understanding inflation and Deflation
Nouriel Roubini Doesn't Understand
Inflation and Deflation
After the financial collapse of 2008, Nouriel Roubini emerged as one of the world's most well known and respected economists. Roubini this week called Jim Rogers' prediction that gold will reach $2,000 in the next decade "utter nonsense" and said that there is no inflation to drive gold prices that high. He also said that oil's rise from $30 to $80 per barrel is "very difficult to justify" when demand for oil is down to year 2005 levels. Although Roubini was accurate at predicting the housing collapse in 2005 and how it would sink the economy, many other people including the co-founders of NIA were also right about the housing bubble in 2005. While we consider Roubini to be more intelligent than most other economists out there today, he is dead wrong when it comes to inflation and deflation.
We believe Roubini needs to wake up and realize that inflation is already here today. Gold rising to a record high on Wednesday of $1,098 per ounce and oil rising to $80 per barrel is a symptom of inflation. The Federal Reserve printing dollars at an unprecedented rate by definition is inflation. Just because we haven't seen a rise as of yet in the government's phony CPI index, doesn't mean we don't have inflation today.
Roubini expects to see heavy deflationary forces through 2012 from industrial overcapacity, falling labor costs and a still damaged financial system; but it is our belief that with the Federal Reserve leaving interest rates on Wednesday at 0%, a massive overdose of excess liquidity will override these deflationary forces and ultimately lead to hyperinflation. Inflation is the easiest thing for any central bank to create and the Federal Reserve is clearly pulling out all the stops to see that we have inflation. Unfortunately, the Federal Reserve doesn't have an exit strategy. By the time inflation becomes the top story on the news each night, it will be impossible to control.
In our opinion, the world will be shocked at how quickly gold rises to $2,000. Jim Rogers' prediction of $2,000 per ounce gold in the next decade is extremely conservative, it could happen next year. Jim Rogers based his prediction on the fact we have been discussing for a long time, gold's high of $850 in 1980 adjusted for inflation is $2,300 per ounce in today's dollars. Compared to 1980 when we were the world's largest creditor nation, today we are the world's largest debtor nation with a national debt that is about to hit $12 trillion. With the U.S. government itself estimating a $9 trillion budget deficit over the next decade, we will eventually get to a point where 50% of taxes collected by the treasury will be needed to pay the interest on our national debt. Combined with unfunded liabilities for Social Security, Medicare and Medicaid, we believe hyperinflation is inevitable.
We agree with Roubini that U.S. stocks have run too far too fast and another dip in nominal terms is more likely to happen than not. What we know for sure is, U.S. stock markets are going to fall substantially priced in gold. History tells us that gold is the only real safe haven and after the collapse of a financial bubble, the Dow Jones/Gold ratio always falls to a level between 1 and 2.
In 2008, the world rushed out of stocks and into U.S. dollars as a safe haven. We said U.S. dollars were the riskiest asset of all and that gold was the only real safe haven. Since then, the world has been rushing to get rid of their dollars by buying stocks, commodities and precious metals. With unemployment numbers being released on Friday, it is possible that investors will soon realize the U.S. economy is not truly recovering and stocks are rallying only due to inflation. This time around, as investors cash out of stocks, more people will stay clear of the U.S. dollar and rush to buy gold instead. We predict a major short-term decline in the Dow Jones/Gold ratio from its current level of 9, back down to the low of 7 we saw earlier this year. Over the next 12 months, the Dow Jones/Gold ratio is likely to make new lows for the current bear market.
After the financial collapse of 2008, Nouriel Roubini emerged as one of the world's most well known and respected economists. Roubini this week called Jim Rogers' prediction that gold will reach $2,000 in the next decade "utter nonsense" and said that there is no inflation to drive gold prices that high. He also said that oil's rise from $30 to $80 per barrel is "very difficult to justify" when demand for oil is down to year 2005 levels. Although Roubini was accurate at predicting the housing collapse in 2005 and how it would sink the economy, many other people including the co-founders of NIA were also right about the housing bubble in 2005. While we consider Roubini to be more intelligent than most other economists out there today, he is dead wrong when it comes to inflation and deflation.
We believe Roubini needs to wake up and realize that inflation is already here today. Gold rising to a record high on Wednesday of $1,098 per ounce and oil rising to $80 per barrel is a symptom of inflation. The Federal Reserve printing dollars at an unprecedented rate by definition is inflation. Just because we haven't seen a rise as of yet in the government's phony CPI index, doesn't mean we don't have inflation today.
Roubini expects to see heavy deflationary forces through 2012 from industrial overcapacity, falling labor costs and a still damaged financial system; but it is our belief that with the Federal Reserve leaving interest rates on Wednesday at 0%, a massive overdose of excess liquidity will override these deflationary forces and ultimately lead to hyperinflation. Inflation is the easiest thing for any central bank to create and the Federal Reserve is clearly pulling out all the stops to see that we have inflation. Unfortunately, the Federal Reserve doesn't have an exit strategy. By the time inflation becomes the top story on the news each night, it will be impossible to control.
In our opinion, the world will be shocked at how quickly gold rises to $2,000. Jim Rogers' prediction of $2,000 per ounce gold in the next decade is extremely conservative, it could happen next year. Jim Rogers based his prediction on the fact we have been discussing for a long time, gold's high of $850 in 1980 adjusted for inflation is $2,300 per ounce in today's dollars. Compared to 1980 when we were the world's largest creditor nation, today we are the world's largest debtor nation with a national debt that is about to hit $12 trillion. With the U.S. government itself estimating a $9 trillion budget deficit over the next decade, we will eventually get to a point where 50% of taxes collected by the treasury will be needed to pay the interest on our national debt. Combined with unfunded liabilities for Social Security, Medicare and Medicaid, we believe hyperinflation is inevitable.
We agree with Roubini that U.S. stocks have run too far too fast and another dip in nominal terms is more likely to happen than not. What we know for sure is, U.S. stock markets are going to fall substantially priced in gold. History tells us that gold is the only real safe haven and after the collapse of a financial bubble, the Dow Jones/Gold ratio always falls to a level between 1 and 2.
In 2008, the world rushed out of stocks and into U.S. dollars as a safe haven. We said U.S. dollars were the riskiest asset of all and that gold was the only real safe haven. Since then, the world has been rushing to get rid of their dollars by buying stocks, commodities and precious metals. With unemployment numbers being released on Friday, it is possible that investors will soon realize the U.S. economy is not truly recovering and stocks are rallying only due to inflation. This time around, as investors cash out of stocks, more people will stay clear of the U.S. dollar and rush to buy gold instead. We predict a major short-term decline in the Dow Jones/Gold ratio from its current level of 9, back down to the low of 7 we saw earlier this year. Over the next 12 months, the Dow Jones/Gold ratio is likely to make new lows for the current bear market.
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