Gold Value Increases During Extreme Deflation (or Inflation)
Shelby Moore
I will explain why it does not matter whether the central banks lead us to
inflation or deflation, because it is too late to maintain any balance in
the business cycle, and defaults are now an unavoidable event in
the not so distant future, which will cause gold to skyrocket in value.
I explained in my previous two articles, "How Derivatives Compete With
Gold" and "Derivatives Are Competing With Gold!", that "interest rates"
are set by the free market (of individual decisions) if on a 100% gold
legal tender standard, because no one can control the supply of gold
money.
Fiat paper/electronic money empowers a central bank to create/destroy (and thus control the supply of) legal tender money and thus the "interest
rates". When "interest rates" are set higher than the free market (of
individual decisions) would, then supply of legal tender money is in
deflation. When "interest rates" are set lower than the free market
would, then supply of legal tender money is in inflation.
Again, I reiterate that "interest rate" is the "opportunity cost" on
investment, so don't confuse this with Fed Funds or even bond rates.
Perhaps a reasonable proxy for "interest rate" is long-term bond rates
minus money supply inflation, but money supply inflation is not accurately
reported and bond rates are being manipulated by CPI lies, direct central
bank intervention (buying/selling) via Repo contracts, and other factors.
Thus we have no accurate measure of "interest rate" when on a fiat money
standard, which is precisely the reason that (the deception of) derivates
can compete with gold.
My previous two articles implied the fact that gold can gain no value when
it is the legal tender money (100% gold standard), because the free market
of "interest rates" is inherently in competitive balance, as thus the
legal tender gold money supply is nearly constant (no centralized
manipulative force able to create/destroy money) with the free market of
individuals deciding the necessary return for investing their money.
When on fiat money standard and perceived "interest rates" are set
higher than free market, either by deflation of fiat money supply or by
deceptive reporting of CPI, real GDP, and M3, then the value of gold
decreases. As explained by Dr. Fekete (see my previous articles), this is
because a (deceptive) higher return can be obtained in fiat derivatives
from the higher than free market "interest rates". The deception is that
the risks of defaults, or the swing of the business cycle, may not be
properly factored, especially if the underlying data on CPI (and thus real
GDP) and money supply inflation are deceptively reported or not reported:
http://ShadowStats.com
Thus many fear that gold will decrease in value when deflation comes in
our current economy. Not true! When derivates have been allowed to grow
to such as an extreme (see my prior article "Derivatives Are Competing
With Gold!" for discussion of how extreme), then any significant
deflationary period will result in catastrophic defaults. This means most
banks, most brokerage accounts, most futures accounts, most businesses,
etc.. will all fail and lose all value. When every method of fiat storage
is failing, then the desire to store fiat fails, then gold skyrockets.
Not convinced? With defaults on that extreme scale (and there can be no
smaller scale based on the extreme quantity of derivatives relative to
everything else, again see my prior article "Derivatives Are Competing
With Gold!"), then massive fear erupts, due to survival instincts and
fighting over scarce production. Fear drives demand for gold. For
example, in 1929, gold went from $20.63 in 1929 to $34.69 in 1934,
and even that 50% increase was too low a price set by government decree.
We know for a fact that $34.69 was too low, because foreigners traded all
their dollars for all our gold at that price until 1971 (officially most
of our gold is gone, and for the remaining small official amount, Fort
Knox hasn't allowed public audit in decades). And that price was with the
supply of gold drastically increased by the 1933 confiscation, and the
entire US demand for gold suddenly outlawed in 1933 (US citizens could not
own gold, while foreigners were allowed to buy the confiscated gold at low
price). So you can imagine how high the price would have skyrocketed, had
the demand and supply of gold remained in the free market.
But of course the Fed will try to delay defaults, thus they will print as
many dollars as necessary to prop up FDIC, Fannie Mae, etc., but remember
that at some point every balloon must pop, so the extreme defaults
deflation is inevitable and only becomes more extreme with more
time to grow.
During the interim time to extreme deflation defaults, while the Fed is
accelerating money supply inflation to keep all derivative boats afloat,
then the inhibition of the growth rate of value of gold (and inversely the
growth rate of derivatives) is dependent on the success of deception. As
deception dies, and more and more people realize that the "interest rates"
on fiat derivatives are inevitably negative (due to inevitable
defaults), then gold will increase in value. Unfortunately, it seems the
masses do not try to figure any of this out, they just wait until they see
everyone else doing something, then they do it. So deception tends to
work very well, until very near the end.
In 2005, the bankruptcy laws were changed so the US citizens (and probably
similar laws being enacted in other countries as well, given that fiat
fractional reserve central banking exists in every country on earth now)
are not allowed to escape their debts if their income is above median
thresholds. The threshold is afaik adjusted by CPI. Given that CPI is
running about 2% per year, while derivatives and gold are growing at 20 -
30% per year, then the threshold line is falling in real value.
When the dollar fails due to extreme defaults, the government will be
pressured to offer a solution to the mayhem. It might offer reinflation
fiats, but these will all fail (as they did in Weimer Germany). Since
eventually there will be no confidence in fiats, government will need to
offer something new, and probably something with a gold backing. The gold
ETFs may or may not be a solution as extreme defaults may wipe out most
brokerage accounts, and the ETFs may fail also due their derivative gold
reserve (paper gold, not physical gold, see the prospectus for proof).
The long-planned Amero may be offered with gold (that the US gave the IMF) backed SDRs from the IMF backing the Amero.
So with the bankruptcy law redesigned in 2005 to trap those above the
median income, do you really think the banks are going to design a
transition to the Amero that favors giving debtors a way out? And I
expect the coming depression will be blamed on those who hoard gold with
derivatives (e.g. Yen carry trade speculators), just as the 1929
depression was erroneously blamed on the gold standard, and thus I see by
government decree one (1) dollar of debt converted to one (1) Amero of
debt, with Amero convertible at perhaps one (1) oz of gold. The populace
will be appeased by punishing those criminal (Enron precedent) gold
hoarding speculators, who used fixed interest rate debt to wreck the
economy. The little guy with debt, won't suffer any worse, as he will
have no gold. And the little guy will favor bringing gold back into the
economy at a favorable price.
So now imagine the gold investor who is taking out a 2nd mortgage to buy
gold. He ends up too rich to escape bankruptcy, unable to find a buyer
for his house, and unable to pay the debt without losing all his gold.
Fiats are debt servitude futures contracts. Caveat emptor.
March 11, 2007
antithesis@coolpage.com
Shelby Moore is sole creator or contributor to numerous commercial
software, e.g. Miningpedia.com (2006-), TurboJet, CoolPage (1998-). WordUp [archived] (1986-1989), Corel Painter (1993-95), EOS PhotoModeler, etc..
www.coolpagehelp.com/developer.html
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