, it is as if it is to a soundtrack of a cockney geezer (I'm not devout) asking is it "kosher?" I have to wonder if the instrument really does have value... it is remarkably difficult to establish a credible answer most of the time. I'm inclined to argue that "religion" is the only answer that might work... not in the join-a-cult or kneel-n-kiss-yer-ass-goodbye kind of ways, but by acting in an honest and transparent way - and asking for the same of others. I do not believe in the "big outrageous conspiracy" explanations - I believe that there are billions of individually minor deceptions... and I'm encouraged by chaos theory which suggests that the consequences of relatively small actions can cause dramatic consequences. For me the only insurance I'd trust is education, reason and communication... all of which are (virtually) free.

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Simply stated:

 

There is an exceedingly high probability that when gold gains significant value as the singular currency of preference there will be NO repeat of the 1980 scenario.

 

There are Two Types of Inflation:

 

Cost push

Demand Pull

 

Increased interest rates can soften the power of Demand Pull Inflation by acting to slow down the pace of business activity, but has no power at all as the present inflation is caused by “Cost Push” as increased short term rates simply add to the costs. Business is not recovering and credit problems are spreading, making hawk talk nothing but talk.

 

We do not control Asian economies that will continue to grow, even if at a lower rate of gain. The cost of materials has suffered a severe reaction in a severe up trend, but is far from being in a bear market as financial TV now declares. Global destruction of demand as applied to crude is just a tad too extreme to be applied to the world energy situation.

 

If the US Fed were to embark on a program of inflation fighting utilizing short-term interest rates, under present monetary conditions they would trigger a transition from a severe recession into a world-class depression. Hawk talk makes good press and neat spin, but to those few that understand, it is rank crap.

 

WOW JIM SINCLAIR writes on this site or have you overlooked giving the lad the credit he is due? :rolleyes:

 

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WOW JIM SINCLAIR writes on this site or have you overlooked giving the lad the credit he is due? :rolleyes:

 

Sorry, I forgot to include the link to the article. Here it is;

 

Federal Reserve Gold Certificate Ratio - An Important Point To Clear Up

 

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I don't think that central bank rates make as big a difference as you suppose. I think they primarily relate to the relative values of currencies in today's global economic environment - the international money markets providing the actual funding. I think that a non-fluctuating exchange rate is the cause of monetary expansion. This doesn't necessarily cause inflation of goods for consumption - but it will cause spiralling non-portable asset prices.

 

I am not sure I completely understand what you are saying here, but let me try approaching this slightly differently.

 

Central bank rates are one step removed from the actual operations central banks do, in that they set a policy rate and then buy and sell some kind of bond - generally government bonds - to maintain that rate. To the degree that the market is already where they wish it to be, they do nothing. If rates are above, then they buy bonds, which increase their prices and lowers the rate, until the desired effect is achieved. If below, they do the opposite - sell bonds until the rate is high enough. There are two interesting things here: first, any money they spend in this process they create, and any received is destroyed. Second, these processes are asymmetric in that there is no limit to how much money may be created, but any given central bank has only so many assets to sell. (Bernanke made this point in his speech on deflation on November 21, 2002.)

 

This is not the only way to create money, but the money thus created is "high-powered" money and may be pyramided on many times through fractional-reserve banking. (Central banks do have tools to control that such as reserve ratios and other regulatory powers.)

 

Now, those of us who are not a fan of fiat currencies are generally concerned about them for some set of the following reasons:

 

1) The history of fiat currencies indicates that they are bad as a store of value.

2) The attempt to manage the business cycle is either unhelpful in moving towards the goal of eliminating the business cycle, or is the cause of our current severe business cycles. (See Austrian business cycle theory for one view on this.)

3) The ability of the central bank to inflate indefinitely, in concert with its lender of last resort powers, has has created significant moral hazard and postponed the reckoning for various bad practices of today's citizens and governments.

4) The temptation of inflating away the liabilities of governments and citizens will only grow greater as the situation deteriorates.

 

The reason many then turn to gold is that it cannot be created by governments, it is reasonably scarce, portable, and so forth. Depending on how one holds it, one may not also depend on a corporation, government, or other entity honoring its promises. (Though of course governments can and have banned it.)

 

Now, countering some of the prior facts is the potentially deflationary effect of debt destruction, recession, and perhaps a depression. The question is whether we will have general deflation in the money supply, or inflation. Partly this depends on which monetary aggregate you examine, and partly on what you think the governments will do if confronted with deflation. Many people that I respect have taken the view that we will have deflation. I tend to believe we will have inflation - but we could both be right if we first have deflation which is then countered with sufficient money printing. We'll have to see how it goes.

 

 

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I am not sure I completely understand what you are saying here, but let me try approaching this slightly differently.

 

I've not made a great case, I'll grant... but the basis, in short, is that I believe that securitisation of debt has been the mechanism by which our money supply in the UK has grown so rapidly.

 

I think that it is the relative rates of interest that matter most... to determine what will happen... and the absolute rate at which events occur defines their scale.

 

If A has a higher rate of interest to B - then B will be motivated to encourage debt in A by financing speculators.

If A has a lower rate of interest to B - then A will first repay debts to B then be encouraged to turn the tables.

 

There are, of course, caveats assuming A and B have separate currencies... since the value of the debts of either is subjective - in the sense that the exchange rate is uncertain and varies over time.

 

* It makes quite a lot of sense for A to maximally unwind debts with B before reducing interest rates... since, once interest rates are dropped - the effect of a devalued currency would likely make it harder to repay debt to B.

* B's investors will certainly want their capital returned as soon as possible if A is set to reduce its interest rates below the returns of domestic investment in B... causing inflation in B's economy.

 

Thus, it seems, the relative interest rates of two countries will tend to force one to be a strong currency, while the other is weak... and for this effect to be self-reinforcing... until such point as bad debts on speculative loans from the weak to the strong currency result in an unwillingness to lend... giving rise to a significant shift in currency values to reduce the consumptive demand of the formerly strong currency.

 

The absolute rates of interest don't seem to matter much - except that where the rates are higher, the ratio of speculative capital to returns from productive enterprise will tend to be larger... so, we should expect more severe busts when they occur if interest rates for trading partners are low when they cross over. In this sense, when worldwide interest rates dropped in ~2001... this did not signal a reversal of capital flows as boom turned to bust (and vice-versa)... but, rather, doubled-up the speculation. If the Sterling interest rate falls below the ECB rate, I think the consequences will be extreme...

 

 

 

 

 

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I have extreme discomfort at this idea. Precious metals are not money - and haven't been for some time.

Let me put this plainly.

 

If so, what is money?

 

Why do Central Banks hold gold?

 

Why did Alan Greenspan say when he was Chairman of the FED say that "gold is the ultimate form of payment"?

 

Will I accept your squirrel skin as payment? Well, if I feel confident that I can use it next week or next year in payment at a closely similar value, then I think I will.

 

If not, no.

 

The idea that precious metals are not money is an indoctrinated servitude inculcated in recent decades in some of the "developed" countries.

 

You clearly suffer from such indoctrination.

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1. If so, what is money?

 

2. Why do Central Banks hold gold?

 

3. Why did Alan Greenspan say when he was Chairman of the FED that "gold is the ultimate form of payment"?

 

4. Will I accept your squirrel skin as payment? Well, if I feel confident that I can use it next week or next year in payment at a closely similar value, then I think I will. If not, no.

 

5. The idea that precious metals are not money is an indoctrinated servitude inculcated in only recent decades in some of the "developed" countries. You clearly suffer from such indoctrination.

 

Numbered for clarity of response.

 

1. Money is standardised tradeable debt - nothing more; nothing less. You may barter with gold, but it is not money.

2. Central banks hold gold as an anachronism dating back to a time when sovereign states could hold each other accountable for their debts by its exchange... that idea itself an anachronism dating back to the times in which it represented the only credible way of establishing trustworthy communication of debt... since it was understood that gold could buy mercenaries to establish political control through warfare at that time.

3. Did he? I've not read that. It is the ultimate form of payment, I suppose, because it is the only non-fiat asset held by central banks... but, today, WMD represent a far more credible threat than the capacity to hire foreign mercenaries.

4. You may buy my squirrel skin if you would like it... but I will only accept payment in tradable debt. I have no desire for your gold.

5. Codswollop. It is a belief not an indoctrination... I believe in the value of people; I do not believe in the value of a heavy soft metal. I don't want homogeneous heavy lumps that I then have to waste effort defending. In fact, if I don't need the squirrel-skin, you can have it for an "IOU 1 squirrel skin equivalent" - if you like.

 

 

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Here are the trends I see in place:

 

We will continue to see rising prices in food and energy .

 

We will continue to see falling prices in housing and anything else associated with debt, the UK or Sterling.

 

These falling prices will be even more apparent if measured in a stronger currency than Sterling (pretty much every one, except possibly the Zimbabwe dollar).

 

When the next phase of these financial crisis kicks in , gold will continue to rise against all currencies.

 

Yes house prices will fall when measured against Sterling, but Sterling will fall when measured against other assets. Wages may also fall as people accept lower salaries to protect their jobs

 

Even with last week's sell-off and August being the worst time of year, gold is still up on the year against Sterling.

 

Those in charge of UK plc are incompetent. Why hold your wealth in the promises of incompetents? Their priority is not the protection of Sterling's purchasing power or your wealth. They seem to be taking every step in their power to debase the currency. It is only their incompetence that stops you believing it is deliberate.

 

It's time for me to go to bed.

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Numbered for clarity of response.
Well organized, thanks.

1. Money is standardised tradeable debt - nothing more; nothing less. You may barter with gold, but it is not money.

:blink: Man, you sound so bought by the debt mongers. For me money is a means for exchange of goods and a store of value in the meantime, meaning to say when I prefer to save rather than spend.

2. Central banks hold gold as an anachronism dating back to a time when sovereign states could hold each other accountable for their debts by its exchange... that idea itself an anachronism dating back to the times in which it represented the only credible way of establishing trustworthy communication of debt... since it was understood that gold could buy mercenaries to establish political control through warfare at that time.

I didn't say precious metals were the only money. Certainly not. That's why I mentioned squirrel skins, which were, I believe, in ancient times in Finland used as money. And if you consider the practicalities quite sensibly so.

3. Did he? I've not read that. It is the ultimate form of payment, I suppose, because it is the only non-fiat asset held by central banks... but, today, WMD represent a far more credible threat than the capacity to hire foreign mercenaries.

"Gold still represents the ultimate form of payment in the world. . . . Fiat money, in extremis, is accepted by nobody. Gold is always accepted" (Speech to Senate Banking Committee in May 1999).

http://news.goldseek.com/GoldSeek/1216209600.php

As you imply, power is worth far more than mere money.

4. You may buy my squirrel skin if you would like it... but I will only accept payment in tradable debt. I have no desire for your gold.
Buy your squirrel skin? I mentioned accepting squirrel skins as payment. You seem, nevertheless, overly concerned with debt, albeit tradable debt as you thankfully emphasize. What if one day this debt ceases to be tradable, i.e. nobody will buy it?

5. Codswollop. It is a belief not an indoctrination... I believe in the value of people; I do not believe in the value of a heavy soft metal. I don't want homogeneous heavy lumps that I then have to waste effort defending. In fact, if I don't need the squirrel-skin, you can have it for an "IOU 1 squirrel skin equivalent" - if you like.

So do you prefer to believe in accounts on magnetic discs or pieces of paper with pictures of "worthies" or something better than squirrel skins?

---------------------------------------------------------------

I was talking about money.

---------------------------------------------------------------

 

I don't believe in the value of people. I know the value of people.

 

And I like to keep it separate from "filthy lucre" as the old phrase goes.

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