Sunday, November 9, 2008

Inflation, deflation and printing presses

A lot of people seem to be confused lately by what's going on in the economy. I am most definitely among them. When you stop and take in the big picture, though, then some of the actions of the government start to make some sense. Obviously, we have a fiat money system as does the rest of the world. There are a lot of reasons for this which I don't really feel like getting into. Basically, though, we were forced to switch to a fiat system because, at the time, the rest of the world was moving towards doing the same and if we hadn't done it then the rest of the world would have been able to purchase our gold backed dollars with their fiat money and then cashed them in, thereby stealing all of our wealth. I read somewhere that South Africa has recently stopped production of krugerands. Do you really think that most of South Africa's krugerands are still in South Africa?

Thanks to a relatively recent and massive furthering of technology our system has become increasingly globalized. With the advent of the computer, the internet, databases and information technology in general it's become easier and easier to separate the money supply from the credit supply. You can deposit your paycheck into a bank and the bank now gets to spend $10 for every $1 you deposit. Recently, you could spend $10 on a share of stock and watch with glee as the value skyrocketed in a few years. Even if the stock shot up to $500 that money was never added to the money supply until you decided to cash it in, though. When it suddenly dropped back down to $5 before you decided to cash it in then only $5 was added to the money supply.

So now we've got the MOAB (thanks Rawles) going on. Hundreds of billions of dollars are now being pumped into the economy. Where is that money going, though? It's not being printed. Physical dollar bills aren't being printed and handed to anyone. As wall street is collapsing and home values are plummeting the government is just trying to supplement the banks' balance sheets by giving them "money" that won't ever reach the hands of the average person. So while the value of your house goes from $200k to $150k the government is just trying to make up the difference so that the banks feel confident enough to loan some money to other banks. Money is the lifeblood of our economy. Once it stops flowing then the body dies. The idea is to stop the banks from losing money so that things get stimulated again and the values of homes and wall street once again start to increase. It aint working so good, though.

Inflation won't start hitting us until Obama decides to implement his stimulus packages. When every Tom, Dick and Harry on main street suddenly has a few extra grand to blow then we'll really start to see inflation rear it's ugly head. Do you really think that people are going to run out and buy a big screen TV or put a down payment down on a brand new car when they're not sure if they'll be able to feed their families in a few months? When consumer confidence is at the point that it's at now the last thing that you want to do is start handing people money. It'll only take a few stimulus packages until everyone in America has real cash that was literally printed and handed to them for us to be standing in bread lines with wheel barrows full of cash hoping that there will be enough left for us and our families when we finally get to the front. On a lighter note gold and silver are both pretty cheap right now. Spot silver is almost at the point where it was at before all of the economic turmoil started to show itself. Good luck finding someone willing to sell physical silver (or gold) at spot price right now, though. Expect to pay at least $15-$20 an ounce for silver and $1000 an ounce for gold.


Anonymous said...

thanks for the insight, it makes me understand the bailout a little better. my parents grew up during the previous great depression, and my dad says there's cause for worry about this next one.

theotherryan said...

Silver one ounce rounds are selling for about 13.50 and gold around 780-800 depending on the exact coin.

The Urban Survivalist said...

It's gradually starting to slip. When I wrote this 1/10th eagles were going for $120 each minimum. 1 ounce eagles were well over $900. 1 gram bars were going for $35+. I was checking ebay yesterday and 1/10th eagles were going for about $90-$100 a piece. 1 gram bars were still going for $30 minimum unless you were buying the ones from Istanbul which don't seem to get good reviews. Those are going for a few bucks less. Gold and silver might have leveled out for now but I don't think that it's ever going to get any cheaper (unless something really catastrophic happens and eliminates our need for money for a few generations). There's still a good chance that it'll skyrocket, though. There is still an air of denial out there for the most part. Once people really start to panic then we'll probably see it spike again along with oil.