U.S. mint suspends gold coin sales

[Mike Barskey]

I'm more prone to believe #2, which may be indicating that now or soon is a good time to buy. (Unless we are actually going in to a deflationary depression, in which case that's the last thing you want to do)

Can you please summarize (for the layman!) what a deflationary depression is?

[toowm]

I'm more prone to believe #2, which may be indicating that now or soon is a good time to buy. (Unless we are actually going in to a deflationary depression, in which case that's the last thing you want to do)

Can you please summarize (for the layman!) what a deflationary depression is?

Think the 1930s. Prices for everything are going down so fast that it seems foolish to buy anything - just wait a while and the price will go down. Unemployment goes way up as businesses produce less. Banks don't lend. People default on their mortgages because they're higher than the house value.

While many folks expect a bad US economy, and fear a worldwide recession, no one is really sure whether deflationary (housing prices, stock prices, commodity prices, decreasing leverage) or inflationary (printing money) pressures will win out.

[John Edward Mercier]

Yes we do.
Boomers are about to retire... the cycle has been known for quite some time now.

[penguins4me]

While many folks expect a bad US economy, and fear a worldwide recession, no one is really sure whether deflationary (housing prices, stock prices, commodity prices, decreasing leverage) or inflationary (printing money) pressures will win out.

One of the strongest arguments I've seen in support of deflationary pressures winning out over hyperinflation (versus "meer" inflation, which has spiked sharply over the last several months) is that with hyperinflation the bankers (chief among which run the US central bank, the Fed) may well be repaid, but with then-worthless fiat currency. A deflationary situation would leave bankers holding the collateral put up for the loans - not something they prefer, but certainly more valuable than poor-quality toilet paper.

Personally, I'm diversifying a bit: some precious metals (for potential use on the upswing), some less-precious metals (lead, copper, brass), and a small store of FRNs to use during what certainly seems to be the approaching deflationary crisis. If history repeats itself, there will be some screaming deals for folks with cash...

[John Edward Mercier]

Not really.
The share holders aren't really looking to capitalize a bank for the purpose of owning automobiles and real estate...
Plus a hyperinflationary or deflationary period is self fueling... its vary dangerous to the US government, and those that rely on its funding.

[penguins4me]

Understood and I concur - but it is still preferable to hold an asset with some value on your books rather than cash-which-has-become-valueless.

OTOH, some of the smart fellers I've been following for the past few years or so have suddenly started screaming about hyperinflation rather than deflation... and the trigger for that seems to be the government now saying it will buy possibly unlimited Fannie/Freddie stock with tax money.

I'm still not sure why this is a "good" thing in the eyes of the stock market... did you see the US Dollar Index ramp today? Holy cow, man!

http://quotes.ino.com/chart/?s=NYBOT_DX

[John Edward Mercier]

The US just recently went through a short period of inflation (maybe some would say hyperinflation)...
Though the value of autos and houses was falling... investors were buying gold/silver and oil.

The FED/Treasury has talked Congress into creating a firewall...

[SamIam]

John,

I would like to understand what your saying, but it's just not adding up for me. I found this Lew Rockwell story that explains why a deflationary depression is extremely unlikely.

Price Deflation: A Great Idea With Low Probability

I've also been talking with Chris who produces the Lew Rockwell podcast to see if they would do a show on the topic. It's something I would really like to understand.

[John Edward Mercier]

So Lew is saying the FED is necessary to avoid any deflationary depression?

My basic premise is we're at the end of a generational macro-cycle. The underlying problem is its not generationally tranfering, but continentially shifting.

In essence the money that your parents saved for retirement is about to be withdrawn from the investment markets and spent. But it will not be spent locally, earned by the next generation, and re-invested for their retirement. But earned and invested by overseas labor.

This is what IOUSA was about.

[SamIam]

So Lew is saying the FED is necessary to avoid any deflationary depression?

You must not read much Lew Rockwell. The story was written by Gary North, and what he's essentially saying is that because of the Federal Reserve, which was created to act as a lender of last resort, this kind of speculative behavior will only continue. The Fed will be there to bail out failed banks and the surviving banks also have an incentive to participate. The money supply won't shrink, because the Fed wil step in and shuffle things around creating whatever is needed.

I agree in part with you, in that some of the money won't be spent here, but a lot of it will. Another factor is that US dollars are only good in the US, and they all eventually have to come back one way or another.

It's like the Anarcho Jesse labor note. It's only good for Jesse's labor, because he is the one that issued them. What happens if Jesse can no longer work after a back injury? FRN's at some point have to come back to the US, and they do when foreign entities step in to buy property, US corporations, etc. The problem is with the continually increasing, out of control supply, there will be no shortage of buyers in china and elsewhere wanting to offload these worthless bits of paper. and prices will rise, because you have more dollars chasing the same amount of goods.

As foreigners see the dollars they get in return for the products they sell loosing value, they will want to convert them into something that holds value. Eventually those FRN's mustl come back to the US  in exchange for some asset, product, or service purchase.(just as Jesse must eventually collect all of his debt notes) As China and other areas industrialize and increase demand, the significance of the US will greatly diminish. Eventually to the point of people no longer wanting or even accepting the dollar. Would you want to open an import/export relationship with a business in Zimbabwe? I believe that's what's happening now on a much smaller scale, which eventually leads to hyperinflation.

[Pat McCotter]

An essay about this issue.

Tribute paid in oil
Hugo Salinas Price

According to the data presented by David Galland in his article "Turning off the Taps", recently published at www.financialsense.com , México is exporting 184,000 barrels of oil less than its programmed quota of sales to the U.S. The article says the deficit amounts to 11%. Therefore, the daily quota must be about 1,673,000 barrels of oil daily, but the actual net export of oil is approximately 1,489,000 barrels a day.

If we multiply 1,489,000 barrels a day by 360 and by $112 dollars, the present price of Mexican oil, we get the amount of some $60 billion dollars of annual exports of Mexican oil to the US .

Mexico 's oil production is in decline due to the on-going exhaustion of the oil fields being exploited.
In 2004, Mexico exported 50% of the oil extracted. Some years ago, Mexico reached its peak production and if we estimate very conservatively that production is declining at a rate of 5% a year, in four years – from 2004 to the present - production must have declined by 20%.

In the meantime, Mexico 's own consumption of oil has increased. So that by 2014, Mexico will have no excess oil production available for export. Galland conjectures that by 2014, not a single barrel of Mexican oil will be exported.

The whole world is presently feeling the first effects of the general exhaustion of world oil fields: "Peak Oil". Unless "Peak Oil" is an imaginary problem, the price of oil is therefore going to continue rising with brutal effects upon the world economy. Not only Mexican oil production is declining; we are dealing with a decline in world production of oil.

For this reason, there will perhaps be no reduction in the amount of dollars entering the Mexican economy for the remaining years during which there will be exports of oil. The price of oil will go to $200, to $300, to $400 hundred dollars a barrel and more, as the economies of the world struggle to obtain the oil required for their industries.

Today, there are at least two world centers which will be able to pay those prices; they will have no option but to pay them, because without oil, the lights will literally go out.

Those centers are the US and the Eurozone. They will be able to pay the necessary price to get their oil, because both the US and the Eurozone can manufacture digital dollars and digital euros at will. Iran is willing to accept Japanese yen in exchange for its oil.

The rest of the world, which needs the oil but does not have the advantage of having a currency accepted as a "reserve currency", will have a terrible time obtaining the dollars or euros necessary to purchase oil. Their economies will be strangled for lack of fuel.

We must note something that is of fundamental importance: neither the US nor the Eurozone are actually paying for their oil with exports of goods and services to the oil producing countries. They "pay" with bank digits , created by computers; these payments are registered in the form of credits in the computer memories of banks in the US and in the Eurozone. We should have to include Japan among the countries which are able to purchase oil with their own currency.

These bank digits are not credit instruments in favor of those who receive them, as for instance dollars were, when they were formerly redeemable in gold; they are simply numbers, because they do not incorporate a promise to deliver something to the beneficiary, the oil exporter. A credit instrument is the promise to deliver something, and a bank digit is not "something". It is just a number and nothing more.

So we can quite correctly say that the US and the Eurozone – and other countries whose currencies are considered "reserve currencies" – are "paying" for their oil imports with nothing at all. The Romans called such an operation "Collection of Tribute from the Conquered".

This is what Mexico is doing; it is exporting precious oil from its oil fields in relentless decline in exchange for – nothing.

It is true, of course, that dollars and euros can be used (for the time being) to purchase things in the rest of the world. They are good for that, because they are accepted as a means of exchange. However, those means of exchange are most certainly not a means of payment. Payment is the delivery of something in exchange for something. Bank digits are not something. They are simple numbers.

This fact is glaringly evident when we contemplate the gigantic "monetary reserves" of China , which has recently accumulated $1.68 Trillion in reserves which include dollars, euros and some other digital currencies. The Chinese really do not have the faintest idea of what to do with this monstrous amount of digits and they, like the Arabs, have formed financial entities which are called "Sovereign Wealth Funds". The purpose of these funds is to find unsuspecting countries upon which to unload these bank digits in return for tangible resources.

The bank digits in the Chinese reserves are only means of exchange. The Chinese are going around the world trying to find places to deliver these digits, for which they otherwise have no use at all. Now, if the Chinese reserves were gold , they would be in no hurry to get rid of them nor would they consider them excessive. But the reserves are not gold; they are simply bank digits which live in the computers of the countries that issue those digits.

For Mexico , what are the consequences of delivering oil from Mexican territory in exchange for bank digits?

I shall not go into detail on how Mexico distributes the digital income from the "sale" – properly speaking, tribute – of oil to the US .

We are talking about some $60 billion digital dollars which are available to various Mexican entities every year. Part of those digits are applied to the importation of merchandise for consumption. Part to pay for imports of machinery and services by PEMEX, the oil company. Part of that income is used by PEMEX to pay salaries and expenses in Mexico , for which it needs to sell its dollars in exchange for pesos with which to effect payments. Part of the oil income goes to the Federal Government, which also exchanges dollars for pesos. When dollar digits are exchanged for pesos, the dollar digits wind up as Reserves in the Bank of Mexico, and increase the total reserves of bank digits held by the Bank.

Net – net – net: What left the country was oil; what came in was bank digits. Part of the bank digits left the country for importation of goods. But a good part remained here. As a reflection of that, the reserves of the Bank of Mexico now stand at a record.

The result of exporting oil is that every day we have more money in circulation. 27% of that money is nothing more than paper bills or metal coins; the remaining 73% is only bank digits called "pesos". This is imaginary money which Mexicans have in the banking system of the country.

Thus the dollar digits coming into Mexico cause monetary inflation , a constant increase in the mass of money in circulation which makes each unit of pre-existing money less valuable. Of course, the most common and inevitable result of this is rising prices.

We are importing inflation from the US because the oil we export is not paid for with goods and services coming from the US to Mexico ; we are given a simulated payment, which is payment in bank digits. This imported inflation is contributing to the general rise in prices taking place in the country. On June 18, the Mexican government decreed an emergency freeze in prices of 150 food products to last until the end of 2008.

The high price of oil is not a blessing for Mexico because it does not mean that we get more things of value from the rest of the world; it means that we receive now, and shall receive in the future, quantities of bank digits which are going to cause an increase in the price of things which Mexicans have to purchase in order to live.

What we are suffering is happening in all the countries of the world which have export surpluses. They are all importing monetary inflation and local prices are going up.

China , the great manufacturing power and exporter, is an example: too much digital money is entering China and thus prices in China are on a tear; both their internal prices and now their exports will be rising in price. Chinese products have to go up in price and soon they will be sold for higher prices both in the US and in Mexico : digital monetary inflation originates in NY City, passes on to China and from there, it returns to the US and to Mexico in the form of higher prices for Chinese products.

When oil reaches $200 dollars a barrel the situation will be even worse. Prices in Mexico will be forced to rise, including wages, for workers will be shortly demanding higher and higher wages. The higher oil goes, the higher prices will rise within Mexico and the higher the prices that imports will cost.

Now we are entering a period in which prices are going to rise for two different reasons.

The first cause will be the growing scarcity of oil in the world. The Central Banks cannot do anything about this rise in prices caused by a greater and greater scarcity of oil. From here on, oil will be subject to a rationing due to scarcity, but the countries which have the advantage of issuing reserve currencies can "jump the waiting line" for their ration and simply issue more banking digits to ensure their supply. When they "jump the waiting line" and create more digital money to get their oil, they are creating a world inflation of prices.

The second cause will originate in the world's financial system which is terribly damaged by bad investments made in recent years. The main Central Banks will create gigantic quantities of money in an attempt to save the busted banks. This tsunami of digital money intended to save the banks – bankers are always saved – will destroy the value of the dollar and consequently the value of the Mexican peso.

Suddenly, in 2014 there will be a great fall in the number of digits entering Mexico , because there will be no more oil to export. The social and political trauma will be enormous. The kind of government to which we have become accustomed will not survive the huge financial hole caused by the absence of $60 billion dollars of annual oil sales, or whatever tens of billions future exports may amount to.

I see an endless number of articles by experts on our present day problems, but I think I am the first, or among the first, to point out that we are in a huge mess in this world, because the world has disregarded the fundamental change in the nature of the dollar, on August 15, 1971. On that date, the dollar was no longer both a means of exchange and a means of payment. It became only a means of exchange. No one seems to have noticed the difference!

It is because the world has not taken notice of this fundamental change in the nature of the dollar, that we have the present mess. I need only refer to the explosion in Central Bank reserves which has taken place in recent years, as "means of exchange" accumulate in Central Bank computers (not vaults!). The amount stands today, at close to $7 TRILLION (valued in dollar digits), which is a sum utterly unnecessary for handling trade and other international so-called "payments".

[John Edward Mercier]

SamIam,
That is how a deflationary depression ends.
An deflationary depression occurs when those holding currency delay indefinately purchase under the belief that the cost of goods/services (companies, property, etc) will be lower in the future.

During the Great Depression and the Panic, the gold standard created a limit on the physical money available... but a credit bubble forced prices higher until the top was reached. Since further credit was unavailable, the collapse continued to those with physical money began purchasing assets.

The present assumption is the FEDs monetary powers can stop this collapse. But the fiscal policy has resulted in uncertainty. Imagine Jesse hurts his back, and there is uncertainty that he will be able to labor in the future. Would people be willing to accept new AJ labor-hour certificates as payment?
If the US government can not borrow money at the fiat FED rates than the market rates will rise regardless?
Not sure if it is still occuring, but at one time Russia could not pay for anything imported with rubbles... it had to be a foreign currency or market valued commodity. I believe this to be the reason Russia is so tied to the value of oil.

[toowm]

Keep reading LewRockwell.com.

Things are getting interesting, in the Chinese curse sort of way.

[SamIam]

I'm reading up to understand the factors to a deflationary depression. However, I don't think the central bank is going to hurt it's back as AnarchoJesse could,  and stop printing money.

Pat, I like the article on Mexico. I would replace bank digits with debt notes, and it makes even more sense. I get what he is trying to say, but it's creating debt, and that doesn't come through.

In the meantime, looks like China is no longer lending to the US. It's begun. . .

http://www.reuters.com/article/companyNewsAndPR/idUSPEK16693720080925?rpc=64

[John Edward Mercier]

The bank digits is the correct term. The FedRes lowers the federal discount rate increasing credit availability in electronic trading thus bank digits. It only has the Bureau of Engraving print FRNs when the need for physical currency exists (which is less in modern times because of personal checks, credit cards, electronic transfer, etc.) MVPEL corrected me at one time. FRNs are warehouse receipts, while T-bills and T-bonds, along with FRBN are debt notes.

The funny part... it would be cheaper for the federal government in the long run to establish coins in higher denominations rather than print FRNs which have shorter lifespans and are more profitable to counterfeit.