"Inflation is many different diseases" -- The Universal Duro as Elixir ?

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The American Peso (psst: the U.S. Dollar) undergoes 100:1 reverse split

A New U.S. Dollar backed by Gold? Or by any combination of "Commodity" & Precious Hard Assets?

The Hard-Asset Standard -- a la the Gold Standard -- The Universal Duro -- "legal tender for all debts public & private"


"Inflation is many different diseases"

Sound familiar ?

It's an echo of: Cancer is many different diseases.

Cancer is not one disease, but many many different diseases, most with unique etiologies or origins, but all mischaracterized and misbranded with the same name -- "cancer".

Inflation likewise, has many different causes, not all of them due to excess money supply. The popular press is full of headlines and articles screaming "inflation", as if it were the monolith from "2001, A Space Odyssey". But no, rather, "inflation" is really a monetary and behavioral Stonehenge.

And, of course, if prices of goods are measured in the Universal Constant of Gold, over decades and centuries there has been no inflation. For hundreds of years anywhere on planet Earth, a good riding or work horse has cost about 20-30 ounces of gold. An average house, 200-300 ounces of gold. And so on down to a shot of whiskey or a Big Mac -- another Universal McConstant of prices or purchasing power worldwide.

How many kinds of inflation are there? Here is a partial list. You can probably think of more:


(1) Debtflation, Debflation, Debaseflation, Devalflation or Devaluflation:

This is "inflation" caused by debasement of a currency, as is now happening with the U.S. Dollar. Creation of excess debt/bonds by a nation causes other countries to fear default, and demand higher interest rates on loans and/or a more favorable exchange rate in trade & investment transactions. The U.S. Dollar will eventually go to Zero and be replaced by a New Dollar, or a New American Yuan, as written elsewhere in this blog.

Are higher prices (e.g., of oil) caused by currency debasement and/or increased repayment risk, are these "inflation" in the traditional economic sense of toooo much money chasing toooo few goods? No, not at all.


(2) Expecflation, Psychoflation, Pathoflation or Wage-Price Spiral:

This is "inflation" driven by a pathological fear of inflation. In short, psychologically-induced inflation -- the mere expectation of higher prices causes workers to demand higher wages, which causes companies to raise the prices of their products & services, thus resulting in the expected inflation. Voila ! -- deja vu inflation fruition. Expecflation or Expectflation likewise has nothing to do with money supply nor the supplies of goods. This form of "inflation" is well-known in economic theory for the past 30 years as the "wage-price spiral".


(3) Classicflation or Supply/Demandflation:

This is the standard form of inflation usually referred to in the press today -- higher prices caused by excessive money/demand chasing dear goods with inadequate supplies. In the classic model, however, constricted or inadequate supply can respond to higher price signals and supply & demand will balance, and prices stop rising, and often actually sink dramatically due to creation of excess supply.

But in today's environment of so-called "competitive currency debasement" or "competitive currency devaluation," combined with the Club of Rome's long-expected "Limits to Growth", supplies of many goods will no longer respond to price signals. See # 5 below for more about this new and developing economic cancer.


(4) Hysterflation, Specflation or Speculative Inflation:

Hysterflation or Specflation is higher prices driven by hysteria, speculation or mass delusion, whether the speculators are individual investors, investment banks (R.I.P.), governments or companies. For example, oil prices in 2008, silver prices in the 1970s courtesy of the Hunt Brothers, and tulip bulbs in Holland in the 1600s.

In such focused markets, it takes only a small percentage of the world's or a country's liquidity or currency supply to drive up prices. Money supply does not have to increase for prices of certain commodities to spike. Yet Specflation is lumped in with "inflation" caused by excessive overall money-supply growth. This is false reasoning. Hysterflation, as with oil in 2008, can materially contribute to higher overall prices as measured by aggregative price metrics such as the CPI (consumer price index), again leading people and the press to call Specflation "inflation". But, again, they are different diseases.


(5) Deplation, Scarcflation or Depletion/Scarcity-driven "Inflation":

As the world's population grows from about 6.5 billion today to 10 billion by 2050, many of the planet's "commodities" will become rarer and rarer, and dearer and dearer. Their prices will rise, whether measured in debased currencies or even in gold. It will be physically impossible for supply to respond to increasing price signals. There will be no more that can be produced. Examples include indium, tungsten, cobalt, gold, rhodium, platinum and oil.

Are higher prices measured in currencies, whether fiat (paper) or physical metals (gold or silver), due to scarcity or depletion really "inflation" in any classical sense ? No, higher prices due to depletion/scarcity where supply cannot respond to price signals will merit a new name, a new term, such as those offered above. Classical economics always assumed supply could always be increased. But no longer. The Limits to Growth will mean increasingly reduced standards of living, even as prices increase. But, again, this is not classical inflation.


The Past as Prolog & Epilog:

The greatest threat now to the U.S. economy is Debtflation -- the coming swift and massive debasement or depreciation of the U.S. Dollar during 2009 - 2012. Prices will rise, not because of excessive money supply in the U.S. economy, but because the cost of all imported goods such as Saudi oil or Russian caviar when measured in dollars will rise. Our foreign creditors holding U.S. Treasury bonds will realize they may never be paid back. The value of the U.S. Dollar will decline towards zero by 2015 - 2018, and the dollar will forever be memorialized in world monetary history as the greatest Ponzi scheme known to Man.

As the U.S. Dollar falls towards Zero, all smart sovereign states worldwide will channel Charles de Gaulle of the late 1960s and early 1970s and demand payment for "all debts public and private" in Gold. Within months, Fort Knox and the New York Federal Reserve's vaults will be empty tombs. The U.S. Government will then have no hard asset basis to back a "New U.S. Dollar".

What to do ? By 2011 - 2012, the largest collection of gold in the world will be held by the so-called People's Central Bank. What is that? -- viz., the:

-->> SPDR Gold Shares / "Spyder Gold Trust" (GLD)

-->> http://finance.yahoo.com/q?s=GLD

-->> http://finance.yahoo.com/q/pr?s=GLD


The U.S. Government will be forced to buy gold or lease it from GLD to back a New U.S. Dollar. Or, will they choose instead to again outlaw private ownership of gold and confiscate the physical gold holdings of GLD ? It has happened before in U.S. history, of course. But this time they might offer the victims of the theft a tax deduction over 10 years for their loss.

But if your gold is not stolen by the U.S. Government, sometime around 2012 - 2015 when the price of gold is about US$ 3,000 - 5,000 per ounce, our karmically-accursed American President of the day will be forced to announce a 100-to-one reverse split of the Old U.S. Dollar, to yield the New U.S. Dollar. And presto change-o ! -- gold will once again be worth only N-US$ (New U.S. Dollars) 30 - 50 per ounce, just as it was during the 1930s - early 1970s.

So how to avoid this politically-explosive confiscation of the People's Central Bank ? As adumbrated below, rather than adopt a New Gold Standard, the bankrupt U.S. Government could embrace a New Hard Asset Standard, or Duro, defined as, concretely and for example:

1 Duro = 1 ounce of Gold = 15 barrels of oil = 90,000,000 BTUs = 30 ounces of Silver = 180 lbs of Nickel = 1.2 ounces of Platinum = 400 lbs of Copper = 10 acre feet of H2O = 50 tons of CO2 (50 carbon permits) = .......

Or any partial combination of these hard assets, whether equally or unequally weighted, which could take the form of a "Duro Index" or "Duro Basket".

So you get the picture. Many of the commodity price relationships shown above have obtained for centuries, e.g., 1 ounce of Gold = approximately 30 ounces of Silver. As Deplation takes hold, some rare resources will become rarer than others. But if the New Hard Asset Standard were recalibrated or adjusted every 1 or 2 years, that would be adequate. The demand for rare natural resources will not change dramatically over such a small historical time frame.


End-stage Monetary Disease & the 2nd Coming of Gold?

During the years of **No** Limits to Growth before the 21st Century, only Gold was rare enough to qualify as a lasting hard-asset backing for a paper or fiat currency. But as the resource half-life of Planet Earth asymptotically gravitates towards Zero, many natural resources will become more and more Un-natural, and qualify as rare earth metals, noble gases, and endangered species. And, thus, qualify as bonafide components of the New Hard Asset Standard that will be used to back the next paper mache / paper-tiger currency of the United States, or any other sovereign country.

Will the New Hard Asset Standard tame inflation and keep politicians and the Federal Reserve honest ? No, probably not. Eventually they will find novel ways to game the new system.

Actually, control of the currency and its backing needs to be taken away from politicians and bureaucrats and returned to the People. But can the People be trusted ? No, they too are suspect and subject to emotions such as psychoflation & specflation. So how should the universal currency or The Universal Duro be valued ?


Big Brother & Heuristic Analog Computer (HAL) as Keepers of the Currency?

Imagine a planet whose fresh-water lakes, power plants, oil wells & tankers, gold & silver mines, atmosphere, natural resource stockpiles, and productive factories are monitored by billions of sensors that measure production, reserves and consumption. Hence, as depletion of any natural resource occurs, it's increasing rarity and value will be immediately known at an intimate physical level.

Thus, a simple computer algorithm could recalculate how deplation affects the value of any component of the Universal Duro every micro-second. No human involvement would be needed. No subjectivity nor speculation could enter the picture. Hence, the value of any puff-piece currency could be measured accurately any micro-second based on its supply (printing runs) versus the stockpiles and reserves of the remaining natural & unnatural resources in that country. And/Or, versus the overseas claims and holdings of that country's natural & un-natural resources.

Could politicians and bureaucrats then scam overseas investors merely by jaw-boning and talking up their flaccid currencies? The answer ?

-->> "I'm sorry, Dave, you can't do that."

A currency Utopia ? Yes, and probably not attainable until 2020 or 2030. In the meantime, our advice ? -- buy gold, silver, oil, raw land, nickels, uranium, Big Macs or any other hard asset. Or...? -- go back to the Future and buy the original 2,400-year-old silver and gold decadrachmae from Sicily and Greece, which are still worth a small Fortune today.


DekaDrakma Investments™ -- Hard Assets for Hard Times.

To learn more about DekaDrakma Investments™ thinking on the current investment environment and the outlook for the next 5 - 10 years, please contact:

David A. Palella
Co-Founder
DEKADRAKMA INVESTMENTS(R)
San Diego, California

tel: 858-793-0741
email: dpalella@san.rr.com
http://dekadrakma.blogspot.com

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2,500 years of Wealth Preservation -- Decadrachmae Redux ?

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First the American Peso, then "The New American Yuan" ?

Swan Dive for the Dollar? -- Or Black Swan Dive ?

Return of the U.S. Trade Dollar ? -- backed by Silver & Gold? Or oil? -- anything physical will do

A two-tiered Treasury Bill Market ? -- Americans as Common Treasuryholders, and Foreigners as Preferred Treasuryholders ?

The Hard-Asset Standard -- a la the Gold Standard -- The New Duro -- "legal tender for all debts public & private"


Why the name DekaDrakma Investments™ for this blog ? Decadrachmae were ten drachmae (or drachma, drachm) coins minted in Sicily and Greece from around 465 BC to 200 AD. Most decadrachmae are made of silver, but some were also produced in gold. Certain decadrachmae from Syracuse, Sicily, are still considered by many numismatists to be the most beautiful coins ever produced in human history. For the past 2,500 years, decadrachmae have been an infallible store of value requiring payment of no management fees and no investment "succession planning" or shifting from one investment vehicle to the next over time.

Hence the name of this blog and our intergenerational wealth advisory firm.

"One generation passeth away, and another generation cometh: but the earth abideth for ever." -- Ecclesiastes 1:4. And likewise gold and silver abide or last forever.

Modern-day investment paparazzi in glossy magazines or on ephemeral web sites love to quote how one imaginary U.S. dollar invested in American stocks or bonds 100 or 200 years ago would have magically grown today to be a portfolio worth 10s or 100s of thousands of dollars, as if Peter Lynch (Fidelity Magellan) and Bill Gross (PIMCO) were among the Founding Fathers of the United States of America and had miraculously lived the past 100 or 200 years to shepherd along this imaginary dollar through 5 or 10 or 20 generations of stock and bond vehicles to arrive at today's magically large tally. These comparisons of paper-investment returns to returns on investing in gold or silver are specious, disingenuous and bogus.

Besides gold & silver as millennial stores of value, only raw land (not buildings) offers similar convenience of ownership and permanency of value across the generations.

So what is the future of paper investments and the fiat U.S. Dollar, which has not been backed by gold since 1971 ? Can you say "American Peso" ?

The Obama Administration's borrowing and/or printing of trillions of dollars for deficit spending signals the imminent swan dive of the Dollar. The composite U.S. Dollar Index®, now at 84 today will, I predict, follow this trajectory downwards:

-->> Year-end 2009 = 75

-->> Year-end 2010 = 65

-->> Year-end 2011 = 50

You can find the daily value of the U.S. Dollar Index in the lower right-hand corner of this web site:

-->> http://www.kitco.com

However, this swan nose-dive above, as Curtis Hesler of Professional Timing Service wrote last year, assumes "an orderly lynching" of the Dollar. But should a Black Swan event occur, the Dollar could plummet much faster towards its ultimate destiny with Eternity -- zero. You can read more about Curtis Hesler's remarkable predictions here:

-->> http://www.protiming.com

As the Dollar continues to lose value over the next several years, foreign investors holding U.S. Treasury bonds will be sucking more and more swamp water and calling for U.S. Government intervention to support the value of the American Peso. U.S. Government agency bonds will lose their triple-A rating and gravitate towards junk status.

Burned foreigners will be reluctant to buy Treasurys unless rewarded with higher interest rates to compensate them for their risk. Selling and speculating on Credit Default Swaps on U.S. Treasurys will become a big business -- unless the U.S. Government makes it illegal ! Higher interest rates on Treasurys will, of course, force all other market interest rates up, killing any stock market rallies and any resurgence of the economy and the flaccid American consumer.

Despite higher interest rates that should support a relatively "stronger" Dollar, America's trading partners will be reluctant to accept IOUs or payment for goods and services in Dollars. Rather, as the French Government under Charles de Gaulle wisely did in the late '60s and early '70s, they should or will insist on payment in gold.

Reference:

-->> http://www.time.com/time/magazine/article/0,9171,840572-1,00.html


How will the U.S. Government solve these myriad fiscal challenges and viagrafy the ever limper U.S. Dollar? Here are some novel speculations:


(1) Bring back the Trade Dollar of 1873-1878: Institute a silver- or gold-backed dollar for international commerce, which would exist only in electronic form, of course, that could be redeemed for payment in physical metal.

-->> http://en.wikipedia.org/wiki/Trade_Dollar_(United_States_coin)


(2) Two-tiered or bifurcated Treasurys market -- domestic & foreign:

To encourage foreigners to take the currency risk of owning American debt, we should pay them a higher interest rate than American citizens holding the same debt instruments. Foreign holders of Treasurys could, for example, be paid 10 % interest, and American investors only 5 %. American investors could be compensated for the lower rate by special tax treatment on the coupon payments. The lower domestic rates on Treasurys should not push up other domestic interest rates for consumer and housing loans, and thus not depress economic activity in America.


(3) Foreign currency-denominated U.S. Government Bonds ?

-->> U.S. Government Samurai Bonds ?

-->> U.S. Government Peking Bonds ?

-->> U.S. Government Taipei Bonds ?

-->> U.S. Government Arabia Bonds ?

-->> U.S. Government Euro Bonds ?

-->> U.S. Government Timbuktu Bonds ?

-->> U.S. Government Singapore Sling Bonds ?

-->> U.S. Government Bloody Mary Bonds ?


Well, you get the picture. Such U.S. Government bonds denominated in the foreign currencies of nations with historical positive balances of trade would put the risk of a devaluing U.S. Dollar on the U.S. Government (the debtor) rather than on the foreign investor (the creditor). Which only makes sense.


(4) The Hard-Asset Standard -- a la the Gold Standard:

Institute a new global currency (pick any name -- the Duro?) backed by a basket of Durable and valuable commodities whose physical supplies are limited. The Gold Standard was restrictive because planet Earth contains so little physical gold. Even a fractional Gold Standard might prove problematic. The solution ? -- institute a basket comprised of:

-->> Gold, silver, platinum & palladium

-->> Oil -- deliverable anywhere in the world, not just Cushing, Oklahoma.

-->> Add in any other hard asset of universal strategic value in global commerce such as indium, nickel, tungsten, etc.

As you see, under a Hard Asset Standard, a "surplus" of any of the constituents of the basket would not depress commodity prices, but, rather, lead countries to store or hoard/save the asset. In short and as a concrete example, the U.S. Strategic Petroleum Reserve would become a 2nd Fort Knox. But the gold would be black and liquid instead.

The units of the Hard Asset Standard or Duro would be "legal tender for all debts, public and private". Sound familiar ? -- this is the marketing slogan printed on all U.S. currency.

The beauty of the Hard Asset Standard ? -- if any country insisted, any debt could be paid for with the physical assets in the basket. Or any equivalent combination or subset of them. Thus, Middle Eastern countries could trade or pay debts principally in oil. The U.S. with silver and gold. Russia with oil, natural gas and nickel. And so on. In sum, world trade would return to a barter economy based on a unit of measure backed by real value -- hard assets that are already in inventory, or which could be produced quickly to settle a debt (e.g., oil); and


(5) Add your own imaginative and speculative economic Deus ex machina here.


To sum up, Hard Times are coming. And only hard solutions will save the U.S. economy, the U.S. Dollar, and your dollar-based investments. And if we shirk the fiscal purge needed, what then? -- Then our children and grand children will live a bitter and sullen debtor's life, ruing the malignant karma that made them be born American.


DekaDrakma Investments™ -- Hard Assets for Hard Times.


To learn more about DekaDrakma Investments™ thinking on the current investment environment and the outlook for the next 5 - 10 years, please contact:

David A. Palella
Co-Founder
DEKADRAKMA INVESTMENTS
San Diego, California

tel: 858-793-0741
email: dpalella@san.rr.com
http://dekadrakma.blogspot.com

*****

U.S. Treasury Bills will be no Family Treasure

We regret to inform you that your U.S. Treasury Bill is now worthless....... and may be written off as a tax deduction.

Supersizing Ronald Reagan & Everett Dirksen for Modern Times:

"A Trillion here, a Trillion there, pretty soon you're talking real money." -- Or unreal fiat paper money anyway.

With # 6 you get bank-rolled !


So how will the U.S. Government eventually pay off the National Debt 5, 10 or 20 years from now? Via higher taxes ? Perhaps. But taxes on whom ? The baby boomers will be fully retarded, demented and earning nothing -- or working part-time at the local McDonald's at minimum wage to make ends meet. What taxes can they pay?

By taxing young Americans? No, there will not be enough of them to pay enough taxes to make a material difference, even if American tax rates rose as high as Sweden's.

Allow huge annual waves of highly-skilled immigrants, and then tax them? That's a good solution -- if the social fabric of America can tolerate millions of new immigrants a year, a la 1890 - 1930. It probably can.

Even so, the hard fact is the National Debt will never be completely paid off. Rather, it will be annulled. Zeroed out. Who will be left holding the bag of cow manure when the M80 firecracker inside goes off ?

Not any foreign holders of Treasury bills and notes, that's for sure. Otherwise America could never borrow again internationally. Rather, as one of my economics professors in MBA school said 30 years ago: "The beauty of the national debt is that it is money we owe to ourselves. So we can always just agree not to pay each other back."

Of course, since the early 1980s, U.S. Gov't debt has become the favorite fentanyl lollipop of China, Japan, Taiwan and the Gulf States. The trillions of Treasurys they hold must surely be paid back.

But we project that by 2012 or 2015 it will become manifest destiny that the U.S. Gov't will be unable to make principal and interest payments on the National Debt and will therefore default on notes and bills held by American citizens. To compensate the losers, the U.S. Gov't will give them a tax deduction for their loss, probably spread over a 5- or 10-year period.

The moral of the story? If you are an American citizen and you invest in U.S. Treasury instruments, do be left holding the bag after approximately 2012 - 2015.

To be continued.......


To learn more about DekaDrakma Investments™ thinking on the current investment environment and the outlook for the next 5 - 10 years, please contact:

David A. Palella
Co-Founder
DEKADRAKMA INVESTMENTS
San Diego, California

tel: 858-793-0741
email: dpalella@san.rr.com
http://dekadrakma.blogspot.com

*****