Monday, September 27, 2010

Preparing for 12% Unemployment and $45 Silver

Had a conversation with an otherwise intelligent fellow the other day who opined that "a little inflation is good."

Before leaping out of my skin amid thoughts of years of savings being wiped away and 14% mortgages as were the norm in the late 70s, I calmly asked how much "a little inflation" was.

There was no answer in absolute numerical terms, only the assertion that enough to keep people working and businesses growing would be "enough."

So, I pondered the relative absurdity of a targeted 2-3 per cent inflation rate, as the Fed has suggested and the greater stupidity of quantitative easing as a way to inflate out of recessions, depressions or other worse scenario.

A little inflation, which we have had, courtesy of the Federal Reserve Bank, has caused the value of the dollar to decline by over 90% since 1913, the year the Fed was formed, and that takes into account the decade-plus of the Great Depression when prices for many consumer goods declined in order to meet the diminished demand of the day. A little deflation turned out to be not such a good thing either, it appears.

One would not be so concerned with inflation if it were a uniform, mathematical construct which took wages higher along with the cost of food, clothing, housing and other mundane necessities, but, alas, that is not the case. The generally abusive inflation of which people most usually speak affects prices of goods only, while wages remain stagnant, as they have over the course of much of the last thirty-five years.

Of course, even in the utopian condition of wage and price inflation, savings would still be eroded. That thousand dollars you put away in 1985 would only be worth about $500 in today's goods. And since the purpose of money saved is to eventually pay for something, without investing at a decent rate of return (and holding it there steadily for 25 years or more - a near-impossibility) the process of saving anything at all seems a fool's game.

And so it was during the boom of the past few decades. Nobody saved much at all, as inflation turned a country of savers into spenders and a net positive trade balance turned negative. So, since inflation makes saving more an exercise in financial self-flagellation than anything prudent and wise, it does emboss the value of investing in cold money, that being gold and silver coins and bars.

Silver has quadrupled in ten short years, as has gold. The current trend, should it continue at its present pace, would bring the price of an ounce of silver to $45 in just three years, possibly sooner, as the precious metals are "heating up" amid widespread acceptance of a number of inescapable monetary facts, those being that the level of government debt being piled upon the already reeking, stinking heap will double before the end of the next decade and will never be repaid, the debt will be well over 100% of current (or future) GDP, as it already is, and the Fed's plan to revive the economy consists of running the printing presses at full bore and adding on a few units to produce more and more federal Reserve Notes.

The Fed's aim is to debase the economy without end, keeping interest rates at ZERO for eternity or longer and completely destroy any remnants of the once proud United States of America and the rule of law. When the Fed finally accomplishes their dastardly deed, we wonder two things: 1> will George Bush be around to announce, "Mission Accomplished", and what currency will replace the tired, worn FRNs?

The simple answers are Yes, and silver, and to some degree, gold. Since the complete destruction of the world's reserve currency should be complete within fifteen years at the outside, George Bush should still be alive and kicking enough to make proclamations. And as a replacement for currency, most people will only accept something that has value. Gold is already too high-priced to be considered currency, except for very expensive items. In 2020, a couple ounces of gold may be enough to buy a new car, so there could not be any coin small enough for everyday purchases.

Enter silver, specifically, silver quarters minted prior to 1965, which contain 90% silver and currently command a value of nearly $4.00. With silver at $21 and change, those same silver quarters will be worth upwards of $8, small enough for reasonable purchase of food, lodging, movie tickets and the such. Often called "poor man's gold", silver will likely take on the moniker of "middle class gold," for obvious reasons.

Larger sums of silver, at $45 and up, may be beneficial as collateral, no matter what fiat or paper currency is currently in vogue, thus making it not only money and a store of value, but also possessive of status as a fractional reserve.

It should be lovely living in a future with plenty of silver on hand.

Morgan Stanley today announced a hiring freeze due to low participation levels in the market. Trading volumes have been at historic lows for months and a continuation of that trend will result in weakened earnings from the major brokerages. Stanley assures us that should the condition persist or worsen, that "hiring freeze" will magically morph into layoffs, heralding in the second leg of the depression, wherein government-measured unemployment increases from the current 9.6% to somewhere North of 12%, in the coming year.

Of course, government measurements are inherently inaccurate, as current "real" unemployment stands today at 16-18%. By the end of next year that number should grow to 20-22%.

Today's markets could not carry though on Friday's rally, culminating in a dizzying dive in the final hour of trading.

Dow 10,812.04, -48.22 (0.44%)
NASDAQ 2,369.77, -11.45 (0.48%)
S&P 500 1,142.16, -6.51 (0.57%)
NYSE Composite 7,263.37. -37.67 (0.52%)

Declining issues overwhelmed advancers, 3400-2330. New highs retained their edge over new lows, 389-26, on dismal volume. More of the same.

NASDAQ Volume 1,888,585,625
NYSE Volume 3,759,252,750

Oil gained three cents, to $76.52. Gold was up 70 cents, to $1,296.70. Silver gained 7 cents per ounce, to $21.46.

There's still plenty of room to run for both gold and silver, as neither have been shown to be in any kind of speculative bubble.

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