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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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Saturday, June 27, 2009
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