Monday 12th May 2008: Inflation/Deflation debate is bunk.
It just is. More later...
May 29th entry now copied to here:
Basically, whether we get inflation or deflation, what is relevant is only whether there id creation or destruction of wealth. We seem to be entering an era where there is a likelihood of massive destruction of wealth.
A period of severe inflation or deflation is at hand - and it is the result only on the destruction of wealth that is now happening. A lot of this is concerned with default on debt - the inability to pay down the debt principal or even the interest due on the debt. The cause of this is excessive debt that has built up due mainly to central bank andgovernment policies of inflation of the money supply and the distribution of this excess money into the financial system, into the hands of banks rather than into the hands of those who produce wealth for the economy.
We have entered into a period, proven by the increasing and extreme ampltude of oscillation of the Dow Jones stock index : Gold ratio, where it is becoming impossible to value anything in terms of money, or even in terms of anything else. The entire economic system is completely broken. Many say that the Dow:Gold ratio measures values of paper assets vs real assets. That is only part of the story. In fact, the Dow stocks represent real companies and real productivity and are therefore semi-tangible. Although the stock prices are based on 'faith' or confidence in those companies, they are also governed by sales and other 'real' assets of those companies such as real estate, plant and equipment.
The wild oscilation of the Dow:gold ratio from 1:1 in 1980 to 43:1 in 2000 is a change by a factor of above 40! This means that the value of one asset is not knowable in terms of another asset within a factor of 40! This is outrageous in a so-called 'stable' economy and is proof positive that the economy is not stable.
Note from my previous blog entries (Chart hints at Financial Disintegration: 2007-12-23) that the instability began in the 1920s, shortly before the USA went off the Gold Standard but after World War I when many industrial nations had already left the Gold Standard (such as England in 1914). Coincidence? I think not!
Contemporary with this was the Hyperinflation in Germany of 1923 and a short re-emergence of the Gold Standard in England in 1925, unsustainable because of highly inflationary policies during the period. The 1920s stock market bubble is what led to the first major off-trend high on the chart - and the major low that followed would be the early 1930s 90% crash in the Dow Jones, which was followed by the seizure of private gold by Roosavelt in 1933 and the subsequent 40% US Dollar devaluation from $20.67 per ouice of gold to $35 per ounce.
The above is my adaptation of the Dow-Gold since 1800 sharelynx chart, with thanks to Nick at sharelynx for permission.
The bottoms of the Dow:Gold ratio in 1933 and 1980 represent major recessions/depressions, one deflationary and one inflationary. The ratio is oblivious to which. The three tops in 1929, 1966 and 2000 represent the euphoria of stock market/financial manias, regardless of the level of inflation at the time, although they probably all represent inflation (in paper aassets, though not necessarily in consumer prices).
In fact at the time of highest consumer price inflation during the 1970s, the ratio was falling fast. The previous fall in the 1930s was during a deflation (with the 1933-34 inflationary policy of dollar devaluation accompanying it)! In both cases, stocks fell massively with respect to gold.
The present fall since 2000 has now gone further than this chart shows (to a ratio of 12 (12,000 Dow and $1000 Gold) and hints at serious recession/depression to come. However, it says nothing about whether it is inflationary or deflationary. It merely shows the destruction of financial assets by one form of default or another. Deflation is default through non-payment and bankruptcy, inflation is default through devaluation of the currency.
So all these people on the Internet 'talking their book' and wasting your time and money getting you to subscribe to their worthless commentaries about deflation vs inflation are giving you worthless arguments. Half of them will be wrong and you won't know which half until it is done. Probably they all will be wrong one way or another. I have nothing to sell, therefore I am unbiased. I am just writing this because I am bored!
Only two things are apparent from the chart:
1. In both cases ('30s and '70s, deflation and inflation), stocks fell massively with respect to gold.
2. The economic instability is increasing with every cycle and valuing anything correctly is becoming impossible, which hints at economic and monetary destruction, possibly at the next extreme of the cycle.
Text Copyright 2008. D. Bellamy.