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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Quantitative Easing, Money Velocity Inflationary Armageddon

Economics / Inflation Sep 01, 2010 - 04:00 PM GMT

By: DeepCaster_LLC

Economics

Best Financial Markets Analysis Article“The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity of money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.


People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason", causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks…

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr. O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

Some might smile at the Bank of England "surprise" at the recent the jump in British inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.

Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc…

Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding…

Grand pianos became a currency or sorts as pauperized members of the civil service elites traded the symbols of their old status for a sack of potatoes and a side of bacon. There is a harrowing moment when each middle-class families first starts to understand that its gilt-edged securities and War Loan will never recover. Irreversible ruin lies ahead. Elderly couples gassed themselves in their apartments…

Great numbers of people failed to see it coming. "My relations and friends were stupid. They didn’t understand what inflation meant. Our solicitors were no better. My mother’s bank manager gave her appalling advice," said one well-connected woman.” (emphasis added)

“The Death of Paper Money”
Ambrose Evans-Pritchard, The Telegraph, London, 7/25/10

“…it is difficult enough to convince some people that the economy is in fact not providing the security they desire, but is actually destroying their future completely. To explain to them that this is deliberate, that the economy is designed to self-destruct, that is another prospect altogether…

Many people hit a proverbial wall on this issue because they simply cannot fathom that certain groups of men (globalists and central bankers) view money and economy in completely different terms than they do. The average American lives within a tiny box when it comes to the mechanics and motivations of finance. They think that their monetary desires and drives are exactly the same as a globalist’s. But, what they don’t realize is that the box they think in was BUILT by globalists. This is why the actions of big banks and the decisions of our mostly corporate establishment run government seem so insane in the face of common sense. We try to rationalize their behavior as “idiocy”, but the reality is that their goals are highly deliberate and so far outside what we have been taught to expect that some of us lack a point of reference. If you cannot see the endgame, you will not understand the steps taken to reach it until it is too late…

Our government, both major parties, is owned lock stock and barrel. This is why there are no satisfactory answers for the questions posed above. Elements of the U.S. Government including almost every president since 1912 have not only turned a blind eye to Globalist activities, they have offered their full support to the bankers…

Corporate globalists believe in global government on their terms and they barely try to hide it. If someone thinks this sounds “fantastical” then they haven’t been paying the slightest attention. When one understands how Elites view economy, and realizes their primary motivations, the fact that they purposely triggered a collapse is perfectly logical…

We once took a feared king to task. Are a bunch of frothing corporate bankers really so daunting? All that is needed is a principled movement with the will to see justice done, and I believe we have that already.

“The Purpose Behind Engineered Economic Collapse”
Giordano Bruno, Neithercorp Press, 8/17/2010

“The Obama administration appears to be proceeding with a novel way of financing trillion-dollar budget deficits by forcing IRA and 401(k) holders to buy Treasury bonds by mandating the placement of government-structured annuities in their investment accounts.

The requirement to invest private retirement assets has been cleverly buried within plans to create "automatic IRAs" that would mandate employer groups enroll all employees in 401(k) or IRA plans.

The U.S. Department of Labor released yesterday an agenda for an upcoming joint hearing with the Department of the Treasury scheduled for Sept. 14 and 15 on whether government life-time annuity options funded by U.S. Treasury debt should be required for private retirement accounts, including IRAs and 401(k) plans.

WND reported in January that Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry are planning to stage a public comment period before implementing regulations that would require private investors to structure IRA and 401(k) accounts into what could amount to a U.S. Treasury debt-backed government annuity.”

“Government wants your 401(k): Hearings set on plan to require Treasuries in 'automatic IRA'”
Jerome R. Corsi, WorldNetDaily, 8/26/10

Why all the concern about Inflation, much less Hyperinflation?

Isn’t the Private Sector Massively deleveraging? Yes.

Hasn’t M3 been dramatically dropping in recent months (a Major Sign of an Economic Depression BTW)? Yes.

Isn’t the U.S. and Key Major Nations GDP dropping (Real U.S. GDP is a Negative Number per Shadowstats.com – see below)? Yes.

But consider that all of the aforementioned are Symptoms of a Stagnating Economy.

And it is entirely possible to have a Stagnating Economy with Inflation or even Hyperinflation.

Indeed, we already have a word for it: Stagflation.

And there are already Signs.

The Public Sector, especially in the U.S.A. and Europe, is leveraging UP.

Massive Central Bank and Major Government Stimuli resulting in The thus-far-“Inert” (see Quote above), but Burgeoning Repositories of Fiat Currencies which lie in wait, an Eerie Simulacrum of the two Year Calm before the Hyperinflationary Storm in the Weimer Republic.

And another sign -- Real U.S. Consumer Price Inflation is already 8.57%. Indeed, it is at this point that we need to look at the Real Numbers, not the Bogus Official ones.

Shadowstats.com calculates the Real Numbers for the U.S. the way they were calculated in the 1980’s and 1990’s, before systematic Official Data Distortion and Interventions began in earnest.

Official Numbers      vs.      Real Numbers (per Shadowstats.com)

Annual U.S. Consumer Price Inflation reported August 13, 2010
1.24%                            8.57% (annualized July 2010 Rate)

U.S. Unemployment reported August 6, 2010
9.5%                              21.7%

U.S. GDP Annual Growth/Decline reported August 27, 2010
2.98%                             -1.25%

U.S. M3 reported August 14, 2010 (Month of July, Y.O.Y.)
No Official Report             - 5.38 %

Indeed, with Stagflation already with us, can Hyper-Stagflation be far behind?

Unfortunately, the likelihood of Hyper(Stag)(in)flation is all too high.

And if Hyperinflation looms (such as described in “When Money Dies: The Nightmare of the Weimar Hyperinflation”), then we are facing a likely Monetary “Velocity-Armageddon” Spike.

And in that event, interest rates will likely launch into the Stratosphere. And the Value (Purchasing Power) of Treasury Paper to which Corsi refers above (as the prospectively required Investments for 401(k) and IRAs in the U.S. Treasury Securities) plummets. Sayonara to the Retirement Plans and Asset Values of Millions of Savers and Retirees.

So what are the Antidotes to such a Monetary Velocity Spike?

Consider:

A Monetary Velocity Spike Occurs when the populace-at-large losses confidence in Fiat Currency.

If a loaf of Bread cost $10 yesterday and cost $20 today, I am impelled to expend all my remaining Fiat Currency (for Bread or other tangibles) ASAP, before its only value is as Zimbabwe Toilet Paper, as it were.

Note the Key Feature of a Velocity-Spike is a demand for Tangibles and Disdain for Fiat Paper.

So what Survives this Fiat Currency Velocity-Armageddon?

Three Categories of Tangibles Survive, and not only retain Purchasing Power Value, but actually see it enhanced. Gold, Silver and Essential Goods such as Food.

Deepcaster has long been, and still is, an advocate of Gold and Silver, as not only the best hedges against Inflation or Deflation, but also those Investments with the best profit potential. Indeed, The Ultimate Monetary Metals, are our #1 and #2 Selections as the best Fortress Assets for Profit and Protection.

Therefore, Deepcaster has two open ‘Buy’ Recommendations on a particular form of these Metals. And, as Regular Readers know, Deepcaster has for weeks maintained these open ‘Buy’ Positions notwithstanding ongoing and prospective Gold and Silver Price Suppression Attempts by the Fed-led Cartel* of Central Bankers.

Importantly, we assert (as our regular readers already know) that a Fed-led Cartel of Central Bankers and Allies has for years been suppressing the prices of Gold and Silver to prevent their attaining wider recognition as the Ultimate Stores and Measures of Value rather than their Treasury Securities and Fiat Currencies.

*We encourage those who doubt the scope and power of Overt and Covert Interventions by a Fed-led Cartel of Key Central Bankers and Favored Financial Institutions to read Deepcaster’s December, 2009, Special Alert containing a summary overview of Intervention entitled “Forecasts and December, 2009 Special Alert: Profiting From The Cartel’s Dark Interventions - III” and Deepcaster’s July, 2010 Letter entitled "Profit from a Weakening Cartel; Buy Reco; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar & U.S. T-Notes & T-Bonds" in the ‘Alerts Cache’ and ‘Latest Letter’ Cache at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org, including testimony before the CFTC, for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.” Attention to The Interventionals facilitated Deepcaster’s recommending five short positions prior to the Fall, 2008 Market Crash all of which were subsequently liquidated profitably.

However, regarding Gold and Silver, as we indicated several Months ago, The Cartel’s* Precious Metals Price Suppression Capacity has been weakened considerably by Recent Revelations catalyzed by GATA, Deepcaster, and others, that e.g. certain Major Gold Repositories have very little of the actual Physical Metal that they claim they have.

This has, thankfully, led to an increased demand for delivery of and possession of Physical Gold and Silver.

Deepcaster sees this September, 2010 period as critical for The Cartel. Will they continue to be able to suppress Precious Metals Prices? The next few weeks should tell the tale. [To see Deepcaster’s forecast regarding whether The Cartel will be able to reverse the, thus far relentless, advance of Gold and Silver, see our latest Forecast in the ‘Alerts Cache’ at  www.deepcaster.com.]

Indeed, GATA Board member Adrian Douglas makes a very strong case that The (Second) London Gold (Price Suppression) Pool is likely to fail imminently, thus propelling Gold and Silver to New Highs, very soon.

In any event, in the Middle and Long Term, Gold and Silver are the World’s Best Bets to rise dramatically in terms of all Fiat Currencies.

Thus they are the best Antidotes to a prospective Monetary Velocity-Armageddon.

And, in light of the foregoing observations, the prospective Government-Mandated Retirement Fund “Investments” in Treasury Securities are not any kind of Antidote but rather look much like a Confiscation and Asset Degradation.

Morgan Stanley has it right (above), and we repeat: ”Morgan Stanley expects Bond Carnage as this catches up with the Fed, predicting that yields on U.S. Treasuries will rocket to 5.5 Percent…”, as, we might add, their Values Plummet.

We are duly warned.

Best Regards,

By DEEPCASTER LLC

www.deepcaster.com
DEEPCASTER FORTRESS ASSETS LETTER
DEEPCASTER HIGH POTENTIAL SPECULATOR
Wealth Preservation         Wealth Enhancement

© 2010 Copyright DeepCaster LLC - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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