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Why Inflation Will Trump Deflation

 
Got Gold?
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02/21/2008 04:17 PM
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Why Inflation Will Trump Deflation
I know this is long, but its well worth the read. It may help you to invest wisly for the impending future.


Why Inflation Will Trump Deflation

Daniel R. Amerman, CFA


In this first article of a series, we will discuss why the answers to the inflation versus deflation debate won’t be found in impersonal mathematical equations – but the quite personal factors of human incentives and motivations. We will show how inflation always trumps deflation with sufficient government willpower – there is simply no contest. We will show how that willpower is already being unequivocally demonstrated today, and why the results of that willpower will ultimately likely be the annihilation of most of the value of the dollar and conventional investor assets. We will close by briefly discussing how investors can not only survive, but profit from the destruction of the dollar.

A Battle of Titans

Will the current deflationary forces in the US housing market transform into overall deflation in the monetary system? Will the credit bubble – which is already claiming the capital of many of the world’s leading financial institutions – end in deflation, or inflation? Subprime mortgage derivative securities make up about one fifth of 1% (0.2%) of the rapidly growing $517 trillion financial derivatives markets. If larger segments of those markets were to also implode – will the purchasing power of the dollar rise, or fall? Will a recession tame inflation, or will we get accelerating inflation and stagflation instead?

Many people look at the answers to these questions as being a battle between economic forces, where the outcome is uncertain. In one corner we have the forces of inflation and hyperinflation, as represented by Germany in the 1920s, Latin America in more recent decades, and Zimbabwe today. In the other corner we have the forces of deflation, as represented by America in the 1930s, and Japan in more recent years. In this battle of titans each side has their highly intelligent and educated advocates, who can use the combination of history and financial equations to make a convincing case that either inflation or deflation will emerge on top – with opposite results for the value of the dollar.

The outcome of this battle is vital for investors. If you invest for the destruction of the dollar (inflation), and the dollar increases in value instead (deflation), then a strategy that looked lucrative on paper could become painful in reality. The opposite is true as well – become convinced of deflation, invest for it, and if the future works out to be inflation the results could be painful indeed. Given the powerful arguments for each side, and the enormous investment consequences – what is an investor to do? How can we find the answer to which force will be stronger?

Rock Breaks Scissors & Inflation Breaks Deflation

Let me suggest that the key to finding the right answer is to first be sure you are asking the right question. Let me further suggest that trying to decide whether inflationary or deflationary forces are stronger in the economy – is asking the wrong question. For as entertaining as the image of a title bout between titanic economic forces would be, this is the wrong metaphor, and is in fact dangerously misleading. A better analogy might be the children’s decision-making game of “rock, paper, scissors”. In this game, scissors always cut paper, paper always covers rock and rock always break scissors. The rules are absolute, and there is no question about whether the scissors will break the rock instead.

Similarly, when we look to the “battle” between inflation and deflation – there is no real question, but an absolute answer. Any government which controls the supply of its own currency can force inflation at any time – it is merely a matter of willpower. For a sufficiently motivated government, inflation breaks deflation. Always and without exception, period, end of debate. The question between inflation and deflation is not one of relative “power” at all, not one of which force will prove more powerful, but of government willpower and motivation.

This inherent power of inflation to always break deflation is Reason One of our 24 Reasons why inflation will trump deflation. The source of this inherent power is quite simply the nature of money, as outlined below:

1. The potential supply of money is infinite for a nation that issues its own currency.

2. The supply of resources to purchase with money is always limited at any one point in time.

3. By sufficiently raising the supply of money relative to the finite amount of desirable goods and services, there will necessarily be more dollars competing to buy each asset, and the dollar denominated price will always rise for the asset.

4. The meaning of inflation is an increase in the dollar prices of goods and services, which is the same thing as a decrease in the purchasing power of every dollar.

5. So long as a government is willing to sufficiently increase the supply of money, it has an absolute power to destroy the value of its own currency through the oversupply of money relative to assets, which is an absolute power to break deflation with inflation.

Changing Assumptions = Changing Results

For those readers who are well versed in economics and inflation, my apologies for the elementary nature of the five points above. However, the fundamental principles reviewed above are essential for even the most sophisticated evaluations of inflation versus deflation. The problem is that generally speaking, the more sophisticated the evaluation – the greater the number of assumptions. Which leads to the danger that if you pull out one of the underlying assumptions – the whole elaborate edifice of equations, papers, dissertations and computer models can come tumbling down.

much more at link
[link to news.goldseek.com]

Last Edited by SPUD on 10/21/2011 11:46 AM
Anonymous Coward (OP)
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02/21/2008 04:46 PM
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Re: Why Inflation Will Trump Deflation
OK, well uh...atleast im prepared, hope some took this with them. The guy is a CFA so he knows what hes talking about.
Anonymous Coward
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02/21/2008 04:52 PM
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Re: Why Inflation Will Trump Deflation
"Our fourth core principle is that there is a limited supply of tangible assets, such as gold, silver, real estate and energy. As tangible assets have a value that is independent of the supply of money, then the way the relationship works is that as the potential supply of money nears infinity, and the purchasing power of financial assets nears zero, then the value of tangible assets also nears infinity (at least as denominated in a currency whose value approaches zero). The higher the rate of inflation, the greater the return differential between financial and tangible assets will grow, and the greater the benefits to buying tangible assets."

And this is why I'm hanging on to my Mickey Mantle rookie card.
Anonymous Coward (OP)
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02/21/2008 04:57 PM
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Re: Why Inflation Will Trump Deflation
"Our fourth core principle is that there is a limited supply of tangible assets, such as gold, silver, real estate and energy. As tangible assets have a value that is independent of the supply of money, then the way the relationship works is that as the potential supply of money nears infinity, and the purchasing power of financial assets nears zero, then the value of tangible assets also nears infinity (at least as denominated in a currency whose value approaches zero). The higher the rate of inflation, the greater the return differential between financial and tangible assets will grow, and the greater the benefits to buying tangible assets."

And this is why I'm hanging on to my Mickey Mantle rookie card.
 Quoting: Anonymous Coward 297356


LOL, well if you can find a buyer in the rough times, im sure it will fetch a pretty penny!
Anonymous Coward
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02/21/2008 11:19 PM
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Re: Why Inflation Will Trump Deflation
bump
Anonymous Coward
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02/22/2008 12:12 AM
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Re: Why Inflation Will Trump Deflation
why
OP
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02/22/2008 12:45 AM
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Re: Why Inflation Will Trump Deflation
Thanks for the pin. This is the first 2 reasons in a series of 28 reasons (another 13 articles to come i think)
Anonymous Coward
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02/22/2008 01:59 AM
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Re: Why Inflation Will Trump Deflation
WARNING: Don not buy Streettracks Gold ETF's


The Fishy Smell Of Streettracks Gold ETF's Reported Holdings

[link to www.jsmineset.com]


Dear CIGAs,

Something smells mighty fishy to me about what is going on in this ETF of late. Some of us have long believed that the inherent flaw in this ETF is in its auditing process which is less than transparent. If the bad guys who comprise COT and are the price managers on behalf of the US monetary authorities needed another source of gold for the supply that they feed into the market to suppress the price, the ETF is a perfect vehicle for this. I find it a huge stretch of the imagination to see gold soaring into all time highs and the one major indicator of investment demand for that same metal sitting there unchanged when it comes to reported holdings for nearly two weeks! I just read this AM that platinum and palladium holdings in the London ETFs for those metals are soaring because of investment demand. Why then is the gold ETF not reporting a sharp increase in its holdings? To believe that nothing has changed in there is to believe that the sun rises in the West.


Buy phisical gold, and any stocks you buy, take paper delivery!
Anonymous Coward
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02/22/2008 03:05 AM
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Re: Why Inflation Will Trump Deflation
OK, well uh...atleast im prepared, hope some took this with them. The guy is a CFA so he knows what hes talking about.
 Quoting: Anonymous Coward 377160


This guy is a salesman. He is selling a cure to inflation; is there much chance that he is going to do anything but hype the inevitability of inflation?

Short term - I agree with him. Through the election, I expect inflation to continue. After the election? Not so sure. No one is sure. Anyone that is 'sure', is selling something - just like this guy. :)
Anonymous Coward
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02/22/2008 03:26 AM
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Re: Why Inflation Will Trump Deflation
OK, well uh...atleast im prepared, hope some took this with them. The guy is a CFA so he knows what hes talking about.


This guy is a salesman. He is selling a cure to inflation; is there much chance that he is going to do anything but hype the inevitability of inflation?

Short term - I agree with him. Through the election, I expect inflation to continue. After the election? Not so sure. No one is sure. Anyone that is 'sure', is selling something - just like this guy. :)
 Quoting: Anonymous Coward 332414


516 trillion in world wide defunked OTC Derivatives, another 300 Billion in sub prime writedowns to come, inflation on a ever increasing up curve, dying bees and bats, increasing world population, Depleated and under producing food crops, 700 billion in 'money from thin air' injected into the US economy, another 150 billion in "stimulus", oil prices skyrocketing, ect.....

Its not hard to see whats going to happen and there is no cure for the writdowns and OTC derivatives.

We are looking at aprox 10 years of severe recession world wide, and possibly depression in the US. The guy is only a select few with a CFA credentials and is thus over qualified to make accurate assements.

I suggest you buy gold now, before it really takes off, and so do a bunch of other over qualified and experienced ppl.
Anonymous Coward
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02/22/2008 04:07 AM
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Re: Why Inflation Will Trump Deflation
Gold Nowhere Near Real Terms High

Author: Dan Norcini










Dear Friends,

As most of you know by now, the price of platinum is roaring into the stratosphere as a perfect combination of both fundamental and technical factors propels it to highs in nominal terms that were inconceivable to anyone just a couple of years ago. I thought you might find the following combination of charts instructive which detail the incredible-looking price chart of the metal and then the same price chart adjusted for inflation using the CPI numbers that the government provides. I have used the most recent numbers to make the charts as up-to-date as possible.

I first provide you with a separate chart of platinum and then a separate chart of CPI adjusted platinum. The next chart then is a combination with platinum in nominal terms on the top and inflation adjusted platinum on the lower pane. Notice that after adjusting for inflation, the price of platinum is quite close to breaking out into an all time high in real terms.

Then following those three charts I have provided the same setup for the gold chart. The first chart is a monthly of gold in nominal terms which as we all know broke into record territory this week. Following that chart is an inflation adjusted chart of gold. You will see by examining that chart that gold is NO WHERE CLOSE to breaking into an all time high in REAL TERMS.

The point in this exercise is to show the potential for where I believe gold is eventually headed as it has a tremendous amount of catchup work to do. While it is indeed rewarding to see gold hitting new highs, I think within the next few years we can expect to see the gold inflation adjusted chart eventually looking much like the platinum inflation adjusted chart with gold moving closer to all time highs in REAL TERMS.

Dan

Charts in PDF: [link to www.jsmineset.com]

Link to article: [link to www.jsmineset.com]
humble being
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02/22/2008 05:58 AM
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Re: Why Inflation Will Trump Deflation
You want to do something usefull prepare yourself for the big worldwide genocide you see the illuminati want to kill 5.5 billion if not more sheeple and believe me these people are not the type who hesitate or feel remorse to kill.
Just look at what they do in the world fluor chemtrail bombing nations destroying the rain forest destroying democratie creating economic depressions selling drugs that makes us sicker dumping radioactive waste in the sea financing terrorism programming ethnic cleansing in africa.
Now you have to ask yourself what is the most important watching your wallet or preparing yourself for the big die off .....
A good piece of advice leave the cities these will become extermination camps in the not too distant future ...............
Anonymous Coward
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02/22/2008 06:23 AM
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Re: Why Inflation Will Trump Deflation
in the LONG term you are just find holding gold, you're even better off holding silver and palladium, because after the deflationary crash, which could drop the prices of precious metals say 50% and give you a great buying opportunity, there will be an inflationary phase which will have all the metals crossing their current price levels regardless...

so I suggest hedging your bets and just buying some precious metals, holding some cash, like straddling an option... we know that we are going to have huge price swings, whether they be deflationary, or inflationary, so having both cash and metals is a sound financial move.

Buy the smart ones like silver and palladium, which have more upside potential in the long run due to supply issues, and good luck!
Anonymous Coward
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02/22/2008 08:35 AM
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Re: Why Inflation Will Trump Deflation
You want to do something usefull prepare yourself for the big worldwide genocide you see the illuminati want to kill 5.5 billion if not more sheeple and believe me these people are not the type who hesitate or feel remorse to kill.
Just look at what they do in the world fluor chemtrail bombing nations destroying the rain forest destroying democratie creating economic depressions selling drugs that makes us sicker dumping radioactive waste in the sea financing terrorism programming ethnic cleansing in africa.
Now you have to ask yourself what is the most important watching your wallet or preparing yourself for the big die off .....
A good piece of advice leave the cities these will become extermination camps in the not too distant future ...............
 Quoting: humble being 377155


Well it certianly look that they do have all angles covered. but untill that time, you will still need to take care of your self and this info might help
Anonymous Coward
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02/22/2008 08:40 AM
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Re: Why Inflation Will Trump Deflation
in the LONG term you are just find holding gold, you're even better off holding silver and palladium, because after the deflationary crash, which could drop the prices of precious metals say 50% and give you a great buying opportunity, there will be an inflationary phase which will have all the metals crossing their current price levels regardless...

so I suggest hedging your bets and just buying some precious metals, holding some cash, like straddling an option... we know that we are going to have huge price swings, whether they be deflationary, or inflationary, so having both cash and metals is a sound financial move.

Buy the smart ones like silver and palladium, which have more upside potential in the long run due to supply issues, and good luck!
 Quoting: dreamer


I agree, hedging your bets is the best way to go, i hold gold and am long, but silver is also a great play for sure.

As for palladium, its a good bet right now, but if the economy crashes, ppl wont take it like they would with gold and silver for bartering. If your in it just for the investing, i agree, but if your also preparing for barter town, i would recomend gold and silver before palladium
Anonymous Coward
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02/22/2008 11:00 AM
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Re: Why Inflation Will Trump Deflation
It's simple.

Think of a teeter-totter.

All the U.S. money foreigners are holding will be sent back to us in exchange for real items(ie commodities, physical items).

This is HIGHLY inflationary.

The last 20 years were deflationary (we exported inflation) because foreigners accepted the U.S. currency. Now that trend is reversing(foreigners will be exporting inflation to us) and its time to pay the piper.


Good luck.
Eagle # 1
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02/22/2008 11:07 AM
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Re: Why Inflation Will Trump Deflation
dreamer ... DID you READ the initial article by OP ???

How can you have ANY doubts about what the politicians/FED have ALREADY DONE and will continue to do ?

OR, does the 'dreamer' name say it ALL ?

At least you have HALF of it right. But hold CASH, a DEPRECIATING, FIAT form of 'wealth' ? MY, My ! It DOES take 'all kinds' and always will.

If you were in a lifeboat, with little expectation of rescue, I assume you would drink the water freely and ration the food, for which you have NO REFRIGIRATION ! Then die of from food poisoning and thirst ?

Novel. But then many minds can only grasp half of the situation, as the whole truth is TOO MUCH to handle.

Peace; END rant !

Eagle
Anonymous Coward
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02/22/2008 12:26 PM
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Re: Why Inflation Will Trump Deflation
Keep praying, is all I've got to say.
Loosecannon

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02/22/2008 12:44 PM
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Re: Why Inflation Will Trump Deflation
I know this is long, but its well worth the read. It may help you to invest wisly for the impending future.


Why Inflation Will Trump Deflation

Daniel R. Amerman, CFA


In this first article of a series, we will discuss why the answers to the inflation versus deflation debate won’t be found in impersonal mathematical equations – but the quite personal factors of human incentives and motivations. We will show how inflation always trumps deflation with sufficient government willpower – there is simply no contest. We will show how that willpower is already being unequivocally demonstrated today, and why the results of that willpower will ultimately likely be the annihilation of most of the value of the dollar and conventional investor assets.
 Quoting: Got Gold? 377160



OK, I certainly agree that inflation is what we have to look forward to. And lots of it, more than in the late 70's/early 80's. And it might fix our economy at a huge cost.

But what is new is the fact that two other currencies and soon a 4th will be competing with us to all undermine their currencies to maintain trade surpluses or at least reduce trade deficits. This is merchantilism all over again competing over manufacturing competitiveness and national equity erosion.

The result is a globalists dream, a race to the bottom for all wages, all currencies and all living standards worldwide.

At least that is one goal of globalization.

It's a conundrum of epic proportions for people and labor the world over. And i see no way to overcome it. Not for us. Not on our present path.
Anonymous Coward
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02/22/2008 01:13 PM
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Re: Why Inflation Will Trump Deflation
I love these inflation vs deflation arguments. They lead nowhere at all.

We will have *both*. Our masters of the universe/finance have engineered a whole new paradigm that works well for them.

The Fed and the CBs (via their handlers) are going to walk the thin line where they can milk out the hugest profits; while the masses will pay, which ever way they turn.

They've invented a new game this time.
Jos
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02/22/2008 01:22 PM
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Re: Why Inflation Will Trump Deflation
If you MUST have it the price will inflate, food, fuel,
health care. If you don't really need it, the price will plummet.
Anonymous Coward
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02/22/2008 01:35 PM
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Re: Why Inflation Will Trump Deflation
CFA doesn't mean much. It's a means to be able to market investments to the sheeple. About the same as an insurance salesman.

"Inflation is a sure thing! You must be able to protect yourself! Buy my book!"
tbear4
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02/22/2008 04:06 PM
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Re: Why Inflation Will Trump Deflation
Inflation, Deflation?
After reading all this, if in real terms there is deflation, is he/she saying that they will say there is inflation?
the only way to get more money is to say there is inflationm, as if you say there is deflation noone could get more money for there programs and may have to take less.
von Doom
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02/22/2008 05:12 PM
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Re: Why Inflation Will Trump Deflation
Hey Goldbugs your ballooning gold is relative to a declining dollar.

And you assume that, once the dollar is dead, your gold will be worth something, someday.

A King's ransom, perhaps...

You are wrong.

The very same people who can and will kill the dollar are not going to reward you with anything.

Clueless!
Anonymous Coward
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02/22/2008 05:15 PM
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Re: Why Inflation Will Trump Deflation
Hey Goldbugs your ballooning gold is relative to a declining dollar.

And you assume that, once the dollar is dead, your gold will be worth something, someday.

A King's ransom, perhaps...

You are wrong.

The very same people who can and will kill the dollar are not going to reward you with anything.

Clueless!
 Quoting: von Doom 370280


dumbass, if the dollar goes to 0, this will be barter town, and the more gold you have the more you have to barter with. Fiat is dead, it just dosent know it yet.
von Doom
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02/22/2008 05:18 PM
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Re: Why Inflation Will Trump Deflation
Hey Goldbugs your ballooning gold is relative to a declining dollar.

And you assume that, once the dollar is dead, your gold will be worth something, someday.

A King's ransom, perhaps...

You are wrong.

The very same people who can and will kill the dollar are not going to reward you with anything.

Clueless!


dumbass, if the dollar goes to 0, this will be barter town, and the more gold you have the more you have to barter with. Fiat is dead, it just dosent know it yet.
 Quoting: Anonymous Coward 378409


You've got to be kidding me.

Are you fucking serious?

You are naive at best, and have absolutely no brain cells functioning to call anyone else a dumbass.
Anonymous Coward
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02/22/2008 06:06 PM
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Re: Why Inflation Will Trump Deflation


The Fed and the CBs (via their handlers) are going to walk the thin line where they can milk out the hugest profits; while the masses will pay, which ever way they turn.

They've invented a new game this time.
 Quoting: Anonymous Coward 365761

You might be surprised, this is a very old game actually, the oldest. Caesar himself was assassinated over the right to control and issue currency.
MANINCHINA
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02/22/2008 07:36 PM
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Re: Why Inflation Will Trump Deflation
Get out of the dollar ASAP. Even if you believe the deflationary scenario over the inflationary one and cash is king, put your cash into another currency.

I am in China on a business trip right now. 6 to 12 month CD rates at all major banks here are over 4% - and that doesn't include the fact that the RMB will appreciate at least 5% (more likely 8%) against the dollar this year.

Whether it's to China, Singapore, Europe, wherever - get your money out of US dollars.

By the way, that information about the GLD ETF scares the hell out of me - but there is no way I want physical gold.

Read Peter Schiff's "Crash Proof". If the shit really hits the fan in the USA, I want an escape hatch - and you won't be able to get the gold out of the country with you.

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