Ian Gordon: US Monetary system will collapse
ray_heritage NEW 11/13/2005 7:14:13 AM
Jay Taylor asks Ian Gordon: - "Do you still hold the view that we are heading for a major deflationary depression? If so, how do you justify that view in light of the Fed's promise to pump huge amounts of money into the system to avoid anything like the deflation Japan has suffered through, not to mention the much worse depression you envision?"
Ian Gordon: - We are poised for a devastating deflationary collapse of our monetary system and a major depression akin to or worse than that of the 1930s. A major credit contraction is all but inevitable and it will drastically reduce the standard of living we in the west have become accustomed to over the past several generations.
Credit is created when people, corporations, and governments go into debt. It is extinguished when they get out of debt. When an excessive amount of debt is created and collateralized with largely inflated assets, its liquidation (when triggered) is usually involuntary and violent.
It is this liquidation that is the cause of the rapid collapse of the total credit money supply. This in turn causes the collapse of demand and the dumping of surplus properties and inventories at sacrifice prices and the sharp rise of unemployment, which is typical of a depression.
The only way you can keep a credit bubble from collapsing is to keep inflating, which is exactly what the Fed is doing now. But there is always a limit to credit inflations.
Eventually, there are no credit-worthy borrowers remaining, because credit has been stretched to outrageous limits. Then the entire credit system begins to fail as it becomes increasingly obvious that a substantial part of it will be defaulted. Once credibility is lost, creditors scramble to salvage what they can.
The Dow could fall to anywhere between 1300 and 500 points. The fact that it really has not collapsed is due in part to the panic actions of the Federal Reserve. Rates were lowered from 6% to 1% in panic, and massive amounts of money were injected into the economy.
Investors now believe that the price of stocks go up forever. They didn't think that way at the start of the great bull market in 1982. They hated stocks, and there were next to no mutual funds plying their wares then. That's always the way at the start of any great bull market—there's little interest, because these bull markets invariably follow bear markets. And at the end of the bull market, everyone believes.
They have been rejuvenated by a panicked Federal Reserve that has reduced interest rates from 6% after the stock market peak to just 1% at the recent low and a massive injection of money into the banking system. These two measures have also added huge amounts to consumer debt, and much of this debt has been injected into consumer purchases that have re-jigged the economy.
The Kondratieff winter's purpose is to wring debt out of the economy
That process is going to be very, very painful. It will mean massive bankruptcies, severe dislocation in the banking system; and a horrendous unemployment rate.
In the depths of the last depression, 25% of the American workforce was unemployed. It's difficult for most people to imagine how horrible this is going to be, because on the surface everything seems so normal, but underneath, the massive debt bubble is about to tear the economy apart.
I still stand by my view based on our position in the Kondratieff Cycle that we are indeed heading for a dreadful deflationary depression akin to or probably worse than that of the previous Kondratieff winter, 1929 to 1949. It's all on account of DEBT, which now stands at $40 trillion.
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Is there anything that the Fed or the government could possibly do that would stop the Kondratieff winter? What would you do at this point to avoid the K-winter if you had the power to make or influence policy?
They've been trying. What do you think all those panic rate cuts were (about), and all that money that they've printed, if it wasn't to try and arrest the down draft?
Cast your mind back a few years; what was the Fed talking about? Wasn't Bernanke promising to drop dollars from helicopters to arrest deflation? So they've been successful in the short term, but that success has come at a terrible price and that price is a massive increase in debt, a huge bubble in real estate, and an overvalued stock market.
I don't think there's anything that could stop the horrendous outcome. Now there's just too much debt and too much greed throughout the economy.
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RE: Part II: US Monetary system will collapse ray_heritage
NEW 11/13/2005 7:16:00 AM
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Part II
Every institution, including governments, and every person will be affected by the Kondratieff winter to a degree. The amount that each will be affected will be directly related to the amount of debt that each carries.
The lending institutions will be affected by the amount of bad credit that they have assumed as the winter gets underway. As for the stock market, it is likely to be every bit as bad as the autumn bull market was good. Remember that stock prices reflect the relative health in the economy.
A Kondratieff winter portends a deflationary depression on a similar scale to that experienced in the 1930s and maybe worse, because this time the debt is much larger, and, more importantly, the U.S. is losing its financial and economic leadership.
Four events occur at the end of summer and herald the onset of autumn. Autumn is always the Kondratieff season in which stocks, bonds, and real estate make the largest price gains of the entire cycle.
As the economy worsens, the price of gold rises, because fear increases. So 2006 should be worse than 2005, and, ergo, the gold price should be higher. If the economy gets worse, as the Kondratieff winter predicts it will, the demand for energy will decrease, and so should prices.
RE: Part III: US Monetary system will collapse ray_heritage
NEW 11/13/2005 7:17:01 AM
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Part III
The largest amount of debt has gone into the housing market, which has become an unsustainable immense speculative bubble.
The question is, therefore how long can the Fed keep the party going?
Not for long it seems.
The Fed been forced to raise interest rates in the face of rising inflation. Rising interest rates have always been the kiss of death to the stock market. To compound it all, energy prices have soared, impacting on consumer discretionary spending. U.S. government spending is out of control. Consumer confidence is falling to new lows, and the economy is in trouble. Regardless, the Fed promises even higher interest rates.
Once the damage becomes apparent, panic could well set in, and stock prices could crash. Thus, the next wave down should be much quicker and more vicious than the initial down wave. This would suggest that the bottom might well be seen three or four years from now.
It will not be pretty - Unemployment will be rife, bankruptcies will be rampant, housing and stock prices will have reached unimaginable lows, the financial system will be in dire straights, and there is a threat of massive civil unrest.
RE: Part IV: US Monetary system will collapse ray_heritage
NEW 11/13/2005 7:18:15 AM
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Part IV
(A NYC based hedge fund manager asked the following question:)
"Explain how deflation will arrive (given) the Fed's ability to raise the money supply almost at will. I understand that if money supply is increased through the banking system that the process involves debt, and how that process can cause deflation as debtors pay off and/or default on that debt. However, the money supply, if I am correct, can also be increased quite directly, outside of the banking system, and, thus, without increasing debt. If the money supply in increased this way, as it has been, how can this excess money not cause more inflation, or, at least, avoid deflation?"
GORDON: - Under the terms of the Monetary Control Act of 1980, the Federal Reserve has been empowered to monetize almost anything. Indeed, shortly after 9/11, a Federal Reserve spokesman suggested that the Bank had considered buying stocks, bonds, and even gold mines to arrest any panic. That suggested to me that they were already interfering in these markets.
In the event of a credit deflation the Fed would start to overtly purchase anything to offset the deflationary panic. But that presupposes that they will recognize the crisis before it develops; otherwise, the collapse will completely get away from them.
It also would require a massive infusion of money to bail out consumers, corporations, governments, and the stock and bond markets. This would frighten the holders of U.S. dollars, perhaps setting off panic selling, and resulting in a huge increase in interest rates. Anyway, we're not talking chump change here, but trillions of dollars.
Following the collapse in 1929, under the charter at that time, the Federal Reserve was allowed to monetize only gold and commercial paper. However, the simultaneous collapse of stock prices, business activity, and international debt from 1929 to 1933 was so severe that not only was gold withdrawn from the banking system by frightened depositors, but the supply of commercial paper also contracted, rapidly leaving the Fed with nothing to monetize.
The U.S. economy is approximately 30% of the total world economy
It's enormous. When it falls into its deflationary depression stage, it will destroy the entire world economy. That is to some extent why the world is cooperating with the United States in buying her debt in spite of the outlandish profligacy of the nation.
The Japanese winter has so far been relatively benign because the rest of the world hasn't yet entered the depression in a meaningful way.
Canada in particular will suffer grave consequences, because more than 70% of its exports go to the United States. Kondratieff wrote that the cycle was a worldwide phenomenon. It's difficult to see how any country could escape the winter once the U.S. goes down. The days of the U.S. dollar as the world's reserve currency are numbered, much as the British pound lost this status in 1931.
I think when things begin to unravel in the United States (and that may well be starting now), the pace will quicken, because the Federal Reserve will have run out of ammunition to take on the huge mass of problems that it will be facing.
The K Wave winter is not approaching; it's already here
Under the circumstances, we must protect ourselves by investing in cash and gold. Investments are not recommended in the economies of other countries, because they'll be going down, too.
RE: Part V: US Monetary system will collapse ray_heritage
NEW 11/13/2005 7:19:15 AM
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Part V
This is the first time in 5000 years that the entire world has been subjected to fiat money. There isn't a good currency among the lot, but the dollar is as bad as it gets on account of debt and future obligations, which in total are close to $90 trillion. There's no way that that can ever be paid. So one has to expect some kind of monetary re-organization, but when, I don't know.
What I can say is that when the depression hits, government obligations will increase dramatically, whilst income through taxes will fall precipitously, compounding the federal and state governments' debt problems. This suggests that the dollar will go even lower, particularly against gold.
The economy is the key, and what drives that is the U.S. consumer. Watch things like consumer confidence levels, their spending, lay-offs, bankruptcies, housing statistics (i.e., new and existing sales), debt problems, and of course the stock and bond markets.
Just get a feel for whether things are getting worse or getting better and how much worse or better. I know what I see. Don't trust official numbers, they're usually baloney.
Learn to think for yourself. Have the courage of your convictions, which are based on your knowledge. For the most part, keep your opinions to yourself, otherwise you might be swayed.
Don't think for a moment that the powers that be will rescue you. They are not the solution; they are the problem, and their hubris knows no bounds. The only solution that the Federal Reserve can have is to throw money at the problem, and we all know where that's gotten us.
RE: Part VI: US Monetary system will collapse ray_heritage
NEW 11/13/2005 7:20:35 AM
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Part VI
It's best to understand how the credit bubble starts to blow apart. Then I think we can understand how deflation starts.
The causes of the last depression were entirely attributable to the great credit expansion that started in 1914 as a result of World War I and gathered pace throughout the 1920s. This credit expansion peaked in July 1929.
Almost everyone, and this includes the American financial establishment, believes that the primary cause of the Great Depression was a tight money policy initiated by the Federal Reserve about year prior to the Crash of 1929 and continued relentlessly during the critical years of the early 1930s.
These same people reason that to avoid a depression all the Fed has to do is keep money easy and keep the credit expansion going, much as is being done today. The tight money theory is simply not true.
What is true is that bank deposits fell by about 30% between 1929 and 1932, and of course there were huge declines in the values of stocks, bonds, commodities, and real estate. But this was not on account of a Fed tight monetary policy. Au contraire.
Following the Crash of 1929, the Fed frantically tried to restart the credit inflation, with cheap money and open market purchases of government securities. Currency increased in 1929; what contracted so severely was bank credit.
And that is why debt is the cause of deflation. We are just about there.
Inflation cannot last much longer, because confidence in the entire credit system is being eroded by the increasing level of bankruptcies and the ridiculous levels of consumer debt
Watch out for the largest credit bubble of all—watch out for real estate.
With no savings to buffer them from the slowdown, and with higher energy and credit costs, the U.S. consumer will have to retrench, which will add to the slowdown.
By 1933, U.S. GNP had fallen by almost 50%. Under similar circumstances this time around, America would be self sufficient in oil. When the world's largest economy fails, the world economy fails too. Thus, worldwide demand for commodities would virtually come to a halt. Prices under these circumstances would be crushed.
The Asian Crisis occurred only seven years ago; demand for oil in that sector of the world dropped dramatically, causing the price of oil to fall from $20 to $10 per barrel. At that time, the cover of the Economist suggested that the oil price could go to $4; yesterday SE Asia, today the world.
RE: wher to put money in such a scenario??? number six
NEW 11/13/2005 7:34:42 AM
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Gold? Cash? Bonds? Shorts? Diamonds??? (big ones.)
Get off the grid?
Drown with everyone else because there's nothing to be done???
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