The Great(er) Depression with a twist (2/3)

Referring back to my 3 questions / concerns:

1. If we are in hyperinflationary times, why is gold still below $1000? It should be trading near $3000 - $4000 an ounce.

Because GOLD at this time is considered money and not a commodity that is the only REAL protection against inflation. So gold will perform OK (not outperform) in a deflationary period because people will hoard cash and save as much as they can. Because gold is "real money" it will perform OK. HOWEVER if people all around the world start to see that there is only 1 product that can protect them from (hyper) inflation (created by the government, see part 3), gold will outperform all other assets, this has been the case throughout history. I suspect it won't be different this time.



2. If there is so much US dollar currency creation, why does the dollar rally against every other currency except the Japanese Yen? The dollar should be a lot lower.

Because so many dollars just vanished out of the system. Every asset in the world is DOWN: crash in stocks, bonds, commodities, mortages/foreclosures, bank defaults, all of that money in US dollars is now gone. Less dollars in the system means that the dollars in the system are worth more, hence the currency will go up. Because the biggest write downs are happening in the US and in US denominated currency, the dollar will rise against other currencies. The dollar rally makes perfect sense. It is not a sign of a strong US economy but it is a sign of the terrible state of the US economy.

The Japanese currency is a different story. For years, institutions have borrowed money in Japanese Yen and paid a low interest (0.5%) and invested that money in higher yielding assets all around the world. If you borrow money at 0.5% and invest it at 4% Us Treasuries, you gain 3.5%. Because of the liquidations and the low yield on those treasuries, big institutions are selling their "safe" US investments and have to buy yen. So the Yen rises.(carry trade)

3. How can there be any kind of inflation if commodities (basic necessities like corn, steel, wheat, oil, silver,...) have crashed at least 60 % during the last 3 months?

There is no inflation, but we have DEFLATION! And just take a look at Japan to see how that deflationay economy will affect us all.

If you would read to forums on yahoo or a Belgian investment sites, people seem to think that the collapse of a few banks have caused this 2500 point DOW decline. I think they are wrong. If a bank collapses, Microsoft shouldn't be down 20% in a week. Nope, the markets fear something more severe. They fear a prolonged period of deflation which would create an economical disaster for all of us.
If we go back in history, we see that the first great deflation, aka the Great Depression lasted about 10 years. WW2 got the US out of it. In Japan, deflation caused the economy to collapse and 18 years later they still haven't recovered.

I think it is important to make sure that people understand WHY the markets are acting so terrible. This is not a buyable dip, this is the end of a complete asset class.

Of course the US government will not let this deflationary period last. I will talk about the possible coming political actions of the Us and other governments in part 3.