The Two Worlds of 2012: Will We Have “Inflation” or “Deflation”? (GLD, SLV, PHYS, IAU, AGQ)
Jeff Nielson: Providing coherent economic analysis has become a nearly impossible task. By definition, “coherent” implies something which “holds together”. Conversely, this analysis is being produced in a world with a mainstream media which is (at the least) bipolar – if not simply schizophrenic.
There are two dominant economic trends in the world today: exponentially increasing money-printing; and extreme, hopeless insolvency. Yet despite the fact that these two trends are extremely closely connected, we have the bipolar media reporting on them, and “analyzing” them as if these trends were occurring on separate worlds.
To describe the media’s reporting and analysis as merely simplistic would be inaccurate. One can be simplistic while still engaging in coherent analysis – i.e. discussing “the big picture” in superficial terms. However what the mainstream media is engaging in is much different.
It is as if the media spends ½ of its time reporting while covering one eye with its hand, and the other half of its reporting is done while covering the other eye. The result is as predictable as it is inevitable: a complete and utter lack of “depth perception”. Thus on the same day we have the following two articles being published in Bloomberg:
“Greek Default Risk Returns As Bond Maturity Nears” [emphasis mine]
“Brazil Futures Yields Rise From Record On Faster Inflation” [emphasis mine]
As you read through Bloomberg’s bipolar reporting on the global economy, you will note no mention (at all) of the soaring inflation gripping most of the world when you read about another, imminent Greek debt-default. Meanwhile, the inflation article on Brazil contains merely one, vague illusion to “caution” in Europe. This is despite the fact that these two trends are not only directly correlated, but causally connected.
The collapse of the West’s Deadbeat Debtors directly leads to an even faster acceleration in its out-of-control money-printing, and money-printing is “inflation”. The very term itself was taken from the act which causes/creates it: “inflating” the money-supply.
When a company prints more shares (i.e. “inflates” the supply of shares), it dilutes the value ofevery share, and the share price falls. When a government prints more money (i.e. inflates the money supply) it reduces the value of every unit of currency. Thus the same loaf of bread which cost $2 less than a decade ago now costs $4 today.
It’s the same loaf of bread, only the value of our (diluted/inflated) currency has changed. Well, that’s not quite true. Actually the size of a loaf of bread has shrunk during this time as well – as the bread-makers attempt to hide even more inflation from their inflation-ravaged customers.
What is also totally missed in the bipolar reporting of the Western media is that inflation worsens the insolvency of the Deadbeat Debtors. We have the tax-phobic clowns in the U.S. government absolutely refusing to restore taxation to previous levels, despite the fact that the U.S. is in the midst of the worst revenue-crisis in history – and already hopelessly insolvent.
What is their justification for this dogmatic intransigence (faithfully parroted by the mainstream media)? “Taxes are a drag on the economy.” The implicit premise here is that the negative impact of taxation is so severe that the U.S.’s fiscal balance would (somehow) worsen if any tax revenues were restored. We then have none other than the mainstream media’s High Priest of Economics, B.S. Bernanke lecturing us on how inflation is a tax on an economy.
Speaking about soaring gasoline prices (which is merely one component of inflation), here is what Bernanke had to say on the subject:
…they act as a tax on household purchasing power and…that is also a drag on the economy.
The very same media (and mainstream “experts”) who steadfastly refuse to ever link soaring inflation with worsening Western insolvency have made this (obvious) conceptual link themselves – they simply refuse to admit/acknowledge it in their day-to-day reporting.
So we see the bipolar media reporting that the EU is printing up another $125 billion worth of paper to (temporarily) prop-up Spain’s banks – as Spain lurches toward debt-default. But it refuses to admit that not only will this money-printing exacerbate the same inflationary pressures on which they report every day; but over the slightly longer term it will also worsenthe very insolvency which is supposedly being forestalled.
This brings us to ½ of the reason why the media refuses to ever open both eyes, and discuss inflation and insolvency together. To do so would be to admit that none of our governments have any “plan” at all; that the short-term band-aids they are applying today knowingly worsen the very problems they pretend to be addressing.
Much like covering a gangrenous wound only causes the infection to spread faster, applying these fiscal and monetary band-aids to our obviously gangrenous Western economies is only causing this economic infection to become terminal with even greater speed. However, the fact that our governments are (busily) “putting out the fire with gasoline” is only one of the two reasons why the media engages in its entirely deceptive bipolar reporting.
The other, even more alarming reason why this bipolar information-sham is being perpetuated is to hide an even more horrifying truth. The global economy has previously had to deal with episodes of widespread insolvency. It has previously had to deal with episodes of soaring inflation. However, never in the entire history of our species have we been simultaneously confronted with both of these extreme economic perils.
Here, media talking-heads and their cadre of pseudo-experts descend into outright schizophrenia. Since these “experts” have never seen (or even read about) extreme inflation and widespread insolvency occurring simultaneously, they simply pretend that these two economic phenomena cannot occur simultaneously.
In the fantasy-world they have constructed for themselves, it’s impossible for Brazil and China to be battling out of control inflation, while Greece and (soon) Spain default on their debts. So they report on this “news” as if it were separate and unrelated events, occurring on two, different planets. Even more surreal, ever since the Crash of ’08 we have been subjected to the most inane/insane false-debate in history:
Will we have “inflation” or “deflation”?
Here it is important to understand that debt-default is the most severe/extreme manifestation of deflation. Deflation literally means a decline in asset prices. Obviously asset prices going to zero is (by definition) the ultimate “deflation”. Living in a world with a bipolar/schizophrenic media, means readers are being denied access to the two most important analytical Truths of our time.
1) Inflation causes more insolvency. Insolvency causes more inflation. And our governments are all wholly committed to policies which must produce both as inevitable consequences of those policies. This not only directly implies a system which is hopelessly unsustainable, but implies that the progression to that total collapse will be geometric (if not exponential) rather than merely linear. Translation: Economic Armageddon must occur sooner rather than later.
2) Inflation and deflation can occur (and is occurring) simultaneously. Specifically, we can have (worthless) paper asset prices going to zero, while the prices of (valuable) hard assets and commodities go to infinity. The reason is obvious: those hard assets are currently denominated in that same (worthless) paper.
Our governments are explicitly engaged in “competitive devaluation”: racing to see which (paper) currency can be driven to zero the fastest. Understand what this implies as a matter of simple arithmetic: our governments are competing to drive (hard) asset prices to infinity – since those prices are denominated in that same (rapidly depreciating) paper.
As this out-of-control inflation exacerbates the insolvency of the West’s Deadbeat Debtors (i.e. all of their paper bonds going to zero); we not only can see “inflation” and “deflation” occur simultaneously, we must see them occur simultaneously. Paper going to zero and hard asset prices going to infinity are not mutually exclusive events. They are two sides of the same coin.
Once those basic Truths are understood, it becomes possible to plan one’s investment strategy with perfect clarity. Does one hold paper assets or hard assets? Obviously hard assets. Does one hold paper currency or metal money (i.e. silver and gold)? Obviously one holds the same metal currencies which have retained their value for roughly 5,000 years: silver and gold.
While readers have many options when it comes time to buy gold and silver, my personal preference are silver coins, specifically minted legal-tender coins. For many reasons, we can expect the current 55:1 price ratio between gold and silver to narrow to its historical average of 15:1 (and likely much lower). In other words, in relative terms silver prices are expected to appreciate much more rapidly than gold prices – as paper goes to zero, and both head toward infinity.
Equally, these 1 oz silver coins (or 1 oz gold coins) are ideal “money”, in the very realistic scenario where one (or more) of our paper fiat currencies plunges to zero before a replacement currency has been introduced – and a reliable medium of exchange is not only desirable, but an absolute necessity. A wallet-full of paper going to zero, or a pocket-full of coins going to infinity: the choice is yours.
[Disclosure: I hold gold and silver bullion, and shares in gold and silver miners.]
Related: SPDR Gold Trust (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), ProShares Ultra Silver ETF (NYSEARCA:AGQ), iShares Gold Trust (NYSEARCA:IAU), Sprott Physical Gold Trust (NYSEARCA:PHYS).
Jeff Nielson is from Canada and is a writer/editor for Bullion Bulls Canada www.bullionbullscanada.com. He has a personal background in law and economics. Bullion Bulls Canada provides general macro-economic and political commentary, since the precious metals markets are among the most complex (and misunderstood) in the world.
Bullion Bulls Canada also provides basic coverage of Canadian precious metals mining companies. Canada is the global leader in mining exploration, and Canadian-listed mining companies (on the Toronto Stock Exchange and Venture Exchange) are responsible for the majority of the world’s most-promising discoveries.