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Competitive Devaluation and Gold, or Gold and the Bond-Bubble(s)

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I was torn between two titles in this piece, before realizing it needed both. Writer after writer talks about the global currency game of “competitive devaluation”, and their writing implies what the impact of this will be on the gold (and silver) market, however I have yet to see our current scenario explicitly laid-out.

Before I get into the heart of this analysis, let me briefly summarize the concept of “competitive devaluation”, for readers who may understand what is happening, but not why. The premise which is guiding the policies of our “leaders” (and the “experts”) who advise them is that the way for each nation to solve its massive, domestic debt/deficit woes is to get other countries to fund their deficits.

How does this relate to the phenomenon of competitive devaluation? The idea is that if any particular nation drives-down the value of its currency that it forces one’s own citizens to buy fewer imports (by destroying their wealth), while simultaneously making one’s domestic manufactured goods cheaper and (supposedly) more-appealing to both domestic and foreign consumers. In other words, every country is planning to fund their domestic deficits with “trade surpluses”.

Obviously, as many have written and most can figure out on their own, it’s impossible for every nation to simultaneously have trade-surpluses, since trade is (by definition) a zero-sum game: for every “surplus” there is a corresponding “deficit”. This means that with everyone trying to do this at once, that (roughly speaking) at least half the nations are doomed to fail – on that basis alone.

To further amplify the idiocy of this monetary ritual-suicide (by Western governments), these governments are engaging in competitive devaluation, irrespective of whether they have anything to sell and/or irrespective of whether there is anyone to buy their goods. The only people with any spending-power (in aggregate terms) are the citizens of Asian/developing economies. However, Japan and the Western debtor-nations are generally only competitive (even with debauched currencies) in producing high quality/hi-tech goods – goods which are still out of reach for most of the low-but-rising incomes of the surplus nations.

This means that even if only one Western nation was engaged in this form of economic devolution that the likelihood of success could not possibly justify the guaranteed harm which comes from destroying the wealth of one’s own citizens, compounded by the ever-increasing risk of hyperinflation if these monetary lemmings are too “successful” in destroying their own currencies.

It is ironic that it is our debt-pushing bankers who are 100% responsible for this voluntary mass-destruction of all the fiat, paper-currencies which they claimed were our path to prosperity. Even more ironic, the only possible end-result of this hopeless gamble is that investor wealth will flee all forms of banker-paper.

Unlike “hard assets”, like gold, silver and the raw materials which fuel our world, the banker’s paper-assets only retain any value at all as long as the (paper) currencies they are expressed in retain their value. This means that destroying currencies also means destroying all banker-paper and the entire paper-empire of Western bankers. This brings us to the bond market.

As I read article after article about Western debtor-nations (and Japan, the surrogate “Westerner”), there is a common theme in the writing of all these commentators (at least by all the competent ones). In very nearly all of these economies, there is an enormously strong case to be made that the bond-markets of each/every one of these nations represent a massive bubble, on the verge of bursting.

What should be terrifying here to any/every person idiotic enough to hold any sovereign debt of the Western-debtors is that the argument being made about these bond-bubbles (and their imminent collapse) is 100% independent of the effect I just described: that destroying currencies must destroy all-banker paper.

Bond-holders can crow all they want about the “fabulous prices” these bonds currently fetch. Presumably bond-holders still retain enough of a vestige of intellect to understand what those nominal bond prices really mean – once converted into worthless currency. Yet even when totally ignoring the monetary argument which concludes that all Western bonds must go to zero, we have analyst after analyst arguing that on pure, domestic fundamentals alone, these markets already represent ridiculous bubbles – ripe for spectacular implosions.

While I write mostly about the U.S. bond-market (the largest and most-ridiculous of all these bond-bubbles), the general fundamentals are common to all:

1) These nations are simultaneously all dumping the most “supply” onto the market in history.

2) Since bond-prices are the inverse of interest rates, and all Western interest rates are near-zero, the bond-market is beginning this massive-dump with prices already near their absolute maximum.

3) All global bond-buyers either want to “diversify” away from sovereign bonds (in the case of Asian surplus-nations), or, they have nothing with which to buy bonds, except the latest funny-money, hot off of their printing presses.

Anyone who has ever cracked-open an Economics 101 text-book can tell you that when you increase supply that price goes down, and when you reduce demand price goes down. And you don’t even have to know how to spell “economics” to know that when the price of something is already at its maximum that the price must go down.

In a world of lemming-investors, bond-holders have the dubious distinction of being the largest herd, running the fastest, toward the largest cliff. As just mentioned, the only way in which Western governments (and Japan) can even temporarily prop-up the world’s largest, most-obvious bubbles is to print-up new “money” at an even faster rate – in order to buy-up their own bonds, or to continue the current bond-market game of “musical chairs”.

For those who still haven’t clued-in to what is happening already in bond-markets, we have these morally/intellectually/economically bankrupt Western nations pretending that there is still “demand” for their bonds, by printing-up more and more fiat-paper for the sole purpose of buying each other’s bonds. Such an exercise usually goes by the name “Ponzi-scheme”.

Simply, the only way to prop-up these doomed bubbles day-by-day is through accelerating money-printing, and thus accelerating the speed with which all banker-paper (including bonds) goes to zero (irrespective of nominal prices).

To this point, I have literally done nothing more than just mention gold and silver. There was little need to do more. In the world’s giant “FX” (foreign currency-exchange) market, when currency-traders see a particular currency weakening, they move into an alternate paper-currency, or gold.

In the world’s even larger market for the bonds of sovereign nations, if you have fears for the bonds of one nation/currency, you sell those bonds in order to buy the bonds from “stronger” nations, and if there is any general uncertainty, you hedge that portfolio with gold.

What we now have in the world’s two largest markets for banker-paper (outside of the derivatives casino) is a scenario where all options for investors are being simultaneously destroyed except for gold and silver. Sadly, in destroying themselves, the bankers are dragging down all of our economies (and all the people) with them.

Whether it happens tomorrow, next week, or next year, the real exodus out of banker-paper is is about to begin. Naturally this exodus must (as a simple matter of arithmetic) cause the bankers $1 quadrillion derivatives market to be vaporized – since it is nothing but leveraged-bets on all of this paper.

Let me repeat the current dynamic one more time (since bond-holders are not the “brightest bulbs on the tree”): the only strategy to prop-up a series of bond-bubbles over the short-term is one which must destroy all of these bond-markets over the medium-term.

Even if we multiply the current prices of bullion by ten, that would still only make the bullion market large enough to absorb less than 5% of all the paper from the gigantic, FX and bond markets. Obviously some of this capital will (and has) flooded into equities markets – yet more paper vulnerable to banker-driven bubbles.

While equities representing “hard assets” (like commodity-producers) will retain value even as other paper goes to zero, equities which are merely based upon more banker-paper (like the entire financial sector) will go to zero – as Western bankers complete their self-annihilation.

The same bankers who have tried to destroy the gold market, and to deny the 5,000 year-old fact that gold and silver are the best “safe havens” for investor wealth have now managed to destroy every other “safe haven” on the planet – while keeping bullion prices low enough to allow precious metals investors who got here first to load-up at (literally) once-in-a-lifetime prices.

Under different circumstances, we should thank them…

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written by HA65MPH, October 12, 2010
Good Comments all around smilies/smiley.gif
Jeff Nielson
...
written by Jeff Nielson, October 09, 2010
That's a very good point, Mathnerd - and something which I need to deal with INSIDE a commentary, some point in the near future.

For now, I choose a MUCH less rigorous definition of "hyperinflation": simply, the point at which "high inflation" has given way to an out-of-control price-spiral - since once that process BEGINS, history is clear that there is no turning back.

Certainly, the hyperinflation spiral in the U.S. will have become irreversible well before hitting that 50% per month level - perhaps even by the time the U.S. hits the 10%/month level? At that point, the hyperinflationary "effects" which I describe will begin to kick-in.

The OTHER reason why I think it's important to "relax" one's definition here is a matter of comprehension. I've been very clear that few, if any people are capable of comprehending a number as large as a trillion - and I include myself in that group.

In trying to "appreciate" such astronomical numbers, I continually "convert" trillions into an expression of billions - since I am capable of dealing with that number.

Similarly, NO ONE (or, at least, very few of us) can comprehend the purchasing-power of our currency going to zero - since the progression where something diminishes into smaller and smaller fractions before reaching zero is merely the flip-side of the progression to infinity.

I KNOW people still don't understand what "hyperinflation" really means (i.e. currencies going to zero), because of one of the most common questions asked of me (or any/every other precious metals commentator): how high COULD the price of gold (or silver) go?

As I have pointed out several times, in hyperinflation, with currencies going to zero, the price of precious metals (expressed in that worthless paper) is NEAR-INFINITY.

This is why commentators such as myself MUST adopt a looser definition of hyperinflation - since there is no point in using a term which few people are capable of understanding...
mathnerd
...
written by mathnerd, October 08, 2010
Jeff, I definitely agree with your analysis of the current economic picture.

I may have appeared less pessimistic on the economy because I define hyperinflation as in the two macroeconomic textbooks I've studied. The rate those authors use is 50% each month, in which case prices increase by a factor of 128 in a year. I try to give the political system the benefit of the doubt, but I realize that's not safe in today's situation.
Jeff Nielson
...
written by Jeff Nielson, October 08, 2010
Mathnerd, at the rate at which they're going, I think 5-7 years is "optimistic".

Apart from the MASSIVE debt-loads, the two problems destroying the fiscal health of our economies is that our income-taxation system is RAPIDLY hollowing-out our economies - as all wealth flows into the pockets of the ultra-wealthy.

The second problem is far too few people working to generate enough tax revenues to sustain all the recipients of various entitlements. This massive, structural unemployment can only be rectified by shrinking the work-week.

The problem is that our governments serve the wealthy - so they have absolutely no interest in fixing our tax systems. Secondly, they LIKE high unemployment, since it permanently depresses wages for "the little people" (which the wealthy also like).

The bottom-line is that with our governments recklessly piling-on new debt exponentially, while not even TRYING to fix the massive, underlying structural problems, this means we should expect implosion SOONER rather than later. Simply, the system cannot withstand our "leaders" continuing to make things worse, for much longer.
mathnerd
...
written by mathnerd, October 08, 2010
For how much longer do you think our glorifious central bankerssmilies/cheesy.gif could hold this Ponzi scheme going before it starts coming down around them - do you think 5 - 7 years is realistic?
Jeff Nielson
...
written by Jeff Nielson, October 08, 2010
I understand your sentiments. When I write this, it often feels like I'm inside some slow-motion dream, where SURELY someone will see the horrible fate ahead, and change course - but no, everyone else continues to heedlessly plod ahead.

When serious people like John Williams warn that U.S. hyperinflation could hit as soon as "this year", I take notice. And what is frightening is seeing so many of the "signs" you see during periods of great strife/distress.

If Canada was its own little island (instead of intimately joined with the U.S.), we Canadians might be able to be a little more relaxed about what is coming (at least temporarily). As things stand, the economic catastrophe that has been created in the U.S. is going to have a severe impact on all of us.
apberusdisvet
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written by apberusdisvet, October 07, 2010
I once thought that a "significant event" would take at least 5 years; now I'm sure that it will occur within 6 months. Too many converging storms on a steady course to meet. I smell a new TARP to be floated after the elections, or more insidiously, greater POMOs to prop up bank balance sheets in the light of the foreclosure fraud mess, the ramifications/implications of which have just made all the toxic assets even more so.

Everyone should keep their bank balances low; a bank "holiday" is in the air.
Jeff Nielson
...
written by Jeff Nielson, October 07, 2010
Paxjds, there is a lot to address there.

Personally, I don't think the banksters have any more of an "exit strategy" than the Fed. Obviously, with the U.S. printing-press directly hooked-up to bankster coffers, they will be able to steal enough to remain in existence, in some form.

However, the destruction of their paper empire will neuter them. They will no longer have the power to manipulate markets, and since no one on the planet will trust them, they have very little opportunity to do business in the Asia-dominated global economy.
paxjds
...
written by paxjds, October 06, 2010
Well said Jeff. There is a possibility the Yen, Dollar, and the Euro will in essence crash together in the race to the bottom and being worthless.
The Banksters, being the banksters that they are, have also figured out all that you have just written.
What will be the Banksters new Ponzi schemes to replace these currencies? More of the same New yens, New dollars, New euros, NEW PAPER WIDGETS? Why should We the People of the world tolerate these wealthiest people of the worlds Ponzi schemes anymore? Are there enough Guilitines left to clean up the mess by the Banksters? Will we have to build larger prisons to accomodate these banksters that have ruined or diminished the lives of billions of people on the planet? Do you think there will be Nerenberg Trials for these banksters?
The question of whats to follow the worldwide crash is just as important as how to protect yourself in the upcoming Largest Crash of All History? The people of the planet need to start answering the above questions! The answers are NOT the Banksters ploy of a new World Central Bank or World Government, but in the Prevention of Centalized Power.

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