first majestic silver

A Unique Perspective On Deflation

January 10, 2015

wasn’t planning to write this morning (Friday); and in fact, will have completed this article before the December NFP payroll report is released. Regarding said report, my advice is the same as always regarding the “island of lies” reporting of the nation’s most politically-sensitive statistic. Which is, to ignore the fraudulent headline numbers – even if “worse than expected” – and look into the internals; which unquestionably, will reveal a true unemployment situation, at best, on a par with the 1930s. Last month’s “headline numbers” set a new “high bar” for government lying (putting it on a level ground with thieving American corporations); making it more likely than ever that “the glaring weakness in true U.S. unemployment will become widely understood” – per a prediction I made last year. Which, for that matter, will be the case with all nations that pretends “employment” is strong; such as Germany, which “coincidentally,” is the chief steward of the world’s second largest currency.

As we head into today’s meaningless “employment report”; which in a world of collapsing currency, commodity, and crude oil markets is already as “old news” as the buggy whip, here are some of the headlines I see. For one, it was reported that in November, U.S. credit card debt growth had its biggest decline in over a year. In other words, people are no longer spending – and this, just as the holiday spending season commenced. Thus, given that nearly all the “jobs” the BLS reports are in the retail sector, is it even possible that employment rose in December – at all?

Or how about the Baltic Dry Index falling yesterday to its lowest-ever level in early January? Yes, lower than even January 2009, at the height of the worst economic crisis (until now) of our lifetimes? Or, switching gears; to Asia, where Japanese corporate bankruptcies exploded to an all-time high, Abenomics notwithstanding; and ditto for the number of Japanese households receiving welfare, which hit an all-time for the sixth straight month.

Or better yet, how about in the soon-to-collapse financial hell that is Europe; where yesterday, the continent’s largest bank, Banco Santander of Spain, had its stock suspended because due to a desperate need of $9 billion of capital to stay solvent? Yes, my friends, the entire European (and Western) banking system is dead in the water – afloat only due to ECB QE and covert Fed “swap agreements” that hand them free, perpetual loans of freshly printed currency to use as collateral against their rapidly collapsing portfolio of toxic loans.

This morning, Santander announced an overnight, heavily dilutive equity financing – no doubt, “aided” by Central bank bids, that chopped 15% off the stock’s valuation. Sadly, as Bill Murphy would say, that’s just “jacks for starters” for the dying European banks, particularly if the “GrExit” I have predicted for two years comes true – as it certainly appears it will. Remember, the Greek elections are just 16 days from now; and the leader of the sure-to-win Syriza party, Alexis Tsirpas, just last week said “Germany had most of the nominal value of its debt written off in 1953, so the same should be done for Greece in 2015.” Greece has roughly €400 billion of debt. Gee, I wonder how the Banco Santanders of Europe will handle most of it being written off.

Here in the States, we’re in the aftermath of the second FOMC-related, PPT-aided equity explosion in three weeks – and the third in three months); based on absolutely NOTHING incrementally positive emerging from the “minutes.” To the contrary, the FOMC minutes were wildly Precious Metal bullish, given the Fed’s obvious fears of global economic contagion and reluctance to even consider rate hikes (gee, could the fact that Treasury yields are plummeting toward record levels have something to do with said reluctance?).

Better yet, yesterday’s equity hyper-drive was attributed to FOMC voting member Charles Evans saying that raising rates would be a “catastrophe”; in other words, validating exactly what we have said all along – that interest rates can never, ever be raised. Heck, just last night, non-voting FOMC member Narayana Kocherlakota claimed a rate rise in 2015 would “retard inflation recovery.” And better yet, in the category of things difficult to believe, he also claimed – I kid you not – “if we have 2% inflation, we’ll have maximum employment.” Yes, this is how dimwitted the people making our nation’s financial decisions are – which is why a decision to NOT buy Precious Metals is utterly insane.

And by the way, if he is in fact correct that 2% inflation is required to materially increase employment, he’d better not read my articles from earlier this week – “the direst prediction of all,” and “death by deflation.” To wit, now that the entire world is heading into an unprecedented Depression, with unprecedented excess capacity, prices of nearly everything will likely plunge for years to come. Except, of course, prices that will need to rise to pay for the insolvency of governments and the financial institutions – like taxes, insurance, and fees. Not to mention, the cost of protectionism, like import tariffs.

Which brings me to today’s topic, which is something that has bugged me for the past week. Which is, the fact that when deflation truly kicks in, everything will decline in value – except money itself, i.e. physical gold and silver. The fact that nominal values will eventually explode when hyper-inflation arrives is immaterial, as real values will continue to plummet irrespective – just as they did in Weimar Germany and 1990s Zimbabwe, to name a few examples. Yes, everything that can’t maintain its purchasing power will plunge; and what “asset” will lose more purchasing power than U.S. Treasury bonds?

Yes, I know – “QE” has supported them for six years; and currently, despite the so-called “end of QE,” Treasuries continue their historic “bull market” due to “front-running” of anticipated “QE to Infinity.” However, like stocks – and in many cases, real estate; valuations are at all-time high levels, whilst fundamentals are at all-time lows. After all, who on Earth would voluntarily lend money to the most heavily indebted, insolvent entity in history? The answer, of course, is NO ONE. And thus, once the inevitable “Yellen Reversal” yields QE4, 5, and “Infinity” – driving Treasury yields close to zero – the “deflation” of Treasury bonds will be historic, not just in the U.S. but the entire Western world. Sovereign debt deflation has already started in nations that don’t have “reserve currencies” backing them – think Greece, Venezuela, and Russia; and eventually, the Western Treasury implosion will be the most damaging economic event in history, compounded by the horrific derivatives underlying them.

And while this happens, gold and silver will just sit there doing what they always do; i.e., maintaining their purchasing power, whilst that of all else collapses. With it, you and your financial kin will be spared the financial purgatory that is coming. And without it, it’s entirely possible that most, if not all of your life’s savings will, at the least, be “severely discounted.”



Courtesy of www.milesfranklin

Andrew ("Andy") Hoffman, CFA joined Miles Franklin, one of America's oldest, largest bullion dealers, as Media Director in October 2011. For a decade, he was a US-based buy-side and sell-side analyst, most notably as an II-ranked oil service analyst at Salomon Smith Barney from 1999 through 2005. Since 2002, his focus has been entirely on precious metals, and since 2006 has written free missives regarding gold, silver and macroeconomics. Prior to joining the company he spent five years working as an investor relations officer or consultant to numerous junior mining companies.

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