Deflation, Inflation And The Gold And Commodities Meltdown

Ouzilly, France

A lot to talk about today...

The "word" on the street is "sub prime." According to the American Dialect Society, it’s the most important new word this year. Along with "jingle mail," "exploding ARMs" and "liars’ loans," it came into the popular language recently...and now everyone uses the term "sub prime" to describe anything that is cheap, low down, or deceitful...says the ADS.

We also want to talk about the collapse of gold and commodities...

About the coming surprise to investors...

And more about the fraudulent economic model America has been flowing for the last quarter century... But first...something important:

"You’ve ruined my summer," said Elizabeth over the weekend.

"Oh... How’d I do that?"

"You’re just such a wet-blanket...such a fuddy duddy... You never want to go out and have a good time..." More about that below...

But back to the news. On Friday, the meltdown of gold and commodities continued. Oil slipped $1.35. The commodities index, the CRB, fell below 500. The dollar rose to $1.46 per euro. The pound is losing value faster than at any time in 37 years. And get this — gold dropped $21 to close below $800, at $792.

So, what can we expect? Will everything go back to where it was in 2002? After climbing the mountain, will Jacks and Jills all over the world merely tumble down the other side? Oil — will it go back to where it was before the Bush administration attacked Iraq — at about $25 a barrel? Will the dollar go back to where it was just after the euro made its debut 10 years ago — at 88 cents? Will gold roll all the way back to where it was when George W. Bush was first elected president — at about $262 an ounce?

And maybe we’ll all be 10 years younger too!

Nah, too bad...but it doesn’t work that way. Every day, everything ages...changes...twists...corrupts...wrinkles...and decays. Nothing wrong with that, of course...that’s just the way it works. But it’s why, when you get a house, a wine, a stock or a woman, you want one that ages well — one that time improves.

But let’s not get distracted...

The slump in the US continues. Foreclosures are still rising in California.

There’s "blood in the street," says Barron’s of America’s most famous street, located in lower Manhattan. Fortune tells us that the "next wave of mortgage defaults" is coming.

And down in Flawda, the Miami Herald reports that the unemployment rate has risen over 6% -- its highest level in 13 years. Florida, along with California and Nevada, is where house prices are falling fastest. Many of the people who used to work in construction, or real estate, or installing granite countertops, or financing houses are now looking for work.

And here, we pause a moment to remember what a joke of an economy we Americans have created. We mentioned it last week. Fortune magazine reported a study that compared Germans to Americans. It found that Americans did not work more hours, after all. We work about the same number of hours as Europeans, generally. But Americans tend to do their work at low-skill, service jobs — like flipping hamburgers or cleaning driveways. Germans work at real careers, cook their own hamburgers and clean their own driveways. Germans put in fewer hours "on the job," as a result.

But in the curious way in which statistics become confused with knowledge, the statistics on hamburger joint revenue get fed into the figures for GDP growth. Then, it looks like the US economy is doing better than the German economy, even though both groups may be eating exactly the same number of hamburgers. And then, too, US economists and politicians believe they have found the secret to economic success; because the US model puts people to work...and boosts GDP growth. Soon, they are giving advice to the Chinese and wagging their fingers at the Europeans. It’s only later, when the credit runs out and their service industries go broke...that they get the punch line — good and hard. Then, they have to cook their own hamburgers again.

*** Occasionally you come across a small insect — a moth or a mosquito — fossilized in a drop of amber. The insect landed on bit of sticky tree say — maybe millions of years ago — and then was covered by the flowing sap, which later hardened into amber.

The prices you see in today’s markets reflect all the latest ideas, information, prejudices and hallucinations of investors — the sap at that moment. The next moment, they are history, past-tense...and the investor, like that poor bug — is stuck. The sap looks attractive...but once he lights down on it...he’s finished. He gets whatever he has coming.

The sap always keeps flowing...and that saps are always surprised by it. So where is tomorrow’s surprise coming from?

There are two possibilities we can see. Either the global slump turns out to be much more punishing than investors expect. That is, instead of a soft landing for the world economy, there will be a smash-up that sends equities, property, and bonds a lot lower than people expect — with trillions of dollars in capital losses, tens of millions of families bankrupt, and a recession that is surprisingly deep and dreadful.

Another surprise might be that the reports of inflation’s death were exaggerated. Inflation may not be dead at all — but just taking a rest. Oil may be going down, but it’s not likely to go back to where it was in 2002. And since oil is so essential to the modern economy, higher priced oil is likely to continue working its way into consumer prices all over the world. And maybe China, India and Russia don’t fall into such a deep slump that they stop using so much oil and other raw materials. And maybe their labor costs continue to rise at 10% per year — which then pumps up their export prices at double digit rates. And, perhaps most important, neither the people nor the theories in modern central banking have changed. They are committed to a system with the dollar as its foundation...a system that ALMOST guarantees inflation.

We don’t know what will happen — every day is a new day, after all — but we know how these central bankers think. And the more a recessionary downturn grips the world, the more Bernanke & Co. will fight against it. And they fight dirty — with counterfeit money.

It’s the "Endgame for Fannie and Freddie" says this week’s Barrons. And the weekend news brought word that the "US Likely to Recapitalize Fannie and Freddie." We expected nothing less. The two lenders are said to be worth about a negative $50 billion each — for a grand total of $100 billion. Of course, the feds don’t exactly have a spare $100 billion lying around. But so what...they’ve got plenty of funny money. As the endgame comes for more American businesses and households, you can expect to see a lot more funny money passing itself off as the real stuff.

So which surprise is it likely to be? A deeper deflationary slump? Or a wilder ride on the inflation roller-coaster?

Both is still our guess.

Buy gold on dips; sell stocks on rallies. We don’t have much of a rally in the stock market, but we have a nice dip in gold. Take advantage of it.

*** "You are such an anti-social fuddy duddy..." said Elizabeth. "We are here in a country where we’re not related to anyone...we have no natural ties with anyone. And we don’t want to live like hermits cut off from the rest of the world. We need to get out and socialize. That’s what makes like worth living — or at least, it’s part of what makes life worth living.

"And since we’ve decided to live here...where we’re not automatically or naturally part of the social scene — because we have no old friends or family here — we have to make a special effort to fit in. We have to work harder than most people just to have an agreeable social life, with friends and acquaintances whose company we can enjoy...

"But all you want to do is to write your Daily Reckonings, paint shutters and work on your various projects... You know perfectly well you actually enjoy going out...but you don’t like being interrupted. And I feel like I’m interrupting you or imposing on you whenever I want to invite people over...

"It’s just not a very pleasant way for us to live together. We’re at odds. I know you have different ideas about how to live...but this is an important issue. We’re going to be here — I guess for the rest of our lives. The children are leaving. It’s just going to be the two of us. And we’re going to be pretty lonely if we don’t have friends in the area..."

By nature, your editor is only interested in two things — work and love. If he has his work to do...and his family around him...he is content. But there is more to life, or so they say — and even he feels a certain hollowness when the family grows up and leaves.

On Saturday, we went to a "dinner in white," on the night of the Assomption of the Virgin. We were instructed to bring a picnic basket, a folding table and all the accoutrements of an elegant dinner — including candlesticks.

Your editor was a bit grumpy about it...reluctant to leave his work and his family to spend the evening with strangers. But he set off without complaint.

We drove down small, oak-lined roads for about 15 minutes. Then, we saw a group of cars parked in a field and a group of people — all dressed in white — standing near a stone farmhouse. A young man appeared as we parked, offering to carry our table and chairs. These were placed in a row with others — out in a field behind the house. The table cloth was laid on...candlesticks set up...bottle of wine opened...

The group of people in white greeted us...we chatted with the few people we knew and enjoyed a glass of champagne. Then, after an hour or so, when a full moon was rising over a pond in the distance...and a haze appeared over the fields, we took our places at the table. Elizabeth and I sat at our table, next to a good-looking youngish couple. Then, our host spoke:

"All men stand up. Shift from where you are now down to the next row of tables."

So, as it turned out...we enjoyed a delightful, candle and moon-light lit dinner with a woman we had barely ever met. There were about 50 or so people in the group, but out in the dark of night, at our little portable tables, each group of 4 diners was surprisingly cozy. Even more surprising, the Virgin herself must have smiled on the whole assembly. Almost every night in August we have had wind or rain — usually both. Saturday night, whilst we dined under the moon and stars, there was not even a breeze...and not a cloud in the sky.

The woman opposite us was from a large family — with a big farm nearby. Her husband had developed the farm into a place for corporate retreats — with hunting...fishing...and team-building obstacles.

"Which one is your husband," we asked, looking around.

"Oh, he died 4 years ago in a car accident."

"Very sorry to hear it."

"Well, life goes on... Is your wife here?"

The conversation was unexpectedly sweet, witty and intimate. We were still at our tables at midnight. Then, the children built a roaring fire. We stood around, talked...and drank...until it was time to go home.

Elizabeth was right, of course.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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Deflation, Inflation And The Gold And Commodities Meltdown

Deflation, Inflation and the Gold and Commodities Meltdown