jim4silver
Silver Member
- Apr 15, 2008
- 3,662
- 495
With PMs dragging along here lately it has caused me to re-think why I am a PM holder.
As I have been doing my daily reading of online PM pundits and thinking about the PM situation and how it fits in with the world economic situation, it seems to me that there are really only two real ways all of this could play out in the world.
Option 1: That the fed stops easing for good (no more QE, Operation Twists, etc), and the US suffers from a serious hit of deflation. For good measure, let's also say under this option they start raising interest rates which further tightens up money supply. The gov raises taxes to help further fund itself and pay off national debt.
I believe if option 1 takes place, there will be massive selling in the stock markets, even greater loss of employment due to lack of excess capital for business, and a lowering of PM prices at least initially. Basically under option 1, the price of EVERYTHING will drop, including housing. I believe it would cause a "depression" and we would see events here similar to what happened at that time in the 30's.
Recently the Fed has said for the time being, no more QE is necessary, which statement has been the alleged cause of the recent PM declines and what has for now stalled the stock market a bit.
Option 2: The Fed at some time in the near future and later on as well probably multiple times, finds ways to "ease" because they want to keep things rolling along like everything is a ok. Thus they keep finding ways to inject liquidity into the economy and markets and keep interest rates low so the money supply is further loosened up. Under this option, at some point we risk much higher inflation as all of those created digits, dollars, etc, find their way into the economy and drive prices up in many places and lower the value of currency. If this happens stocks should continue to rise and PMs will continue the bull market as it has for the past 10 years or so.
Wildcard events that will have an impact whether we have option 1 or 2 take place:
A. War with Iran or some other new mid east conflict. This will cause already high oil prices to keep going higher, especially if Iran were to close the Straits of Hormuz like they have threatened to do.
B. Future need to raise the debt ceiling limit of the US. This is already a definite go. They will need to do this before the election in the fall, probably sometime between Aug - Oct. Will be interesting to see what if any effect it has on the campaigning when it takes place.
C. Some unforeseen calamity (terror attack or other domestic problem not known or contemplated).
Some things that cannot be argued, at least with a straight face, is that our national debt will never be able to be repaid. Further, the unfunded liabilities of the US gov (social security, medicare, etc) dwarf our current 16 Trillion or so national debt. Thus, something has to happen down the road that will be unpleasant no matter which happens.
For example, if the gov fails to raise the debt ceiling in an effort to stop the debt from growing (something that seems like a responsible thing to do from an Austrian economic perspective) our gov would not be able to pay for all the goodies the US citizens are used to getting, nor pay for "normal" things we take for granted like having emergency services, gov workers, military, etc. This would not be good for any politician who wants to win an election if such an event were to happen (not raising the debt level that is).
If the gov were to keep adding debt in the trillions (they did raise the debt ceiling), at some point there will be a default on the national debt that would spell the end for the dollar. Interest must be paid on a debt or there is a default. You can look at what happened in Greece where some bondholders lost 70% or so on their bonds. They might not want to call it a default, but the bottom line is that not only was the proper interest not paid, the bondholders wound up with only 30% of their principal in a sense.
So we are in a damned if you do, damned if you don't with respect to what happens. Either way will cause unhappy voters, either sooner if Option 1 happens, or later with Option 2.
From my perspective, the fed/gov is going to keep QE and other easing programs going. I cannot imagine the politicians ever doing anything that will hurt their chances for election or re-election, no matter which party they belong to. For the fed/gov to really tighten up and take measures to reduce the debt, it will require cutting many "benefits" people have grown accustomed to and there would not be a group of people unaffected (welfare--poor folks and recently including some middle class as the jobs evaporate; social security/medicare-- old folks; raising taxes--working folks, companies, etc).
In conclusion, I believe that PMs are still a great way to store value/buying power, etc. If we have a depression, most other "investments" will fall too, so PMs should be no worse than stocks, housing, etc. Being in "dollars" would be better under this scenario perhaps, but since I believe we will see option 2, I am not worried.
If anyone has any other "options" that might play out, I would like to hear them.
All just my opinion.
Jim
As I have been doing my daily reading of online PM pundits and thinking about the PM situation and how it fits in with the world economic situation, it seems to me that there are really only two real ways all of this could play out in the world.
Option 1: That the fed stops easing for good (no more QE, Operation Twists, etc), and the US suffers from a serious hit of deflation. For good measure, let's also say under this option they start raising interest rates which further tightens up money supply. The gov raises taxes to help further fund itself and pay off national debt.
I believe if option 1 takes place, there will be massive selling in the stock markets, even greater loss of employment due to lack of excess capital for business, and a lowering of PM prices at least initially. Basically under option 1, the price of EVERYTHING will drop, including housing. I believe it would cause a "depression" and we would see events here similar to what happened at that time in the 30's.
Recently the Fed has said for the time being, no more QE is necessary, which statement has been the alleged cause of the recent PM declines and what has for now stalled the stock market a bit.
Option 2: The Fed at some time in the near future and later on as well probably multiple times, finds ways to "ease" because they want to keep things rolling along like everything is a ok. Thus they keep finding ways to inject liquidity into the economy and markets and keep interest rates low so the money supply is further loosened up. Under this option, at some point we risk much higher inflation as all of those created digits, dollars, etc, find their way into the economy and drive prices up in many places and lower the value of currency. If this happens stocks should continue to rise and PMs will continue the bull market as it has for the past 10 years or so.
Wildcard events that will have an impact whether we have option 1 or 2 take place:
A. War with Iran or some other new mid east conflict. This will cause already high oil prices to keep going higher, especially if Iran were to close the Straits of Hormuz like they have threatened to do.
B. Future need to raise the debt ceiling limit of the US. This is already a definite go. They will need to do this before the election in the fall, probably sometime between Aug - Oct. Will be interesting to see what if any effect it has on the campaigning when it takes place.
C. Some unforeseen calamity (terror attack or other domestic problem not known or contemplated).
Some things that cannot be argued, at least with a straight face, is that our national debt will never be able to be repaid. Further, the unfunded liabilities of the US gov (social security, medicare, etc) dwarf our current 16 Trillion or so national debt. Thus, something has to happen down the road that will be unpleasant no matter which happens.
For example, if the gov fails to raise the debt ceiling in an effort to stop the debt from growing (something that seems like a responsible thing to do from an Austrian economic perspective) our gov would not be able to pay for all the goodies the US citizens are used to getting, nor pay for "normal" things we take for granted like having emergency services, gov workers, military, etc. This would not be good for any politician who wants to win an election if such an event were to happen (not raising the debt level that is).
If the gov were to keep adding debt in the trillions (they did raise the debt ceiling), at some point there will be a default on the national debt that would spell the end for the dollar. Interest must be paid on a debt or there is a default. You can look at what happened in Greece where some bondholders lost 70% or so on their bonds. They might not want to call it a default, but the bottom line is that not only was the proper interest not paid, the bondholders wound up with only 30% of their principal in a sense.
So we are in a damned if you do, damned if you don't with respect to what happens. Either way will cause unhappy voters, either sooner if Option 1 happens, or later with Option 2.
From my perspective, the fed/gov is going to keep QE and other easing programs going. I cannot imagine the politicians ever doing anything that will hurt their chances for election or re-election, no matter which party they belong to. For the fed/gov to really tighten up and take measures to reduce the debt, it will require cutting many "benefits" people have grown accustomed to and there would not be a group of people unaffected (welfare--poor folks and recently including some middle class as the jobs evaporate; social security/medicare-- old folks; raising taxes--working folks, companies, etc).
In conclusion, I believe that PMs are still a great way to store value/buying power, etc. If we have a depression, most other "investments" will fall too, so PMs should be no worse than stocks, housing, etc. Being in "dollars" would be better under this scenario perhaps, but since I believe we will see option 2, I am not worried.
If anyone has any other "options" that might play out, I would like to hear them.
All just my opinion.
Jim
As you know Jim one good source has said that the Derivatives Market is the one to watch and to get out off it. I'm still looking for deals on my PM's but getting harder to find. Keep Stacking. Charlie
