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Posts Tagged ‘deflation’

The U.S. real estate collapse continues

Financial analyst Al Martin gave a stark and timely presentation of the continuing economic collapse on his August 28, 2010 monthly appearance on Erskine Overnight.

First segment

  • Existing home sales have fallen to levels not seen since the Korean war.
  • Unsold inventories of existing homes, 12 1/2 months, is the highest on record, not even reached during the depths of the Great Depression in 1933.
  • 44 of the last 48 months have been negative for mutual funds.
  • $500 billion annual drawdown of common stock mutual funds.
  • He said gold is the ultimate hedge. (In contrast, in November 2009, he effectively told gold shills to take a chill pill).
  • He said gold has always risen in a deflationary environment.

Second segment

  • In 2005, 26% of U.S. debt was financed internally — now 33%.
  • $500,000 house in Stockton, California in 2005, has defaulted three times since then. It dropped to $400,000 in Q1 2007, $300,000 in Q2 2008, $200,000 in Q3 2009, now being sold by the bank for $185,000.
  • He said historically, a bottom in the U.S. real estate market comes as the percentage of cash buyers increases. Now, 33% of all housing units sold are paid in full with cash. When it reaches 50%, he says the market will have reached a bottom.
  • 25 to 30 year-old first time homebuyers have fallen 70% since 2005.

Third segment

  • Defense Secretary Robert Gates announced 150,000 U.S. troops to be redeployed to the U.S. by 2014.
  • He said there is record global inventory for oil and copper: a 2 million ton net surplus for copper at the end of the year, and copper is at least a dollar per pound overvalued, and oil is overvalued by at least $20 a barrel.
  • They figured the world economy would perpetually grow by at least 2.2% per year, but 1% is now the new target.

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One of the main selling points of a gold standard is the claim that it holds the line on inflation.

However, what is the track record of the gold standard in the U.S. given the earliest reliable numbers?

From the Bureau of Labor Statistics Inflation Calculator, we see:

  • From 1913 to 1932, while the U.S. was on a gold standard domestically and externally, inflation was 27.5%, or 1.45% annualized.
  • From 1933 to 1970, while the U.S. was on a gold standard externally, inflation was 66.4%, or 1.79% annualized.

We see that going off the gold standard domestically did correspond with higher inflation, but only marginally so.

While low inflation is generally regarded as a good thing, deflation isn’t. What the gold standard didn’t prevent was the massive deflation of 31.5% from 1929 to 1933, which greatly contributed to the annualized inflation rate of 1.45% from 1913 to 1932, instead of the 2.27% it would’ve been if there was no deflation from 1929 to 1933.

That’s significantly higher than the 1.45% annualized inflation from 1933-1970, when the lack of a domestic gold standard, according to gold standard proponents, should’ve pushed inflation far higher.

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According to Gary North of LewRockwell.com, it is.  That is, when you have to justify gold’s embarrassing performance from 1980-2001, from a closing high of $850 USD an ounce in January 1980, to a low of $255 an ounce in 2001.

He writes:

The case for gold as an investment is different. First, it is an inflation hedge over long periods of time, though not necessarily in the medium term, e.g., 1980–2001. Second, it is a crisis hedge when the international capital markets are in turmoil. (So, for that matter, is the U.S. dollar.)

Official inflation from 1980-2001 was 115%, according to the BLS, while gold declined by 70% over that period. Gary North has to rely on making the arbitrary claim that 21 years is the medium-term in order for his claim about gold being an inflation hedge over the long-term, to not be utterly embarrassing.

BusinessDictionary.com defines a long-term investment as one “that matures in more than 10 years,” and to me, 21 years falls well within the scope of a long-term investment, and outside that of a “medium-term investment”.

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Among the most famous of quotations attributed to Thomas Jefferson, is this one:

If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around  them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.

But did Thomas Jefferson really say that? That’s what I had thought, especially after hearing it repeated by so many people on so many different programs and web sites. Then, one day, I decided to verify it for myself, and was surprised by what I found.

Bartleby, famous for its books of quotations, states:

Although Jefferson was opposed to paper money, this quotation is obviously spurious. Inflation was listed in Webster’s dictionary of 1864, according to the Oxford English Dictionary, but the OED gives 1920 as the earliest use of deflation.

Another authoritative dictionary, Merriam-Webster, reports the first use of the word deflation, in any context, dating back to 1890 — 64 years after the death of Thomas Jefferson.

As Bartleby hints at, one shouldn’t throw the baby out with the bath water. Even if Jefferson didn’t say that, in whole or in part, it’s consistent with his beliefs and actions.

The full significance of this quotation will be addressed in several subsequent articles.

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