Thursday, June 23, 2011

Pop cotton

Cotton prices fall 37%

Actually we saw another 13% drop today so from a peak of $220 per bale 2 months ago we hit $125 a bale today. A minor detail in one sense, but decent evidence that the recent commodity spike that drove inflation higher was based on speculation (as I have stated a few times) and had next to nothing to do with currency collapse, or interest rates levels or other such Schifferian nonsense. Appreciate this is no longer the house view, sadly the house view ultimately falls to those who have all day to print posts like Weimar Papiermarks.

Posted by bellwether @ 03:30 PM (2998 views)
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79 thoughts on “Pop cotton

  • mark wadsworth says:

    Good stuff. All these asset price bubbles pop sooner or later, it’s only a question of time before gold goes the same way and having the nerves to sell short on the way down.

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  • and anyone seen oil…. and i dread to say it…. as i may well get accosted by GC – the yellow stuff?

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  • that drove inflation higher was based on speculation (as I have stated a few times)

    What rot.

    Yawn, yawn……

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  • hpwatcher – The Invesco Perpetual boys have some good information on Inflation (demand pull, cost push etc..) and commodity prices – well worth a read (they have commodities heading South) See http://www.invescoperpetual.co.uk/portal/site/splash-uk and just sign as professional adviser to get more widespread information

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  • general congreve says:

    Little testy today aren’t we Bellwether? Yes, I have got all day as it happens. Had I not invested in gold and wasn’t currently sitting on a tidy 50% profit, I’d be out working and you’d have the run of the place. Quid Pro Quo.

    @2 – I know, it’s dropped like a stone to, to, to, let me see, oh yes, where is was at 9am yesterday:

    Image and video hosting by TinyPic

    Strange, you guys were nowhere to be seen when gold was on it’s merry way from £900/Oz to £965/OZ. Now it’s been routed all the way back to £952/Oz, look who comes out the woodwork to rub it in. Ouch, stop, it’s really hurting!!!

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  • @2.

    Goodness me, a huge correction of just over 1% gold price in sterling!

    Gold bugs, you’re all doomed I tell ya, doomed!

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  • ontheotherhand says:

    In times of volatility and panic, people have to convert their portfolio to cash. You might be suprised that if there is a big frightening event, gold actually shoots down for a while as people sell everthing to get cash.

    Yes the pound ‘only’ fell 30% in trade weighted terms and so there are other explanations to the cotton price bubble. Could it be with a crop like cotton that farmers react to higher prices by planting more, and that users of cotton react to higher prices by using less and switching to substitutes?

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  • general congreve says:

    Quick poll, because I’m not sure on this one, did Iceland suffer a deflationary crash in 2008?

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  • box thinker says:

    Does anyone honestly think gold is going to crash when the entire global bond markets are on the precipice of collapse? For the past 4 years all I have seen in the papers and forums is the gold is in a bubble argument. I think there are a few too many experts with their noses pressed too close to their trading screens. Is anyone here really stupid enough to think that what is happening in Greece cannot and will not be replicated across Europe and the eventually in the UK?

    If the Greeks demand default then the Irish, Spanish and Portuguese people will demand the same.

    Bonds, currencies and manifestos won’t be worth the paper their written on.

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  • GC – most of the regulars on here have been aware of the Gold price since Str1 included way back in the day as part of his predictions linked to various Black Swan events – the current price has a long way to go (North) if he gets it right.

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  • Mark a matter of time for gold for sure although I suspect that it’s got quite a way to run yet. Which is great if you can get out and not so great if your left holding physical as will surely happen for many.

    What interests me more however is the zeal of those who are into it, they remind me of property types from 2002 – 2007 or possibly the religous sorts that used to go round doors. I’m pretty sure that deep down its because they are worried they will end up being wrong (see para 1) – which is not surprising as any speculative endeavour carries that risk. This is probably also why anyone who owns physical talks about it so much. It’s fear.

    Also the irony is rich (but rather lost) that a site built as a reaction to mindless speculation in one asset class (that couldn’t fail) should become hostage to mindless speculation about another asset class that cannot fail.

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  • But box thinker the entire global bond market isn’t really on the brink of collapse. The debts are largely illusionary and could be wiped clean tomorrow with little or no real world consequences.

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  • GC see my post at 11.

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  • general congreve says:

    Well, it’s strange, I can’t find any info that states Iceland suffered a deflationary collapse, when what happened to them was a collapse of the banking sector and a government default. Apparently those things will bring deflation, so we are told.

    Having done a little digging on Iceland I have found the following which I collated yesterday. It may help some of you understand the risks that pertain to gold, cash, shares and bonds in any forthcoming deflationary scenario we experience her or elsewhere.

    If you read this blog:

    http://europeanpermanentportfolio.blogspot.com/2009/08/permanent-portfolio-in-iceland.html

    you will see the figures for what happened in Iceland and what the results were for Iceland’s financial landscape, post-‘deflation’. I had to search through and pick out the figures for gold, because the blogger is looking at the effect of the collapse on a portfolio comprised of 25% shares, 25% short term Icelandic bonds, 25% long term Icelandic bonds and 25% gold. Here’s the figures:

    Gold went from 47,700K/Oz to 117,680K/Oz (Beginning of 2008 to end 2008) – a 259% gain.

    Krona devalued by 69% against the Euro over 2008.

    So, if you held Krona you lost 69% of your purchasing power against the Euro and similar against most other major currencies. Your 47,700k effectively became worth 14,787k. It folded in 3 and the some!

    If you held gold you made a gain of 259% in Krona, but accounting for devaluation of the Krona of 69% you were left with a value of 36,480k/Oz. This was, a 23.5% loss, but a smaller one than those holding cash.

    This was obviously still a negative outcome for gold when it comes to buying imported goods. But still a better one than cash by a long way and according to the blog those holding gold were actually 8% better off when buying Icelandic property due to relative price movements in property. Same can’t be said for those in cash (or the shares and bonds also covered in the article – they bombed too). So, financially within Icelands own financial narrative, Gold was the last man standing and came out relatively unscathed compared to the rout elsewhere, most notably in deflation-friendly cash.

    One massive caveat must be applied here. Gold in most currencies, especially the euro and dollar went down in 2008. So there was outside pressure on gold prices at the time, mainly from a flight to cash (dollar/euro) for safety in the wake of Iceland and Lehman Brothers. This of course was before financial sector debts became sovereign debts, thereby undermining the perceived safety of these currencies. So the situation is not longer the same, as the Euro, Dollar etc. are no longer viewed as the bastions of safety they were once percieved to be, and rightly so.

    As we can see from the Icelandic example, cash is hardly safe in ‘deflationary’ times, especially when it is backed by governments that are broke. The story will be even more bullish for gold next time, if ‘deflation’ goes global and starts hitting major currencies. Then it will truly shine, as it will be recognised as the true safe currency, unlike the debt-laden-to-death Dollar or Euro.

    Oh yeah, I should also add that in the year following Iceland’s ‘deflationary’ crash, the Krona inflated over 18%.

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  • GC – am duly accosted! For what its worth i do think we can see the mid to low 1400s before we see the 1558 highs but i then think we may very well march right back up and exceed the highs with a final thrust!

    No comments on black gold?

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  • hpwatcher – why are you such a [email protected]?

    Remember for every seller there is a buyer….

    Moreover, this drop is only due to the unusual step by the International Energy Agency to sell some of their reserves on the world market. Once sold, the price will rise again. Nothing to do with speculation – but you believe that ……if you want to.

    Little testy today aren’t we Bellwether? Yes, I have got all day as it happens. Had I not invested in gold and wasn’t currently sitting on a tidy 50% profit, I’d be out working and you’d have the run of the place. Quid Pro Quo.

    I really think that Bellwether’s failure to invest in commodities is eating him alive.

    What interests me more however is the zeal of those who are into it, they remind me of property types from 2002 – 2007 or possibly the religous sorts that used to go round doors.

    What makes me laugh, is that you are so bitter about it. It’s just something to invest in for a while, nothing else. Annoyed about your paper being worth less every year?

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  • hpw i see you’ve sharpened your dentures!! :).

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  • box thinker says:

    Bellwether the debts are real enough to make millions take to the streets across the globe and demand default. If you measure gold against the euro, pound and dollar then your thinking of gold as a commodity in a bubble and probably missed out on the early part of the parabolic rise in gold’s value.

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  • general congreve says:

    @11 – Let’s clear the air about over-zealous and mindless investing habits and what not.

    I bought my own place in 2002, could see the market was bubbling, but had to make some hard choices based on rent costing more than the mortgage and second guessing the market would continue up for a bit longer. I judged it right and sold bang on the peak at August 2007. All thanks to due diligence.

    I then reinvested the proceeds in Icesave at 6% for a year, pulled it out 2 days before they collapsed. Due diligence.

    I then reinvested half of the money in gold and silver and have made a 50% return on gold so far and a 100% return on silver (that’s AFTER it’s recent crash to $35/Oz).

    Seems I’ve made some reasonable calls. The first two couldn’t have been more on the money, could they? Exact month of the property peak and, well OK, I could have pulled the Icesave savings with one day to go instead of two, so I admit I was 24hours early on that one, you got me there. 😆

    With anything, there is a time to have skin in the game and a time and a time not too. The time to be in gold is now. The time to be investing in property is not now (certainly if you are leveraged with a big mortgage), the time to be investing in bonds is not now, the time to be out of fiat currencies IS now. Will it be this way forever? No and I have never claimed that, I merely say gold/silver is the best place for your wealth NOW.

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  • box thinker says:

    hpwatcher is wrong. When it comes to physical gold for every seller there are numerous buyers in India and China.

    It’s human nature to get upset when you miss the boat. Many of you didn’t just miss out on maximising on the last property boom but you also missed out on the gold boom.

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  • general congreve says:

    @19 – Forgot to add that yes, one day the value of gold may reverse it’s upward trend, although it may just stop at a higher value and stay there, depending on whether we see a move from debt-based currency to gold-backed currency again. But, just in the way a stopped clock is right twice a day, doing a Chicken Little on gold doesn’t serve any purpose. Yes, we are all aware the price may reverse at some point, that’s why you need to do due diligence. That point IMO is much further in the future.

    Timing is the key and fortune favours the brave. The fact I had the balls to front up the entire fiat stake I wanted to put into gold and silver back in 2009 in one hit, and then held my nerve while is spent six months correcting (small beer now!) means I have netted 50% gains in gold and 100% gains in silver. That tells me my timing hasn’t been all that bad so far, and also offer me plenty of margin to get out of Dodge without losses should some sudden unexpected fiscal sanity return to the world.

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  • hpwatcher is wrong. When it comes to physical gold for every seller there are numerous buyers in India and China.

    Sometimes it is nice to be wrong.

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  • but you also missed out on the gold boom.

    Not a boom – just watch the US.

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  • box thinker says:

    Yes hpwatcher you are correct, incorrect terminology on my part.

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  • general congreve says:

    @15 – Personally, I prefer something that won’t leak onto the floor if I have to try and smuggle it out of the country in my pocket 😉

    Would have been nice to have gone in at $35 a barrel admittedly, but hindsight is a wonderful thing. If we get another rout like that, I expect I’ll be in like Fynn.

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  • Oil is my Mastermind specialist subject, so I’ll weigh in here.

    There are two sides to the oil story. The first is supply & demand. The second is the dollar.

    The supply picture is nuanced. Producers aren’t producing any more. However, more alternatives are appearing; shale gas is big in America, and many oil-fuelled power stations can be easily converted to run on gas. It only takes a small shift in demand to cause a fairly big change in the price of oil; so that’s bearish for oil prices.
    The demand picture is poor. The US economy still hasn’t really recovered, and is quite likely to double-dip. Newly-imposed fuel economy standards for cars may have an effect on oil consumption. China’s thirst for commodities seems to be slowing down. Any crisis in the Eurozone certainly won’t add to economic growth (and hence oil demand).

    The dollar is also uncertain; but unless QE3 is announced, it’s probably due for a bit of a rebound. That’s partly due to some of the same factors as above: slowdown in the world economy, flight to safety, etc. That’s bearish for all commodities and stocks, including gold.

    Gold however is a separate case. It acts more as an insurance policy, a fear index. Right now economic fear is actually quite high – fear of the Arab Spring, fear of a Eurozone crisis, fear of another banking collapse. None of those problems is going away any time soon, and there are plenty of other similar problems just waiting to erupt. So I don’t see why gold would fall.
    In 1980, when gold collapsed, it was because the Federal Reserve finally decided to get tough on inflation, and hiked interest rates. There’s absolutely no sign of that happening now (China’s recent rate tightening hasn’t affected gold either). I don’t think gold will start to fall until interest rates rise.

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  • general congreve says:

    @26 – Yes. Positive real interest rates, that’s one of the main keys for reversing the fortunes of gold. Unfortunately positive real rates will collapse the global economy and sink the banks. So it’s a bit of a one way bet for the time being.

    Here’s a graph showing the historical 12-month rolling change for the gold price versus real interest rates. As you can see, real interest rates (Interest rate minus inflation) need to be around at least 2% before negative yearly movement in the gold price gets to -1%. Currently in the UK we have interest rates at 0.5% and inflation at about 5%, so negative real rates of -4.5%. For them to get to 2% positive territory in the UK the base rate would need to be 6.5%. See that on the radar anywhere in the BoE minutes?

    Image and video hosting by TinyPic

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  • gc,
    Agree with you 100%! Nice graph – where’d you get it?

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  • @Drewster

    A writer for Reuters has opined that the “International Energy Agency’s (IEA) decision to release 60 million barrels of crude oil from strategic reserves is intended to drive speculators out of the market and resist the formation of a bubble by breaking expectations about near-term supply shortages, rather than target OPEC.”

    http://www.reuters.com/article/2011/06/23/column-iea-oil-release-idUSLDE75M1H020110623

    Do you have anything to say about Bellwether’s allegation that oil and other commodities are being pushed around by speculators?

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  • @Hpwatcher

    “I really think that Bellwether’s failure to invest in commodities is eating him alive.”

    I doubt that. If you don’t mind my asking, what % of your savings do you hold in PMs or commodities?

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  • I doubt that.

    If he isn’t bothered, why then does he continue to post articles that take a very negative view of commodities? He has also been very outspoken in his criticism of those people who do choose to invest? Why does he care so much? I mean this is a HPC website after all and it isn’t me that is posting those types of articles….

    If you don’t mind my asking, what % of your savings do you hold in PMs or commodities?

    What difference does it make?

    Do you have anything to say about Bellwether’s allegation that oil and other commodities are being pushed around by speculators?

    It should not be surprising to anyone that no-one wants to hold paper given the irresponsible actions of central banks.

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  • @Hpwatcher

    What difference does it make?

    I thought the point was obvious: have you invested your money in PMs, commodities or something else other than the fiat that you told Bellwether is “worth less every year?”

    Or to put it more bluntly, is your money were your mouth is?

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  • mark wadsworth says:

    Bellwether: “the entire global bond market isn’t really on the brink of collapse. The debts are largely illusionary and could be wiped clean tomorrow with little or no real world consequences.”

    Exactly!

    You can call describe this “wiping clean” as default, devaluation, bankruptcy, insolvency, debt-for-equity swap, tearing up contracts etc. you can call it whatever you like, but writing off debts has absolutely no impact on real total wealth available to mankind whatsoever, and if done properly, it can even increase it slightly.

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  • So what happens to the inflation??? and index linked hahahaha
    I told people dont buy them

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  • Or to put it more bluntly, is your money were your mouth is?

    Yes, but with respect, that’s all ypu need to know

    the entire global bond market isn’t really on the brink of collapse. The debts are largely illusionary and could be wiped clean tomorrow with little or no real world consequences

    That’s only because central banks are prepared to print and print and print. The key issue is when the bonds are held by another country, and the country wants to use them to buy ”real” things…..nothing can be wiped clean that easily.

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  • “the entire global bond market isn’t really on the brink of collapse. The debts are largely illusionary and could be wiped clean tomorrow with little or no real world consequences.”

    I wonder what the greeks would have to say about that statement?

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  • hpwatcher, it’s nice that you’ve taken time off from advising the World Bank, IMF, International Energy Authority et al to give us all the benefit of your insight by posting on here. Their loss is clearly our gain.

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  • general congreve says:

    @28 – I believe the graph was from a Money Week article.

    @30 – I’ll step up to the plate. Currently have 81% of my cash assets in gold/silver. Money? Mouth? Same place? Check. Originally it was 50/50. But spent some cash and gold has gone up 50% and silver 100% since then.

    @33 – Totally agree. The sun is still shining, the crops are still growing, capital goods haven’t disappeared in a flash of smoke, the fish still swim in the sea, therefore the net wealth of the world is actually unchanged. However, what WILL change, is how the claims to the world’s wealth are allocated. That’s what we’re dealing with here.

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  • general congreve says:

    @38 – Just wanted to add for my reply to @33 that you need to make sure that once everything is cancelled out and settled, you aren’t left holding what is now an empty claim to to the world’s wealth when all is said and done.

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  • quiet guy @ 29,

    No, the oil market is far too large to be cornered by speculators. Even if it were, they wouldn’t want prices to go high and remain high. Speculators thrive on volatility: they like big ups and downs so that they can dive in and out. If the market were being rigged, it would be a few cents here and a few cents there, tricks with timing of trades, etc.

    Besides, I’ve heard it all before. Allegedly the Saudis are going to unleash a massive flood of cheap oil, because (a) they’re worried about the effect of high oil prices on the global economy, (b) America told them to do it, (c) they want to choke Iran’s nuclear programme, (d) they’re just crazy like that. It’s always nonsense. Saudi Arabia doesn’t have the spare capacity; and even if it did, it quite likes high prices. The Saudis desperately need the money to fund the ever-more lavish lifestyles of its ever-growing middle class. Did you think the Americans were greedy with their SUVs? That’s nothing compared to the Saudis.

    The oil price is due a tumble; however any fall will be short-lived (no more than 18 months).

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  • hpwatcher, it’s nice that you’ve taken time off from advising the World Bank, IMF, International Energy Authority et al to give us all the benefit of your insight by posting on here. Their loss is clearly our gain.

    Yes, I’m always happy to make time for people like you.

    By the way, it’s only the third time since 1974 since the International Energy Agency have attempted to control oil prices like this……I doubt whether it will last long……

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  • GC @ 25 – Im not talking about whether or not you are invested in black gold, i actually agree with hpw there with his “who cares” comment.

    The issue i am referring to is the $6 fall in brent yesterday. We are actually up against the 200DMA so what happens here will be key. To go back to the beginning B/ws post is about the falls in cotton, indicating that we may have finished or be approaching the end of the reflation.

    Add to that the oil price and the CRB retraced back to around 62% of its initial fall. Now Gold may very well be the last commodity to top and if it does so and as i think it will show a screaming divergence with the others, then its days will be numbered.

    Overall we are all entitled to different views and opinions and different investment interests, the only thing with you GC is that you say all this stuff like its gospel and a one way bet. Sadly these things often bit you in the ar5e. I could show you many charts of many things that have outperformed gold, over multiple time frames (admittedly in “funny money”),

    As for hpws comments about B/w investment strategies, clearly this nar nar ner nar nar stuff belongs back in the playground. Or maybe alan, quiet guy, b/wether and myself (to name a few) are all tw4ts and hpw is a shining light… I notice that when alan asks hpw why he is such a prat, the response is deafening.

    GC @ 6 : “Strange, you guys were nowhere to be seen when gold was on it’s merry way from £900/Oz to £965/OZ. Now it’s been routed all the way back to £952/Oz, look who comes out the woodwork to rub it in. Ouch, stop, it’s really hurting!!!”

    Really dont know what you are rabbiting on about, are you really that sensitive? – i didnt think anyone was “rubbing it in”.

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  • As for hpws comments about B/w investment strategies, clearly this nar nar ner nar nar stuff belongs back in the playground.

    Nothing playground about that – it had quite an impact yesterday.

    … I notice that when alan asks hpw why he is such a prat, the response is deafening.

    Now that really was an example of the ”playground”……I think that very few people would respond to playground name calling like that.

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  • The prostitution rests 🙂

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  • The prostitution rests 🙂

    Whatever makes you happy.

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  • general congreve says:

    @42 – Firstly the rubbing in comment, just having a bit of a laugh, don’t mean anything by it. Just livening up the debate with a little bear bating – a bit like they do in the house of commons. 😉

    I’ll admit I don’t follow oil closely, I know roughly where it is is at the moment, but don’t follow it on a daily basis. Due to it’s volatility I think now is probably too high a price to be investing in it. I thought about it investing around $70 a barrel, decided not to, thought I’d had a lucky escape when it dipped back down, then it turned around and bust through $100! But like I said, if it drops significantly from here, I’ll probably have a punt. However, if it does drop, I’d put it down to slowly global demand due to economic slowdown and the whys and wherefores of speculators (and what their flavour of the month is), but not deflation.

    Why? Because ‘Deflation’ is a con. Deflation actually means a contraction of the money supply, does it not? And yes, that leads to falling prices, because there is less money available, money has disappeared from circulation! However, just because the rate of the supply of credit supplied to the market has contracted (note: the rate, not the credit itself), this will not cause deflation, in the the true sense.

    Think of it like this. Bank creates money on balance sheet and lends money to customer, customer spends money in economy, maybe buys a house for example, previous home owner takes newly created money as payment. That new money is now feral in the economy. Just because the bank realises it’s made bad loans and stops the credit creation tap, it doesn’t mean all the previous money they created suddenly evaporates, does it? Sure, house prices will deflate (this is what the are really talking about when the erreneously talk of ‘deflation’), but house prices are just notional price tags based on the availability of ‘new’ credit, they have no affect on the money supply, which is just the same as it ever was.

    So, yes, the withdrawal of easy credit will impact certain asset classes, like houses, whose purchase was primarily funded through credit, but it will not cause a contraction in the money supply and therefore will not cause a general contraction in prices, only in over-leveraged asset classes.

    Side note: By the way, few investors are buying gold on leverage, the CME has made sure of that with their recent margin hikes on futures, so the potential for a ‘bubble’ bust, even if this were normal times, is far lower than a leveraged market like housing.

    Meanwhile we have central banks adding to the money supply to bailout banks and governments. The future is inflationary. So, we may see a dip in commodities from here, I think some of the speculative heat will have to come out for a while, that is only natural as people bank profits. But the inflationary pressures that lie behind that speculation (more money being created causing inflation, fear of inflation etc.) are still there. So, while we will see corrections, I don’t think we will see commodities crash back down all the way to whence they came.

    As for gold, as a monetary metal, more than a commodity, I see the pattern of bullish runs, followed by small consolidations continuing until the wheels fall off the global economy. And they will fall off, whether it is a so-called ‘deflationary’ collapse or more likely an inflationary collapse induced by insane money printing in an effort to avoid the former (i.e. save banks and over-indebted governments from direct default). When the wheels finally do come off, we will see fiat currencies collapse in value, either through sudden devaluation, creeping inflation or a combination of both and as a result gold will rise dramatically at that point. After that, we have to wait for the dust to settle. If the powers that be decide to go to a gold backed world reserve currency, then gold will probably never be a sell in the true sense of word, as it will be money (with much more purchasing power than it has now). The only reason you would ‘sell’ it at that point is to exchange it for something else, not ‘bank profits’, as it will be money itself – personally I expect I would be looking to buy yielding assets at that point. If the powers don’t go for a gold-backed currency, then we will have to play it by ear, but in that scenario I find it difficult to see gold losing its lustre after the present lot of fiat currencies have bombed.

    So, that’s my fairly comprehensive overview of where I think things are going, comments much appreciated.

    By the way @15 – You’ve got to admit, you’re sitting on the fence there a bit, gold might go down and then up, but it might just go up? A bit of covering all bases going on there 😉 Personally I think we will never see it in the low to mid $1400’s again. Just maybe it might break as low as $1470 before rebounding, such is the pattern that occurs in this bull market, but I can’t see it losing $100 an ounce from here its recent $1550 high. So, looks like we’ve got a sort of bet on now!

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  • GC – im just a bit surprised in as much as exactly who you were baiting.

    The premise of your argument is that governments will continue to maintain a zero IR policy and will try to “print” their way out of trouble. Fair enough and respect for you to have the courage of your convictions and putting your money where your mouth is. I agree also that a contraction in money supply is deflation. AS for the money previously created not evaporating what do you think happens when there is default? This is where i like in particular the work of Keeno. A very brief video will explain his position. http://www.youtube.com/watch?v=4SJeOplfPEs

    The real difference in opinion is that you believe they can create credit which will offset deleveraging ad-infinitum. Yep thats a view, but its one to which i dont subscribe. Of course they MAY do some more but i think there are limits – not in a practical sense but in a political sense.

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  • general congreve says:

    @48 – Well you did imply gold had crashed yesterday, well it had only lost £10/Oz 😉

    Will watch the video, because maybe I’m missing something and will get back to you.

    But in the first instance, all default means it that money that is notionally owed to someone at some point in the future isn’t forthcoming. The money that was actually loaned that was defaulted on is still out there, so there is no contraction in the money supply. Look at it like this:

    1. Bank creates money
    2. Loans money to mortgagee
    3. Mortgagee spends money on house
    4. Former house owner takes money
    5. Former house owner spends money
    6. Money is now feral in the economy
    7. Homeowner loses job, can’t pay bank
    8. Bank goes bust
    9. Money disappears into a black hole? No, money still in circulation, but bank is bust.
    10.But surely all those savings at the bank have disppeared though?
    11.No. Bank creditors move in and strip assets for payment, including depositers money – so that money is still in circulation.

    Or:

    1. Someone lends money to a government
    2. Government pay money it didn’t originally have to public sector worker (inflationary!)
    3. Public Sector Worker spends money
    4. Money now feral in the economy
    5. Lenders decide not to lend more money to government as don’t think they will see money again
    6. Short of money for fund their bloated debt-funded payments, government defaults!
    7. Existing lenders don’t get paid back.
    8. Money originally loaned by these lenders disappears in flash of smoke? No. Money is still in circulation, as it was spent.

    As you can see, no actual real money was harmed in the making of these examples.

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  • No GC – i was not implying that gold had crashed. You no listen :). I do have gold, as i have said many times on here. But i did sell a fair chunk in March 2008. In any case, I was just saying that perhaps the falls (more in oil than in Gold really) was just indicative of the reflation coming to an end. The markets are always ahead of the curve.

    As for your argument, how then would we ever get a contraction in money supply?

    you may or may not agree with the following but its interesting IMO nonetheless : http://www.bullnotbull.com/archive/primary-precondition-deflation.html

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  • Mark, Bellwether
    Cancelling the debt (or at least enough of it) is clearly the right policy if the alternative is loans to cover the payments, for obvious reasons. However, the fact that mankind’s total wealth is not affected does not imply there will be no adverse consequences. What if your pension fund holds Greek bonds, for example, or your bank is sufficiently exposed (the the redistribution) that there will be a run on it?
    Nick

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  • The real difference in opinion is that you believe they can create credit which will offset deleveraging ad-infinitum. Yep thats a view, but its one to which i dont subscribe. Of course they MAY do some more but i think there are limits – not in a practical sense but in a political sense.

    I don’t think there is a limit. Believe, they would not want the alternative, and they have shown this many times. If interest rates starting rising, there would be anarchy.

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  • @techieman, GC
    Is not the contraction in money supply the tendency of banks (especially dead ones) not to issue loans in adverse economic conditions? Meanwhile debt paid down cancels the initial credit created (otherwise, why are money supply and debt stock pretty roughly equal?).
    If a bank goes bust, every ‘homeowner’ who has not lost his job still has to pay his mortgage to someone else who has taken over the dead bank’s assets, who is cancelling principal and accumulating interest. The dead bank is therefore cancelling credit but not pumping out new loans.
    Nick

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  • true Nick , but say a business fails… what happens to those debts? The corporate no longer pays the debt as there is no-one left to pay the debt, if it was liquid it wouldnt be liquidated. What about bancruptcies or IVAs?

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  • Sure, or if a mortgage payer spontaneously combusts it is even clearer… but the banks are the ones who expand and contract the money stock. I’d guess those cases of feral money have a pretty minor influence compared to banks on the overall flow volume.

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  • general congreve says:

    @50 – OK fair enough, my mistake Techie! As for how do we ever get a contraction in the money supply? That’s a straw man if ever I saw one. But in answer you get a contraction of the money supply when money is taken out of circulation, i.e. if the BoE took a load of billions worth of notes and burnt then in a big pile. As opposed to printing more of them.

    @51 – Exactly. It’s about wealth rebalancing, not being destroyed. So what happens if your pension fund is holding Greek Bonds? What happens if our pension is holding gold? These are the sort of questions that are at the heart of this crisis, as the answer to such questions determine the future distribution of wealth in the world.

    @53 – A contraction in new lending is not the same as a contraction in the money supply, the money supply just stops growing at the same rate. You make a good point on loans being repaid and therefore new credit being a zero sum game in terms of money supply, let’s explore that further:

    1. Bank A creates and loans money to loads of mortgagees
    2. Mortgagees spend money on houses and sellers at the ends of all those chains take the money and spend it – money supply expands
    3. Housing bubble bursts
    4. Huge numbers of mortgagees go into default
    5. Bank doesn’t get enough money back on loans to stay solvent and goes bust
    6. Banks assets (loan book) are bought by Bank B for pennies on the pound
    7. All defaulted money is still feral, it will not be cancelled by being repayed
    8. Mortgagees who can still pay their inflated mortgages do so to Bank B
    9. Bank B takes the money, but it only has to cancel out pennies for all the pounds it is getting in from those remaining mortgages.
    10. Overall result, more money in the money supply than when we started at 1.

    Maybe I’m wrong, but I just can’t see money supply shrinking in this scenario. Which, incidentally, is the scenario the world finds itself in now.

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  • So i take it you didnt watch Keeno! :). Yes the central banks can push in money and it may or may not compensate for private sector de-leverage. Whatever scenario you paint the fact remains you think they will compensate and i think they wont.

    In any case the point is that M3 DID contract. See my latest by Keeno today for more info.

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  • @ 52 – fair enough! “I don’t think there is a limit. Believe, they would not want the alternative, and they have shown this many times. If interest rates starting rising, there would be anarchy.”

    All i am doing is stating that you and i have a different opinion in that regard. So far – obviously – you have been proved right, i quite agree, but whether you will go on being right or not is the debate. However you have gone 2 stages in the opposite direction 1. sell back the assets 2. increase IRs. in fact 3 stages because if things get worse you expect them to increase asset purchases. “printing”.

    infact GC, this is another way to contract M3 – i.e. reverse QE. Which obviously they would love to be able to do but the state of the economy means they are unable to do so.

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  • general congreve says:

    @57 – You are right I didn’t watch your Keeno post, I will do so shortly. But I wasn’t talking about central banks in my example, I was talking about any other institution who can buy up those assets (the loan book) in a free market. Of course, we are not currently in a free market. What we have that is BoE, FED etc. using QE in an effort to solve bank solvency issues, see here:

    1. Banks are in trouble because economy is shrinking and their loan books are in the red
    2. No one wants to buy their sh1tty loans book at the amount they CLAIM the are worth (because they are not worth that much)
    3. Banks are in big trouble, they are insolvent!
    4. Central Bank steps in as buyer of last resort, prints money, buys bank assets at CLAIMED value to recapitalise banks – this is QE
    4. Hurray, the banks are now solvent! Central Banks plans to sell assets back to market when economy recovers for CLAIMED value.
    5. The economy, which was built on credit sand, unsurprisingly continues to collapse.
    6. The Central bank is left with a load of sh1tty MBS’s, Bonds etc. that are not worth the money loaned on them.
    6. Banks are in even more insolvency trouble as economy continues to collapse
    7. Central bank plans even more QE!
    8. Central Bank ends up with loads of sh1tty assets no one wants to buy and therefore much of the original loaned money is feral and never gets cancelled.
    9. Inflation of the money supply has taken place.

    If they halt QE and ZIRP, we will see just collapsing asset values, I then refer you to @56, where the private sector will mop up for pennies on the pound and money will not be destroyed either.

    I will now watch Keeno and see why I am wrong! 😉

    they have printed money, acted bought assets from the bank at

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  • general congreve says:

    @59 – Ignore that last sentence!

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  • general congreve says:

    @57 – OK it was an article, a very good one, on ‘asset deflation’. He dealt with the value of stocks, bonds and property deflating. Not the money supply. In this paragraph he talks about the zero sum game of lending and what happens if there is default:

    A similar dynamic holds in the creation and destruction of credit. Let’s suppose that a lender starts with a million dollars and the borrower starts with zero. Upon extending the loan, the borrower possesses the million dollars, yet the lender feels that he still owns the million dollars that he lent out. If anyone asks the lender what he is worth, he says, “a million dollars,” and shows the note to prove it. Because of this conviction, there is, in the minds of the debtor and the creditor combined, two million dollars worth of value where before there was only one. When the lender calls in the debt and the borrower pays it, he gets back his million dollars. If the borrower can’t pay it, the value of the note goes to zero. Either way, the extra value disappears. If the original lender sold his note for cash, then someone else down the line loses.

    Let’s look at that again, lender STARTS with a million dollars, either is gets paid back, or there is a default and someone else ends up with the money, net expansion to money supply ZERO.

    Now what if that creditor is a bank that has CREATED that million dollars. Either it gets paid back and cancelled, ergo no expansion of money supply, or it is defaulted on and the money in now feral. Therefore expansion of the money supply by a million dollars.

    Sure in a widespread default situation, the likes of which we are on the verge of, and only QE and ZIRP are preventing (inflationary), previously inflated notional asset values bomb (houses, stocks, bonds), but there is NOT deflation of the money supply, because the loans on those assets were created from nothing and are now feral, so will no longer be cancelled out.

    So what? You say! Gold is an asset, surely that will deflate too?! But it is a monetary metal that moves in the opposite direction to the value of fiat currencies (which are going down in this scenario because their supply is expanding). It is also an asset that is for the most part not bought with credit, so debt deleveraging will not have any lasting impact on it’s value (unlike houses).

    What do you say good Sir?

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  • general congreve says:

    @62 – This is why the future will be bi-flationary for a while. Credit-inflated assets will deflate in price, due to new credit drying up, all other assets will rise in price due to the inflation of the money supply. Eventually an equilibrium will be found, once the supply of credit and money become stable.

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  • GC
    A fall in the rate of new lending does cause a contraction overall. Take it to its extremity – all banks stop lending completely, trying to rebuild their loan books. But all loans to still sovent individuals and businesses are still collected, whereupon the principal on the loans is liquidated. Net result will be falling stock of money in circulation.
    N

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  • hpwatcher – the sound of your one hand clapping is hardly inspiring…

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  • general congreve says:

    @63 – Yes, loans repaid net to zero. Those that aren’t go feral and inflate the money supply. Now, what we also have to remember is that in an economy that depends on new debt to continue operating, if banks stop lending to consumers, many of those previously solvent leveraged businesses go boom too.

    Result, a massive depression with a huge level of default across the board. Defaulted money goes feral and is never withdrawn from the money supply. The banks go broke due to the level of default. The creditors gobble up the savings held by the bank as collateral against their losses, no money lost there. Then along come GC and NickB Enterprises and buy up the loan books for pennies on the pound. The outstanding solvent loans are then repaid to us. We didn’t create the loan on our balance sheet, we’ve just bought the right to collect the outstanding loans. So do we burn the most of the money we get back for the sake of keeping the money supply stable? Do we hell!

    End result is that a huge ‘deflationary asset collapse’, in a credit-fuelled economy where those assets values were the product of mushrooming credit, is inflationary for the money supply, not deflationary.

    If you need more evidence look at Iceland. The banks collapsed, the government went broke and what happened? Next year inflation was at 18%! No deflation of the money supply in sight.

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  • GC
    The flaw in your argument, it seems to me, is that those ‘businesses go boom’ because of the fall in money supply. Ergo, money supply has fallen. It’s what Irving Fisher was writing about in the original theory of debt deflation. The experience of the 1930s seems to bugger your theory, sorry!
    Nick

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  • GC
    There is a beautiful (well, sick really) natural experiment going on right now that illuminates all this. Ireland versus Iceland. Ireland is experiencing debt deflation and Iceland some inflation – but only because of the devaluation of its independent currency. I wonder what the comparative situation is for prices of imported and domestically produced goods in Iceland. This is why the UK could in principle end up in a mess such as that in Iceland, but not such as that of Ireland.
    http://www.investmentpostcards.com/2010/12/06/ireland-vs-iceland-deflation-vs-devaluation/

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  • general congreve says:

    @66 – I’m not saying all businesses go boom, just enough to sink the banks. Defaulted loans stay in the money supply and whoever buys the loan book from insolvent banks just keeps all the outstanding loan income as it is paid back, so no deflation in the money supply.

    Yes, there was an economic depression in the 30’s, but if there was really deflation in the 30’s, how come gold was suddenly revalued from $20.67/Oz to $35/Oz in 1934. Sure it was a deliberate devaluation of the dollar by the US govt., but just why did they do that if the money supply was shrinking? Surely gold would have gone down in value, not up?

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  • general congreve says:

    @67 Devaluation/Inflation, two sides of the same coin. You do not want to be holding cash in either scenario, but gold will benefit in both.

    Let me read the article on Ireland/Iceland and get back to you, currently a bit busy, but will reply.

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  • Gc excuse am using phone. No the video is at 48. End of 2nd para.

    T heissue is the amount of private debt. IF THAT delevers in a big way then govs responses is p1ssing in the wind. As I said watch the vid. Night.

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  • GC – as i said here: http://www.youtube.com/watch?v=4SJeOplfPEs 5 min video
    Keenos seminar – about half an hour: posted this for hpw but duly ignored (obviously) :).

    Part 1 : http://www.youtube.com/watch?v=E0YC2PLnWRA
    2 : http://www.youtube.com/watch?v=fGnRIgKbKE0&feature=related
    3: http://www.youtube.com/watch?v=dl2rSXaaIao&feature=related

    GC what i posted above (text) is an extract from this : http://www.elliottwave.com/deflation/

    I am not trying to convert you – im not a mormon! [some would say moron but hey we all are entitled to opinions].

    Ok just to give you a flavour for putting my money where my mouth is – i have the following open positions

    Short Eur/USD @1.4622 , 1.4335, 1.4284 [particularly proud of that one as near yesterday’s high] = looking for 1.4060 as a conservative target (if gets there will probably liquidate half – UNLESS it goes up first, then would ignore) – stops are all at B/even. Normal pyramid structure. – i.e. 1.4622 is 4x, 1.4335 is 2x and 1.4284 is x [where x could be anything from 50p per pip to £85 per pip] Current : 14193.

    Short S&P @ 1285. Stop @ 95. Current 1269. As for Gold – i said that i would think we would have down to about 1450 maybe lower, before a final rise up. Where that final rise will end – my method can only give targets once we see how low that wave down goes.As you probably know i have no interest in what gold is worth in GBP but only in USD. Therefore a break below 1500 after it was trading at 1560 a couple of sessions back is, im afraid, in technical terms significant. [regardless of its only 3% or whatever]. If thats in part due to dollar strength (that incidentally a couple of years back posters were telling me the Greenback was finished) then ok.

    Good luck to you and have a nice w/end

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  • general congreve says:

    @70 – Still not had time to read Ireland/Iceland article, bookmarked it though. Thus far though, what I am trying to say is that private sector deleveraging, i.e. just letting the cards fall as they may without trying to print to cover the losses, will still result in inflation of the money supply, vis-a-vis the processes I have listed above.

    Anyway, while not being a man of Prechter – he’s been top calling gold since $300/Oz! – Apparently if you’d started following his calls word for word in 1988 with a million dollars you’d have about $750 now! – I will take a look at the vids too.

    Probably best if we continue this in another newer deflation thread once I have read/watched this stuff so I can roundly rebuff it 😉

    Have a good weekend!

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  • general congreve says:

    @71 – Oh yes, with regards to money where mouth is, I have a little challenge on that on investment returns, if I don’t remember to bring it up, please remind me!

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  • GC – wasnt saying that as a boast or anything. You can track these positions if you want. Was responding to your point about having money in the PMs – to be honest i hate having money on the line, but i can make enough with around 1-5% of my net worth at stake at any one time. Frankly i would never ever consider committing 80% of capital at any one time and never ever to any one commodity. Then again since in effect i am working on margin, i suppose i am controlling a much higher portion of the market – whatever that may be than the 1-5% i speak of.

    As for pretchers performance in gold or anything else for that matter i have always said he is generally way too early on his calls. Recently he did call the low (about 2 or 3 days out) in March 2009, but he has had a couple of bites on the short side for the stock market., which actually i think is fair enough.

    Generally my philosophy is to take alot of toe-dipping and potentially take small losses – you would be surprised how many times i get things wrong, but the big moves put me in the black. Im not saying thats right or wrong – each to their own. Ofc you have to be nimble and you have to have confidence, but my account balance is proof that thetradiong around a position can and does work.

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  • general congreve says:

    @74 – Hopefully you’ll see this reply. Didn’t think you were boasting. It was the fact you say you’ve made some good calls recently reminded me of a recent comment estrader made to me, basically that Peter Schiff (also bullish on incidentally) was obviously a lot cleverer than me because he was a multi-millionaire. Now estrader had misunderstood my previous point (I was not criticising Schiff), but his response got me thinking and I did some figures, because I knew Schiff called the dollar collapse early and lost his customers 40%-70% of their money in 2008. I have no other figures for Schiff’s Euro Pacific Capital fund performance for other years unfortunately, so can’t compare his overall average return with mine. But from my own figures I have worked out I have returned a yearly average over the last 8 years of 13.9% (before inflation). Out of interest, any idea of your own investment returns over the same period?

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  • Tough question to answer. I really dont do averages. All i can say is that 2007 and 2008 were bumper years, 2009 first half was good too but second wasnt, but since then down in 2010 and was about level this year before the trades you see in 2011. [this is all based on realised gains / losses – e.g. i have a basket of cash currencies]. As i said i only have about 1-5% of my net worth on the line at any one time, so on the basis of a ROI based on high gearing the percentages would go per trade – not annualised. To give you an example my typical initial FTSE risk is around 50 points (sometimes less) on the basis of if it goes there it goes lower (higher) still . However i made over 1,000 points on one FTSE position (i.e. im talking about a single position), so on that basis thats a 1,900 percent gain.
    Similarly if the 50 points were lost that would be a 100% loss.

    If you mean a ROI (i.e.not on my net worth) overall i’d probably say around 40% in both 2007/8 and a small gain in 2009 5%. Loss in 2010 of about 20%. Those are all of a simple base capital. For example using £100 start in 2007 i dont say hey i have £140 to use in 2008, so both 2007 and 2008 would be the equivalent of £40. But as i said i dont really do it on those terms. The percentages are on the basis of using up all the margin payments. Most of my money is in less liquid deposits. Sorry if that doesnt answer the question.

    Let me know when you have watched the vids! :).

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  • GC
    Re the US in the 30s, according to eyewitness accounts at the time, there was simply not any (credit) money around. E.g. farmers were destroying produce that could be harvested while labourers were standing idle – for want of money to facilitate the obvious exchanges. Debt deflation gives a perfectly good explanation of these phenomena, whilst on your view they should have been swimming in number money. I’m not sure how the price of gold relates to this, since there could be many reasons for revaluing the $ in gold terms (e.g. supply conditions changing on world markets). Probably best to refer to contemporary accounts, no?
    Nick

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  • general congreve says:

    @76 – Fair enough, I understand it’s diffcult with all the trades you are doing to put a number on it, but thanks for trying to give me an estimate. So we’re saying about a 65% gain over 4 years, so average return 16.25%. Not bad at all, hat tip in order.

    @77 – Well the example of farmers destroying produce because there is no credit might well illustrate the point. Farmers might not be able to sell to traders that formerly bought with credit, so will destroy produce. What does that do for the price of the remaining produce that makes it to the shops when you look at supply and demand to the end consumer. However, I am talking about price inflation there, for money supply inflation during default/depression see nest paragraph.

    There was something I didn’t clarify above. When I was talking about ‘asset deflation’ (caused by default) being inflationary and not deflationary in terms of the money supply, what I meant was that because loans are defaulted on, that money remains in the money supply, i.e. not paid back and zeroed on a bank’s accounts, and is therefore inflationary, BUT only in so far as that money already being in the system in the first place is inflationary, plus any additional price inflation from it being left in the system, thanks to the time lag between rising prices and increasing the money supply. So it is probably not as inflationary as ZIRP for example, but is inflationary and certainly NOT deflationary when we are talking about the money supply.

    As for gold. I jumped the gun on that one with the 30’s example, was in a bit of a rush Friday. Having thought on it, I’m sure the revaluation of gold was the result of a direct devaluation of the dollar. The weakened state of the US economy meant the dollar lost strength and therefore had to be devalued. Of course devaluation is inflationary. This is what I have been arguing all along. If they print and bail we get inflation, if they let the chips fall, we have a depression which severely weakens the economy and therefore will lead to devaluation of the pound. The government will either be forced to devalue the pound to pay its growing debt burden, or the currency markets will sell the pound and do it for us, or both. Being a net importer, this will of course be inflationary as far as prices in the shops are concerned. With regard to contemporary accounts, Iceland is analogous, as I detailed above.

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  • GC
    It’s accepted fact of economic history that there was deflation in the 30s, some debate over why, but monetary contraction seems still to be far and away the leading contender. See e.g. American Economic Review, Vol. 82, No. 1, March 1992, pp. 141-156.
    N

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