China's Massive Monetary Expansion and Crackup Boom

Mike writes as though he understands the subject matter but his forecasts are virtully always proven to be wrong!

For instance earlier in the year he was writing that the chinese economy would crash, now he has switched to a crack-up boom ???

Similarly he has been proven to be wrong on a bullish US Dollar, wrong on the stocks bear market, and WRONG on DEFLATION!

China is going through its version of what the USA did in 1920s, before the Great Depression. At that time, USA was displacing the rest of the world in commerce, and Europe was in a fiscal mess. The capital was running from Europe to USA, causing the Roaring 1920s. We all know the misery that followed for the USA, even though the USA would go on to be the strongest economy in the 20th century.

Mish is correct about deflation, but only if we use gold as the unit-of-account. Gold is the only thing that can retire the global debt. Since mankind refuses to go to gold willingly, then it will come in the form in an capitulation to debt slavery, aka the one world (NWO) currency (SDRs):

http://goldwetrust.up-with.com/economics-f4/changing-world-order-t32-120.htm#3831

I have many posts about China's misallocation of capital:

http://goldwetrust.up-with.com/precious-metals-f6/silver-as-an-investment-t33-255.htm#3777

Gold price rising is ONE manifestation of inflation.

No one recieves their salary in gold or buys groceries or any other consumer goods in gold.

If there were deflation then the gold price would FALL!

All that gold has done for the past decade is to try and catch up with inflation, infact it still is well below where it would have to be to have kept pace with inflation.

Mish and others complicate some that that is really simple. When the price of something / anything in the domestic currency is rising then it is INFLATING, when the price of something is falling then that is DEFLATING. Mish shows that he does not have a clue what he is talking about because he does not not understand the obvious.

Deflation is a delusion... I feel another article coming on.... :)

Any one can receive their earnings in gold, simply buy gold when you receive the fiat.

And thus we see that if someone's earnings are not increasing about 20% per year since 2001, then their earnings are deflating, i.e. DEFLATION.

Nadeem, it is a meaningless statement to say that the gold price would fall in deflation, because for example during hyper-inflation some governments have removed some zeros from their currency, to pretend the hyper-inflation does not exist, and thus the price of everything falls instantly to say 0.0000001 of the former price, but that is not deflation.

Rather the meaningful metric is to ask what is the purchasing power of gold. During deflation, the purchasing power of gold increases, and during inflation, the purchasing power of gold decreases. From 1980 to 2001, we had inflation, because the purchasing power of gold was declining. But in 2001, the debt bubble peaked and now the purchasing power of gold is increasing, because only gold can retire debt (no fiat can retire debt, because fiat is debt).

The problem that the world has is that the masses don't keep their mental unit-of-account in gold. This is why they can be manipulated and fooled as to the true of what is going on.

In reality, the 309 year public inflation wave (growth of socialism since birth of USA) ended in 1998 and the private wave deflation (growth of free market and gold back to money) has begun:

http://goldwetrust.up-with.com/economics-f4/changing-world-order-t32-105.htm#3818

your making the same mistake as Mish.

Your picking what has risen in price X4, over 10 years (INFLATED).

Afterall price IS in the domestic currency !

Price of goods and services ARE in the domestic currency!

Wages are PAID IN the domestic currency! and you can't switch in and out of gold EVERY other day to meet your living expenses! your wages would disappear in commissions regardless of how high gold went!

GOLD IS NOT THE DOMESTIC CURRENCY !!!!!!!

If gold crashed to $600 tomorrow then what ? - Oh... No wait... Gold price falling to $600 is DEFLATION !!!!!

Gold price rising to $1300 is DEFLATION !!!!

It's ALWAYS DEFLATION !!!

I really am going to have to do another article and bust this .....

Nadeem,

You know that I agree there is price inflation in fiat. I have also busted those who argue otherwise as evident in numerous of my comments on your site.

However, you are confused about what deflation and inflation are. It is impossible to define anything in life, if you use an arbitrary measuring stick such as fiat. Fiat is nothing more than plastic chips in a casino-- the house determines their value at will. They can create more at will. They remove zeros at will.

The only stable metric is purchasing power. That is what matters to people. They want to know how much they can purchase with their money.

From 1980 to roughly 1998, people could purchase less with gold. Since then, they could purchase more with gold.

No I am not picking what has risen over a short period of time. Since 1913, the purchasing power of gold is roughly constant in terms of raw materials (adjusted by any technological productivity improvements). Whereas, the fiats have lost 95+% of their purchasing power.

It is meaningless to talk about inflation versus deflation if you unit-of-account is fiat, because fiats NEVER deflate. They inflate (lose purchasing power) until they return to their intrinsic value of 0.

So we might as well just stop the entire discussion if we are going to use fiat as our measuring stick (i.e. unit-of-account), because there is never deflation in that case.

The only meaningful discussion is to use gold as the unit-of-account. This has been true for over 2000 years.

You are arguing about a non-argument. I don't disagree with you that there is always inflation for those who are stupid enough to use fiat as their unit-of-account.

For those of us (like Rothschild) who use gold as our unit-of-account, we are interested in inflation and deflation with respect to gold, because it enables us to be richer and smarter than the masses.

Shelby and Nadeem,

Quick question. How does one know when to switch from gold to fiat currencies? When real interest rates are positive? When the credit destruction/default process is complete, i.e. the marginal utility of debt is positive? The past 10 years have been great for those who grasp gold’s role in the regulation of the fiscal and monetary mismanagement of the world’s fiat currencies, yet I am wondering when it is time to return to the land of fiat currencies.

Regards,

Michael

Michael B. that is an excellent question. Nadeem may have a different opinion than me.

The backward-looking metric is when the interest rate paid on fiat sovereign bonds (an entity backstopped by the central bank printing press that can not default), is greater than the appreciation in the fiat price of gold.

So roughly 20%, although that has been 40% during past 2 years. This is why I wrote that at the "End Game, the Gold Investors Destroyed", the level of interest rates required to arrest the gold bull would be catastrophic to society and the compounded relative losses for gold investor who do not pay the taxes so they can't re-enter sovereign bonds at that time, would be extreme. And my thesis is that the level of taxes at this end game, will probably result in a loss of purchasing power greater than the appreciation of purchasing power during the bull run of gold:

http://www.marketoracle.co.uk/Article20327.html

However, that backward-looking relative metric (interest rates vs. appreciation of gold fiat price) may not help tell you when to sell gold, because by the time the metric gives a sell signal, any parabolic increase in the gold price may have reversed into a crash in the gold price.

Normally I would say we will be near the top when I will hear common people talking about buying investment gold at places where they are now oblivious (e.g. at the mall). However, in order to raise interest rates (whether it be via domestic currencies or a new international one, e.g. SDRs), it will be necessary for the global economy to implode (all the misallocation of capital will be erased).

Thus what I see likely is that SDRs will be (at least partially) backed with gold (recent BIS gold swap may be for this purpose), and that the domestic currencies will become like banana republics. The way the NWO currency will start is as an alternative to the broken (perpetual QE and halving of the interest rates) domestic currencies. Thus I can see interest rates rising for SDRs, while interest rates continue to fall for domestic currencies. In order to invest in SDR bonds (or national bonds indexed to SDRs), you will have to pay your taxes (prove where your cash came from). Initially SDRs will not be available to the average person.

Over time as more capital moves into SDRs, and as national govts are forced to borrow in SDRs (i.e. inflation or maybe even hyper-inflation relative to SDRs and gold), the SDRs will gradually become the world's reserve currency. At that point the world's central bank will have complete control over the world, as every person will be preferring to buy and sell using SDRs instead of the nearly worthless local currencies:

http://goldwetrust.up-with.com/economics-f4/shelby-s-newsletters-t38.htm#3834

Then as the interest rates paid on SDRs come down, and the appreciation of gold relative to SDRs stagnate, it will be time to trade gold for SDRs, but you will still have that huge tax loss problem. The SDRs will also be debased over time, stealing from the world in inflation. This will be the death march for humanity (as predicted in Revelation).

My philosophy on this is different. Gold is money and nothing more. My ideal period of time to hold gold is never. As the Bible says, wealth grows wings and flys away. Never do I want to feel secure in wealth. The point of having wealth is as per the Parable of the Talents, that more wealth is given to those who know how to put it to productive use and enrich the lives of the most people. The Bible is clear about this, don't plant a single fruit tree, it implores us to plant a whole acre and trade.

Thus ideally we want to constantly be recycling our wealth as investments in productive businesses. In that case, you really don't care what is going on with the currencies (especially if you are in software development like I am where the incremental changes in currencies are irrelevant to the bottom line).

For any insurance savings, then I never want to sell it. My holding period for that gold and silver is forever.

So the answer to your question is you should sell gold as soon as you can find a productive use for your wealth. This is why Buffett said he thought digging gold out of the ground to bury it again in a vault, was stupid.

However, I will never again invest my money in interest bearing fiat instruments (and insurance) as Buffett has done, because it is very clear from the math, that such actions by society lead to slavery and socialism:

http://www.marketoracle.co.uk/Article21650.html

The man who becomes so wealthy that he can no longer invest his wealth in productive business, but rather has to rely on the slavery system of usury compounding (insurance and futures contracts are similar), has sold himself and society to slavery.

Rather if I am getting wealthier than my ability to reinvest in productive business (and I am already so), then I will structure my businesses to share more of the profit with my employees and customers. In that way, making the world more prosperous, as they can invest the money more rapidly and wisely than I can. A centralized decision maker is the antithesis of success, prosperity, freedom, and free markets. Are you reading this Warren Buffett?

It is really just the Henry Ford principle:

http://en.wikipedia.org/wiki/Henry_Ford#.245_day

Hope that helps.

Wags, apologies for the double post, but wags comment was approved by Nadeem after I had read and was composing my reply to Michael B's excellent question.

I do not remember ever being refuted on this site. And I have not changed my position, rather I have remained consistent in my understanding of the macro-economics. I think perhaps you didn't understand my points?

You seem to think that some near-term skyrocketing inflation in China is sign of a crack-up hyperinflation? Did you forget what happened in Q1 2008? It was the same thing, then a crash of the global economy. You don't understand, just as Gordon Lira and other hyperinflationalists don't understand. I suggest you read the prior reply I made to Michael B and also the following link (and the sub-links) about how long the end game will drag out:

http://goldwetrust.up-with.com/economics-f4/changing-world-order-t32-120.htm#3850

You will find refutation of Gordon Lira at sub-link of the above link. It is also posted on this marketoracle.co.uk site some where if you search all my comments.

I think it is important I make it clear that gold is different than any other substance on earth in a very specific way. One must understand this in order to understand macro-economics.

Gold has the lowest new stocks relative to existing above ground readily recoverable stocks of any tangible thing on earth (aka stocks-to-flows ratio[1]). Silver is the second lowest.

Above ground gold is about 160,000 tonnes (nearly all of which is held in forms that are readily salable) and annual supply is about 2,500 tonnes, or roughly a 66.6 years of supply thus 1.5% rate of monetary inflation (debasement). Above ground silver in tradable forms is roughly 20 billion oz, and annual supply is about 0.8 billion oz, or roughly a 25 years of supply thus 4% rate of monetary inflation (debasement). Btw, this is why the central banks say they target a low inflation rate (but it is lie).

All the other commodities (including other metals and foods) are consumed such that readily recoverable stocks are not more than about 6 months of supply. This is also why there can't be a global hyperinflation relative to general commodities, because the people would starve themselves within 6 months.

Only gold and silver can not be debased. All other substances on earth (especially paper or digital money) can be overproduced to create artificial inflation and theft by the central bank.

Lately I had an epiphany, and my thesis is that knowledge has a very huge existing stock relative to new supply. As we know (even the Bible says), most knowledge is recycled and not new. Thus I think if knowledge could be made fungible with programmatic referential transparency, then we could replace gold and silver with a form of money that we carry in our mind:

http://goldwetrust.up-with.com/knowledge-f9/book-ultimate-truth-chapter-6-math-proves-go-forth-multiply-t159-15.htm#3640

That is what I am working on now.

[1] http://www.professorfekete.com/