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There is no doubt that the current environment is a deflationary credit contraction in contrast to an inflationary credit expansion. The inflationary credit expansion lasted for at least 60 years and perhaps even as long as 100-600 years. Change is here and change is now. I will speaking on this topic Jan. 25-26 in Vancouver, BC at the notable Cambridge House Investment Conference.
The zenith was reached and a few years ago the deflationary credit contraction began. 2008 was simply the aroma of the appetizers being prepared. Soon we will get our first course of at least a nine course meal. Oh the anticipation.
Those who fail to adapt will see entire fortunes of staggering amounts vaporized. For example, former billionaires Bjorgflur Gudmundsson and Luis Portillio whose net worth in March were $1.1B and $1.2B respectively have current net worths of nothing and $15M respectively. Riches have become extremely slippery.
During 2008 the forgotten four letter word reasserted itself in the minds of holders of capital. R-I-S-K, which was thought to have been understood and calculated for, flew in like the Nazgûl riding on a flock of black swans. Instead of taking lessons from history and running for cover most people are still analyzing the situation under the tools they learned for measuring risk when all the swans were white.
As Austrian economics is not taught in the leading business schools it is fairly predictable that so many otherwise intelligent people lost themselves and their clients so much purchasing power. Even still many are infected with the Financial Insanity Virus (FIV) and are in denial of how things really work. They believe the derivative illusion and live in their own delusions thinking that ‘things will return to normal’ where all the swans are white again. If anything there will be a lot of grey swans but make no mistake about it; the world will not be returning to an all white swan environment again.
TREASURIES ARE THE BUBBLE
During 2008 one of the better asset classes to have capital in was the Treasury Bond. During 2008 gold in FRN$ was up about 6%, gold in £ was up 44% while gold in ¥ was down about 15%. This is because the FRN$ and ¥ are considered by many to be ‘safe’ and ‘liquid’. During an inflationary credit expansion capital moves up the liquidity pyramid. During a deflationary credit contraction capital moves down the liquidity pyramid.
Because the FRN$ is the world reserve currency and because Treasury Bonds are considered ‘safe’ and ‘liquid’ therefore it is predictable that capital would flow into the Treasury Bond and it would perform well during 2008. But the Treasury Bond is fraught with R-I-S-K and that R-I-S-K will eventually be made apparent. At the same time gold’s purchasing power is increasing as revealed by gold to oil and gold to DOW being near highs.
The FRN$ in its current form is the largest bubble and Ponzi scam of them all. This fiat currency bubble has swollen for 60, 100 and perhaps even 600 years. The FRN$ bubble is in search of a golden pin and is going to find one.
VELOCITY OF TREASURIES IS SLOWING
As the deflationary credit contraction continues and intensifies the economy will continue to slow. Like many over the past few days I have gorged myself on football. One of my private bankers even got me tickets right next to the field at the 50 yard line for the Gator Bowl. It is great to be on the receiving end of all this TARP bailout money! I even got to see Lil’ Red.
During the Chairman’s Brunch I was talking with an interesting fellow who owns a respectable truck parts store that his grandfather started in 1919. He mentioned that ‘October and November were the worst months ever’. Hopefully this solid family business does not see Big Red on the income statement like Toyota (TM) did for the first time in 70 years.
The velocity of the FRN$ is slowing. Empty ships betray the fact that the economy is grinding to a halt. There is no bottom line without a top line. The spending cycle has metamorphosed into a savings cycle and many businesses are going to have a tough time. There will be many casualties.
VELOCITY OF GOLD IS RISING
At all times and in all places gold remains money and is potentially the most powerful currency in the world. The FRN$ is not money but a money substitute that functions as currency. FRN$s are ‘bills of credit’, prohibited by the United States Constitution and will continue evaporating through hyperinflation during this deflationary credit contraction. With the advent of the Internet the entire nature and function of currency is evolving.
Credit and debit cards are like the early attempts at transportation using the engine that resembled a horse drawn buggy. The use of digital gold currencies is increasing even while the velocity of the FRN$ is declining. Gold is to currencies what Latin is to languages but these technological innovations breathe new life into the previously ‘dead’ currency and gold is only now beginning to awaken from its long slumber and increase in velocity. As the FRN$’s velocity slows the value of the FRN$ will decline. As gold’s velocity increases the value of gold will increase.
Dr. Au Buygold’s suggestions of preventative measures for FIV is frequent contact with gold bullion and he suggests individuals to ‘Buy two ounces and call me in the morning’. This may prove difficult though because there only about 0.8 ounces per person of available gold for sale. Dr. Au Buygold’s suggestions apply to buying real gold and not apparitions like the problematic GLD or SLV. With riches so slippery why would those who have the gold allow it to slip out of their hands?
As Henry Thornton, economist and Bank of England governor, observed in his 1802 An Enquiry into the Paper Credit of Great Britain ”We assume that the currency which is in all our hands is fixed, and that the price of bullion moves; whereas in truth, it is the currency of each nation that moves, and it is bullion which is the more fixed.”
The normal and natural way for money and currency to function is with gold and silver or some other physical commodity. This allows for useful and accurate value calculation. Financial historians may very well view the 95 year FRN$ bubble as an unusual anomaly and wonder how so many people were so ignorant much like we view the culture who thought the earth was flat.
As Ludwig von Mises predicted decades ago in chapter 20 of Human Action, ‘The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. … But then finally the masses wake up. … A breakdown occurs. The crack-up boom appears.’
With the M1 Money Multiplier ratio declining so sharply it portents saner times are coming and mankind will enjoy the fruits of their labor because gold and silver will circulate as currency in ordinary daily transactions. If you thought 2008 was a fun year then 2009 will be even better.
DISCLOSURES – Long physical gold and no GLD, SLV, TM, LTL, AGG, etc. banks or other Treasury securities.