Thursday, November 11, 2010

A Few More Notes on Inflation, and All That

A few thoughts that need to be added to my prior post.

First, when I said that " thin dime of junk silver is worth essentially $2", that's saying it wrong.  I think most of you know it's more correct to say that the silver has kept its value and the dollar has sunk.  That means, of course, that a dollar is worth 5% of what it was when we issued those silver coins.  Pure inflation.

It's instructive to look at prices, and your salary, accounting for inflation.  There are a lot of web sites which will help you, the trick is getting one that doesn't use the (lying) CPI numbers from the government.  I think this method (comparing a dollar in silver coins to today's prices) is a pretty good approach.  I did this back in June in Luncheon Counters of the Third Kind.  Unfortunately, this method won't do you much good when comparing today's prices to a period well after we went off the gold standard, like the mid-'80s. 

The only argument for holding onto silver and gold is that they have historically been valued by people.  Their value has never gone to zero.  My guess is that they will probably be a medium of trade again.  Don't forget that copper pennies from pre-1984 are still in circulation (they're worth about 2 1/2 cents), and nickles are worth about 6 cents in melt value, so they are likely to be devalued soon, too. This website gives you the melt value of coins, up to the minute.  These things may also be trade items. 

As Brigid says in her comment yesterday, "Think practical. Think barterable. Think provisions."  In the novel Patriots, Rawles depicts a flea market that happens several months after their collapse.  One character has a Corvette, a ferociously expensive car that has been rendered worthless by events and can't be traded for anything.  Not practical. 

John Embry, chief investment strategist at Sprott Asset Management and the Sprott Gold and Precious Minerals Fund was interviewed in "The Au Report" this week.  His opinion is that the results of the election are unimportant and that the die has been cast for the collapse of the dollar.  It will largely be due to the Federal Reserve's QE actions.
TGR: Is it a foregone conclusion that inflation or hyperinflation would lead back into a depression? Will we end up in the same place regardless?

JE: I think we do end up in the same place. There's no example in history that unbridled money creation works to solve any problems; in fact, it usually exacerbates them. I'm not sure it's going to be any different this time because I believe today's financial structure is probably more vulnerable than it's ever been in history. I don't want to get into derivatives and all these various collateralized debt vehicles, but the fact is we've never seen anything like this before. If you try to deflate, that would come to the fore immediately; if you inflate, that just creates a bigger problem later.

So, I'm kind of stuck; I can't see a more positive outcome. I am a great believer in the Austrian School of Economics, and with a hugely excessive debt buildup in the economic system, there's no escaping the consequences. We've had the biggest debt buildup in history, and here we are in consequence time.

TGR: I think everybody agrees about consequence time; it's a matter of the degree of pain.

JE: If you went the tough route initially, you'd go through a lot of pain but you'd probably come out the other end sooner and save your currency. Now, if you go the unlimited QE route—or, as my friend Jim Sinclair puts it, "quantitative easing to infinity"—the currency will be destroyed. When that happens, you unleash an immense amount of inflation in your system; and, in that situation, people lose all their rudders. There's nothing to hang onto when your money's value is destroyed. I worry about social unrest; but in the end, you've got to clean the system out anyway.
JE: That's why I am extraordinarily bullish on gold. Either way, gold will be all right because it's a tangible asset—a hard asset that's existed through centuries. The hardest point to get across is that gold isn't what's changing. Gold is gold. It's been around for thousands of years, recognized as money by most societies. What's changing is the current paper-money experiment.

Without exception, paper money is always devalued in the end and always ends up worthless. We've got a long way to go, but we're definitely en route to that ultimate conclusion. So, it's not gold that's changing; it's the value of the paper money in which gold is valued; that's why the price of gold is going up.
It's pretty straightforward.  If you stay in the paper assets: stocks, bonds, dollars, your money will be de-valued away.  The way to preserve your worth is in things people value or must have.  Food, survival items, probably precious metals.  Brass, copper, and lead.  This is a pretty old story.  It's a sad story, because it didn't have to be this way.     



  1. Nice looking family ya' got there. I recognize Mr. .308, Mrs. .223, and little 40S&W and 9MM. I see cousin 22LR snuck into this one as well. But who's that cute little guy there second from the left?

    Societies do always seem to resort back to precious metals as sort of a "currency of last resort" don't they? I suspect that when its all said and done that those who chose 'stuff' will end up with less stuff and more metals, and those who chose metals will end up with less metals and more 'stuff'. Pretty much like a free market should be minus the .gov manipulations. Since I'm late to the game on the metals side, I may just settle with a bit of silver to complement my stuff and hope for the best - I'm in a pretty rural area anyway so stuff makes more sense for me.

    Thanks for getting me thinking about silver. Up until now I hadn't really considered that option, and I don't have enough wealth right now for gold to make sense (yet). I really hope we learn the lesson well this time around. (But given the course of human history I doubt it)

  2. The slightly short guy is cousin .25 auto. My dad used to work the night shift for the US Post Office in downtown Miami, back in the 1960s. When he passed away, he left me his little Galesi .25 auto and some (then) 30 year old ammo. I've used it a few times, just to get a feel for shooting it. I've read enough scare talk about the .25 being ineffective that I don't carry it, but I plan to hold on to it for obvious reasons.

    (Strange how for all the talk against it, I've never run into anyone who is willing to get shot by the .25 as a demo. Funny how that works.)

  3. This picture inspired me to post a similar one over on my blog. I'm not sure what the netiquette is for attribution of ideas (I've not been at this very long), but I've linked your post from my post as a way of giving credit where credit is due - that is, if it's okay with you. Thanks!