LOL

Basically the deal is those foolish and irresponsible companies are broke. They can't pay their debts. They owe more than they're worth. If they were just ordinary companies, that would be fine. They could shut their doors and we could all move on.

But if it's, say, Citibank that's broke, and can't pay pay its debt, then there's a problem. Because Citibank's creditors include every person who has a checking, saving, or any other type of account with Citibank. If Citi closes its doors (and I'm not predicting anything here) suddenly millions of people wake up and find out their bank cards don't work. Their credit cards don't work. Their checks are no good, and the bank doors are locked.

Even worse, Citi does not just owe money to depositors. It owes money to other banks. When it stops paying, suddenly those banks are in trouble too.

That's the armaggedon that scares the **** out of Paulson and Bernanke.

I agree with Phone Booth? Phone Booth agrees with me? Lordy me, the vapors!

I disagree with one point, while the Fed doesn't have the power to print and distribute money in ways that, say Mugabe has had, the types of crises that proceed hyperinflation usually lead to politicians screaming for extra powers to fix the problem.

The Fed can purchase an unlimited amount of Treasury bonds. When the Fed does that, it's effectively printing money. Ex: The Govt issues a bond, the Fed buys it, and credits the Govt with cash. The Govt then uses the cash to do whatever it wants. It's the same as if the Govt printed up the cash in the first place.

In the last 14 months the FED's supply of Treasury securities has decreased by almost 40% so we must be heading in the opposite direction. From 791,000 million down to about 491,000 million.

Jimbo

Hello PB, I was hoping you might address my questions. I've read enough of your posts to have considerable respect for your opinions. Only recently have I begun to learn about the relation between debt and the money supply; it is still a bit confusing to me.

Has the rate of money destruction caused by the debt crisis really outpaced the rate of money creation by government borrowing and printing presses? I was alarmed by reports (complete with graphs containing sharply rising curves) claiming that the government bailout is causing the overall money supply to skyrocket (and I should therefore buy shiny metals in anticipation of escalating inflation).

You suggest we have the "political will" to balance the budget. Before this finanical crisis became manifest, I believe George Bush resided over the biggest expansion of government spending (even not including the Iraq war) in history. Do you really think President Obama and the Democratic-controlled legislature will be more conservative? I would expect them to use an economic upturn as justification for further increases in spending and borrowing.

Jimbo appears to argue that a worldwide shortage of hard commodities supports the value of the dollar. This seems to conflict with a web video I recently viewed ("Money as Debt") arguing that our monetary system will fail because it depends on the perpetual exponential acceleration of debt and productivity levels. Of course, the limited supply of natural resources on earth will prevent perpetual exponential productivity growth. Any truth to either of these arguments?

I would appreciate the opinion of yourself and others regarding the relative safety (i.e., the likelihood of preserving value without regard to appreciation potential) of the following asset classes over the next 10 to 20 years:

1. gold/silver/platinum bullion (and tin foil)
2. I-bonds and TIPS
3. American stocks (a highly diversified portfolio)
4. International stocks (a highly diversified portfolio)
5. United States dollars (cash)
6. high quality corporate and government bonds (medium to long term)

[The above order reflects my relatively uneducated guess.]

Thanks

Hmm, this is actually a pretty interesting question. It depends what the question you're asking is... The answer is different depending on what X is in the following question: What is the probability that the value of an investment in each of these assets will be higher than X% of the initial value in 10 to 20 years. If you meant X=100% then I would order them in the following way:

1. TIPS / I-bonds
2. Corp / govt bonds
3. American Stocks
4. International Stocks
5. Gold etc
6. Cash

The only risk TIPS and I bonds are subject to is armageddon risk, and I think that's <<1%.

AAA corp and govt bonds *should* beat inflation, but there's a higher risk that they won't than for TIPS and I bonds.

I think American stocks are more likely to be above the initial price than internationals just because international stocks are riskier and reward-ier.

The price of gold varies wildly over long time periods but if X were 10%, I might put gold first rather than 5th because of it's survival of armageddon scenarios.



I know cash is going to be worth less in 10 years than it is now.

Thank you for addressing my questions! I am not optimistic about our government reducing its spending and borrowing when the economy improves.

If the federal reserves creates money by purchasing treasury bonds, is this almost as inflationary as printing the money? How does the inflationary impact compare with selling treasury bonds to foreign governments or the private sector?

In the event of hyperinflation, I thought the government could sort of declare bankruptcy and start over with a new currency. We would probably be under martial law, but I think the government would still exist.


Good point about cash in an extreme deflationary scenario. I consider the money in my bank account to be "cash," but in the worst case deflationary scenario, I suppose that "cash" could be unavailable. Sounds like one more argument for holding some shiny metals.

In the event that the dollar greatly declines in value, I would think that some companies might profit and therefore the stock market (as a whole) would be a good bet to lose less value than cash (especially from its already fallen level). If this is not the case, then it seems that hard commodities such as precious metals (and companies that produce them) may be the only out for someone who does not short markets. Did those Japanese stocks decline more than the value of their currency?

I'm afraid its too late for that. I have already made a couple of purchases but my total exposure (including bullion and a precious metals and mining mutual fund) is only around 4% of my net worth. My plan was to gradually increase my exposure to as much as 15%. I view it more as an insurance policy than an investment opportunity. It is also a convenient way to dispose of some excess cash earned at the poker tables.

Thank you for your response. I did mean X=100%. Your ranking make sense to me, especially if we assume that recent events have not dramatically changed the game and high inflation is far from inevitable. I am persuaded that I put precious metals too high on my list. Perhaps if I had specified a 100 year time period, gold would be number one. I am a little surprised by how highly you ranked corp/gov bonds due to their interest rate risk.

I'm not sure that gold is necessarily going to beat inflation over any time period. The price of gold is affected by the supply and demand for it. Maybe someone discovers an enormous vein of gold in the Australian outback? Maybe gold goes out of fashion for jewelery in X years? Maybe we start using something else for high quality conductors?

Also, for the bonds, I'm assuming that over these time periods you could carry the bonds to maturity, in which case the interest rate risk is irrelevant.

I did think gold was likely to keep pace with inflation but not necessarily beat it. I probably should have specified x=90%...not that it would change the ranking.

I also should have specified a diversified low cost mutual fund holding high quality bonds, since this the only way I've owned bonds other than I-bonds. Would your ranking for a bond mutual fund differ from individual bonds?

If the federal reserves creates money by purchasing treasury bonds, is this almost as inflationary as printing the money? How does the inflationary impact compare with selling treasury bonds to foreign governments or the private sector?

A dollar is an obligation of the Federal Reserve. It's a kind of debt, but it's a special kind, because it can't really be redeemed - well, you can redeem a dollar, but all you'll get is another dollar in return. Dollars pay 0 interest.

Treasurys are the debt of the government. They pay interest and can be redeemed for dollars.

The US government can issue debt, but it can't issue dollars. In order to get dollars, it has to sell treasurys. If the treasurys are bought up by the public, people are giving money to the government, which in turn spends that same money back into the economy.

After the transaction is complete, there's more debt, but there's no more dollars. No additional dollars, I mean. So when the government sells treasurys to the public it's not creating money. So it's less inflationary than if the government was just printing money, Zimbabwe-style.

I don't want to say that creating debt has no inflationary impact, however. I believe that debt does create inflation, just less than if the government was actually printing money.

Now suppose that the Govt goes to sell Treasurys to the public, and the public doesn't buy. Well, the Govt needs the money, to roll over its old debt, if nothing else. So the Govt turns to the Fed and sells the debt to them.

Well, when the Fed buys the debt, it's creating money. It's money that didn't exist before the Fed bought the debt. It's increasing the money supply, which translates directly into higher inflation.

In fact, it's a very dangerous, slippery road once the Fed starts down that path, because so much of our debt is held by foreigners. Once the see that the Fed is inflating away the value of the dollars and Treasurys they hold, they're going to be less willing to hold them. That will push interest rates and inflation even higher.

So the bottom line is that as long as we can sell our debt at low interest rates, we're pretty much ok. (Well, it means higher taxes and less government spending in the future, but for the moment we're ok.)

If or when people - including foreigners - get sick of buying our debt, things go to hell in a handbasket pretty fast.

FWIW, there was an Economist article in the past two weeks that floated the idea somewhat seriously of inflating away our debts and didn't make it out to be quite the doomsday scenario some due. I'll try to find a link to it.

first disclaimer here i don't mean to derail this thread in any way so please just don't respond to me if i go off topic... I don't want to rehash all of your questions as anyone who has read more than a few of my posts knows pretty much all of my viewpoints on every topic or can easily guess them. A lot of good points have already been posted, but these threads are inevitably overpopulated by nits / sheep, so this is one more post for "the good guys."

- First off I want to say that TIPS are not a very good investment at all because the inflation #'s are artificially manipulated lower purposely so that govt entitlement programs don't get out of hand, and so the general public doesn't complain about inflation. Over the past 5 years, inflation has been reported at RIDICULOUSLY low levels such as 2%, 4%, 6% etc... our real inflation is much more like 14% 16% 18%

How does oil go from 1$ a gallon to $3.50 a gallon ( soon much higher ) when inflation is only 2%??? Other things went down in price during this time...?!!? Ammo is up, groceries are up, gas is up, elecricity / heat / water are up, insurance is up, taxes are up. These are the things I really spend money on, if you look at the inflation rate for what a lower or middle income family ACTUALLY PURCHASES, and not what the gov't manipulates... it is staggering. Start saving your receipts so you can look back in 5 years and see how cheap everything used to be...

I would get my money out of paper assets and into physical assets at all costs. Buy real gold or silver, not traded ETFs. Buy real guns and ammo, not traded ETFs. Buy real food and water, not ETFs. Commodities aren't exactly an investment, but they are surely a great store of wealth for the coming decades. Try to buy things you plan to use anyways, things with dual purposes. Many commodities can be consumed for some benefit if there is no market for them. If things get really bad, and they will shortly in my humble opinion, I would rather be holding food and water than stocks. One group is poised to go up tenfold, one group is poised to go down tenfold.

I can think of so many companies that absolutely need to either : get a huge bailout, or declare bankruptcy, or get bought / have major changes of action.

Unemployment is likely 12% now, I don't think this will be over until we hit well over 30%. Many jobs can be more efficiently replaced by machines + technology over time, we have a slightly growing population, we are already slashing untold numbers of jobs which will only lead down a larger ever accelerating spiral into the worst depression we have ever seen. As our standards of living continue to decrease sharply, many professions will find themselves out of work or no longer needed.

If you can find and document 5 very inaccurate / fraudulent / blatantly corrupt situations the gov't is involved in... there are probably another 5,000 you can't even imagine. There's just too many funny coincidences out there and each one is a puzzle piece. If you fit enough of them together, you will see the conspiracy plain as day... and be frustrated with yourself for not realizing how obvious it was. It's sad how much people trust govt days- like they're ever done anything good for us. ( to be fair, they did buy us an 80% stake in AIG- approx value negative thirty to negative seventy trillion IMHO)

Also I would highly highly recommend the movie "money as debt" that someone else recommended above, i was going to put that into my post very good movie, and it's cartoonish and easy to understand... if you don't know how the fed operates or aren't completely sure I can't recommend this enough.

If the federal reserves creates money by purchasing treasury bonds, is this almost as inflationary as printing the money? How does the inflationary impact compare with selling treasury bonds to foreign governments or the private sector?

A dollar is an obligation of the Federal Reserve. It's a kind of debt, but it's a special kind, because it can't really be redeemed - well, you can redeem a dollar, but all you'll get is another dollar in return. Dollars pay 0 interest.

Treasurys are the debt of the government. They pay interest and can be redeemed for dollars.

The US government can issue debt, but it can't issue dollars. In order to get dollars, it has to sell treasurys. If the treasurys are bought up by the public, people are giving money to the government, which in turn spends that same money back into the economy.

After the transaction is complete, there's more debt, but there's no more dollars. No additional dollars, I mean. So when the government sells treasurys to the public it's not creating money. So it's less inflationary than if the government was just printing money, Zimbabwe-style.

I don't want to say that creating debt has no inflationary impact, however. I believe that debt does create inflation, just less than if the government was actually printing money.

Now suppose that the Govt goes to sell Treasurys to the public, and the public doesn't buy. Well, the Govt needs the money, to roll over its old debt, if nothing else. So the Govt turns to the Fed and sells the debt to them.

Well, when the Fed buys the debt, it's creating money. It's money that didn't exist before the Fed bought the debt. It's increasing the money supply, which translates directly into higher inflation.

In fact, it's a very dangerous, slippery road once the Fed starts down that path, because so much of our debt is held by foreigners. Once the see that the Fed is inflating away the value of the dollars and Treasurys they hold, they're going to be less willing to hold them. That will push interest rates and inflation even higher.

So the bottom line is that as long as we can sell our debt at low interest rates, we're pretty much ok. (Well, it means higher taxes and less government spending in the future, but for the moment we're ok.)

If or when people - including foreigners - get sick of buying our debt, things go to hell in a handbasket pretty fast.

I know you're obviously joking here but your advice for all three levels is absolutely terrible, pretty much the worst advice i have ever seen... I just don't want anyone to take you at all seriously here... if you actually think any of these recommendations or allocations are at all defensible under any scenario, please say so and I will be happy to argue why I believe in buying nearly the exact opposite of what you recommend for each situation / "threat level"

Like I have said before, having some gunsammo and food is A+++... but 50 years worth? where are you going to store it lol??? Underground bunker??? Yes I have helped to build / been inside a few before but you just sound like a complete idiot here... why not just not just keep your mouth shut instead of making recommendations about something you obviously have NO IDEA about.

Why make the best possible advice you offer look like something that only crazy people would do?

You'd be crazy not to invest in 2-3 yrs / food per person, a ****load of seeds/gardening tools / silver / plat/ 3-4 guns per person, bunch of ammo. I would shoot to drop like 10-15k / per person on this if you can easily afford to do so. If not, there are many things you can do for free. Knowledge is power. If I sleep better at night because I have good investments,good for me. It's worth it to sleep better at night for me, I hope I am wrong and we never have a crisis, but too many people who i have too much respect for believe that we are in for something big, so i'd rather play it safe. You all can risk not be able to turn all of your hours of labor into real products. Me, i'll just buy some real products and not have to worry as about timing the collapse and leaving someone else holding the worthless TP. "Survivalism" or whatever you want to call it is much more about knowledge, sustainability, resourcefulness than having a million bullets and a million pounds of food and a million gallons of water... that's great but the rioting masses could take it from you, or the gov't , or you could need to leave suddenly. I suppose portability is what keeps me buying more platinum than silver right now... hard to find either these days.

http://www.economist.com/finance/dis...ry_id=11622353

I have no idea if this particular economist article is the one you were referring to, but I think it does an impeccable job of showing why the economist is an extremely biased publication printing pure horse ****, and they cannot be trusted...
it basically goes on to explain why most americans are stupid and think inflation is actually much higher than the reported 2.5%. Obviously inflation is only 2.5%!!! take our word for it.... don't think about prices of the things you actually buy and how they are going up in price... only an idiot would do that. Inflation is only 2.5%, TRRUST ME ON THIS ONE.

They talk about fears of the 'wage price-spiral' - I AM VERY FEARFUL OF THE WAGE PRICE SPIRAL GUYZ... wait a second... we have already been seeing said spiral for DECADES... is very high inflation and very high unemployment going to give us power to demand higher wages? I don't think so... many jobs can be replaced easier than you think by computers or the next warm body in line who will do the job for 1/2 of the price. If you hav ea family to feed, or even if you don't... once you have been unemployed for long enough... ANY JOB will look good to you for ANY PRICE... if there is no alternative of course. Look at what has happened in ARGENTINA over the past 10 years. Look at their job market specifically- many jobs are simply no longer needed or relevant. google "ferfal frugalsquirrel " this guy is a poster on multiple message boards who has been living in Argentina, he has documented his own opinion and first hand view , very compelling and interesting whether you know anything about anything, BFI related or otherwise, I WOULD HIGHLY recommend reading through his posts... im spacing on his blog address but i have read through some of that as well, found that to be very good. sure it will come up in googel.

If I understand correctly: Borrow money at 4%, created new USD at 6%, then pay off the loan. What could possibly go wrong?

The price of everything is affected by the supply and demand for it, theoretically speaking in a free market of course. Why has the price been going up for it over the past 8 years? More demand, and less supply would be one reasonable guess. As the supply of people continues to increase, and the supply of gold continues to diminish ( sure it doesn't even get destroyed per se but it's in the hands of some private individual who likely has no great reason to part with it ) More money travels to the hands of an elite few. More gold follows to the elite few...

We aren't using gold for high quality conductors in any significant quantity. Can you provide a link to this claim i'm curious?

Someone could discover a whole bunch of gold in australia, or silver, or oil, or copper, or GM stock... you can just never say for sure what's going to happen. But we can say for sure that it will always cost a certain number of inputs to generate outputs ( gold ) from the ground. IE a certain amount of oil, electricity, labor hours, effort must be given up to get the gold. This is of course not so with ink and paper... any tree can be turned from $4,000 to $4,000,000 in a few weeks so to speak.

Although the interest rate risk is not relevant on the bonds as long as you have no need for the liquidity that ST bonds provide, the INFLATION RATE RISK is very high here. I think you will be able to buy much much much higher yield bonds 1 year from now. I do not believe that TIPS really help you out with the inflation rate risk very much. Gov't #s are hilarious... TIPs would be yielding 12-15% already if gov't used correct inflation numbers.

Wanted to add... if you bought gold at $20 and now sell for 900$... that's a 45 bagger. I don't think that's a great return- I do not even think it is an inflation beating return. I think if you look at the ticker price of your long term investments more than 3 or 4 times per year, you probably have poor long term investments. If you look at the ticker price of your long term investments multiple times per week, you surely have poor long term investments.

Only crazy people would sell gold anywhere near the artificially low spot price it currently resides at. I don't see WHY demand of gold has gone up so much... except that a lot of money from a lot of smart players is flowing in and THE NET SHORT POSITION OF GOLD ON COMEX HAS SKYROCKETED TO KEEP PRICES DOWN... whichever bank is short all of these gold contracts could easily have to declare bankruptcy...

Gold isn't used for anything, yet somehow retains its value pretty well through all of this money printing. Gold is hardly even used in jewelry these days... jewelers try to turn you towards diamonds because they are insanely common and very high profit margin. Wedding ring bands are normally made out of platinum, or palladium, or silver if you're poor like me... its amazing how well gold has done considering how little it has going for it.
-Doesn't pay dividends
-Barbaric Relic
-No Industrial uses
-relatively easy to create substantially more supply of it in short periods of time

Don't listen to the haters! I think putting 10% of your NW in real physical silver + platinum + other metals is the way to go. I cannot cannot stress enough about owning real physical commodities instead of ETFs AT ALL costs. These ETFs absolutely DO NOT OWN the metals they claim they do, they shortsell your paper metals to other people.

Also as an insurance policy i'd highly recommend learning how to shoot a gun, buy a gun or two for everyone in your family. Also, store up some food and water. Both of these are so much more important than owning metals. EPSECIALLY paper metals that won't be able to buy anything... if you're really worried about a collapse, or want an insurance policy for a collapse. Really sit down adn think about WHAT you are reasonably preparing for? deflation? hyperinflation? riots? natural disasters? martial law? wars? gold confiscations by the fed govt?

If the govt has another gold confiscation, would you rather have real gold or paper gold? If there is a __insert event here__ where you actually want to access the item you bought in case of emergencies???!?!1 AHHHHHHH

I think i'm going to make a fire extinguisher ETF... everyone can send me $20, and i'll buy a bajillion fire extinguishers. I have a great accountant friend who can take care of the audits... And thne if anyone ever has a fire...
i'll have a bunch of fire extinguishers that i've been lending out to my buddies...
WHAT?? YOU WANT TO TAKE DELIVERY OF YOUR FIRE EXTINGUISHER???
Nope, not allowed. No, I still have them all... uhhh you just can't take delivery of them... but seriously, they're all here in great condition... ask my accountant, he saw them last year during the audit... uhhhh
ya... you can sell off your fire extinguisher ETF, no problem...
will i buy it back from you?!?!?! you must be kidding me...

but there's a fool born every minute, although it may take a while to find one bigger than you... can't believe you fell for the good ol fire extinguisher ponzi scheme etf game... CLASSIC

Sounds like one more argument for holding some shiny metals.

I'm prejudiced against gold. It pays no interest, no dividends, and no rent, and it can't be eaten, smoked, or sheltered in.

It's speculative, like Beanie Babies, baseball cards, or antiques. I'm not saying those things aren't valuable, or that you can't make money trading in them. I'm just saying they're not real investments.

I know there's a whole subculture that regards gold as the only real money, but there's no real reason for it, other than history. But historically people have used all kinds of things - shells, beads, pelts, tobacco, rocks, salt, women - for money.

If I want to invest, I want something that pays me interest, dividends, or whatever, or at least provides me with something I want, like shelter.

So you're saying that anything that is speculative is not a good or real investment? Obviously speculate on a fad product is a very bad idea... Beanie Babies can be mass produced for 3 dollars apiece. Baseball cards? 3 cents. The fact of the matter is, it costs probably ~900$ to pull an ounce of gold out of the ground. If you can't make a profit from your mine, you eventually shut down production. Beanie baby production will never shut down as long as someone is willing to pay five dolla for them. If nobody is willing to buy the gold, gold mines will shut down... they can't make any money. This will only make gold exponentially more scarce.

http://www.youtube.com/watch?v=N6V5ym9kx_8

Hardly, closer to under $350, as oil prices have recently decreased it costs even less now.

Jimbo

Under 350$$??? what year are we talking about? 2004? 2001?

Do you have any source at all for this information?

http://www.mineweb.net/mineweb/view/...9485&sn=Detail

i know you're going to attack any article i ever post about gold and call me a gold bug or something... no official gov't site is ever going to report truthful or relevant info about gold. Even when gold is over 10,000$, i guarantee you the donx on TV will be recommending the stock market still and making fun of people who hold the gold...
"victim/smart" guy on TV: wait but my investment went UP 30x and the stock market went down by 90%....
random TV pundit: gold is a barbaric relic, you're foolish for buying gold. Buy the stock market, it pays teh dividends, it beat inflation over this one really good 20 yr bull market caused by insane inflation, an d therefore you must buy the stock market or you're an idiot. Also, gold didn't really go up. And inflation is 2%. And the market will come back since .... it always does?? I hope??

Ifthere's one absolute sell signal here, it's Buffet recommending buying index funds. When I saw buffet recommended buying index funds, i shorted a few stocks immediately. If you don't realize this is a HUGE HUGE sell signal, I would recommend getting out of the markets and re-evaluating everything you know... reminds me EXACTLY of rockefeller conning millions out of the american public before the depression...

I consistently see gold production costs rising in line with inflation at 15-20% annually... I realize oil is low right now- very very cheap, but you also have to realize many of these companies are benefitting from hedges that may expire soon or in the next few years. Also, although oil has probably fallen by 40-50% at least 5 times in the next 10 years, it has always come back stronger than ever and obviously this is a very limited resource that WE WILL RUN OUT OF SOON if we keep up our current levels of consumption. Gov't needs the rest of this oil for themselves, so they are printing up tons of money so that none of us can afford oil any more. Then we will be even more the govt's bitch than we already are =)

http://www.goldworld.com/articles/in...fed-economy/43

http://www.dani2989.com/gold/ratiogo...17102004gb.htm