Bernanke expended a lot of capital (literally) to keep inflation expectations in check. This is why he swapped Treasury debt for non-performing assets instad of monetizing debt. I fully expect gold to retreat from its current high, but then again, I thought gold would NEVER fall below $300/oz.

Gold is money, but silver is a money substitute and can be had at reasonable rates. Stock up when it hits $8.50. You can use silver to buy toothpaste when the dollar dies. Gold may be problematic for such exchanges.

It was when I read this bit that I felt the goose walking over my grave.

“Scared (sovereign) capital”, by Brad Setser, Council on Foreign Relations, October 10, 2008.

There isn’t a shortage of demand for US Treasuries right now. There is by contrast a shortage of institutions willing to lend in dollars to a host of banks — or cut into the Treasury-Agency spread by selling Treasuries and buying Agencies. A year ago central banks couldn’t get enough Agencies. Now they won’t touch them, even though they are far better substitutes for Treasuries now than they were then.

Mortgage rates are approaching 7 percent as long-term treasury yields and risk spreads are apparently on the rise as well. So much for this being a good time to buy because of the still historically low interest rates. Eight percent mortgages are going to push home prices in the U.S. down another 20 percent, regardless of any other economic factors.

Would gold be hedge in both scenarios ?

The domestic money supply is contracting because banks clamped a hemostat to their balance sheets when they started hemhorraging from losses on subprime loans.

Banks are flush with newly printed dollars, gained by selling bad assets to the Fed, but they are either using them to buy Treasury debt or holding them on reserve with the Fed (with interest) so as to bolster their balance sheets against any additional subprime related losses. Deflation (a decrease in credit or money in circulation)is the result.

Political pressure from heavily indebted and unemployed constituents will force Congress to initiate public works projects (read: rebuilding infrastructure). They will spend lavishly, funding it with additional debt. The subsequent demand for labor and materials will begin to lift commodity prices.

This will affect the price of “second order” goods, i.e., the capital industries: petrochemical, steel, heavy construction, etc. Banks will finace this activity as a guaranteed, govenment-financed revenue source.

Then we see if sovereign wealth funds hold dollars or begin to spend them back into circulation because they fear rising commodity prices will depreciate their dollar holdings.

I think we will see a bidding war between Washington and foreigners as to who spends money faster. It will trigger a crack-up boom.

Hyperinflation is on the way, but it will come by way of deflation.

How on earth could it be politically (or morally) feasible to have grandma and grandpa dieing on the streets because we can’t fund medicare due to our monthly interest payments to China (or Japan or Dubai or where ever)?

By the time W leaves office, it’s very likely that he will have DOUBLED the national debt ($5.7+ trillion entering, $10.2+ trillion today, plus $850 billion bailout plus Iraq @ $10 billion/month for 4 more months plus $37.5 billion for AIG bailout #2 plus $680 billion liquidity injection from the Fed last week plus…) IN EIGHT YEARS! And right as the boomers are retiring!?

Our debts are denominated in our dollars, if we don’t print grandma likely doesn’t get her SS, Medicare, drugs…

I truly understand the deflation argument, and I feel ya on it (and Mish and others), but I keep coming back to the boomers, the doubling of the debt and the politics of it all. Someone, tell me where I’m wrong!

Cn

http://blogs.cfr.org/setser/2008/10/10/scared-sovereign-capital/