03/03/10 Baltimore, Maryland – Since the feds can’t grow their way out of debt…they’ll have to try to inflate their way out.
Trouble is, first…central bankers don’t have that good a grasp of inflation. They can control the amount of money in the monetary base at the Fed. But they don’t really control what happens to it next. For a long time, prices don’t necessarily react…because, in a depression, the velocity of money slows down to a crawl. The banks don’t lend; the money doesn’t get around…and it doesn’t feed into consumer prices. Then, all of a sudden, people realize that there dollars are losing value…suddenly, they are eager to send them on their way. Velocity increases – fast. It is as if they had put cash in a particle accelerator. Instead of 6% inflation, the CPI goes to 12%…or 25%…or 100%.
The other problem is the ‘bond vigilantes.’ You remember them. They’re the ones who so impressed Bill Clinton that he said that if he died, he wanted to be reincarnated as a bond trader. Because those guys are the ones with the real power, he noticed.
America is going to need to borrow an additional $1.6 trillion this year. And then keep borrowing $1 trillion-plus for years and years to come. There are no surpluses – ever again – in any plausible budget forecasts.
But what will the bond vigilantes make of this? What if they see inflation increasing? What if they no longer want to lend? What if yields on the 10-year notes (which go up when bond prices go down) rise to 5%, or to more than 15%, as they did in the early ’80s?
Then, instead of a deflationary depression we will have an inflationary depression. How it will play out exactly is beyond the scope of today’s Daily Reckoning. Besides, we don’t know. But one thing is almost certain – that gold will go up.
Gold is what people buy when they fear a crack-up in the monetary system. As the day of reckoning draws near, gold will shift from being a means of storing wealth…to a hedge against inflation and/or a monetary crisis…to a speculative play.
Currently, you see ads for companies that offer to buy your gold – in exchange for paper dollars. The public still has no idea; if they knew what was coming they’d want to hold onto every piece of gold they own.
Sometime in the future you’ll see ads with the opposite message. Companies will want to sell you gold – at prices far higher than those today. Then, cab drivers will give you tips on which is the best penny mining share to own…and hair dressers will opine on their favorite gold coins.
When that happens, we will have to remember to sell. But that is still way in the future…
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Price inflation is already starting and your dire warnings are absolutely correct–something easy to understand. Lots of people are promoting the purchase of gold. Is gold expected to be a store of value (in effect, insurance) or an investment?
An investment requires sale at some point; I assume in exchange for dollars. Why would anyone trade a valuable commodity for pieces of paper–crappy government IOU’s? From this investment standpoint, a real shortage of precious metals could trigger premium dollar value but a sale would entail high risk of holding depreciating dollars. I submit that some things are more important than precious metals–like food or, more importantly, the means of food production
If holding PM’s as insurance against total collapse of currency (a strong possibility), at what point do you no longer need insurance?
I fully expect that a desperate government will seize privately-owned gold, maybe silver as well, to support a disrespected currency. Regardless of why one is buying PM’s, a game plan that includes buying AND selling gold and silver is critical. One may be illegally dealing with a black market
I always tell my students that is very possible to see an inflation-deflation scenario in the comming years. Both living togheter.
Sell Gold Bill?
OK, given what we see and know… for what?
History may rhyme, but its time frame can be centuries… as in given what we see it may well be centuries before one has an incentive to sell gold.
And we both know its that bad!
“Gold is what people buy when they fear a crack-up in the monetary system.” Keep saying it enough and pretty soon some people will believe you.
Like .99 cents is so much less than $1.00. Pitiful.
Reminds me of Rev 3:17-18.
Just sayin
Equity markets are about to explode upward. The last place you would want to be is stuck in gold. It makes no sense – especially at such lofty prices. Bring it back down to $500 or so and I’ll take a look.
@Harry: You may never see gold at 500 again in your lifetime. Explode upward? Maybe, but then prices of food and all else will be exploding even further. Stuck in gold? Never in history has anyone wanted to sell gold and found no buyer. George Soros himself, while saying gold is in a bubble (sure, he’s a shark, he says the opposite of what he means, knowing that the flock will jump to his command), has DOUBLED his position in the metal.
@Drunk: Private gold confiscation? I think we’re a long way from that…in my oppinion, how a gold confiscation could take place in today’s world? First, you stage a “terrorist attack” inside the US. Then you start a war to save us. Then you urge all patriot citizens to deliver their gold in order to help US fight for homeland security. Then you criminalize those that don’t, and turn that into a witch-hunt. gold horders help “terists” to destroy “America”. Other than that, any gold confiscation would be practically impossible nowadays. As to sell gold and buy what? Food, shelter, production means. Selling to get paper money will be just dumb.
@JMR, good thoughts. Yes, gold confiscation may be pretty far off but has been before. Envision a very high rate of inflation, commerce breaking down causing food shortages and the gov issuing a new “Gold Dollar” to calm a panicky population.
Register, tax, outlaw possession and confiscate is the usual procedure (ala gun control attempts). As you say, brand non-compliance as “economic terrorism”–in (what 1932?)some people did give up their gold…wouldn’t want to violate the law, would we?
Sure will be easy spotting someone walking around with pockets full of gold.
Like .99 cents is so much less than $1.00. Pitiful.
EACH AUSTRALIAN SITTING ON A $500 GOLD MINE
Aussies urged to check their jewelry boxes for new ‘stimulus package’
Since gold has hit new record highs this year, Australia’s leading buyer of gold The Gold Company has rewarded its customers, on average, a massive $544.80 each for their unwanted gold items. A review of the last thousand customers has shown this to be the average dollar value taken home.
Spurred on by the tougher economic times and record gold prices, The Gold Company has experienced a gold rush with people keen to make money off items that would have otherwise stayed stashed away in their jewelry boxes, underwear drawers or bedside tables.
For most, the value of their unwanted items comes as a complete surprise as the jewellery has spent most of its time collecting dust in boxes, “I have lost count at the number of times people have walked in here expecting to earn enough for a couple of CDs and instead walk away with enough for a brand new stereo,” says Roy Cohen, precious metal expert from The Gold Company.
“The term ‘worth its weight in gold’ exists for a reason. It’s valuable and people now understand they can make a significant amount by simply visiting our offices in Sydney’s CBD or requesting a GoldPak online. It’s so much easier, more profitable and safer than selling the items elsewhere.
“An elderly couple recently brought in some unwanted jewellry. The highest offer they had was $3000! The gold company paid $5400 for the parcel. Needless to say they were more than happy.”
Buy Gold ? HOW ? Most of those out in the real world are living pay check to pay check , myself included . How can the working stiff get enough money to buy gold ? It aint gonna happen . Even silver is getting expensive although still within reach of most people.
Consifcation of gold , Not Needed . All the goverment has to do is OUT LAW its use as legal trnder !! You will not be able to buy goods or services , pay bills. and would be forced to turn it in for what ever currency is out there. Now the law would apply to citizens only , the goverment would still be able to use it between other countrys. neat huh ?
@99 cents Nation, one gold piece in each pocket will be enough for any normal puchases short of a new car, and they won’t clink.
@Bob Ketchen, try purchasing AOCS-approved silver medallions a little at a time. Join bulk purchases if you can find them. E.g., in Dallas, agtradingpost.com is good.
@Airborne71, gold is already not legal tender, i.e., you cannot FORCE anyone to take it as payment. But you CAN trade it for goods and service with anyone WILLING to trade with you. Same with silver, which is the whole point behind AOCS trade medallions. Support mises.org by buying 1oz .999 pure silver with Ludwig von Mises himself on it.
Bill,
I read your article early, before any posts, and decided I needed to post a reply. It now seems that everyone else is thinking what I’m thinking. Sell precious metals (PM) for what? Do you want 1 wheelbarrow full of worthless $$$ or 10 wheelbarrows full of worthless $$$. Please respond in a future article.
In a nutshell, Bill. Seems like they still use ‘famine’ to control the masses.
For the record, it was James Carville, not Bill Clinton, who said if he was reincarnated he’d want to “come back as the bond market, so I can intimidate everyone.”
Great article, if you’re looking to sell gold or silver in Auckland, New Zealand then talk with the gold buyers that pay the best rates – Gold Smart Gold Buyers!