The market fell big time today, as oil prices fell to $61 a barrel and deflation worries abound
There is a fear that lower oil prices is an indication that world economies are starting to fail and world economies may be headed into a deflationary spiral. The Fed can handle inflation, because it means they can pay off debt in the future with inflated currency. That’s what happened after World War II. However, deflation is another matter. With interest rates close to zero and as the Fed has already purchased several trillion dollars worth of bonds (QE), there appears little likelihood that they are in a position to stimulate the economy if deflation raises it ugly head. SEE BELOW I continue to believe industrial nations are going to have a problem with economic growth, as all the income growth is being sucked up by the top 1%. The working poor earning minimum wages, cannot support a consumer economy.
It is interesting to note that the price of gold is getting some notice, 43 years after Pres. Nixon scrap the gold standard. Gold appears to be reemerging as the centerpiece of a handful of initiatives in Europe, Asia and the Middle East. Voters in Switzerland considered and eventually rejected a populist plan to force its central banks to buy gold to stabilize its currency. Russia and China have both made the headlines by snapping up enormous stores of gold. In France, politicians are calling for the government to start amassing gold and the Netherlands followed suit by asking for its $5 billion of gold in the vaults of New York to be delivered to them. Even the Islamist state is declaring they wanted to avoid the ‘tyrannical financial system’ of the West by buying gold. What’s going on here? Holding gold for people and government reflects our anxieties about the future. Even though it might seem somewhat retrograde to many investors, having it on hand makes people feel safe
I have been reading a recent book called The Death of Money and the Coming Finincial Collapse of the International Monetary System by James G Richards Mr. Richards asserts that he expects the economy to be in a economic bubble. He believes that the old normal is gone, but the new normal has not yet arrived and that the economy is in a phase of transition from one state to another. He believes that a new international monetary system will rise from the ashes of our present system based on the dollar, just as the British Commonwealth at Bretton Woods in 1944 happened. He believes the mortgage problem in 2008 was manageable however unmanageable were the trillions of dollars still in derivatives created from underlying mortgages and trillions more and of repurchase agreements. From 2009 two 2012 the U.S. Treasury increased a $15 trillion cumulative debit and the Federal Reserve printed $3 trillion in new money. The bankers jobs and bonuses were preserved but nothing was achieved for the average citizen. The Fed sees inflation as a way to dilute the real value of US debt and avoid the specter of deflation. He expects deflation or skyrocketing gold prices and the crashing dollar to be two sides of the same coin and that will occur quickly. Deflation is the Federal Reserve’s worst nightmare for many reasons as real gains from deflation cannot be easily taxed. Deflation would increase the real value of government debt making it harder to repay. If deflation is not reversed there will be an outright default on the national depth rather than the less dramatic outcome of default by inflation. He suggests the breaking up of the banks that would eliminate the problem of too big to fail. He believes where larger financing is required small the banks can acquire a syndicate. He believes that if large banks continue to dominate the financial situation, and that financial failure on a global basis will follow and that the task every qualifying the finances of the world will fall to the IMF, because the IMF will have the only clean balance sheet left among institutions. He believes the IMF will then rise to the occasion with a towering issuance of SDR’s, and this monetary operation will effectively end the dollar’s role as a leading reserve currency. If this does occur United States be allowed to print money. So in these uncertain times, gold should be looked at as an alternative investment. Gold holds its purchasing value in deflation and deflation.
Carl M. Birkelbach 12/11/14