Tuesday, September 9, 2008

The Debts of the World: How Deflation is Killing Gold and Strengthening the Dollar

Enough about the conspiracy theories on banks shorting gold.

While there's a kernel of truth to that, the real story is in deflation.

I'm watching the BOND markets - not precious metals -for the realstory. There was a HUGE rush to Treasuries today because of the Lehman implosion.

Poor economies in the OECD are leading to a rush to cash - and no currency is more "safe" than the dollar. The retail investor is not used to thinking of debt as money...but it is the de facto currency of the institutions. All Treasuries and government paper is merely the present value of future payments. This leads to deflation buying more time for the government agencies to bail out their friends on Wall Street.

Effectively, when deflation is strong it gives the Treasury more ammo
for another round of bailouts. The ultimate, long term effects will beVERY bad for the US economy...but Paulson and Bernanke will be long gone by then or on the other side.

Just look at Greenspan - he now works for the Paulson hedge fund (no relation to Hank Paulson), which actively shorts sub-prime debt.

Chalk it up to institutional inertia by central banks and long standing tradition by formerly poor developing nations. Gold will keep on going down until the next President pulls an FDR.
Until then, we might see another short term rise if there is another banking bailout -possiblyas early as this weekend (the traditional time to bail out banks).