Bonds & Interest Rates

The "Black Hole of Deflation” turns into runaway inflation. What of Gold & Silver

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Posted by Julian D. W. Phillips Gold/Silver Forecaster

on Friday, 06 July 2012 07:58

But the concept of inflation is poorly understood. In today's world it is thought of as simply rising prices due to shortages. In economics there are several forms of inflation that appear in different circumstances.

Overall governments favor low inflation because it gives the appearance of rising wealth as prices rise, provided that these levels are restrained around, say 3%. Above that and savings are visibly damaged and consequently the economic power of a nation.

But we are moving far away from such a concept now. In today's world the bulk of inflation has come from rising oil prices [an insidious, usually imported inflation] and the like. At the moment, we are at a time when inflation is at very low levels, so low they no longer represent a fear or concern.

Deflation is now the global fear, far more so in the developed world than in the emerging world. But the deflation we are talking about is not simply an economic slowdown. Today's deflation is a decay of trust, of confidence and consequently, hope. Deflation breeds prudence, caution, discouragement, which attacks growth. Banks slow down their lending, delay the processing of loan requests, take only very secured collateral for their loans.  Individuals save in the hope that they can manage those rainy days they see coming.

As the current type of deflation persists, it accelerates slowly but surely. Central banks [particularly Mr. Bernanke] are aware of this and try to simply promote an expansion of money that replaces lost asset values and no more. It is critical that no more than has been lost to asset/debt deflation, be added.

There is a point where adding too much by way of newly issued money, that it is inflationary, cheapening the price and value of currency itself. This inflation is a very different animal to the one the public perceives it to be. As deflation rises, so there is a point where inflation takes off and becomes much more difficult to control. In fact, that point becomes ever more mercurial as deflations spreads and confidence continues to sag, as it continues to do in the States and in Europe right now. It is probably a misnomer to call it inflation because it is a cheapening of the value of money.

Since 2008 we have seen the process of money creation happen first through QE, then as the European Central Bank used swap arrangements with the Fed to do the same, through the unlimited window of credit to European banks. This has left the banking system relatively solvent, when it would have collapsed without it. But what looks to be a set of now relatively healthy balance sheets ignores the continuing asset/debt deflation that goes on unabated. The reason it becomes mercurial in nature is because new money issues have less and less affect as the deflation progresses. As this ineffectiveness in producing greater economic activity grows, the only answer appears to be to defer, or seemingly halt, more deflation and recession, so more money is issued. This is where the current impasse between Germany and the weaker members of the Eurozone are in conflict now.

But more new money can only provide a temporary solution, because it is only greater economic activity that can resolve the problem. It is growth that produces economic health and the ability to repay debt.

As debt mires such growth reliance on new money at some point exacerbates the problem giving rise to a greater and greater demand for more money. Money cheapens during the process, but if governments can act in concert to stop that from being seen in falling exchange rates, then an atmosphere of normalcy is maintained. This does fool most people for a while, but its fragility grows. We are now seeing an exchange rate between the dollar and the euro moving so little that it is hiding the real extent of the Eurozone crisis!

At some point politicians and bankers have to make an extremely difficult choice. Do they let the economy suffer the full range of symptoms of deflation, or, for the sake of political stability and civil calm, do we keep patching up the mess with bandages of 'new money'. With votes needed to continue their careers, politicians are likely to go for the soft option of 'new money.'

Loss of asset value hits cash too

During this time the value of savings are destroyed either through providing no, or nearly no real return, as we see now in the States and almost in Europe, or all [except cash holdings] drop in price.  As interest rates are unlikely to rise for the next couple of years, cash yields are nearly zero.

You would think that savings wouldn't drop in value during deflation and that with asset prices falling, the old adage that "cash is king” would hold true. It doesn't, because in this global world of ours, exchange rates can easily decay and lower the international value of cash. As this happens, imported goods increase in value giving cash less buying power.  So we have to re-define what we mean when we say "cash is king”. What cash? U.S. dollars [it has a coming debt crisis that dwarfs that of Europe, postponed by the system of monetary and fiscal union it has] or the Swiss Franc [the government is holding the exchange rate down, killing it as a 'safe-haven' or the Yen [they are doing the same as the Swiss]? Many investors are turning to property in the belief that that will hold value in the most cosmopolitan of nations and cities. But will it? The evidence is that only in relatively exclusive cities is this happening, but in many nations property has failed to retain value.

Demand for liquidity blossoms

Then there comes a point where the demand for liquidity continues to grow and overwhelm the liquidity available [remaining stagnant in favored pools, in banks and balance sheets, too fearful to venture outside].

At this point we see the "Black Hole” of deflation sucking in more and more money. So just to stand still and hold what economic activity there is, the demand for money continues to grow and overwhelm whatever is thrown at it, but still not producing greater economic activity.

And this is the trigger point, when cash deflates in value. This is the start of runaway inflation, producing no good at all. Money itself has lost confidence and ceases to be an expression of value as its issuance accelerates. At its worst this process becomes hyperinflation.

By this time businesses are collapsing, banks failing and the only people who are thriving are those who avoid money, changing it into some asset or goods immediately it is received.

For example;

One must own the farm that produces food, own the transport that takes it to market, own the market stall and have access to asset into which to change it before its value is depleted.

Meanwhile, social extremes are being seen in politics, at community levels when stress takes a firm grip on ordinary citizen's lives. The social consequences of the process scar entire generations.

Right now it is that fear that is holding back Germany from loosening the reins on its solvency as memories of the Weimar Republic and its hyperinflation in 1923 re-surface in the following generations.

During this entire process of deflation, fuelling growing inflation, politicians come under greater and greater pressure to do something. But the system of Democracy itself mitigates against their ability and willingness to take effective action! It takes a collapse of the monetary system and political system, before there is sufficient will in people to rectify matters.

You, the reader, have to decide not just where we are in this process but can it be halted now? Is there the political and financial will to halt the process or are we silently watching that point pass in the calming waters of media and political reassurance? How close to such extremes happening are we now?

What happens to gold and silver during this time?

The joys of both silver and gold are that they are both cash and an asset at the same time.

-         Gold and silver can't be printed.

-         They have always been internationally accepted cash.

-         More importantly they are acceptable in the world's monetary system as money in the form of reserve assets.

-         Gold becomes collateral that facilitates loans at cheaper interest rates.

These qualities grow throughout the above deflation and subsequent inflation.


Member's only:

Part 3 –

-         Measures of value and eventual confiscation

-         Tier I Asset?

-         Gold Confiscation

Get the rest of the article. Subscribe @

www.GoldForecaster.com / www.SilverForecaster.com


Bonds & Interest Rates

An Economy Ablaze - How Government Spending Continues to Add Fuel to the Fire

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Posted by Bill Bonner - The Daily Reckoning

on Monday, 02 July 2012 14:11

“France is rotten,” said a friend yesterday. “I don’t know why you came back. Half the people are broke. The other half are crazy...

“...and you foreigners still come here, pay $1 million for a hole- in-the-wall apartment...and walk around the city and step in dogsh*t.”

Yes, dear reader, that is a fair description of France circa 2012. The new president, Francois Hollande, says he won’t wait for the private sector to create jobs. He will do it himself. He’ll hire more teachers. Never mind that the payback on educational spending is zero — or less. It sounds good to the lumpen-voters.

And how will he pay for these new teachers? This week, he is expected to raise taxes on the rich. The top marginal rate, he says, will go up to 75%. And the wealth tax will go up too.

In short, the elites who control France will soon control, directly, more of it...and more of the rich will move to Switzerland, England or Belgium.


But here at The Daily Reckoning, we like rotten countries. For example, in a state of even more advanced decay, there is Argentina, where president Cristina Fernando de Kirchner has just announced a solution to the housing problem.

We pause to give dear readers a quick résumé of how housing got to be a problem south of the Rio Plata. In the ’80s, the generals who ran Argentina tried to pay their bills by printing money. This led to consumer price increases of more than 1,000% per year. They had to throw out one currency, start a new one, and then throw that one out too. And then there was the war with England. Eventually, people got sick of it and threw the generals out. Then, President Carlos Menem promised a “hard” currency for Argentina, which he would achieve by tying the peso directly to the dollar. 

No one is more persuasive than an Argentine when he is trying to borrow money. And since the currency risk was eliminated — or so investors thought — the Argentines soon were able to borrow more money than they could possibly repay, which led to the biggest default — about $100 billion — in world history.

The official inflation rate is now still in single digits. But the actual inflation rate — which is apparently illegal to report — is near 25%. This — combined with the fact that when you lend Argentines money they don’t pay it back — greatly reduces the availability of credit...and housing. People have to pay all cash...or nearly all-cash...to buy a house. 

Well, you can imagine what America’s housing market would look like if people had to save money before buying a house. There wouldn’t be so many houses. And that’s why there aren’t so many houses in Argentina. And many of those that were built in the past are not in great shape.

So, in comes Cristina. Rather than give any hint that her predecessors and her own political party bear any responsibility for the housing problem, she offers another crackpot solution.

We will come to that in just a minute. We just want to point out that this situation is classic. Government causes problems. It then offers solutions that make them worse.

On a macro level that is what is happening in the US. The feds created a credit-based economy, increasing the supply of credit 50 times in the past 50 years. This huge swell of credit swamped the entire world...leading to (among other things) the explosion in factory output in China...the bubble in housing in the US...the big increase in wealth for the ‘rich’...the blow up in ’08-’09...high unemployment...and little real growth. 

But rather than recognize that, they set the house on fire...the feds arrive on the scene like firefighters, pretending to put it out. Trouble is, they keep adding tinder — more credit!

The feds have added $4.39 trillion to the national debt since Obama moved into the White House. On an accrual basis, they’ll add $20 trillion by the end of this year. 

And that’s the fiscal side. Over on the monetary side, the Fed has been doing its part. It has added $2 trillion to its balance sheet (the foundation of the US money supply) since the crisis blew up in ’08-’09.

Even with all that gasoline and dry sticks, they’ve had trouble keeping the fire going. Consumers...and households...have been a wet blanket. They’re trying to de-leverage. That is, they want to get rid of credit, not add more. 

But the government comes to the rescue with more student loans, housing loans, bailouts, subsidies, free bread at home...military circuses abroad.

And Paul Krugman, Joseph Stiglitz, Larry Summers et al urge the feds to do even more! In our view, they’ve done enough damage already. 

Not that we’re complaining. It’s all very entertaining and instructive. 

But today’s note is about rotten economies. And while the US is developing large brown spots and a sticky-sweet smell...it’s not nearly as ripe as some others. For example...Argentina. Here’s Cristina’s solution to the housing problem; if the private sector won’t make mortgage loans, the government will:

She’ll take money from pension accounts (that she seized 2 years ago) and then lend it to homebuyers at one-tenth the rate of inflation!

Gee, you’d think that people would line up around the block to get that kind of money...which is exactly what they do. So, how do they decide who gets a loan? By lottery! Here’s the report:

Argentina Denies Runaway Inflation Subsidizing Loans: Mortgages
By Camila Russo

June 29 (Bloomberg) — Argentines are lining up at banks again. This time, they’re leaving with loans.

Veronica Cajal, who wants to move out of her mother’s house, is among 1.4 million Argentines who applied for subsidized home- construction loans in the first week they were offered as part of a program designed to ease a chronic housing shortage and help revive growth in South America’s second-biggest economy.

The plan calls for the national pension agency to lend about 20 billion pesos ($4.4 billion) for new homes at rates as low as one- tenth the pace of consumer-price increases. The government is trying to foster home building as private banks balk at issuing long-term loans amid inflation that economists estimate at 24 percent a year, a legacy of government policies that followed a $95 billion default in 2001, when Argentines queued at banks to buy dollars before a currency devaluation.

The program calls for making 100,000 loans by the end of 2013. Recipients will be chosen randomly from all eligible applications.

Why didn’t you think of that, Mr. Market? You dumb-bell. All you can think of is tired old formulas — protecting the value of the money...then letting willing buyers and sellers work out for themselves how much credit they want...and at what price.


C’mon, Mr. Market...use some imagination...!

Bill Bonner
for The Daily Reckoning


Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010. 

Special Video Presentation: Urgent Message About Your Net Worth The single, solution-packed book that could... literally... mean the difference between growing wealthy or suffering an ugly, vicious decline in your net worth. Discover how to claim a FREE copy of this book, right here.

Read more: How Government Spending Continues to Add Fuel to the Fire http://dailyreckoning.com/how-government-spending-continues-to-add-fuel-to-the-fire/#ixzz1zV77Sfdm


Bonds & Interest Rates

Time-Lapse Interactive Graph Shows Stunning Rise in Anti-Euro Sentiment in Italy

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Posted by Mike Shedlock, pf ax

on Saturday, 30 June 2012 03:47

The rise of the Five Star Movement in Italy is the number one happening in Europe right now and mainstream media has not even begun to cover it in any depth. The movement is led by an Italian comedian, Beppe Grillo.

Main Rules for the Five Star Movement

  • Not be an elected politician prior to 5 Stelle
  • Commit to stay in charge for no longer than 2 terms
  • Commit to take a minimum salary and give the rest back to the community
  • Post a public platform on the internet
  • Be willing to hold a public debate on the platform

Beppe Grillo's personal position, not a mandate for the Five Star Movement is "Get out of the Euro and default on debt"

For more on the Five Star Movement please see Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement 

Time-Lapse Interactive Polls

Following are some time lapse polls of the Five Star Movement and other political parties in Italy. Please give the graphs extra time to load.

The polls are from data gathered by data gathered by Termometro Polico (one on the best Italian poll-makers according to a friend who sent me the link.) The important poll is in tab number four.

Explanations and Comments on the graphs appear below.

For now, please click on tab number four. You may also wish to go to the link above for additional information (in Italian). 

Picture 4

The rise of the Five Star Movement in Italy is the number one happening in Europe right now and mainstream media has not even begun to cover it in any depth. The movement is led by an Italian comedian, Beppe Grillo.

Main Rules for the Five Star Movement

  • Not be an elected politician prior to 5 Stelle
  • Commit to stay in charge for no longer than 2 terms
  • Commit to take a minimum salary and give the rest back to the community
  • Post a public platform on the internet
  • Be willing to hold a public debate on the platform

Beppe Grillo's personal position, not a mandate for the Five Star Movement is "Get out of the Euro and default on debt"

For more on the Five Star Movement please see Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement 

Time-Lapse Interactive Polls

Following are some time lapse polls of the Five Star Movement and other political parties in Italy. Please give the graphs extra time to load.

The polls are from data gathered by data gathered by Termometro Polico (one on the best Italian poll-makers according to a friend who sent me the link.) The important poll is in tab number four.

5 star September 2011 vs june 2012

Explanations and Comments on the graphs appear below.

For now, please click on tab number four. You may also wish to go to the link above for additional information (in Italian). 


Bonds & Interest Rates

Flirtin’ with Disaster & Extremely Low Interest Rates

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Posted by John Mauldin - Outside the Box

on Friday, 29 June 2012 08:07

This week I offer a main course, a veritable piece de resistance, for Outside the Box readers, from my friend Rich Yamarone. Rich is Chief Economist for Bloomberg and one really sharp talent. He helps write Bloomberg Brief: Economics, a daily notebook that comes out every business morning with an all-encompassing view of what's happening and will happen.

I have been on stage with him several times recently and have spent even more time with him over dinners. He keeps reminding me to pay attention to the slow-motion slowdown and eventual (he says) recession that is coming right here to the US. He thinks ten-year bond rates could scare 0.5% (not a typo!) if/when both Europe and China have a simultaneous crisis and the US is seen as a real –and perhaps the last – safe haven (to which I would add: besides gold). Certainly 1% on the ten-year and 2% on the 30-year will be on offer in such a scenario. Ed Note: notice how very close we are to 1% on the 10 Year Note Below:

Picture 2

I asked him to give us a brief tour, based on some of the graphs in his latest presentation, and it arrived today. If you like, you can subscribe to their regular research by going tobloombergbriefs.com/economics.

But we can't ignore Europe entirely, so for an appetizer I offer this small note from Rob Arnott, founder of Research Affiliates (you may know them as the Fundamental Index guys) and manager of the extremely popular (for good reason) All-Asset Fund at PIMCO. Rob will be with me in about a week in Italy, and I look forward to great evenings over Italian food with friends and family.

Here, Rob looks into the future (something he does with great success in his funds) and walks us backward in time. But I will let him tell his story and then we'll get on to the main course. Quoting:

"On another topic, one of my favorite games as an asset manager is to look past current travails and ask what *must* happen in the years ahead. Then we can turn attention to working backwards, identifying the intervening "path of least resistance." Sometimes, this is *way* more powerful than looking at the near-term decision tree and working forwards.

"The EZ travails lend themselves elegantly to this treatment. What will happen in the months ahead? No one really knows. What will happen in the years ahead? Nations addicted to debt-financed consumption will have to balance their books. All of Europe (and the US and Japan) will be spending no more (or very little more) than their tax receipts, a few years hence. Why? Because – as with any family – debt-financed consumption is ultimately unsustainable.

"Likewise, some years hence, entitlements will need to be on a pay-as-we-go basis, give or take a little wiggle room, in order to not crowd out all other forms of spending. Debt service will need to be part of the nations' spending, crowding out other forms of spending; a 'primary surplus' will be irrelevant.

"When will this transition take place? It's impossible for the status quo to continue more than a few years, though Japan shows that debt-financed government spending can persist far longer than most observers might suppose. And it's impossible for status quo to persist after the capital markets begin looking these few years ahead, which telescopes this transition into the coming handful of years. The more a nation relies on foreign investors to fund its spending, the faster this cliff arrives.

"So, working backwards from these inevitabilities ...

· "Since government spending roughly equals tax receipts, less interest payments, collecting more in taxes is a very dubious path by which to arrive at balance.

· "This leaves us with spending cuts. Entitlement spending roughly equals tax receipts attached to the entitlements. So the same logic applies: entitlement spending will be cut. Age of eligibility, means testing, and rationing are the paths of least resistance; but this will require an evisceration of the public sector and empowering of the private sector, which will in turn require a stark liberalization of regulatory and employment law.

· "*Or* there will be a collapse of GDP, as public spending drops without allowing the private sector to pick up the slack. Increasing global pressure for financial transparency, to facilitate tax collection, will become the norm.

"As we move back closer to the present, the near-term implications are less clear.

· "Nothing in this end-point *requires* that countries leave the EZ. Greece can simply slash public-worker salaries or head count to be fully covered by tax receipts. Likewise, Spain, Italy, Portugal, France (!).

· "If any country does exit, its banking sector must rebuild from scratch. The domino effect here is obvious: countries exiting en masse becomes a possibility. Italy and France are not assured to remain in the EZ in this circumstance. So, it's implausible that one, and only one, country exits.

· "All of this means that EZ exits may prove to be too messy to be allowed to happen, in which case defaulting countries will simply default, then cut spending to balance their budgets ... and then move on, with sharply diminished public sectors and GDP."

And back with John. It all sounds so simple when he explains it. But we will lurch from crisis to crisis in Europe, and then Japan will enter the picture in a big way. Hopefully we in the US can learn a lesson and deal proactively with our very similar problems, about which I will write this week.

And now I have to go to my next meeting, although it will be a pleasant one over a low-cholesterol dinner. Have a great week. The next time you hear from me I will be in Madrid on my way to Italy. So adios and ciao for now.

Your ready for a little downtime and conversation analyst,

John Mauldin, Editor
Outside the Box


Bonds & Interest Rates

Treasurys Gain As EU Summit Starts

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Posted by DEBORAH LEVINE - Wall Street Journal Smart Money

on Thursday, 28 June 2012 13:30

Picture 1

NEW YORK (MarketWatch) — Treasury prices rose on Thursday, pushing yields down in a tight range, as European Union leaders began a two-day summit, though investors have very low expectations for progress on key steps needed to resolve the region’s debt and banking crisis.

Bonds held onto gains after the U.S. government’s sale of 7-year notes (7_YEAR) came at the lowest yield on record.

Yields on 10-year notes (10_YEAR) , which move inversely to prices, fell 5 basis points to 1.58%. A basis point is one one-hundredth of a percentage point.

Yields on 30-year bonds (5_YEAR)  declined 3 basis points to 2.66%.

Five-year yields (5_YEAR)  fell 6 basis points to 0.69%.

EU leaders are expected to focus on addressing the 2-1/2 year old euro-zone debt crisis, with programs to spur growth and work more on a regional bank union and bank supervisor most likely, analysts said. Read more on EU summit.

“Hopefully the market is getting past the point of expecting a grand bargain and can let them get to a solution,� said Tom Murphy, who heads up investment-grade corporate debt at RiverSource Investments, which oversees about $165 billion in fixed-income assets. “I don’t have any confidence the European situation gets much better, but I hope it doesn’t get much worse.�

They may discuss how the already-approved bailout programs — the European Stability Mechanism and European Financial Stability Fund — relate to private bond holders and how they can distribute aid, according to analysts at Credit Suisse.

But what’s pretty unlikely to see details on would be agreement to unify fiscal decision making, which Germany has demanded as a necessary precursor to any form of jointly-guaranteed debt instrument, often lumped together as euro bonds.

Bonds rose “as, get this, a disappointing outcome is expected from the EU summit,� quipped David Ader, head of government bond strategy at CRT Capital Group.

But still, yields have remained in a tight range in recent sessions, and could have trouble rising much as the continued problems in Europe support safe-haven demand for U.S. bonds. Read about Thursday’s bond action.

“The sideways price action is not hard to understand,� Ader wrote in a report. Based on investor positioning surveys, “the market clearly has moved to a very neutral view even as it has accepted/respected the litany of risks that favor support for Treasurys in the weeks and months to come.�

Also supporting bonds was an extension of the sell-off in U.S. equities after the Supreme Court upheld the Affordable Care Act of 2010. Read more on Supreme Court, healthcare.

Last auction of the week

The Treasury Department sold $29 billion in 7-year notes at 1.075%, though demand from a group of investors which includes domestic money managers was notably light. Read more on 7-year auction results.

The government already sold 2-year (2_YEAR)  and 5-year notes this week, receiving tepid demand.

Those auctions didn’t come at record low yields, which “is a sign of continued investor migration up the curve,� as shorter-term rates are expected to stay locked down by the Federal Reserve’s on-hold interest-rate policy, said strategists at Nomura Securities.

Treasury prices shrugged off data showed U.S. initial jobless claims fell 6,000 to 386,000 in the latest week, after the prior week’s number was revised up. A separate report showed the U.S. economy grew an unrevised 1.9% in the first quarter. Read about jobless claims.



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