Tuesday, 24 January 2012

Deflation / Inflation revisited. Deleveraging vs Hyperinflation; the Fed vs the free Market. 2012-01-24

I have just listened to the ultimate hyperinflation guru, John Williamsd of the excellent www.shadowstats.com on Jim Puplava's Financial Sense Newshour and straight afterwards, I am now listening to the ultimate deflationist, Robert 'Bob' Prechter on GoldSeek radio.

Yesterday, I listened to Ian Gordon on Jay Taylor's show and before that I have listened to the always interesting Bob Hoye on www.HoweStreet.com - Ian Gordon is a deflationist who thinks the dollar will collapse afterwards (so he seems to have a foot in both camps) and Bob Hoye is also somewhat in that camp, thinking that the US dollar will be strong for at least a period during the deflationary/deleveraging process.

It is difficult to reconcile these two types of view, because I can see both points of view. One basically believes that the Federal Reserve can continue to debase the dollar ad infinitum until there is hyperinflation and the others basically are saying that the Fed is "not omnipotent" (Bob Prechter's words) and, as Bob Hoye says, the dollar will not be repudiated but the policies of the Fed and the interventionist economists will.

I am not entirely convinced by either argument actually.

Bob Prechter thinks that the setup now for gold and silver is like 1974 when silver crashed and gold went on rising before crashing by 50%.

Bob Hoye and his colleague, technician par excellence Ross Clark, see a stong dollar rally coming soon with a break well above 80 on the US dollar Index (the USDX). This rally may have started from the downturn in the general markets in the credit crisis around March 2008 and might last for around 10 years.

I can see that we may see a reconciliation of the deflationist/inflationist point of view here. As debt collapses in Europe for instance, money flows into US dollars, as Bob Hoye says, because most of the debts in the world are payable in the pimary financial centre of New York, in US dollars. During the deleveraging process, similar to a margin call in the futures market, the debtor or loser has to pay off the debts in an awful hurry and has to sell alkmost anything to raise US dollars to pay them off.

Prechter sees some very negative changes in social mood and mass psychology, irrational behaviour, anger, riots and even massive political changes, such as states seceding from the union in the USA.

Prechter sees the repudiation of the Fed as already in process with politicians and citizens criticizing Chairman Ben Bernanke, whereas they all sucked up to his predecessor Alan Greenspan and treated him as a demi-god. So, maybe Bob Hoye is right that the Fed will be repudiated, together with governing class of bankers, Keynsian economists, politicians and central bankers as a whole.

The great James Dines, in his interview on King World News last weekend, is seeing many changes towards the dark side in social mood. These would be illustrated by the riots all over the world and the revolutionary changes in the MENA (Middle East North Africa) countries.

A major rally in the US dollar would be what Bob Hoye describes as the worst thing for central bankers - an "outbreak of sound money," which increases the purchasing power of the debt, screwing debtors into the ground by making them sell off even more of their other assets to find US dollars to pay off those debts. This applies to individuals, companies, financial institutions and countries!

His technician colleague Ross Clark spotted the nascent rally in the dollar restarting before Christmas during the market crash from a level of 74 to the 82-82 level just now. However, the gold guru Jim Sinclair is asserting in his interview on KWN last week thatr the dollar will top at 82.

A major rally in the US dollar would be in line with the 40 year trend channel, which slopes down gradually and has major declines lasting 6-8 years followed by major 8-10 year rallies. The last decline was from late 2011 to early 2008 and the bottoming process may have been completed with choppy action at the 71-80 level recently. The deflationists scored a massive coup in this intellectual battle by predicting that the dollar would strengthen on a credit crisis and it has, somewhat, despit e all the money printing (Quantitative Easing, QE1 and QE2) as well as all the backstops of bad debtors carried out by the Fed since late 2008.

In the 2008 markert crashes, the dollar index rallied from 71 to 90 and then began another decline as the money printing came back in. However, the dollar did not make a new low below 71. The decline stopped at 74 and the dollar is now up at 81.

The 'reconciliation' of the deflationist and inflationost points of views might come from the situation where there are many other countries, financial institutions, companies and individuals in the western world and elsewhere that are basically bankrupt.

The sovereign debt crisis in Europe could collapse the Euro. If it does, then one could see a large flight into the US dollar as varioous countries undergo currency collapse. If any or all of Greece, Portugal, Ireland, Spain and Italy are forced to leave the Euro, their new national currencies would be likely to collapse under an orgy of money printing to pay off the national debts and/or support their unsupportable socialist policies. With the people heavily enfranchised into socialism and wealth tranfers and many millions employed direcutly and indirectly by their governments, money printing would likely be demanded and hyperinflation would probably ensue as worlwide creditors cut off those countries and collapse their currencies.

In that case, the dollar could have major rallies as this unfolds. It might take several years. The US government would have plentiful sources of funding for its extremely excessive spending. It would only be when the European issues and other national currency collapses of countries outside the USA (such as the British Pound in the UK) that the speculative inflow of money fleeing into the US government could cease, leading to a government default and currecny collapse in the USA a few years from now.

It is all very conjectural. John WIlliams sees hyperinflation in the USA beginning as soon as 2014. OK, it might, but if we get an 8-10 year dollar rally and it started in 2008, we might not see a top in the dollar until about 2017 and then perhaps the US dollar hyperinflation and collapse.

This would be all very very disappointing and a long wait for gold bugs and silver bugs, who are always expecting the dollar to collapse and the gold price to go to the moon at any moment.

I will post the links to all these interviews on this article soon. The combination of interviews has been particularly good in the last couple of weeks, at a key moment in financial and monetary history!

What is certain is that the future is uncertain!

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