the hyperinflation/deflation argument isn’t that tough. the only recorded instances of hyperinflation was when governments could print endless amount of fiat backed by nothing. depression is caused by a recession in an asset based money system. when the presses are chained to gold or other finite resources, a finite amount of “money” can be created, even with the fractional reserve thing. deflation in a fiat system happens when leveraged assets lose value. buy a $250,000. house with -0- down expecting more inflation but the music stops and now the house is worth $200,000. buyers walk away and the lienholder is down $50,000. when 10,000 people walk away from a house, your are talking about severe losses to lenders which is not available immediately to loan out again. this is velocity reduction since the amount of the losses have evaporated fiat, temporarily. the system starts to break down because the fractional reserve thing works in reverse. a $50,000. loss means $500,000.less to loan out.

in a sound money program, no more “money” can be put into the system unless more gold is held in reserve. in a fiat system, when the lenders lose fiat, the government pumps more fiat into the system, the fractional reserve multiplies it and we go again, at much higher prices because the old fiat is still in the system. in a sound money system, it takes a while for the money to recycle thus keeping prices the same over long periods of time. if a shortage develops in some necessary non monetary resource,the prices of other resources must go down in a sound system. in a fiat system, resources still cycle in price but are continually rising because of the extra fiat introduced into the system over time.

the longer a fiat system operates, the faster the rise in prices because the % increase is on an ever rising amount of fiat. in a sound money system a price rise in one area must be offset in another since a finite amount of money is available.

the only way depressions can occur in a fiat system is when prices of leveraged assets are falling rapidly and causes the system to cascade down faster than the fiat can be printed and circulated. fiat systems continue only so long as the fiat can support the entire economy. sooner or later some people can’t keep up with the rising prices and living standards begin to fall or succeeding generations have a lower living standards than previous generations. at this point, the system is generally fragile and any problems require huge inputs of fiat to keep the system working. eventually, endless amount of fiat chasing finite hard resources is rejected as a medium of exchange and store of value.

the fiat environment described is here and now. the baby boomers have control of the fiat and finite resources and the following generation is doing the dirty work. the dollar has lost 95% of purchasing power since the gold standard was rejected. the gold standard guaranteed price stability and depressions. a fiat system guarantees price instability and inflation leading to eventual hyperinflation.

i agree we are currently experiencing deflation. the velocity of fiat has slowed considerably. if new fiat were not being pumped into the system, we would enter a depression. the mountain of fiat going into the system guarantees much higher inflation as it works through the system. the typical time lag for liquidity injections and interest rate changes is usually 90-180 days for the system to respond.

i know i sound like a broken record harping on the disappearance of physical from the retail system. stupid people didn’t cause the shortage. the next places they will go is the comex and other storage areas for physical. when that is unavailable, the only place left is gold in the ground. i still stand by my statements from months ago about the rotation of commodity prices. oil tripled its previous all time high, grains doubled or more the all time highs. the yen carry trade was far higher than anyone ever assumed. the cdo mess is still unraveling. currencies have unbelievable daily moves. gold is making new all time highs in some currencies. guess what happens when the dollar breaks.

just about the time john q public realizes he’s been duped and starts looking for ways to salvage his retirement and other assets, what form of gold will he buy? the physical will be long gone by then. i expect heavy delivery on the december futures contract which should clean up the last of the available physical. what do you think every stockbroker in the world will be pitching his customers? the only gold available will be gold in the ground.

in the investment world, everyone can be correct if the time factors are expanded or contracted. yes, we certainly have deflation today. what happens when that mountain of fiat works its way through the system? the break in 1929 tossed the whole world into depression because all the money was concentrated in strong hands and governments were powerless to “jump start” the economies because the presses were chained to gold. the “new deal” put a few bucks into the system, the fractional reserve multiplied it and presto, a savior was born. if a little money worked that well, what would a whole lot do? (wwll) things worked well until folks started showing up to trade in gold and silver certificates for the real thing. that was the beginning of the end we are witnessing now.

think back to the folks who have absorbed all the physical around the world. are they smart or stupid? act accordingly.

rno