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Tuesday, November 27, 2007

"Legal tender for all debts, public and private"

Karl Denninger is emphatic that there's going to be a deflation, not inflation, and investing in metals won't save us.

Part of his argument is that the money supply is determined not just by how much there is in the economy, but also by how fast it changes hands (its "velocity"). If the heartbeat of economic activity slows, the monetary pressure will reduce.

Denninger shares the growing concern that subprime losses could be of the order of $1 trillion, and believes

... we are literally weeks or a handful of months away from an utter implosion in the equity markets.

I believe we are very, very close to the precipice - and that nothing Bernanke or Paulson can do now will change the outcome. The opportunity to address this and stop it expired a few years ago, with the cumulative damage growing the longer regulators fail to act.

In which case, it's time to hold cash, which on American notes says is good "for all debts".

This reminds me of another quotation I can't source: "Would that I could be so certain of anything as he is of everything." I suspect he may be right on this one; then again, I would, since I've been feeling it in my bones for about a decade, before the official policy became to inflate our way out of all troubles.


Anonymous said...

Index-linked Savings Certificates might be a good two-way bet. If inflation goes up, so do they. If inflation turns negative, they don't.

Sackerson said...

I have suggested this to clients as part of a wider portfolio, though all you get is RPI plus arounbd 1%, so if inflation is zero or negative...

Anonymous said...

Actually, there is still a case of holding gold even in times of deflation. I mentioned before in Should you hold gold or cash in times of deflation?:

"So, a good question to ask is this: in times of deflation, wouldn’t it be better to hold cash instead of gold?

The short answer is this: In theory, yes. In reality, no. If you want to know the long answer, read on."

The reason is due to: the return of your cash as oppose to return on your cash.

If the government guarantees the return of your cash (e.g. Northern Rock) through the printing of money we have an inflation problem. If they don't, we have a deflation problem.

Sackerson said...

Thank, CIJ - I'll take a look at your article now.

Brian said...

Heh, anyone still think he's wrong now? "A handful of months" and here we are.