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Many are
the obstructions to the so-called (mislabeled) deflation threat within the
USEconomy. To begin with, falling asset prices does not constitute deflation.
One of the primary objectives of the banking elite in firm control of the
USGovt and USCongress is to confuse the public and investment community on
the entire topic of inflation, what it is, how it is measured, and its
risks. The same goes for deflation. All debate as to whether the Untied
States will suffer from inflation or deflation is a horrible misdirected
distraction that manifests the confusion. The US
will suffer both higher monetary inflation and worse economic deterioration,
not one or the other, but BOTH, and with steadily increasing intensity.
Imagine a massive tornado building force, inflicting damage, and being fed to
grow even more powerful by current policy. To argue on whether the high
pressure or low pressure will prevail misses the entire storm, built upon the
grand and growing differential in pressure. The storm is born of opposing
pressures, each growing more intense. Human response to economic distress and
banking woes ensure evermore pressures to be exerted on each side. The
grand growing monetary expansion continues to collide with grand worsening
asset price decline, while the Deflation Knuckleheads spout more
nonsense. They miss the storm itself, how it is formed, and the dual nature
of its tempest.
A very
important point must be made, something few if any analysts or pundits or
anchors are mentioning. In fact, the staggering direction of monetary aid for
rescues of dead banks, for nationalization of dead corporations, and for
stimulus to an insolvent nation guarantee more damage. The huge monetary
growth guarantees that the asset prices will continue to fall, and that the
great tempest will grow in magnitude and danger. Why? Because bad money
drives out good money, because phony money undermines legitimate assets,
because easy money encourages more bubbles. It acts like a cancer, one that
has essentially destroyed the fundamental foundation of the nation. This
extremely important point will lead to the ultimate downfall of the Untied
States, as their inflation will destroy too much capital in
determined yet mindless application.
The primary question that the errant Deflationists avoid is “Why
is the Crude Oil price rising?” since it highlights their erroneous
position and twisted viewpoint. The strong uptrend in crude oil price stands
as contradiction to their argument, but they ignore it. The hidden question
that they cannot even manage to formulate is “Is the Shadow Banking
System flow data included in the Money Velocity figure?” as some
within their camp appear to trust USFed data itself. The other bank system
has kept the entire credit market afloat for over a decade, without benefit
of statistical inclusion. Never permit a syndicate to supply critical data.
To dismiss official price inflation data but trust their money velocity data
is folly. In my travels, when my confrontational questions are posed, they
are almost never answered. The posed questions are as little understood as the
emotion is great behind their incorrect views. The Deflationists will be
correct only if the Central Banks and their franchise system of destruction
shut down and halt the accelerated production of phony money. Aint happenin!
What is particularly disturbing is how intelligent aware members of
the gold community of sound money principles find themselves ensnared within
the lexicon of the Deflationist camp. They show confusion by simply engaging
in discussions, as they use the crippled terms. For instance, a bright
colleague from inside the gold community recently said in an exchange “Deflation
will make the inflation worse” which is nonsense on its face. He
meant to say “Falling asset prices will force even more monetary inflation
in response in the form of rescue or stimulus.” Another from outside
the gold community said “Deflation suffered by the banks from
housing will push down the gold price” which is again a comment
within a pretzel. He meant to say “The housing pressure on bank
balance sheets will lead to falling asset prices generally, and thus harm the
gold price” which is utter nonsense. It is actually difficult to
debate the topic, since most people are hampered by the faulty lexicon
adopted. To clarify most clouds of confusion, it is best to refer to
‘Falling Asset Prices’ instead of ‘Deflation’ in
almost all cases. The bankers must be laughing hard in their snifter
glasses at the bewilderment laced throughout the public, as 90% have no idea
what inflation and deflation are, let alone where they come from, and surely
not how neither could possibly prevail in today’s environment.
Meanwhile, the great storm continues, with only minimal recognition, since
the growing amplitude in the differential rules the day. The monetary
aggregate is growing, just as the asset value destruction continues. Each has
its hidden components, to further add to the confusion.
CRUDE OIL
CURVE BALL
The biggest elephant in the wayward Deflationist living room is the
strong crude oil price. If deflation (whatever they believe that means) is to
dominate, then the crude oil price should be around the 40 level. It should
be scraping the bottom. Instead, it has staged a rebound that has endured for
four months. Put the copper price chart aside, and turn to crude oil, which
is still heavily traded. The two principal pillars of the crude oil recovery
in full view are US$ monetization by the USFed and USDept
Treasury, along with the broad deployment of US$ hedges by
private investment houses and sovereign wealth funds. New money and
additional credit come into the system. Banks are the primary recipients of
such largesse at the public expense. Some finds its way into crude oil
instruments on hedge fund ledgers. Banks surely are not lending much. They
are investing in the USTreasury carry trade with the trusty help of the US
Federal Reserve, which actually likes the steepening yield curve (long-term
rates are higher than short-term rates). Investment banks are also quietly
buying crude oil positions, since they work well to add to their crippled
balance sheets. The hedge funds flock to crude oil, while the sovereign
wealth funds continue not only to stockpile crude oil, but build new storage
facilities. The crude oil hedge against the embattled USDollar is just as
prevalent globally as the flow of new funds into the backwaters lined with
oil. The hidden disguised and improper release of crude oil from the
Strategic Petroleum Reserve last summer and autumn provided the perfect
conditions for the launch of a powerful rebound, that now is powered by
reaction to the USDollar debauchery. The SPR release took the crude oil price
too low. Now the weak USDollar and revolt against it will ensure continued
upward momentum.
The powerful message is that the monetary rivers and USDollar
brokenness dispute the deflation claim in one of the most important asset
prices in existence – crude oil. The Deflationists point to falling asset prices, but ignore the crude
oil price as an exception. It is the most important economic cost for
businesses and households on the tangible side, with the cost of money the
most important on the financial side. Watch for a bullish technical crossover
as the faster 20-week moving average challenges the 50-wk MA. The more stable
longer term moving average is providing support above the 67 level.
GOLD SHOWS
NO SIGNS OF SO-CALLED DEFLATION
If deflation (whatever they believe that means) is gaining an upper
hand, then somebody should tell the gold price. It is oblivious to any such
vapid threat. Being ultimately a monetary instrument, gold continues to build
its energy field for the next rise. Notice the rising moving averages and the
rising trend on the build-up toward the breakout level of 1000. To be sure,
the gold market is reluctant to advance with power. It is being held back by
the illicit gold futures shorting campaign that violates every regulatory statute
in the book, beginning with the 90% collateral requirement. Heck, we all
could bring down the price of a cup of coffee to a mere dime if we shorted
the coffee contract into oblivion without benefit of supply, provided the
central bankers kept huge inventories to work past the midnight hours in
their nether chambers, where they devise new Politburo poppycock plans.
Notice not so much the Head & Shoulders reversal pattern shown in past
articles, but the upward energy embodied in the chart.
Numerous factors conspire to push the gold price above the 1000 level.
Most investment camps seem to be waiting for an ‘All Clear’ sign,
to lessen their perceived risk. One might have thought it would have been the
mid-March monetization message by the USFed. However, a mountain of new
illicit non-collateralized gold futures contract sales at the same time
prevented such a power push. The vile Power Elite was prepared and responded.
Many other messages are certain to fuel the ultimate power push. The foreign
sovereign wealth funds are diverting some of their new trade surplus funds
into gold, even announcing it. In fact, the foreign creditors have halted the
great majority of USTreasury Bond purchase, even the USAgency Mortgage Bond
purchase in a virtual global strike. That new development has escaped the
intrepid lapdog US press. They have reported the sharp rise in ‘Indirect
Bids’ for USTreasury auctions in back pages where few read. Translation:
foreign central banks are the only buyers anymore, and probably they act on
behalf of the USDept Treasury. Thus, the USGovt is the primary buyer of
new USGovt debt, monetization. They key point to take home and run with is
that the USGovt has begun to disguise its vast monetization, so
as not to annoy the already angry Chinese creditors. Maybe the USGovt can
pledge a couple US cities as collateral, and toss in a couple national parks
and some golf courses.
MAIN
PSYCHOLOGICAL THEME
One eager opinionated acquaintance from several years ago maintains
with a degree of defiant gusto that the foreigners must retreat to the
USDollar for whatever reason, and their undying support will continue, perhaps
even reluctantly, to the surprise of the investment community generally. They
continue US$ support in his opinion because they are deeply committed to the
embattled buck. They do so because their banking systems have cut a
multi-decade deal with the deadly dollar devil, thus making them stuck
committed. They will do so because no other legitimate alternative with
sufficient structure and trading volume is available. They will do so because
deep down, they still trust the longstanding security of the USDollar
fortress, backed by both a military and huge economy and tradition of
financial dominance. They will do so because their export businesses require
a USDollar not to fall significantly, and expire on the intensive care table.
My rebuttal reflects what China clearly manifests as a strategy. The
rest of the large creditor nations are certain to either follow the Chinese
path or set out on a parallel course. Past work has called the Chinese
initiatives the spearhead against the USDollar. They realize they must
smother (but not kill) the USDollar slowly, eventually suffocating it only at
a time their many initiatives are fully deployed in place, much like a neck
noose built into a straightjacket. The strategy has two important sides. First,
they are protecting their outsized core of US$-based bonds of several
stripes. They choose not to embark on any aggressive strategy that would
seriously undermine their core holdings in reserves. However, they are not
stupid. They see the unprecedented and colossal debauchery of the USDollar
via trillion$ in new debt, with seemingly little or no concern over foreign
reserve holdings, demands, or priorities. The USGovt believes it can deflate
its debts one more time, delivering foreigners weak coffee at the lunch counter,
and get away with it. They cannot time, not this time, especially since the
USEconomy is stuck in a deteriorating spiral, the US banks are insolvent
(despite phony accounting), US households are insolvent, and US industry is
either absent or depleted. Foreigners are far too aware of the USGovt
attempts to inflate debt away, actually an impossible task as those debts
multiply like bacteria, or better described as CANCER. The US leaders want to
reduce both the value of the debt burden and assure that its ongoing service
costs are kept low. Foreigners are in revolt, threatening to pull the plug.
So foreigners have embarked on a broad response. Second, they are
diversifying away from the US$ at the margin in bold moves. They are
devoting NEW trade surplus funds to hard assets, like stockpiles, like grand
production contracts, like large acquisitions and partnerships. They are
regularly urging wider acceptance of the I.M.F. bonds as an alternative to
storing surplus funds outside the US$ sphere. In fact, the Chinese lead the global
initiative to end international contract settlement in US$ terms, after
several decades. They do so with yuan currency swap facilities
scattered across the globe like so many automatic teller machines. They do so
with historically unprecedented bilateral barter accords, whose
systems are being assembled and put into place. See Russia with China. See
Russia with Germany also. The stockpile movement is not strictly a Chinese
phenomenon. The Shanghai Coop Organization (SCO) recently completed a global
meeting, with several key invited guest nations like Brazil. Their unstated
purpose was to make concrete steps in contract settlements for a variety of
commodities (from crude oil to natural gas to industrial metals), and do so
without USDollar involvement. The June SCO meeting in Yekaterinburg Russia
was hardly covered by the US financial press. Where it was covered, it was
downplayed. Also, despite its many problems within the European Union, like
economic recession and wounded banks, foreigners are flocking to the Euro
currency, now over 141 and pushing toward 142.
NO, the major theme of 2009 on the Psychology Billboard is REVOLT
AGAINST THE USDOLLAR AT THE MARGIN, NOT THE CORE. The foreign creditors and suppliers to the Untied
States are in a coordinated global revolt position, being fortified with each
passing month. That is the major theme of 2009. Notice the shutdown in
Chinese purchase of USTreasury Bonds, down to a mere trickle since October.
In fact, the objective of those in revolt is to play down their revolt, to
talk nice to the USGovt (which controls an aggressive military), to utter
empty words about support for the USDollar, but to work behind the scenes to
undermine it AT THE MARGIN. Their exercise is akin to soothing and singing to
a large wounded beast, as it is being surrounded, tied up, and muzzled. Their
objective includes a pace of undermine intended to be gradual.
Foreign creditors wish to use their USTBond reserves in constructive
intelligent manner. The Chinese recently announced a dedication to hedge
funds from their vast sovereign wealth fund holdings, a likely avenue for
USTBonds used as collateral in accounts. If properly deployed, with
sufficient volume, additional USGovt debt can be used to fortify the
commodity prices and prevent a perverse unjustified USDollar rebound, built
upon failure and liquidation. Slowly but surely, the credit supply for the
USGovt and USEconomy will be reduced to the point that later, unclear how
much later, it will be cut off.
FOREIGN VULNERABILITY
Reading economic reports from foreign lands serves as a distraction to
this entire ill-footed deflation versus inflation debate. Some like my
outspoken acquaintance believe that foreign economic distress assures
continued decline in US asset prices. They miss the main point. Foreign
economic distress assures less trade surplus recycle into USTreasury Bonds,
and further isolates the USDept Treasury into monetizing their debt.
A DEEP ISOLATION COMES TO THE UNTIED STATES AS FOREIGN CREDITORS BOTH REFUSE
TO FUND AND CANNOT FUND THE PROFOUND CRIPPLING US DEBT. Hidden within the
bowels of the funding process is the gradual destruction in the official bond
primary dealers. Last week, Dresdner Kleinwort decided to exit in its role as
a primary bond dealer. The US-based dealers are sitting on a mountain of
inventory, acting like a huge collection of boulders on a medium sized vessel
at sea. Primary dealers now have a record $368 billion in Corporate, Agency
(mortgage), mainstream mortgage bonds, and USTreasury inventory. And the vast
bulk of their holdings of USAgency debt has less than a 3-year maturity. Just
like the private equity groups and Wall Street firms, they are heading toward
a day when they choke on their own feces.
The USEconomy is most vulnerable to price inflation, due to US$
weakness and revolt globally against it, as commodity prices are inversely
linked. The USEconomy is perversely the most protected from price deflation.
The deflationist argument might possibly hold some water with foreign
economies, as their currencies rise enough to harm export trade, as their
strong currencies keep commodity costs down. The Deflationist Knuckleheads at
best have it backwards, and at worst continue to be lost.
Jim Willie CB
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