gold heading for $ 300, page-49

Lesson on Deflation -v- Inflation from the Kenneth Gerbino site.

1. The money supply (MZM – zero maturity or immediately available money) in the U.S. has already increased by $1 trillion in the past 14 months yet most commentators are fixated on M1 which is an obsolete measurement of money supply because money is swept from these M1 accounts every night into interest bearing money markets (not counted as M1). Therefore the so called monetary base is useless as an indication of the nation’s money supply. Because of this huge confusion people are worried about a “deflation” because M1 is going sideways. On the contrary, we are being flooded with money and because of the stress on Wall Street much more is coming and this will be very inflationary.
2. The bailout of the financial institutions Fannie, Freddie, AIG and the consolidation of investment banks like Merrill and probably Morgan Stanley into commercial banks will create institutions that cannot fail. Hence the entire professional hierarchy of these new giants will certainly lean towards investments and more financial gimmicks (some to be created in the future) as speculative as possible to make more year end bonuses. Top management who can now also make huge bonuses could care less as Uncle Sam will be there to bail them out. This is certainly a moral hazard concept that will cause taxpayers huge pain in the future.
3. China and India have both doubled their money supplies in just the last 5 years! I am expecting 10-15% annual inflation rates in both these countries for the next 3-4 years. This will have a dramatic positive effect on gold demand and prices and will dwarf the U.S. and European demand for gold.
4. The Inflation vs. Deflation debate is a debate between Knowledge and Stupidity. History and Fantasy. Understanding and Confusion. When a stock portfolio goes from $2 million to $1 million this is in fact a “deflated” value but this does not cause a deflation in the economy. Even with $10 trillion of stock market losses it has little effect on the general price level of goods and services in an economy. The crash of 1987 saw $15 trillion of stock and bond losses in the U.S. An historic loss of asset values at the time. Yet inflation in 1988 and 1989 averaged 3.2% and 4.3% respectively. There was no deflation. The same concept is true for real estate. Real Estate losses in 1990-91 were in the trillions and the inflation rates in 1990, 91, 92 averaged 4% annually. There was no deflation. There never is with paper money.
5. Do not confuse financial assets, real assets and money ….they are very different animals. The deflation fears are promoted by the banking establishment economists as an excuse to print more money. In a paper money system deflation is basically impossible. Yes, “deflated” prices of assets can take place but that is a market mechanism of asset prices and asset values and nothing to do with a deflation in the economy.
6. The great deflation and Depression in the U.S. in the 1930’s was caused by three factors. Treasury Secretary Mellon who was clueless on the theories and practices of money and credit thought that because the stock market was going up in the late twenties that the money supply would explode and we would have “inflation” so he instigated a horrendous margin increase to curb stock prices and liquidations then followed and got out of hand. He also raised taxes! On top of that the Federal Reserve actually drained money out of the banking system. This caused a panic and a true deflation. It was the work of government intervention. When Credit Anstalt (major Austrian bank) went under in May of 1931, it brought down many British and U.S. banks and started the banking crises of the 1930’s.

7. There will be no deflation. If your adviser or broker or newsletter writer ever mentions this word…send him this article and wise him/her up. Inflation is here to stay as prices have not gone down in this country in any year for the last 60 years despite the calls of the deflationists. During this time, despite market crashes, horrible recessions, and numerous real estate busts we have had no deflations. Paper money is inflationary and we are going to be flooded with more of it before the bailout of the global financial system is completed.

8. Nancy Pelosi (Speaker of the House) and Barney Frank (Chairman of the Banking Committee) want to have Congress handle the current financial crises. This is almost as bad as it gets. There is only a handful of men in Washington that understand honest monetary policy. Friend Congressman Ron Paul is one of the few. The Congressional solution will be to flood the country with even more money and this will take the heat off the Fed and Treasury for debasing the currency. They will socialize Wall Street and under the guise of protecting people give the bankers carte blanche to speculate, take huge bonuses and never have to worry about losses as the Fed will bail them out. The real hidden price of all this is the destruction of the middle and lower income earners standard of living. There is no free lunch.

9. Merrill Lynch every year does a very extensive and well known Global Survey of Money Managers. The results just announced are so off the wall that it made me add another $1,000 an ounce to my gold price projection. 7 out of 10 managers expect lower inflation in the next 12 months. This means that the so called best and brightest managing trillions of dollars have bought into the Great Lie.

10. The Great Lie: For almost 75 years the Fed and the Treasury have promoted the following concept. Inflation is caused by a strong economy. This, of course, is a smokescreen for the truth that all inflations are caused by an increase in money supply. But with this stable datum that a strong economy causes inflation, the powers that be always had something else to blame for inflation. Money managers therefore thinking that if a strong economy causes inflation then a slow economy or a recession will cause less inflation. Therefore they reason “why own gold or the gold stocks”. These were some of the guys selling the gold shares the last 3-4 months. They are so wrong.

11. Ironically there are plenty of institutional money managers and investors that buy gold because they think a massive deflation will take place and money will disappear, therefore making gold a good hedge as a substitute currency. On the other hand inflation minded investors buy gold to protect themselves from higher prices. Gold is actually benefitting from the Great Lie. Unfortunately, the man in the street is not as inflation from more paper money ruins his take home pay purchasing power.