The Global Economic Crisis and Its Effect on the Australian Currency

[skating101]

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

 

[theasxgorilla]

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.

 

[theasxgorilla]

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.

 

[theasxgorilla]

8) Why should I not buy gold?

Because you already have enough?

 

[Tysonboss1]

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.

 

[skating101]

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.

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?

 

[howmanyru]

But gold is sooooo pretty, sooooo shiny !!

 

[Starcraftmazter]

Just my opinion.

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.

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.

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.

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.

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.

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.

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.

8) Why should I not buy gold?

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

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.

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/

 

[Glen48]

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

 

[skating101]

Just my opinion.



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.

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)

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

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

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?

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

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?

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?

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

So why isnt eveyone buying gold in this inflationary environment?

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

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

 

[skating101]

• 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?

• 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.

• If uncertainty and fear continue around the globe…

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

• 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

• 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

• If government interference in the economy continues to increase…

See above answer

• 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.

• 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.

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

 

[Glen48]

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.

 

[Starcraftmazter]

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?

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.

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.

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.

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.

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.

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.

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.

Quietly stealing from the masses

Yep

 

[skating101]

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.

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.

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.

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?

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.

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.

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

We are in agreement though that they would.

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

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?

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?

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?

Yep

 

[Starcraftmazter]

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.

 

[skating101]

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.

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?

 

[Glen48]

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.

 

[lurker123]

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.

 

[skating101]

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.

 

[skating101]

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)