# The Global Economic Crisis and Its Effect on the Australian Currency



## skating101 (24 February 2012)

General economic questions as I understand

US has extended unlimited line of credit (loans) to ECB (at low interest)

ECB loans money to (at low interest) to European banks

European banks told "Use the money to buy government bonds to hold down the yields on bonds"

European banks sell the bonds back to the ECB on the secondary market at reduced interest

European banks profit.

European governments use this money from new bond sales to pay existing debt obligations and increase their Debt to GDP ratios even higher.

Correct?

So,

1) Isnt the entire of europe going to end up like Greece with astronomical debt to GDP ratios and ridiculous austerity?

2) Is the US likely to remove its line of credit because it must surely understand that it wont get any of this money lent to the ECB back again?

3) In the short term would this continued printing/lending of money lead to a higher Australian dollar as we are the only ones not debasing our currency?

4) In the medium term Australian exports would be significantly reduced due to the higher dollar and therefore Australian GDP would reduce?

5) In the medium term wouldnt the RBA notice this reduction in GDP and hence reduce interest rates to devalue our own currency?

6) In the long term wouldnt this lead to significant asset inflation (except perhaps australian property which could stagnate to previously sustainable price/affordability ratios) due to the reduced value of the dollar?

7) If the central banks of the world understand that any deflationary shock or liquidity crisis could unravel the whole system would they not continue to debase their currency?

8) Why should I not buy gold?

9) So the global debt levels have reached unserviceable levels and and such no amount of austerity (which only hampers GDP/Tax incomes) or stimulus packages (which cannot increase GDP/Tax incomes enough) could pay the required levels of debt payments (not paying down the principal) so we will all race to inflate our currencies in order to make the debt more serviceable?

10) In order to stay in line with the RBAs dual mandate (mantaining GDP growth while controlling inflation), the RBA will revise it indicators for inflation to ensure that their definition of inflation doesnt increase while they debase the currency


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## theasxgorilla (24 February 2012)

skating101 said:


> 10) In order to stay in line with the RBAs dual mandate (mantaining GDP growth while controlling inflation), the RBA will revise it indicators for inflation to ensure that their definition of inflation doesnt increase while they debase the currency




Yes, and there are other ways for inflation to occur without detection.

When describing criticism of the US CPI Wikipedia says:



> "A "first-order" bias of the CPI in the other direction has been argued to its failure to measure fully improvements in quality over time."




I believe it can and does work in the other direction when quality decreases, as happens covertly with food.  For example, if all food measured in CPI used to be locally produced, less processed and more organic, and now local, organic and whole foods sell at a premium, and the indicator doesn't attempt to discern the difference, and assuming other things remain equal, then in effect inflation has occurred, and been obscured.


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## theasxgorilla (24 February 2012)

skating101 said:


> 3) In the short term would this continued printing/lending of money lead to a higher Australian dollar as we are the only ones not debasing our currency?




Yes, the interest rate differential between money printing regions like the US/Europe and Australia, should attract carry trades.

The EU+US = ~50% of the world's nominal GDP, and they are both exhibiting low growth and low interest rates.  I imagine that since the money supply in these regions has massively increased the high yielding little AUD has been an inadvertent benefactor.


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## theasxgorilla (24 February 2012)

skating101 said:


> 8) Why should I not buy gold?




Because you already have enough?


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## Tysonboss1 (24 February 2012)

skating101 said:


> 8) Why should I not buy gold?




Outside of making jewellery, and a few industrial applications there is no commercial use for gold.

More gold is dug up and stock piled each year than is actual used, So there is a massive global supply.

It does not make sense to me to accumulate somthing that produces no income, Is trading at record high levels, has massive stockpiles, and is produced at levels that far out weigh the annual demand for industrial applications.

As Buffett explains below, there are quality assets that not only have the same inflation protection, but are trading at relatively cheap levels and produce income each year.

there is a massive over supply.


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## skating101 (24 February 2012)

Tysonboss1 said:


> Outside of making jewellery, and a few industrial applications there is no commercial use for gold.
> 
> More gold is dug up and stock piled each year than is actual used, So there is a massive global supply.
> 
> ...





Gold may have no fundamental use outside of jewellery however what it does have is the ability to not be used up and not to go off such as numerous other commodities. 

As fiat currency is slowly debased to zero, while those other assets would also retain their value, they would not be suitable as backing for a new currency which would surely be needed, correct? This is probably the understand behind gold purchases.

Imagine a oil or natural gas based currency where the supply is constantly being used up

They would however make a tremendous investment however so long as they were still in demand in an inflationary world where only the baseist of commodities could still be in demand, correct?


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## howmanyru (24 February 2012)

But gold is sooooo pretty, sooooo shiny !!


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## Starcraftmazter (24 February 2012)

Just my opinion.



skating101 said:


> 1) Isnt the entire of europe going to end up like Greece with astronomical debt to GDP ratios and ridiculous austerity?




Well they aren't all going to impose austerity on themselves. Germany has already done this to a significant extent anyway. They have drawn up legislation for nobody to have a budget deficit exceeding 3% of GDP to put the issue under control. Whether it will work, who knows.

But at least with countries like Portugal, Ireland, Spain, Italy and Cyprus, it's very unclear if they can get out of the mess.



skating101 said:


> 2) Is the US likely to remove its line of credit because it must surely understand that it wont get any of this money lent to the ECB back again?




No, also it's not the US that is extending the line of credit, it is the Fed. Do not confuse the two. Nobody in the US can override the decisions of the Fed - it is a private bank not controlled by government with the power to create money. All the central banks are in a cartel with each other, they are friends as you may say.



skating101 said:


> 3) In the short term would this continued printing/lending of money lead to a higher Australian dollar as we are the only ones not debasing our currency?




Yes. Until our own economy collapses.



skating101 said:


> 4) In the medium term Australian exports would be significantly reduced due to the higher dollar and therefore Australian GDP would reduce?




GDP is not an overly good measure of anything anyway. For all intents and purposes, it would mean our exporters make less money, and all the repercussions that go along with that.



skating101 said:


> 5) In the medium term wouldnt the RBA notice this reduction in GDP and hence reduce interest rates to devalue our own currency?




First of all, interest rates matter for many reasons, currency valuation is just one of them. Above all the RBA will want to prevent our housing bubble from re-inflating, and this I think would be the most important issue for them when it comes to setting interest rates.

Second of all, lowering interest rates does not necessarily help. The Swiss central bank runs ZIRP (zero interest rate policy), and it has not helped them with currency speculators one bit. In fact they've now had to peg their currency to the Euro.



skating101 said:


> 6) In the long term wouldnt this lead to significant asset inflation (except perhaps australian property which could stagnate to previously sustainable price/affordability ratios) due to the reduced value of the dollar?




Asset inflation happens because of low interest rates causing speculation and/or hot money inflows. The latter might happen due to excessive currency speculation (ie. when you buy a lot of AUD, you may as well put it somewhere...). This can be regulated very easily by disallowing foreigners from buying property for instance. Of course our government isn't competent enough to do that.



skating101 said:


> 7) If the central banks of the world understand that any deflationary shock or liquidity crisis could unravel the whole system would they not continue to debase their currency?




The men behind the central banks are the most arrogant egomaniacs in the world. They think they own the world and can do anything. Do not underestimate their hubris.

They are also having to deploy ever-crazier strategies because the economic system of the world is falling apart.



skating101 said:


> 8) Why should I not buy gold?




Gold is an excellent store of value and protects against hyperinflation.



skating101 said:


> 9) So the global debt levels have reached unserviceable levels and and such no amount of austerity (which only hampers GDP/Tax incomes) or stimulus packages (which cannot increase GDP/Tax incomes enough) could pay the required levels of debt payments (not paying down the principal) so we will all race to inflate our currencies in order to make the debt more serviceable?




Pretty much yes. Then start all over.



skating101 said:


> 10) In order to stay in line with the RBAs dual mandate (mantaining GDP growth while controlling inflation), the RBA will revise it indicators for inflation to ensure that their definition of inflation doesnt increase while they debase the currency




They (the ABS) and their counterparts abroad have been doing this for decades - changing the way CPI is calculated so that it does not at all reflect inflation.

http://shadowstats.org/


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## Glen48 (24 February 2012)

By Jeff Clark, Casey Research

Enduring Characteristics

Let's start with the basics. I have some characteristics that no other matter on Earth has…
Printed (ask a miner how long it takes)
Counterfeited (you can try)
Inflated (I can't be reproduced)
I cannot be destroyed by;

Fire Water 
I don't need:

Feeding (like cattle)
Fertilizer (like corn)
Maintenance (like printing presses)
I have no:

Time limit (most metal is still in existence)
Counterparty risk (remember MF Global?)
Shelf life (I never expire)
As a metal, I am uniquely:

Malleable Ductile Beautiful 
As money, I am:

Liquid (easily convertible to cash)
Portable (you can conveniently hold $50,000 in one hand)
Divisible (you can use me in tiny fractions)
Consistent (I am the same in any quantity, at any place)
Private (no one has to know you own me)
I am internationally accepted, last for thousands of years, and probably most important, you can't make any more of me.

"Gold Is Money"

You've heard that statement before – but do you know what it really means? Money is a medium of exchange and a store of value. Almost anything can be used as money, but obviously some things work better than others. It's hard to exchange things people don't want and other things don't store value well. Over thousands of years, I have emerged as the best form of money (along with silver).

The paper dollars in your wallet are technically a currency, not real money. In other words, they are a government substitute for money. The man you call Aristotle best defined the primary reasons why I'm considered money: a good form of money must be durable, divisible, consistent, convenient, and have value in and of itself.

It must be durable because you can't have your money disintegrating in your pocket or bank. That's why you don't use wheat; it can rot or be eaten by insects.
It must be divisible, which is why you don't use diamonds or artwork; they can't be split into pieces without destroying the value of the whole.
The lack of consistency is why you can't use real estate. One piece is always different from another piece.
It must be convenient, which is why you don't use other metals like lead. The coins would have to be too big to handle easily to be of sufficient value.
It must have value in and of itself. This is why you shouldn't use paper as money.
And one more thing: I can't be created out of thin air. Not even the kings and emperors who clipped and diluted gold coins used paper as money. Aristotle didn't include this in his list, but it's vital.
So you see, there's no superstition here. It's simply common sense. I am particularly good for use as money, just as aluminum is good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. If you try to make airplanes out of lead or money out of paper, you're in for a crash.

And by the way, don't fret about those who say I'm not as good an asset as an income-producing vehicle. They misunderstand my role. I'm not trying to be a stock, for example. My function is as money and a store of value, so the proper comparison is to your dollars, or what you call Treasury Bills (of similar nominal value). And here is where I excel and serve my purpose: since 1913, the US dollar has lost 96% of its purchasing power. I have lost none.

Remember, I am the only financial asset that is not simultaneously someone else's liability. I don't require the backing of any bank or government.

The History Lesson

Because I am eons old, I've observed something throughout history that you may not be aware of: government fiat currencies are a relatively new invention, and none has endured. Eventually, they have all failed. Me? I've never been defaulted on or worth zero. Remember this the next time you have any doubts about my long-term worth.

Another of my roles is to protect your purchasing power. Here are a few examples of how my purchasing power has endured:

During the time of Christ, an ounce of me purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals. Today, one ounce will still buy a good suit, a leather belt, and a pair of shoes.
In 400 BC, during the reign of King Nebuchadnezzar, some scholars reported that an ounce of me bought 350 loaves of bread. Today, an ounce still buys about 350 loaves ($1,700 divided by 350 = $4.85/loaf).
In 1979, my average price was $306.68. This bought an average-priced full-size bed. Thirty-three years later, $1,700 would still buy you a nice full-size bed (and then some).
You can rest assured that over time, I will hold my value. And when you near the end of your life, you can pass me on to your loved ones, knowing full well they will have something that cannot be devalued, debased, or destroyed.

What Color Is Your Money?

Like you, I'm concerned about the current state of fiscal and monetary affairs. It seems your government leaders have boxed themselves into a corner. They've incurred too much debt and are spending too much money. It's important that you understand some lessons from history about this kind of behavior so that you're certain of what I can do for you.

The common denominators that lead to the downfall of every fiat currency are the two big Ds: debts and deficits. With that in mind, consider the following:

Morgan Stanley reported that there is "no historical precedent" for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. US total debt currently exceeds GDP by roughly 400%.
Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they exceed 80% of GDP. US government debt will exceed 100% of GDP this year.
Investment legend Marc Faber reports that once a country's payments on debt exceed 30% of tax revenue, the currency is "done for." By some estimates, the US will hit that ratio this year.
Peter Bernholz, a leading expert on hyperinflation, states unequivocally that "hyperinflation is caused by government budget deficits." Next year's US budget deficit is projected to be $1.3 trillion.
The solution many of your leaders are pursuing is to create more currency units. Here's an updated picture of the increase in the US monetary base vs. my rise in price since 2008, when your problems starting surfacing.



(Click on image to enlarge)

The monetary base has grown 205.8%, while my price is up 65.8%. This alone implies that my price in dollars is likely to climb much higher.

This is also the reason why I'm not in a bubble, as some have tried to claim. It is your central banks and bond markets that are in a bubble. The fact that my price is rising is a warning that what your leaders are doing is unsustainable and potentially dangerous to your currency.

Think about this: the US has debt backed by debt, based on debt, dependent on debt, and leveraged with debt. You can, for example, buy a bond (i.e., lend money) on margin (i.e., with borrowed money). This is not a sound way to run financial markets.

Meanwhile, the warning bells continue to sound regarding Europe's debt crisis. In just the past 30 days:

Moody's cautioned that it may cut the triple-A status of France, Austria, and the UK; and it downgraded six other European nations including Italy, Spain, and Portugal.
Standard & Poor's cut the triple-A status of France and Austria, while Italy, Spain, Portugal, Cyprus, Malta, Slovakia, and Slovenia were downgraded.
Fitch downgraded Belgium, Cyprus, Italy, Slovenia, and Spain, and stated there was a 50% chance of further cuts in the next two years.
Standard & Poor's downgraded 34 of Italy's 37 banks.
Moody's warned just last week that it may cut the credit ratings of 17 global financial institutions and 114 European ones.
The European crisis is far from over; and the path of least resistance for politicians is to create more currency units. This action can and will have clear and direct consequences: currencies will devalue, and inflation – perhaps hyperinflation – will result.

Once again, I encourage you to use me to protect some of your wealth.

How Much Is Enough?

Given the state of your monetary system, you should accumulate me (and silver) on a regular basis. Just buy some every month and put it in a safe place. After what I've witnessed throughout history, and based on the current path your government leaders insist on pursuing, I suggest using me as your savings vehicle instead of putting dollars in a bank.

If you don't own enough of me when these fiscal troubles really accelerate, I fear you will regret it. I've warned many in the past about the dilution of nations' currencies, and those who didn't heed my warnings experienced severe financial pain. Excuses won't pay the mortgage nor feed the family when the effects of currency debasement hit your home and pocketbook.

Make sure you own enough of me to make a difference to your portfolio. This means having more than a couple coins or a few shares of GLD, the latter of which is only a proxy for my price.

How do you know if you own enough? Ask yourself:

• If inflation returns, or even hyperinflation hits…
• If the economy is flat…
• If uncertainty and fear continue around the globe…
• If stock markets languish…
• If the amount of spending from the world's governments proves futile…
• If government interference in the economy continues to increase…
• If the value of the US dollar takes a major fall…
• If the world enters a recession or depression…
• If you wonder if you have enough "safe" money…

… would you feel that you own enough of me?

Buy a sufficient amount so that as your currency continues to lose value, your portfolio won't. If you do your part, I promise I'll do mine.

Your monetary friend,

Gold


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## skating101 (24 February 2012)

Starcraftmazter said:


> Just my opinion.
> 
> 
> 
> ...




Forget about who is imposing austerity, the central bankers worldwide understand they cant let ANYONE fail without causing huge credit shocks to the system hence the massive amount of liquidity which will just always be inserted to prop up anyone with debts, however the liquidity isnt being used to pay down the debt just used to pay the interest payments of existing debt. Hence the debt to GDP ratios will only get higher (in the same way taking out another credit card to pay off other credit card interest payments would)



Starcraftmazter said:


> No, also it's not the US that is extending the line of credit, it is the Fed. Do not confuse the two. Nobody in the US can override the decisions of the Fed - it is a private bank not controlled by government with the power to create money. All the central banks are in a cartel with each other, they are friends as you may say.




My mistake I know that it is not "the US" and I understand that the Fed is a private back but regardless the Federal Reserve should understand that these loans to the ECB will never get paid back



Starcraftmazter said:


> Yes. Until our own economy collapses.




However the RBA will try and prevent this by debasing our own currency (printing /interest rate cuts etc) and as such "prevent" an economic collapse but introduce higher inflation



Starcraftmazter said:


> GDP is not an overly good measure of anything anyway. For all intents and purposes, it would mean our exporters make less money, and all the repercussions that go along with that.




Hence the RBA would try to salvage our reduced productivity in our manufacturing and mining sectors by debasing our currency, correct?



Starcraftmazter said:


> First of all, interest rates matter for many reasons, currency valuation is just one of them. Above all the RBA will want to prevent our housing bubble from re-inflating, and this I think would be the most important issue for them when it comes to setting interest rates.
> 
> Second of all, lowering interest rates does not necessarily help. The Swiss central bank runs ZIRP (zero interest rate policy), and it has not helped them with currency speculators one bit. In fact they've now had to peg their currency to the Euro.




The RBA has little interest in preventing a reinflating housing bubble or they would not consider lowering interest rates.

the ZIRP may not reduce a currencies value due to speculators but as you said there are other ways and the RBA would gladly explore those just to maintain economic growth/employment etc. the path is still the same, currency devaluation race



Starcraftmazter said:


> Asset inflation happens because of low interest rates causing speculation and/or hot money inflows. The latter might happen due to excessive currency speculation (ie. when you buy a lot of AUD, you may as well put it somewhere...). This can be regulated very easily by disallowing foreigners from buying property for instance. Of course our government isn't competent enough to do that.




Surely asset inflation would also be generally caused by a debasement of ones own currency, more money in the system, less value, hence higher prices?



Starcraftmazter said:


> The men behind the central banks are the most arrogant egomaniacs in the world. They think they own the world and can do anything. Do not underestimate their hubris.
> 
> They are also having to deploy ever-crazier strategies because the economic system of the world is falling apart.




They do understand that inflation is the easiest path to reducing the value of debt and debasement is the easiest path to inflation, the question is surely how far do they need to go to make the debt serviceable?



Starcraftmazter said:


> Gold is an excellent store of value and protects against hyperinflation.




So why isnt eveyone buying gold in this inflationary environment? 



Starcraftmazter said:


> Pretty much yes. Then start all over.




And any new currency that would be needed for the reset would need to be back by something (unless they just didnt learn their lesson) and what better to back it than gold



Starcraftmazter said:


> They (the ABS) and their counterparts abroad have been doing this for decades - changing the way CPI is calculated so that it does not at all reflect inflation.
> 
> http://shadowstats.org/




Quietly stealing from the masses


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## skating101 (24 February 2012)

Glen48 said:


> • If inflation returns, or even hyperinflation hits…




Currency debasement can only lead to inflation so therefore not an "if" the only "if" is will the debasement get the debt to serviceable levels or go too far and lead to hyperinflation?



Glen48 said:


> • If the economy is flat…




Currency debasement/stimulus will ensure continued economic "development", everyone will still be employed and spending money, just the inflationary effect will slowly reduce their expendible income to zero.



Glen48 said:


> • If uncertainty and fear continue around the globe…




Uncertainty will be replaced with complacency as "printing" becomes the norm and all appears fine



Glen48 said:


> • If stock markets languish…




The underlying value of alot of stocks would remain and the currency debasement would lead to continued rallying, so investing in solid companies would be another way to avoid inflationary effects



Glen48 said:


> • If the amount of spending from the world's governments proves futile…




The spending from the world's governments will maintain employment and "development" so the effects will be less noticeable but slowly inflation will steal more and more wealth 



Glen48 said:


> • If government interference in the economy continues to increase…




See above answer



Glen48 said:


> • If the value of the US dollar takes a major fall…




The central bankers are now preemptively racing to debase their currencies so while a large fall in the US dollar is unlikely in a short period of time, it will slowly but surely occur. The US dollar value against other currencies wont change much due to other currencies following suit in the race to debase making the inflation even less noticeable. 



Glen48 said:


> • If the world enters a recession or depression…




Seems unlikely due to printing/stimulus packages, just a slow steady inflationary path to the end of fiat currencies.



Glen48 said:


> • If you wonder if you have enough "safe" money…


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## Glen48 (24 February 2012)

Greece hope to get their Debt/ GDP down 120% in 8 years time that's if they can last until 23 March 2012. 
Fund managers are investing money in Bonds that will repay 95% in 5 years time.


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## Starcraftmazter (24 February 2012)

skating101 said:


> My mistake I know that it is not "the US" and I understand that the Fed is a private back but regardless the Federal Reserve should understand that these loans to the ECB will never get paid back




Well two things;

1. If you are a central bank given the power to print money out of thin air, what difference does it make to you whether this money is paid back or not?

2. Given you are lending your money to yet another central bank which also has the ability to print money out of thin air (allabit in a different currency), how can they not be able to pay it back?



skating101 said:


> However the RBA will try and prevent this by debasing our own currency (printing /interest rate cuts etc) and as such "prevent" an economic collapse but introduce higher inflation




We will see. Politicians have said that they are against it - but at the end of the day, they don't tell their banking overlords what to do.

Still, you have to understand that to control the speculation of the magnitude that now exist, you need to take extremely aggressive actions. 




skating101 said:


> Hence the RBA would try to salvage our reduced productivity in our manufacturing and mining sectors by debasing our currency, correct?




Nothing is a given. Again, I think it would be very hard to do it effectively in a political sense. Our central bank also does not have a history of doing this, unlike the Fed, unlike the BoJ, unlike the PBoC and now unlike the ECB.

If there was a time to manipulate the AUD then the time has already come, if they are not yet doing it - even amid the calls that the currency will rise to ever higher valuations, you have to wonder if they ever plan to do it. No point once manufacturing is already destroyed.



skating101 said:


> The RBA has little interest in preventing a reinflating housing bubble or they would not consider lowering interest rates.




And perhaps they won't until the house prices declines speed up.



skating101 said:


> Surely asset inflation would also be generally caused by a debasement of ones own currency, more money in the system, less value, hence higher prices?




Higher prices for something - not necessarily hard assets.



skating101 said:


> They do understand that inflation is the easiest path to reducing the value of debt and debasement is the easiest path to inflation, the question is surely how far do they need to go to make the debt serviceable?




A few years at 10% inflation should do it.



skating101 said:


> So why isnt eveyone buying gold in this inflationary environment?




I think the answer is they are, just look at the chart of gold of the last 10 years.



skating101 said:


> And any new currency that would be needed for the reset would need to be back by something (unless they just didnt learn their lesson) and what better to back it than gold




People are the ones who need to learn a lesson, the elites favour fiat currencies due to how easy they are to manipulate.




skating101 said:


> Quietly stealing from the masses




Yep


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## skating101 (24 February 2012)

Starcraftmazter said:


> Well two things;
> 1. If you are a central bank given the power to print money out of thin air, what difference does it make to you whether this money is paid back or not?




Exactly so why not just debase your own currency and inflate to make debts more sustainable.



Starcraftmazter said:


> 2. Given you are lending your money to yet another central bank which also has the ability to print money out of thin air (allabit in a different currency), how can they not be able to pay it back?




Hence further debasement and therefore the same fundamental question, why should we not all be investing heavily in gold/core assets.



Starcraftmazter said:


> We will see. Politicians have said that they are against it - but at the end of the day, they don't tell their banking overlords what to do.




But their banking overlords would always fear a restless society where unemployment skyrocketed and asset prices fell heavily so therefore would rather debase currency in order to maintain some level of debt servicing.



Starcraftmazter said:


> Still, you have to understand that to control the speculation of the magnitude that now exist, you need to take extremely aggressive actions.




Those aggressive actions would lead to further inflation, so once again why isnt everyone buying gold?



Starcraftmazter said:


> Nothing is a given. Again, I think it would be very hard to do it effectively in a political sense. Our central bank also does not have a history of doing this, unlike the Fed, unlike the BoJ, unlike the PBoC and now unlike the ECB.




Do Australians even currently understand that inflation is a manipulated figure its something that has crept up on them so slowly that they didnt fight at all. Their most significant fear is that their house prices will fall or they would lose their job not the increase in their price of milk.



Starcraftmazter said:


> If there was a time to manipulate the AUD then the time has already come, if they are not yet doing it - even amid the calls that the currency will rise to ever higher valuations, you have to wonder if they ever plan to do it. No point once manufacturing is already destroyed.




The point would be made only once the jobs fell significantly and loan defaults increased and housing started to drop.



Starcraftmazter said:


> And perhaps they won't until the house prices declines speed up.




We are in agreement though that they would.



Starcraftmazter said:


> Higher prices for something - not necessarily hard assets.




Well the retained value of hard assets would still remain just be priced differently as the currency would be less valuable



Starcraftmazter said:


> A few years at 10% inflation should do it.




And what do you define as sustainable debt to gdp ratios? Also if thats the case why not invest significantly in gold? What other options do they have? I want someone to make a case against investing in gold or other assets with even more intrinsic value (such as oil or food)? How else does this whole chapter unravel?



Starcraftmazter said:


> I think the answer is they are, just look at the chart of gold of the last 10 years.




Yeah but surely the debasement has only just begun, correct?



Starcraftmazter said:


> People are the ones who need to learn a lesson, the elites favour fiat currencies due to how easy they are to manipulate.




Agreed however the fiat currencies have nowhere to go but down correct? Only mass deflationary debt write offs could do the opposite and the central banks have shown they wont ever allow that to happen again, correct?



Starcraftmazter said:


> Yep


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## Starcraftmazter (24 February 2012)

Everyone is not buying gold for the same reason why everyone does not march to central banks and hang the bankers. They do not know anything about money nor how it works.

There is no case against buying gold in my view, but you can check out the gold price thread - there are sure to be some there.

Food is a worthwhile investment (in terms of fertile farmland), however it is rather difficult to protect, and you cannot take it with you. It also needs labour to generate returns.

Oil is worth a lot lot lot less than gold in terms of weight and dimensions, therefore it is much harder to accumulate it in significant enough quantities let alone carry.

Gold is most valuable, is easy to carry around (relative to other things), and it has a very long history of being used as a store of value and money to transact.


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## skating101 (24 February 2012)

Starcraftmazter said:


> Everyone is not buying gold for the same reason why everyone does not march to central banks and hang the bankers. They do not know anything about money nor how it works.
> 
> There is no case against buying gold in my view, but you can check out the gold price thread - there are sure to be some there.
> 
> ...




Thanks for the reply, if we are in agreement that the central bankers will fight deflation with preemptive inflation then surely any credit crisis or deflationary event could be avoided and even an investment in stocks of those core companies, Coles, Woolworths, Telstra and oil miners etc would be just as profitable as gold?


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## Glen48 (24 February 2012)

Once the depression hits people will go to survival mode cancel the phone and use skype  or e mail or share a phone between the family, buy tinned food, use less power, cars fuel and keep cutting back on any thing they can just to survive but could  be many years of this life style.
Worry about fighting off any one who is unprepared and wanting their goods.


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## lurker123 (25 February 2012)

*The main question is "what is money?" *

It is a medium that facilitates exchange, nothing more. In order for it to be useful in facilitating exchange it must store imaginary value. This applies to both fiat currencies as well as gold. Money gets stripped of imaginary value through inflation / hyperinflation. Gold can be similarily stripped of imaginary value. As long as more and more people buy into the imaginary value of gold compared to fiat currencies the value of gold will continue to rise. However if for some reason more and more gold buyers or people who hold gold lose confidence in the value of gold it will get stripped of its imaginary value. Once gold is stripped of its imaginary value however, unlike fiat currencies it still has worth and will be priced to the worth of the metal itself. Since gold as a metal has various useful properties.

*"Where does money come from?"*

Central banks have the ability to create money out of thin air. 
*"Fractional reserve banking" simplified*
Say the central bank deposits $100 at a commercial bank and the commercial bank has a 20% reserve requirement. The commercial bank keeps $20 as deposit and lends out the other $80. The person who borrows that $80 pays someone else to do work (buys food/services e.t.c). The person who was paid (did work) deposits that $80 at the commercial bank. The commercial bank then keeps $16 and lends out $64. As before, whoever was paid for work done by the borrower deposits $64 at the commercial bank. The commercial bank then keeps $12.80 and lends out $51.20. This process continues until the original $100 deposited by the central bank approaches $500. 
So, due to fractional reserve banking, commercial banks also create money out of thin air. Money created by fractional reserve banking is created by taking on debt.
*Bank runs *
Bank runs occur when people lose confidence in the commercial bank and try to withdraw more money than the bank can cover with its reserves. E.g. continueing with the previous example the bank only has $100 in reserve while the amount deposited approaches $500. Therefore only the first $100 can be withdrawn.

*Deflation*

After reading all this information alot of people think that fractional reserve banking should be replaced with full reserve banking where commercial banks can't create money out of thin air. They also think that fiat money should be replaced by gold which central banks can't create out of thin air. However they are wrong. As stated before money created by fractional reserve banking is created through debt, therefore fractional reserve banking creates jobs. The supply of fiat money can increase with population growth whereas the production of gold, a rare metal cannot keep up with population growth. If gold was used instead of fiat money deflation would result. The value of gold will continue to increase because production cannot keep up with population growth. Why is this bad? Deflation decreases investment and lending because hoarding gold will be preferable, therefore the rate of job creation cannot keep up with population growth. It transfers wealth from borrowers and holders of illiquid assets to the benefit of savers and holders of liquid assets. What this means is that deflation is another interest rate on top of the interest rate on a mortgage and this particular interest rate keeps increasing. 
The Great Depression was a period of deflation.

*Inflation*

Inflation is the opposite of deflation and occurs when the supply of money increases more than population/job growth. It decreases the value of money and causes the price of goods to rise. Another effect is it basically taxes savers/lenders to subsidize borrowers. Using the example of a mortgage if the interest rate on a home loan is 7% and inflation is at 6% then the interest rate in effect becomes 1%. If inflation is at 20% then 7 - 20 = -13% which means the amount owed has effectively decreased by 13%, this is good for the borrower assuming his/her income increases with inflation. Inflation can over-stimulate investment and cause bubbles e.g. housing or dotcom bubble. When hyperinflation occurs the value of money continues to decrease rapidly. It renders money and savings worthless and wipes out debt causing the currency to no longer be viable as a medium of exchange.

*"Why is there so much government and personal debt?"*

Money is introduced through debt as the central banks continue to create money out of thin air to increase the money supply, more debt is created when commercial banks loan out the money deposited by the central banks. All that debt needs to be held by someone. Capitalism, for someone to have money someone else needs to be in debt.


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## skating101 (25 February 2012)

Glen48 said:


> Once the depression hits people will go to survival mode cancel the phone and use skype  or e mail or share a phone between the family, buy tinned food, use less power, cars fuel and keep cutting back on any thing they can just to survive but could  be many years of this life style.
> Worry about fighting off any one who is unprepared and wanting their goods.




That would be the outcome in the deflationary situation where money became scarce (eg 1930's america) however the central banks have already proved that they wont allow a deflationary event and they will always be ready to provide liquidity. 

The liquidity/stimulus packages will keep everyone in a job and keep everything normal so long as hyper inflation could be avoided.


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## skating101 (25 February 2012)

Here is another afew more basic questions:

If all central bankers are printing money and issuing it in the form of loans to governments provide stimulus for an economy. Is it inflationary? 

If the economic stimulus only provides $0.5 to GDP for every $1 of stimulus then how could the debt levels ever come down to sustainable levels?

Would direct monetisation of this debt (print money without creating a loan and pay it off directly) be inflationary or deflationary? (i suspect hyperinflationary)


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## Tysonboss1 (25 February 2012)

skating101 said:


> 1, Gold may have no fundamental use outside of jewellery however what it does have is the ability to not be used up and not to go off such as numerous other commodities.
> 
> 2, As fiat currency is slowly debased to zero, while those other assets would also retain their value, they would not be suitable as backing for a new currency which would surely be needed, correct?
> 
> ...




1, yeah, so it just sits there, ever increasing in quantity, not producing anything and the only way it can make money is by having another person coming and offering you more for it.

2, whos to say there will be another currency or that it wwould be backed by gold, What if it is replaced by a new fiat currency. Secondly, even if the new currency came in and it was backed by gold, why would I need gold, My farmland, businesses, oil fields, etc.etc would just start accepting the new currency for their goods and services.

3, it wouldn't have to be backed by oil and gas, it could just be a new fiat currency.

4, great businesses are always better investments than gold or cash over time, if you purchase them at rational prices


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## Tysonboss1 (25 February 2012)

> Currency debasement can only lead to inflation so therefore not an "if" the only "if" is will the debasement get the debt to serviceable levels or go too far and lead to hyperinflation?





Our currency being "Fiat" if you want to call it that, Is very dynamic. It can be both inflated and deflated as policy makers see fit. Deflation is seen as a bigger threat than Inflation, So policy makers generally side with monetary policy that is a little bit inflationary ie target 3%.




> Currency debasement/stimulus will ensure continued economic "development", everyone will still be employed and spending money, just the inflationary effect will slowly reduce their expendible income to zero.




Not true, Our money is based on debt. And when you have massive amounts of capital slashed from the banking sector, as happened during the GFC. followed by a period where the private sector is desperately deleveraging, followed by greek euro bonds being slashed by 70%, the money supply under the fractional reserve system is at serious risk of a negative feedback cycle of deflation, Hence why governments have stepped in to try and fill the gap and stimulate activity.




> Uncertainty will be replaced with complacency as "printing" becomes the norm and all appears fine




You understand that money is not actually being printed right, and the actions that are being taken are simply shuffling existing capital from short dated obligations to longer dated ones at decreased interst rates, all of which eventually expire.




> The underlying value of alot of stocks would remain and the currency debasement would lead to continued rallying, so investing in solid companies would be another way to avoid inflationary effects




Yes, over time. good businesses and assets will increase in value as the currency loses value, However. If the montentary policy caused deflation prices on everything would fall, business and consumers would not be able to met debt obligations, and a negative feedback cycle of delation would push the world into depression, Hence why they are taking the actions they are.




> The spending from the world's governments will maintain employment and "development" so the effects will be less noticeable but slowly inflation will steal more and more wealth




Real wealth is assets, not cash. cash is a shorterm store of value, a medium of exchange, it is not a longterm store of wealth, and it shouldn't be. Inflation does not take the value of you assets outside of cash away.




> The central bankers are now preemptively racing to debase their currencies so while a large fall in the US dollar is unlikely in a short period of time, it will slowly but surely occur. The US dollar value against other currencies wont change much due to other currencies following suit in the race to debase making the inflation even less noticeable.




As I said they are racing to will gaps in the money supply caused by private sector capital destruction and deleveraging. All the actions they take, like a mortgage eventually expire and if not replace by private sector expansion or more government stimulas will again see deflationary pressure



> Seems unlikely due to printing/stimulus packages, just a slow steady inflationary path to the end of fiat currencies




In disagree, there will not be an end to fiat currency, the numbers printed will just slowly get mor zeros, and when it gets to crazy, it will just be replaced with a new fiat.


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## skating101 (25 February 2012)

Tysonboss1 said:


> Our currency being "Fiat" if you want to call it that, Is very dynamic. It can be both inflated and deflated as policy makers see fit. Deflation is seen as a bigger threat than Inflation, So policy makers generally side with monetary policy that is a little bit inflationary ie target 3%.




Ok if that was actually the real level of inflation then money in the bank at 5% would be worth more in the future than what is it now, 2% more each year in fact



Tysonboss1 said:


> Not true, Our money is based on debt. And when you have massive amounts of capital slashed from the banking sector, as happened during the GFC. followed by a period where the private sector is desperately deleveraging, followed by greek euro bonds being slashed by 70%, the money supply under the fractional reserve system is at serious risk of a negative feedback cycle of deflation, Hence why governments have stepped in to try and fill the gap and stimulate activity.




But the governments are not stimulating GDP growth they are instigating austerity (which only further hampers ability to pay down existing debt) and issuing further debt (to replace the existing debt that is being written down)

Why not just forget about debt writedowns and refinance all existing debt with incredibly low interest, no deflation.



Tysonboss1 said:


> You understand that money is not actually being printed right, and the actions that are being taken are simply shuffling existing capital from short dated obligations to longer dated ones at decreased interst rates, all of which eventually expire.




I know the money isnt being printed but for example greece gets a handout which is a loan which is used to pay existing debt obligations increasing their overall debt loading. Why not just force the debt holders to refinance all their existing debt at 0.01% interest and let greece grow its way out without issuing further debt? They would have sustainable debt to gdp ratios because the debt would be such low interest



Tysonboss1 said:


> Yes, over time. good businesses and assets will increase in value as the currency loses value, However. If the montentary policy caused deflation prices on everything would fall, business and consumers would not be able to met debt obligations, and a negative feedback cycle of delation would push the world into depression, Hence why they are taking the actions they are.




I understand the deflationary cycle and why they are trying to avoid it by issuing new debt to replace the writedowns



Tysonboss1 said:


> Real wealth is assets, not cash. cash is a shorterm store of value, a medium of exchange, it is not a longterm store of wealth, and it shouldn't be. Inflation does not take the value of you assets outside of cash away.




I didnt mean wealth in terms of assets i meant cash so they are stealing the "value" of the cash in the long term, or its "wealth"



Tysonboss1 said:


> As I said they are racing to will gaps in the money supply caused by private sector capital destruction and deleveraging. All the actions they take, like a mortgage eventually expire and if not replace by private sector expansion or more government stimulas will again see deflationary pressure




But is there not a sustainable level of debt at a particular interest rate that will not hamper a countries ability to grow GDP?



Tysonboss1 said:


> In disagree, there will not be an end to fiat currency, the numbers printed will just slowly get mor zeros, and when it gets to crazy, it will just be replaced with a new fiat.




I understand a new fiat would be issued and I also understand that gold backed currency could not return with ever increasing population so therefore forget about investing in gold why not invest in core companies that retain value (so long as deflationary events are preemptively counteracted with issuance of new debt or refinancing of existing debt to sustainable interest levels)?


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## Glen48 (25 February 2012)

Real estate is a consumable just  like a car you pay x for it and depending on the market the prices goes up or down.
Classic cars go up in price due to demand and numbers, housing is the same.

 A 1980 Commodore you paid say $10 K is still worth $500 or so and stil an asset.

 Yes they are all worth some thing how much is the big question and do you have a buyer at your price or theirs.
 Gold is the same it is a bubble big question when will it pop and at what price.
15 yrs ago housing was starting to grow now it has popped and you need to look and move on to the next bubble.


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## skyQuake (25 February 2012)

Glen48 said:


> Real estate is a consumable just  like a car you pay x for it and depending on the market the prices goes up or down.
> Classic cars go up in price due to demand and numbers, housing is the same.
> 
> A 1980 Commodore you paid say $10 K is still worth $500 or so and stil an asset.
> ...




I doubt that very much. Housing doesnt just get consumed, it doesnt get used and 'thrown away'. Sure prices may fluctuate in value but not to the extent of a car (which will always almost go down). 
You can keep a house and land in perpetuity with some good maintenance and renovations, which you definitely cannot do with a car.


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## Glen48 (25 February 2012)

skyQuake said:


> I doubt that very much. Housing doesnt just get consumed, it doesnt get used and 'thrown away'. Sure prices may fluctuate in value but not to the extent of a car (which will always almost go down).
> You can keep a house and land in perpetuity with *some good maintenance and renovations, *which you definitely*(CAN )* cannot do with a car.



 You answered your own statement


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## Tysonboss1 (25 February 2012)

> Ok if that was actually the real level of inflation then money in the bank at 5% would be worth more in the future than what is it now, 2% more each year in fact




Not really, because you have to pay tax out of that 5% you earned, so after tax your only earning say 3.5% take 3% inflation out your left with 50c for every $100 you hold, then the 1 or 2 years of higer inflation every now and then would wipe out any real growth seen. At best high interest cash accounts hold the value of your money.

And thats OK with me, I don't believe simply holding cash in a bank account should make you rich, they way to earn real returns is to invest it back into real investments ie, Businesses, cash produceing assets etc etc, this in turn builds the real economy.




> But the governments are not stimulating GDP growth they are instigating austerity (which only further hampers ability to pay down existing debt) and issuing further debt (to replace the existing debt that is being written down)




Only in the countries that have been spending to much, offcourse to get them out of a hole you got to stop them digging out the bottom, Mean while stimulas is happening in other parts of the world and a large part of the world is seeing natural organic growth.



> Why not just forget about debt writedowns and refinance all existing debt with incredibly low interest, no deflation.




No doubt that is one of the options they have looked at.




> I know the money isnt being printed but for example greece gets a handout which is a loan which is used to pay existing debt obligations increasing their overall debt loading. Why not just force the debt holders to refinance all their existing debt at 0.01% interest and let greece grow its way out without issuing further debt? They would have sustainable debt to gdp ratios because the debt would be such low interest




well basically they are getting a big priciple write down combined with cheaper interest rates.




> I didnt mean wealth in terms of assets i meant cash so they are stealing the "value" of the cash in the long term, or its "wealth"




Think of it as a penalty for hoarding cash, cash is not supposed to be horded,  the cornering of the money supply has caused economic collapse in the past, Our system threatens anyone hording large sums of our economic blood with a loss of a value.

As I said earlier i am very comfortable with this.




> But is there not a sustainable level of debt at a particular interest rate that will not hamper a countries ability to grow GDP?




Yes, but that number changes over time, basically in the good years governments should be paying of their debts so that when the bad times happen they have savings and clear balance sheets from which to stimulate the economy with.





> why not invest in core companies that retain value (so long as deflationary events are preemptively counteracted with issuance of new debt or refinancing of existing debt to sustainable interest levels




Thats what I do,

I hold only a small portion of my wealth in cash, I hold about 12months living expenses in cash accounts, and an emergancy cash reserve in my company and thats it.

The rest of my funds are deployed in real assets, ie, businesses, real estate, farmland all of which produce cash which I can then deploy it building further assets.

Buffet says, Cash is like oxygen, You always need it around, But you don't have to have excessive amounts. I tend to agree with him.


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## Tysonboss1 (25 February 2012)

Glen48 said:


> Real estate is a consumable .




Thats true for the actual building, ie bricks tiles fittings etc.

But not true for the land component,

The land component is an inflation hedge asset that produces nothing, but goes up and down in value and should provide some sort of hedge against inflation.

The building is as you described a consumable where the various componets slowly wear out at different speeds, ie, carpets etc 5 - 10years, some other parts of building 20 - 80years to wear out, other perhaps over 150years to wear out.

for example a real estate investment might look somthing like this,

Property total value $350,000=

land content - $200,000 ( earns nothing but holds value, may increase with population and inflation )

Building and other improvements - $150,000 ( earns a $15,000 rent p/a, 10% some of which must be reinvested to maintain building and to stay in business, parts of building that take 20 - 150  years to depreatiate will also provide a degree of inflation protection and growth)


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## theasxgorilla (25 February 2012)

Tysonboss1 said:


> Building and other improvements - $150,000 ( earns a $15,000 rent p/a, 10% some of which must be reinvested to maintain building and to stay in business, parts of building that take 20 - 150  years to depreatiate will also provide a degree of inflation protection and growth)




Tyson, what is your view on buildings which have an architectural quality?  For example, old buildings, with desirable "character".  The ones that they simply don't make like they used to.  

Do these have additional effectiveness as a hedge against inflation, since there is some scarcity factor to the building, which can act as an offset to depreciation from things like building wear and tear.


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## Tysonboss1 (25 February 2012)

theasxgorilla said:


> Tyson, what is your view on buildings which have an architectural quality?  For example, old buildings, with desirable "character".  The ones that they simply don't make like they used to.
> 
> Do these have additional effectiveness as a hedge against inflation, since there is some scarcity factor to the building, which can act as an offset to depreciation from things like building wear and tear.




Yes, obviously a building that is well built and can last a couple of hundred years would have the remaining portions value rise with inflation, however fittings of shorter life will still decay in value.

I guess it can be a double edge sword though, if the building is heritage listed and not able to be knocked down it can hold the land value back, 

For example in Sydney there are heritage buildings sitting on land that would be suitable for 20 level office buildings, where the land. value should be $20m, but that value can't be unlocked with the hertitage building sitting on it,


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## Aussiejeff (26 February 2012)

Tysonboss1 said:


> Yes, obviously a building that is well built and can last a couple of hundred years would have the remaining portions value rise with inflation, however fittings of shorter life will still decay in value.
> 
> I guess it can be a double edge sword though, if the building is heritage listed and not able to be knocked down it can hold the land value back,
> 
> For example in Sydney there are heritage buildings sitting on land that would be suitable for 20 level office buildings, where the land. value should be $20m, but that value can't be unlocked with the hertitage building sitting on it,




I'm sure the title of this thread is....

"The Global Economic Crisis and Its Effect on the _*Australian Currency*_"

All this RE guff belongs elsewhere...


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## skating101 (26 February 2012)

Tysonboss1 said:


> Not really, because you have to pay tax out of that 5% you earned, so after tax your only earning say 3.5% take 3% inflation out your left with 50c for every $100 you hold, then the 1 or 2 years of higer inflation every now and then would wipe out any real growth seen. At best high interest cash accounts hold the value of your money.




I suspect inflation would be required to be higher than 3% in order to make existing debt loadings sustainable without significant refinancing to reduce interest rates (and thats just existing debt) 



Tysonboss1 said:


> And thats OK with me, I don't believe simply holding cash in a bank account should make you rich, they way to earn real returns is to invest it back into real investments ie, Businesses, cash produceing assets etc etc, this in turn builds the real economy.




I agree with you that just holding cash shouldnt make you rich however it should at least retain its value, anything else is just theft.



Tysonboss1 said:


> Only in the countries that have been spending to much, offcourse to get them out of a hole you got to stop them digging out the bottom, Mean while stimulas is happening in other parts of the world and a large part of the world is seeing natural organic growth.




Except that even the US has a significant budget deficit and ever increasing debt burden and is making almost no effort to try and reduce this. Surely the debt loadings will only get larger (unless a government didnt actually want to get reelected.



Tysonboss1 said:


> No doubt that is one of the options they have looked at.




And from your description is the only real way to solve this.



Tysonboss1 said:


> well basically they are getting a big priciple write down combined with cheaper interest rates.




If i lent someone $1000 @ 5% interest and then they said they couldnt pay however I could either get $1000 in an indetermined amount of time @ 0.15% interest or get $300 @ 2.5% interest, which would you choose?



Tysonboss1 said:


> Think of it as a penalty for hoarding cash, cash is not supposed to be horded,  the cornering of the money supply has caused economic collapse in the past, Our system threatens anyone hording large sums of our economic blood with a loss of a value.




You do understand the banks dont keep the money in a vault right? All money that gets deposited at a bank get relent out by the bank to stimulate the economy, unfortunately most of this money has just been used to over inflate australian real estate, a completely unproductive asset which does not assist the australian economy at all (unless you build houses of course).

 This money could have been used to develop australia's other industries and make australia a world leader on another stage rather than property prices



Tysonboss1 said:


> As I said earlier i am very comfortable with this.







Tysonboss1 said:


> Yes, but that number changes over time, basically in the good years governments should be paying of their debts so that when the bad times happen they have savings and clear balance sheets from which to stimulate the economy with.




Except that in the good years governments dont



Tysonboss1 said:


> Thats what I do,
> 
> I hold only a small portion of my wealth in cash, I hold about 12months living expenses in cash accounts, and an emergancy cash reserve in my company and thats it.
> 
> The rest of my funds are deployed in real assets, ie, businesses, real estate, farmland all of which produce cash which I can then deploy it building further assets.




Good strategy and wouldve worked perfectly well during a credit boom environment where debt was ever expanding to push up the prices of your real estate. See previous answer regarding investment in real estate.


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## Starcraftmazter (26 February 2012)

skating101 said:


> Thanks for the reply, if we are in agreement that the central bankers will fight deflation with preemptive inflation then surely any credit crisis or deflationary event could be avoided and even an investment in stocks of those core companies, Coles, Woolworths, Telstra and oil miners etc would be just as profitable as gold?




Not at all, see the results of Weimar Republic and the extreme under performance of their stock market at the time during the hyper inflationary stages of it's existence relative to gold.


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## Glen48 (26 February 2012)

How China Plans to Change the Way Gold Is Traded
By Porter Stansberry
Saturday, February 25, 2012
Today, the global price of gold is largely controlled by just five "bullion banks" in London. These banks establish the price twice a day by offering to buy or sell gold at a fixed price. The world's other markets operate largely off these prices.

Manipulating the price of gold (and thus the value of other major currencies, like the U.S. dollar) is possible by influencing those five bullion banks: Bank of Nova Scotia, Barclays Capital, Deutsche Bank, HSBC, and Societe Generale.

Whether that's happening right now or not, I can't say. But it is a matter of public record that the world's eight leading governments conspired from November 1961 until March 1968 to suppress the price of gold by using their central banks to manipulate the London bullion market. So it has happened before.  

Meanwhile, the trading range of the gold price suggests that the market continues to be heavily manipulated.  

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Why do I believe that?  

Because as a precious metal with no yield, gold should be a fairly volatile asset – like silver and platinum are. But when you look at how many times the price of gold moves by more than 5% in a day, you find that it almost never happens.

Over the last 10 years, the price of gold has moved up or down by more than 5% on only 10 occasions. The same volatility has occurred in silver 80 times. It has happened in oil 137 times.

No explanation other than manipulation can account for gold's exceptionally low volatility. It simply doesn't trade like a free-market commodity.

As I explained yesterday, to control the market for gold, the Chinese must not only accumulate massive gold reserves (which it's doing), it must establish the world's leading exchange – and regulate it honestly.

And that's exactly what's happening… 

For decades, Chinese citizens were barred from owning physical gold under penalty of imprisonment. Then in September 2009, China became the only country in the world to promote gold ownership to its citizens. The government started a major campaign to encourage all citizens to buy gold. Locals can now buy gold bars, which come in four sizes, at ANY Chinese bank in the country. If you don't think that's unusual, try buying gold at ANY bank in the United States and watch the funny look you get from the teller.

The Chinese government has also set up thousands of gold "stores" around the country… which look like jewelry stores, but instead sell bars of gold.

As Forbes recently reported at the scene of one such gold store…  

The crowds surge shoulder to shoulder inside Beijing's Cai Bai store to buy 5 to 10 gram slivers of gold and jewelry of every size and shape. It's one dramatic example of the gold craze in China, which is officially and unofficially promoted by the Communist government… And it is an integral part of the pro-gold preference by the Chinese public and its government.

My friend Simon Black – who writes about geopolitical, expatriation, and wealth issues on his Sovereign Man website – also visited one of these Chinese gold stores on a recent trip, and said…  

On the inside, these gold stores look like jewelry shops – armed guards, glass viewing cases, etc. But instead of diamond crusted earrings and white star sapphires, you see bars. Lots of bars. The government mints bars in sizes ranging from 5 grams (which are so tiny they're actually cute) to 1 kilogram. The prices are updated instantly – they have a Bloomberg screen that tracks the spot price… and the bars are all serialized and [offer] 0.9999 purity, the same as you would get from Switzerland. They are also certified by the gold exchange, which validates the quality.  

We went into several stores and saw Chinese people buying like crazy… all with cash. The most popular denominations were 10 grams and 50 grams, as well as every piece of jewelry in sight. I'm surprised the mint shops didn't sell out [as] the inventory was flying off the shelf. 

Why would the Chinese government set off a frenzy for gold? 

Well, here's one thing to remember… the Chinese government doesn't pay much attention to human rights or property rights. It could demand all of its citizens' gold at any time – just like FDR did in the U.S. back in 1933.

But all of these facts are just hints about what's to come. The real story won't be unveiled until June. That's when China will open something called the Pan Asia Gold Exchange (PAGE). This is a direct competitor to the London Metals Exchange and the COMEX in New York.

The way things work right now, the futures market in London "fixes" the spot price of gold each morning and afternoon, based on trading in London and on America's COMEX market.  

But both of these markets back gold contracts with only 10% of the actual metal. The new China PAGE market is expected to have a much larger gold backing and could change the way gold is traded.

As James Turk's GoldMoney site recently reported:  

The potential effects cannot be underscored enough – PAGE is clearly preparing the world for a Chinese world reserve currency, and is doing this by bringing gold, and by extension silver, back into the Chinese economy.

Forbes wrote about the development…  

It means the spot market in gold could be headed for China – and away from London's Metals Exchange or the Comex in New York. It also means that the Chinese currency – not dollars – will for the first time become the ruling currency used in one of the major speculative commodities of our age. All eyes will be on the influence of the gold trade in China rather than New York, London, Switzerland, or South Africa.

For several years, we've been warning about the loss of world reserve currency status for the U.S. dollar. We have worried about our currency because we understood the propensity of governments to steal from their citizens through inflation.  

With roughly half of our national debt held by foreigners, we have long believed efforts to print away our obligations will prove catastrophic for America's leading international position – and most especially for the role of our dollar as the world's leading reserve currency.

But until recently, we were unsure of the exact mechanism by which the dollar would be replaced. Now, we see how it will unfold…  

The Chinese will slowly hedge their exposure to the dollar by becoming the world's leading gold investors. By taking over the world's gold markets and building a huge stockpile of gold, they will be able to back their currency with the world's traditional form of money.

Once they are ready to make the yuan freely convertible, they will have created tremendous demand for their bonds and bills by making their currency the world's most reliable… and the only one backed with gold.  

The impact on the dollar could be catastrophic… And every day the dollar falls, China's gold stockpile will grow more valuable (and more powerful). You can protect you and your family from this potential collapse with a handful of very simple steps… the first one being to own plenty of gold.

Good investing, 

Porter Stansberry


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## Tysonboss1 (26 February 2012)

> I agree with you that just holding cash shouldnt make you rich however it should at least retain its value, anything else is just theft.




As discussed, if you put it in a high interest bearing account it will retain it's value.




> Except that even the US has a significant budget deficit and ever increasing debt burden and is making almost no effort to try and reduce this. Surely the debt loadings will only get larger (unless a government didnt actually want to get reelected.




They have more tools to work with than a country like greece, they will be ok. They have encountered and solved bigger problems in the past.



> And from your description is the only real way to solve this.




I am sure there are people smarter than me and you working on the problem, they will work it out




> If i lent someone $1000 @ 5% interest and then they said they couldnt pay however I could either get $1000 in an indetermined amount of time @ 0.15% interest or get $300 @ 2.5% interest, which would you choose?




Well it's not quite as simple as that, if there is no chance they can pay the priciple back in a reasonable time it might be worth while taking a hair cut rather than taking a total loss is the end up defaulting.

Dropping to an ultra low interest rate and extending the term to say 50years will like wise see the market value of that $1000 bond down below $300 any way, so I take a haircut anyway and end up with less interest aswell.



> You do understand the banks dont keep the money in a vault right? All money that gets deposited at a bank get relent out by the bank to stimulate the economy,




Yes I know, Thats why you don't lose as much value to inflation if you have it in the bank. so the result is this.

Bury the cash in a vault - Recieve a penalty for hoarding by loss of value by inflation

Bank It - Recieve alot of protection from inflation, and loss

Invest it well - Protect your principle from inflation, recieve income and capital growth



> This money could have been used to develop australia's other industries and make australia a world leader on another stage rather than property prices




It does, Funding the development of property is a sound thing, we all need a place to live.

Also the banks have funded many economy building projects, especially the mining sector.






> Except that in the good years governments dont




Australia did during the john howard years we cleared out debt and had billions in surplus.

the chinese are doing it, chile is doing it, most developing nations are doing it.



> Good strategy and wouldve worked perfectly well during a credit boom environment where debt was ever expanding to push up the prices of your real estate. See previous answer regarding investment in real estate




Yes it has worked well, and still is working well, and always will work well.


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## Tysonboss1 (26 February 2012)

Aussiejeff said:


> I'm sure the title of this thread is....
> 
> "The Global Economic Crisis and Its Effect on the _*Australian Currency*_"
> 
> All this RE guff belongs elsewhere...




our comments have been about inflation which are not outside the scope of the threads title.

Also the dicussion which only went over 5 posts was started by questions from the OP.


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## fatmango (27 February 2012)

Hope this is not getting off the topic too much but as interest rates are influencing the $AUD here goes - I keep reading newspaper reports about our banks paying high interest rates overseas to borrow money on the wholesale market. Can someone please explain this to me. Aren't interest rates overseas around 0 to 0.05%? Are wholesale rates different again?


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## Glen48 (27 February 2012)

My understanding is the USA feds are printing money and giving it to the banks to lend out at 0  to .5 % and I guess would depend on who wants the loot

Where the  OZ banks are borrowing money at a higher rate and maybe this is where the feds get some return on their money.


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## Starcraftmazter (28 February 2012)

fatmango said:


> Hope this is not getting off the topic too much but as interest rates are influencing the $AUD here goes - I keep reading newspaper reports about our banks paying high interest rates overseas to borrow money on the wholesale market. Can someone please explain this to me. Aren't interest rates overseas around 0 to 0.05%? Are wholesale rates different again?




Our banks do not borrow money from foreign central banks. Some of them did during the dark days of the GFC panic - but that was an isolated event in the way banks get funding.

Our banks issue bonds into foreign markets (and our domestic market), and have *private* investors bid for them.

All in all, interest rates set by foreign central banks (or our central bank) are irrelevant, as the banks will get the money at the interest rates which these private investors are willing to lend the money to our banks at.


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## Tysonboss1 (28 February 2012)

Starcraftmazter said:


> Our banks do not borrow money from foreign central banks. Some of them did during the dark days of the GFC panic - but that was an isolated event in the way banks get funding.
> 
> Our banks issue bonds into foreign markets (and our domestic market), and have *private* investors bid for them.
> 
> All in all, interest rates set by foreign central banks (or our central bank) are irrelevant, as the banks will get the money at the interest rates which these private investors are willing to lend the money to our banks at.




correct,

The funding comes from very diverse sources,

Eg, 

domestic bank accounts 0.1% interest, 
domestic High interest bank accounts 5.25%,
domestic Term deposits circa 5%,
domestic Bonds circa 4-5%, 
Asx listed debt equites ie, cba pearls circa 7%,
Over seas money markets,
Overseas bonds

and the list does go on,

Another factor to think about, Even if they are sourcing over seas bonds the low coupon interest does not actually give a fair indication of the true cost of the capital because they will have to pay to hedge the forex risk. because they don't want to borrow $1Billion US dollars and then have the Aussie dollar collapse back to 50US cents, and have to pay back $2Billion aussie dollars.


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## Tyler Durden (28 February 2012)

Glen48 said:


> How China Plans to Change the Way Gold Is Traded
> By Porter Stansberry
> Saturday, February 25, 2012




Thanks so much, that was a great read. Definitely accords with my limited experience so far (held shares in a gold mining company taken over by the Chinese).


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## fatmango (3 March 2012)

Starcraftmazter said:


> Our banks do not borrow money from foreign central banks. Some of them did during the dark days of the GFC panic - but that was an isolated event in the way banks get funding.
> 
> Our banks issue bonds into foreign markets (and our domestic market), and have *private* investors bid for them.
> 
> All in all, interest rates set by foreign central banks (or our central bank) are irrelevant, as the banks will get the money at the interest rates which these private investors are willing to lend the money to our banks at.




thank you


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## fatmango (3 March 2012)

Tysonboss1 said:


> correct,
> 
> The funding comes from very diverse sources,
> 
> ...




and thank you! I take it then that when athe media refers to wholesale markets they are talking about these bond markets mentioned in these posts.


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## Starcraftmazter (4 March 2012)

fatmango said:


> and thank you! I take it then that when athe media refers to wholesale markets they are talking about these bond markets mentioned in these posts.




That's right.


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## skating101 (8 March 2012)

So, it appears a deflationary event is on the horizon.

Greece appears to be heading to a default either technical or not.

The Federal Reserve has made it clear they will not print in the short term at least, perhaps they are waiting for a significant deflationary event.

This default would be a largely deflationary event and would be reflected in a flight back to the $US.

The $AU is currently at unsustainably high levels and even Australian industry wants a significant reduction in the $AU. 

So could any of you make an argument why the $AU will rise against the $US over the next few months?

During 2008 after lehman brothers collapse the $AU/$US fell from 95c to 60c in the space of 4 months.

Why not just put the money into $US now and just await the deflationary event?


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## Starcraftmazter (9 March 2012)

skating101 said:


> Why not just put the money into $US now and just await the deflationary event?




Because there is too much crazy **** happening all the time.


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## Timmy (9 March 2012)

Starcraftmazter said:


> Because there is too much crazy **** happening all the time.




"All the crazy **** I did tonight, those'll be the best memories"


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