Is It Really Getting Worse?

[charlietwo]

Dave-- Very well stated. I think your assessments are spot-on, and sagely. In regards to affecting change, I have no doubt that things will happen in time, but I do sincerely doubt that time is something that America can afford at the moment. I will definitely look into that book, as it sounds like something I would soak up As it stands now, for the past 30 years, the socialist/communist ideology has taken center stage in all major spheres of influence in this country. The media, public education, universities, Hollywood, etc. have hypnotized the masses into slavery to *something*. Whether it be welfare, television, food, or sports, the majority of the country has become slaves to their own devices. In doing so, they have traded the heavy burdens of democratic responsibility for the comfortable chains of ignorance. *jumps off his soapbox*

Here are a couple of proposed solutions that I see bringing about a change in the slavish atmosphere that has become America--

1) Receipt of public support results in forfeiture of the right to vote until public support is no longer received.
-Welfare would not concern me as much if the recipients weren't voting themselves raises every election cycle. It's become so common now, that to challenge it is to become accused of "racism". Welfare is just another form of slavery, only the chains come in the form of financial support. Absolutely brilliant concept. My hat is off to Karl Marx.

2) Compulsory national service. Any form of service to the state, or nation to organizations agreed upon by the voting population (read: Community Organizers are excluded).
-Judging by what I've seen from the *children* in high schools as a recruiter, servitude to a cause greater than oneself, even if it is compulsory, could do a great deal of damage to the "Me mentality" which is the root of much of America's woes.

3) Taxation without Representation.
-Not sure what to say here exactly, but I do not feel represented in Illinois, as our state policy is set by the enslaved masses in Chicago. It seems to me that since the inception of this great nation, taxes has always been the crux of the issues. I'll pay taxes all day long, provided they are not used to spread the yoke of oppression.

These are my humble opinions, and I present them to all for review, rebuttal, and recommendations. Feel free to pile on, people! I'm enjoying this conversation thoroughly

[Surf n Turf]

Originally Posted by nmap

It will require substantial discomfort (pain) for a majority of the population, such that they choose to reform themselves. Until the environment changes, they will choose to remain as they are.

I think we can be confident the financial and geopolitical environment will change. There are a number of converging possibilities, and unless our leadership and population do a lot of things right, we will experience significant adversity. When that happens (I do not use the term "if"), people will be shaken from complacency, and they will seek solutions.

Nmap, First let me say that after reading your posts, I wish that I had spent more time on composition, and less time on ohms. Extremely well written, logical, and well presented.
I tend to be in general agreement with most of your discussion, but I arrived by a different route.
I wonder if the bottom 40% of income earners who pay no income taxes. (“they receive a net payment from the federal income tax system -- meaning from the taxpayers -- equal to 3.8% of all federal income taxes”) will reach a majority. If they do, then we are doomed. If you pay no taxes – what is wrong with a tax increase? Then we will have “social adjustment” on a scale not seen since October, 1917.
SnT

[nmap]

Originally Posted by Surf n Turf

I wonder if the bottom 40% of income earners who pay no income taxes. (“they receive a net payment from the federal income tax system -- meaning from the taxpayers -- equal to 3.8% of all federal income taxes”) will reach a majority. If they do, then we are doomed. If you pay no taxes – what is wrong with a tax increase? Then we will have “social adjustment” on a scale not seen since October, 1917.
SnT

Thank you for the kind words!

We will reach that tipping point. I believe I can even predict the year - about 2012. I hasten to add that this has nothing to do with Mayan calendars.

The problem lies in demographics; in this case, the fundamental design of the Social Security program and the aging baby-boomer generation. A steadily increasing number of boomers will apply for Social Security benefits.

The problem with the so-called Social Security trust fund is that there isn't one. Money comes in, and the excess is used to purchase Treasury Bonds. Money goes out in the form of benefits. But in 2012 (roughly) the amount that comes in will be less than what goes out. Where does the U.S. get the money to cash in those bonds that have accumulated? Only through budget deficits and the printing press. (You can read more HERE. ) Which means that a large number of people will become net recipients of money from the government.

None of this is any surprise. I read about it more than a decade ago in Barron's. You will notice that the link is dated in 1996. The problem has been recognized and discussed for quite some time, nothing has been done, and now we will face some painful choices.

We can cut benefits, raise taxes, debase the dollar, or some combination of all three.

It gets worse, too. The boomers (or those acting on their behalf, such as pension funds) will sell stocks, bonds, and other assets. This will tend to depress the price of those assets for decades. At the same time, the boomers will continue to consume - but they will not produce much. This suggests inflation.

So, yes, we can expect social confrontation and upheaval, in my opinion.

Originally Posted by Broadsword2004

nmap, how does inflation help the value of assets like property, stocks, etc...go up? Wouldn't that help most people who own a home and own a portfolio or a 401K, etc...?

Owning a single home doesn't help much. Let's suppose a person buys a house for $250M and lives in it. Some years later, it's worth a million. Has the person made money?

They sell the house and get their million, less costs and some taxes. They now need a place to live - but other properties have increased in value too. Have they gained?

Granted, they can choose a smaller house. Also, they can move to a less expensive location. In each case, they are doing something besides just selling.

They may have a 401K and other investments. The question is, how much? If someone has $250M invested, what can they withdraw consistently? As I recall, the insurance industry regards 6% (before inflation and taxes) as quite good. Another source suggests that 4% is better. ( LINK ).

So, let's use 5%. That provides an income of $ 12,500 per year. If we suppose about $15,000 per year from Social Security, we get $27,500 per year. We haven't allowed anything for inflation. This looks like a fairly modest income for a retired couple with some medical expenses. Inflation - say, of gasoline prices, or grocery prices - will hurt them.

Can our hypothetical couple afford risk? Do they dare invest in precious metals or commodity ETFs? I suspect not.

In contrast, someone with more - say, $100MM - could live well on a million per year, while investing the remaining income. As I understand it, the Bass brothers in Texas buy large tracts of undeveloped real estate. They hold it for decades, pay low taxes, and sell it as growth causes it to appreciate. In one case, inflation erodes purchasing power, whereas in the other it increases the value of assets. This becomes even more powerful with leverage - so the person can make high returns.

The leverage dynamic was the particularly seductive part of the housing bubble. People could put a few dollars down and experience fabulous returns on their actual investment. However, they lacked holding power. I have no doubt some of those foreclosed houses will be worth more a decade into the future - but that doesn't help someone who can't make the payments.

Can someone making a middle-class income accumulate assets and make the transition? Sure. But few do. The Federal Reserve published a paper (HERE) that discusses net worth. On page 11, table 5, it points out that (as of 2004) the top 5% of the population had 57% of the net wealth. The bottom 50% has 2.5%. Notice how this comes back to Surf n Turf's point - in trying to encourage an ownership society, we face the problem of half the population owning very little. This may represent a further possibility for social upheaval.

None of this is meant to say that the distribution is "good" or "bad" - but I can imagine it creates a difference in perspectives.

[nmap]

Originally Posted by Broadsword2004

Maybe there are two types of inflation though, the inflation that's bad for the middle-class but can help the wealthier, but the wealthier world also has its own type of inflation apparently...?

As I look at my previous post, I see that I did a poor job of explaining. Please let me try again.

I perceive four issues. These include sensible leverage, patience, opportunity (scale), and investment management.

Sensible leverage means using leverage as tool, but within bounds that optimize the rate of return versus the risk. We've seen examples of houses purchased with essentially no money down. This offers the benefit of high leverage, but unless the purchaser has substantial means exposes the owner to the risk of loss. A further example might be commodity futures. Once again, the purchaser takes a position with a leverage ratio of 20 to 1 or more, implying equity of less than 5%. If inflation in the particular asset produces a significantly higher return than the cost of holding the asset, such as interest, then leverage multiplies the returns.

As long as leverage works as planned, the results are beneficial. Thus an individual who purchased an expensive house with no money down would gain far more (on a percentage basis) from the appreciation than the rate of inflation represents. For example, if the person purchased an item for $100, and put down one dollar while financing the rest, the effect of a 10% move in the underlying investment from $100 to $110 increases the value of the actual money invested from $1 to $10. Thus, in this particular example, a 10% inflation rate would generate a return of 1000% less carrying costs and interest. If an individual owns a single house, then the increase is of little benefit. However, if the individual owned a dozen houses, then the return, along with the benefits of leverage, could produce significant returns in excess of inflation.

Once again, the term sensible must be emphasized. Prices fluctuate, even for houses. If the purchaser has the means and personality to hold the investment over the course of years and decades time may overcome temporary price declines. However, in the case of high leverage and limited means, the individual can lose the underlying asset due to temporary fluctuations in price and availability of credit. We can see an example in the present housing situation.

Patience is the next issue. A person that obtains raw undeveloped land and is prepared to wait half-a-century for growth in surrounding population centers to reach the area, benefits from both inflation and an increase in desirability of the property. Furthermore, patience can overcome temporary price fluctuations as discussed above. We can see an example in the current stock market fluctuations. There is a very good chance the person who purchased stocks at any given time would see excellent appreciation over a time frame of 70 years. (This reference is from Bullseye Investing by John Mauldin). Most of us have a shorter time horizon. Thus, a retiree with a 401(k) who depends on income from the investment does not have the luxury of patience. Furthermore, even someone with the time horizon of 20 years could experience a significant degradation in investment return if they acquire stocks that are expensive relative to historical valuations. Many middle-class people do not have the financial capacity to exercise such patience. Contrast this with those who manage generational transfers of significant wealth.

The third issue is opportunity, or scale. Those with significant means have the opportunity to invest in instruments or businesses that offer superior returns, and which are often unavailable to smaller investors. For example, both the Bush family and T. Boone Pickens have acquired properties with substantial rights to water beneath the land. There are some who believe that water will be every bit as important an issue in the future as oil is today. Thus, those who acquire large properties with substantial water rights may experience excellent returns over the next half-century. However, such options are only minimally available to ordinary investors. While it is true that an exchange traded fund (ETF) named PHO does offer some limited exposure to this area, it is sadly deficient when compared to the acquisitions mentioned above. A further example can be seen in the wind generators in West Texas. Investment partnerships and hedge funds can invest in the generators, sell the electricity, and enjoy tax benefits. I am unaware of any such opportunities for the ordinary investor.

Finally, the issue of investment management from the perspective of the wealthy investor provides insight into the issue you mention. First, an anecdote. Some decades ago, I knew a young and pleasant attorney who happened to manage a few investment trusts. Unfortunately, he was tempted to borrow money from the funds under his management. As is not unusual in such cases, the borrowings grew until they could never be paid back. He was caught, prosecuted, convicted, and served time in prison. While justice was done, the clients who trusted him and placed money in his hands lost their money and never received restitution. They never will either; the young attorney was murdered in his apartment not long after his release from prison. From the perspective of wealthy investor, this represents a warning. Money placed with individual trustees is at risk. One might decide to use a bank or other large institution as the trustee. However, such trustees are likely to be highly conservative. They may well place all the money in bank certificates of deposit, treasury securities, and highly rated bonds. In the case of banks, a large and stable investment in certificates of deposits represents a benefit to the bank. The recipient of such yields is in the same position as an ordinary person invested in similar instruments. In fact, the wealthy beneficiary of the trust may be a worse position. The securities do generate an income, but the yield on conservative instruments such as mentioned above is likely to be less than the actual rate of inflation. In addition, trusts charge fees that will reduce the yield to lessen inflation. Therefore, the account given in the book you mention is completely valid.

What does this mean for the rest of us? In my opinion, we should observe and take a lesson from those who make inflation work for them. We may not be able to gain access to the same opportunities they have, and we may not be able to exercise the patience they can; however, if we are aware of the effects, we can perhaps adapt the knowledge to our own use.

[Surf n Turf]

Originally Posted by nmap

The problem has been recognized and discussed for quite some time, nothing has been done, and now we will face some painful choices.
We can cut benefits, raise taxes, debase the dollar, or some combination of all three.

It gets worse, too. The boomers (or those acting on their behalf, such as pension funds) will sell stocks, bonds, and other assets. This will tend to depress the price of those assets for decades. At the same time, the boomers will continue to consume - but they will not produce much. This suggests inflation.

So, yes, we can expect social confrontation and upheaval, in my opinion.

Nmap,
Several queries / comments:
By cutting benefits, I assume you are describing “means testing” eligibility. Would this not make the Social Security / Medicare programs pseudo “Welfare Systems”, in that the larger contributors would receive no benefits for their contributions. Additionally, wouldn’t this make “voluntary contributions” to either program less attractive, when one realized they are unlikely to benefit from their contribution?

By raising taxes on these programs, the taxes would be directed to the group described above, who are “means tested” out of the programs. Again, wouldn’t the same arguments be made for raising taxes for programs, that a significant portion of the population would be proscribed from participation?

By debasing the dollar I am not sure if you are suggesting inflation or deflation. There are certainly signs of inflation (to much money chasing to little goods), but with the current overstocked housing market & Automobile market, plus the credit card default increases, are we not setting the stage for deflation (To much goods chasing to little money). Plus, as you point out, the Boomers will sell stocks, bonds, and other assets for subsistence. Isn't that deflationary?

If we are to expect social confrontation and upheaval, I have two queries:
Based on the above, where / how do people plan their finances to maintain purchasing power.
Based on the above, where and how do people live in order in minimize upheaval?

SnT

Post Script - "There is no known example, in the history of the world, where a fiat currency was debased in a wild fractional-reserve multiplication by the greedy banks that did NOT end badly. And 100% of the time is as close as you can get to 'guaranteed'." Hyman Minsky

Originally Posted by rubberneck

Yes, 1972 to 1980 were pretty dark times. High unemployment, run away inflation, mass gas shortages and there was a very large segment of our society that indulged themselves in self loathing. In fact those young people are now the clowns running one of the two major parties, but I digress.

Not for me! Life was good at that time for me. I started a new business in '72 in NY, sold it and "retired" to Florida in 1978. I did beach and bar recon for a year before coming out of retirement and starting another business...life was great.

I didn't find the gas shortages to be much more than a minor inconvenience... I don't recall anyone I knew not having enough gas to get to work or other places they needed to go. I had more than enough to tool around in my gas-guzzling Big Block Vettes. Yep! For me, those were the good old days!

Free Love and The Sexual Revolution didn't end in the 60's!

[nmap]

Originally Posted by Surf n Turf

Nmap,
Several queries / comments:
By cutting benefits, I assume you are describing “means testing” eligibility. Would this not make the Social Security / Medicare programs pseudo “Welfare Systems”, in that the larger contributors would receive no benefits for their contributions. Additionally, wouldn’t this make “voluntary contributions” to either program less attractive, when one realized they are unlikely to benefit from their contribution?

Means testing is only one option. It is possible to reduce benefits for all future retirees (as was done back in 1983.) The reduction could be accomplished by changing the way benefits are calculated, increasing the retirement age, or making more of the benefits taxable. One could also lower the income trigger that starts taxation of benefits. Yet another way is to change the way inflation statistics are calculated, with official numbers providing a lower figure for inflation than did the previous method of calculation (which has already been done).

Each of these moves us incrementally closer to your scenario. A more rapid transition is incorporated in the Obama plan, since it removes the upper limit on social security taxation of income. It seems unlikely that upper income earners will receive payments proportional to their contributions.

So, yes, those contributions become steadily less attractive. This will surely cause some to seek ways to avoid such taxes, and may encourage some to consider illegal tax evasion. The underground economy, with its emphasis on cash transactions, is likely to become larger.

Originally Posted by Surf n Turf

By raising taxes on these programs, the taxes would be directed to the group described above, who are “means tested” out of the programs. Again, wouldn’t the same arguments be made for raising taxes for programs, that a significant portion of the population would be proscribed from participation?

Sure. That’s the fundamental reality of “spreading the wealth” or income redistribution. Right now, the increase in Social Security taxes is an easy way to raise a great deal of money in a manner hidden from most wage earners. It is interesting to note the proposed increase in capital gains taxes from 15% to 20%. I strongly suspect we will see others, just as you suggest.

Ironically, the victims in all this are middle class people who earn a paycheck through an employer. The truly wealthy will have the means to choose other (often better) options. The poor (however defined) will benefit from the programs. In addition, both the wealthy and the poor can shift away from traditional paychecks to other approaches. In the case of the poor, cash compensation as part of the underground economy might work. The wealthy can use approaches that avoid ordinary taxes. The middle class, however, are trapped.

Originally Posted by Surf n Turf

By debasing the dollar I am not sure if you are suggesting inflation or deflation.

My meaning was (and for that matter, is) inflation. As the supply of dollars increases, inflation follows. Present trends bring that view into question; however, I regard the present governmental deficit spending pattern as a prelude to future inflation. We’ll see how that works out.

Originally Posted by Surf n Turf

There are certainly signs of inflation (to much money chasing to little goods), but with the current overstocked housing market & Automobile market, plus the credit card default increases, are we not setting the stage for deflation (To much goods chasing to little money). Plus, as you point out, the Boomers will sell stocks, bonds, and other assets for subsistence. Isn't that deflationary?

Yes – we are going though a remarkably strong period of deflation. I wonder if the failure of various assets has not destroyed money at a rate even faster than the Treasury and the Fed can generate it. If we enter a global deflationary cycle, matters will become, quite frankly, bad. We live in a debt driven economy, and the liquidation of hundreds of trillions (yes – seriously. Hundreds of trillions is not a typo) of debt would destroy the monetary system.

There is another possibility. The current deflation may be a side-effect of debt and asset liquidation coupled with a flight to safety. I’ve attached a chart of the U.S. dollar index. Notice the rapid appreciation. This begs the question – why?

In a monetary crises, where does one put one’s money? In Switzerland? Maybe. But they have (as I recall) a deposits to GDP ratio of 7. Iceland was at 9. Iceland is not turning out well, with talk of defaults and lost depositor money. Is Switzerland better? That’s hard to say.

Europe seems strong, but we’re already observing some internal stresses among the EU nations. Japan seems strong. But notice that there are few truly safe places to put money, and the U.S. seems like one of the best, leading to people putting their assets into dollars.

In addition, much of the debt being liquidated is denominated in dollars. This means that debtors must buy dollars, putting upward pressure on the dollar. It also means that other assets must be liquidated – and I cannot help wondering if that isn’t part of the reason stocks, oil, gold, and other assets continue down. Hedge funds had 30-to-1 leverage, and they weren’t the only entities that used that dangerous tool. So the present price action may be an artifact of market reaction to unwinding all these positions.

Still, based on the present price action, the case for deflation is strong. If prices continue lower, and if unemployment starts forcing wages lower, then we are likely to experience a deflationary spiral that could last for years – or even a decade. Such a period will be memorable, and is likely to share characteristics of the 1929 depression.

Originally Posted by Surf n Turf

If we are to expect social confrontation and upheaval, I have two queries:
Based on the above, where / how do people plan their finances to maintain purchasing power.
Based on the above, where and how do people live in order in minimize upheaval?

This is no small problem. From the standpoint of maintaining purchasing power, we face two contradictory scenarios. With inflation, cash (here, cash includes bank CDs, treasury securities, and other high-grade debt instruments) are all wasting assets. Tangibles, including gold, land, and even stocks will generally appreciate along with inflation. However, with deflation, tangibles decline, and the value of cash increases. A bank CD is better than gold, land, or stocks. These do not consider social upheaval.

Our problem is finding a way to prepare for both scenarios at the same time – which means, we must allow for an internal contradiction in our expectations. A strategy that works for one scenario is wrong for the opposite situation. One approach that might fit someone with deep concerns about the economy would probably allow for about 80% of assets allocated to insured bank accounts and treasury securities. Perhaps 20% could be placed in physical gold coins. One well-respected newsletter advocates precisely this approach (Dow Theory Newsletters by Richard Russell). Others take a more dire (or, perhaps, apoplectic ) position and suggest that present trends suggest complete monetary failure. Karl Denninger is an example, and you can read some of his thoughts HERE. He has some interesting arguments. These couple well with your concern over fiat currencies.

Social upheaval is an additional factor. This can range from complete breakdown, as in Somalia, to a few riots and increased crime rates. This is an interesting problem in that one must examine our society critically, and come to a conclusion about both the severity of the problem, and the likely reaction of the general population to such problems. My personal view is that matters will not degrade as badly as some suggest, and civil society will continue, although with greater risks for crime.

Personally, I have doubts about my ability to protect a substantial cache of gold coins, so my emphasis is on undeveloped land. On the negative side, it is has far less liquidity than gold and no transportability. On the positive side, it is harder to steal. I like bank CDs and FDIC insured bank money market funds. Some mutual funds, a few stocks, and some commodity ETFs (all down since the first of the year) round out the position. In essence, I assume that deflation will be temporary, that the dollar will not be destroyed, and that inflation will return. In addition, I suppose that upheaval will occur but within limits. Your mileage will probably vary.

By the way – again, purely my opinion – the next problem we will see is the decline of the Cantarell oil field, and hence revenue for PEMEX in Mexico. Combine a general economic slowdown with problems for PEMEX revenues, and one has the potential for 100,000,000 people to face desperate circumstances. Such a situation might create instability in the border regions. I hope to finish up my degree work in just under two years, and I intend to look seriously at locating further away from the border. Once again, your mileage probably varies from mine on this issue.

I have attached two charts. One represents the value of the dollar. Notice the recent sharp appreciation. The second chart is the Baltic Dry Index, and is a measure of the cost of shipping dry goods. As such, it provides some indications on the level of global trade. Further declines in trade could trigger long-term deflation.

Notice the effort in Argentina to seize private pension assets. LINK. T he actions taken by FDR are worthy of reflection.

[Surf n Turf]

Nmap,
Your post required that I take several pages to respond
SnT

Originally Posted by nmap

The reduction could be accomplished by changing the way benefits are calculated, increasing the retirement age
making more of the benefits taxable.
lower the income trigger that starts taxation of benefits.
change the way inflation statistics are calculated.

Obama plan removes the upper limit on social security taxation of income.
unlikely that upper income earners will receive payments proportional to their contributions.

nmap, I suspect that you are correct in all of the above. We already have a system in place to increase the retirement age, and inflation calculations have been incorrect for years. It is clear that the “upper income earners” will receive a massive tax increase when social security is taxed all the way up. I am still of the opinion that SS benefits will be “means tested”

Originally Posted by nmap

those contributions become steadily less attractive.
some to seek ways to avoid such taxes
encourage some to consider illegal tax evasion.
The underground economy is likely to become larger.

The underground / shadow economy is very large now. In an April 2005 article the WSJ claimed that it is about $970 billion, or nearly 9% that of the real economy. It could soon pass $1 trillion. I suspect that in 2008 we have now passed way beyond $1 trillion, and could be in the $2-3 trillion range. This might be one vehicle that the middle class saves itself from extinction.
http://wsjclassroom.com/archive/05ap...nderground.htm

Originally Posted by nmap

the increase in Social Security taxes is an easy way to raise a great deal of money in a manner hidden from most wage earners.
It is interesting to note the proposed increase in capital gains taxes from 15% to 20%.
I strongly suspect we will see others

The increase in Cap Gains was discussed with BHO, and he conceded that a lowering would bring more revenue into the treasury, but was opposed because in was “not fair”
The other taxes increases we will see may include letting the Bush tax cuts expire in 2010, (Death Tax, Marriage Penalty, Tax brackets, R&D credits,, etc) Higher Income Taxes, Capital Gains And Dividend Taxes, Corporate Taxes, Tax On Coal And Natural Gas, and the AMT tax.

Originally Posted by nmap

Ironically, the victims in all this are middle class people
The truly wealthy will have the means to choose other (often better) options.
The poor (however defined) will benefit from the programs.
both the wealthy and the poor can shift away from traditional paychecks to other approaches.
The middle class, however, are trapped.

I am of the opinion that the middle class will also move to the underground or non-traditional economy. There is some inquiry in congress to monitor Ebay transactions, to try and catch some citizens, but I am not sure how that would be enforced. Other craftsmen will quote two prices (one cash, and one check). The middle class will adapt.

Originally Posted by nmap

My meaning was (and for that matter, is) inflation.
As the supply of dollars increases, inflation follows.
I regard the present governmental deficit spending pattern as a prelude to future inflation.

I am in general agreement with you. However, as you discuss later, deflation is potentially a far greater problem in the short term. In the short term CASH is king, especially in the areas of “tangible” assets such as Gold, Silver (very low), land, and business acquisition. I would note that this may be a perfect time to make acquisitions in tangible assets. Your results may vary, based on region, timing, and asset.
SnT

[Surf n Turf]

Originally Posted by nmap

we are going though a remarkably strong period of deflation. I wonder if the failure of various assets has not destroyed money at a rate even faster than the Treasury and the Fed can generate it.
If we enter a global deflationary cycle, matters will become, quite frankly, bad.
We live in a debt driven economy, and the liquidation of hundreds of trillions (yes – seriously. Hundreds of trillions is not a typo) of debt would destroy the monetary system.

In the month of October 2008, we have witnessed a reduction in wealth, via the stock markets, that is unprecedented in America, and the world. I am reasonably sure that (in constant dollars) it exceeds the “Great Depression”. We have yet to hit bottom, and your observation may be correct. No longer are there “widows & orphans” stocks, nor safe options in which to invest. All areas are at risk.

Originally Posted by nmap

There is another possibility.
The current deflation may be a side-effect of debt and asset liquidation coupled with a flight to safety.
I’ve attached a chart of the U.S. dollar index. Notice the rapid appreciation. This begs the question – why?

In a monetary crises, where does one put one’s money

I am betting (figuratively) that your observation is correct.
The dollar is the least worse place to move money, and it is not that the dollar is up, it is that all currencies (except Yen) are down.
But the dollar will fall. Wait until you see the results on Monday, of this weekends “lets make the dollar weaker” conference – brought to you by the IMF and ??
“The International Monetary Fund believes that emerging countries will become the next victims of the credit crisis and is trying to force through a rescue package within a week to allow such economies to swap their own currencies for US dollars.
While Wall Street has speculated that the swap facility could be worth $1 trillion (£620 billion),”
http://business.timesonline.co.uk/to...cle5004044.ece

Originally Posted by nmap

and I cannot help wondering if that isn’t part of the reason stocks, oil, gold, and other assets continue down. Hedge funds had 30-to-1 leverage, and they weren’t the only entities that used that dangerous tool.
So the present price action may be an artifact of market reaction to unwinding all these positions.

As you know I am interested in Gold / Silver, and have followed both since the Texas Chainsaw massacre that ended March 27, 1980. The current prices for both Gold / Silver are understated (Silver by a factor of at least 4, Gold by 1.5). Although Hedge Funds are involved, I wonder what other “entities” you believe are also using this leverage?

Originally Posted by nmap

Still, based on the present price action, the case for deflation is strong. If prices continue lower, and if unemployment starts forcing wages lower, then we are likely to experience a deflationary spiral that could last for years – or even a decade. Such a period will be memorable, and is likely to share characteristics of the 1929 depression.

I tend to believe that our current deflationary period will be short lived, based on the amount of liquidity being bilge pumped into the economic system. If I am wrong, I may shortly be living in a “McMansion”, and starving to death.

[Surf n Turf]

Originally Posted by nmap

This is no small problem. From the standpoint of maintaining purchasing power, we face two contradictory scenarios.
With inflation, cash (here, cash includes bank CDs, treasury securities, and other high-grade debt instruments) are all wasting assets.
Tangibles, including gold, land, and even stocks will generally appreciate along with inflation.
with deflation, tangibles decline, and the value of cash increases. A bank CD is better than gold, land, or stocks.
Our problem is finding a way to prepare for both scenarios at the same time – which means, we must allow for an internal contradiction in our expectations.

ay, there's the rub
We have two opposite scenarios, both in play, and we cannot devise a means to maintain purchasing power in either / both, while trying to maximizing outcome. It strikes me that a middle course is probably the best bet, and at the end of the day to break even, and to live to fight another day.

Originally Posted by nmap

A strategy that works for one scenario is wrong for the opposite situation. One approach that might fit someone with deep concerns about the economy would probably allow for about 80% of assets allocated to insured bank accounts and treasury securities. Perhaps 20% could be placed in physical gold coins.

One well-respected newsletter advocates precisely this approach (Dow Theory Newsletters by Richard Russell). Others take a more dire (or, perhaps, apoplectic ) position and suggest that present trends suggest complete monetary failure

I follow the strategy listed above. It now seems to be the best approach to balancing Inflation with Deflation. I am convinced that long term the printing press is our enemy, and I do not want to have a $1 Billion bill to buy a loaf of bread. The danger is that the CD’s, Bank Accounts & Treasuries will not keep up with inflation / taxation. – and the harder you run, the behinder you get. We have to many “assets” to have a monetary failure (at least on a local level). The farmer will always trade, as he did during the early 1930 period.

Originally Posted by nmap

Social upheaval is an additional factor. This can range from complete breakdown, as in Somalia, to a few riots and increased crime rates. This is an interesting problem in that one must examine our society critically, and come to a conclusion about both the severity of the problem, and the likely reaction of the general population to such problems. My personal view is that matters will not degrade as badly as some suggest, and civil society will continue, although with greater risks for crime.

We could probably have a complete thread devoted to this subject.

Originally Posted by nmap

Personally, I have doubts about my ability to protect a substantial cache of gold coins, so my emphasis is on undeveloped land. On the negative side, it is has far less liquidity than gold and no transportability. On the positive side, it is harder to steal. I like bank CDs and FDIC insured bank money market funds. Some mutual funds, a few stocks, and some commodity ETFs (all down since the first of the year) round out the position. In essence, I assume that deflation will be temporary, that the dollar will not be destroyed, and that inflation will return. In addition, I suppose that upheaval will occur but within limits.

Agree, Deflation temporary, dollar weak but viable, and inflation in our future. Only worry is rate of inflation

Originally Posted by nmap

The second chart is the Baltic Dry Index, and is a measure of the cost of shipping dry goods. As such, it provides some indications on the level of global trade. Further declines in trade could trigger long-term deflation.

I do not see deflation occurring in the long-term. Barring some act that paralyzes the worlds financial systems, we can crawl our way out of this mess in five (5) years or so.“Carpe Diem”

Originally Posted by nmap

T he actions taken by FDR are worthy of reflection.

In March and April 1933 Roosevelt implemented a series of policies to combat the crisis of solvency of the US monetary and banking systems, including Executive Order 6073, the Emergency Banking Act, Executive Order 6102, Executive Order 6111, and later the Agricultural Adjustment Act, 1933 Banking Act and HJR-192. These acts and executive orders effectively suspended the gold standard in the United States

Executive Order No. 6102 – 5 April 1933
By virtue of the authority vested in me by Section 5(B) of The Act of Oct. 6, 1917, as amended by section 2 of the Act of March 9, 1933, in which Congress declared that a serious emergency exists, I as President, do declare that the national
emergency still exists; That the continued private hoarding of gold and silver by subjects of the United States poses a grave threat to the peace, equal justice, and well-being of the United States; and that appropriate measures must be taken immediately to protect the interests of our people.
"Therefore, pursuant to the above authority, I herby proclaim that such gold and silver holdings are prohibited, and that all such coin, bullion or other possessions of gold and silver be tendered within fourteen days to agents of the Government of the United States for compensation at the official price, in the legal tender of the Government. All safe deposit boxes in banks or financial institutions have been sealed, pending action in the due course of the law. All sales or purchases or movements of such gold and
silver within the borders of the United States and its territories, and all foreign exchange transactions or movements of such metals across the border are herby prohibited.
"Your possession of these proscribed metals and/or your maintenance of a safe-deposit box to store them is known to the Government from bank and insurance records. Therefore, be advised that your vault box must remain sealed, and may only be opened in the presence of an agent of The Internal Revenue Service.
"By lawful Order given this day,
the President of the United States."