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27 May 2009

Is Inflation Ready to Come Back?

The actions of the government seem like they are extremely inflationary. That is the view of most investors. Inflation happens when the government prints money and it enters the economy. The government's actions today are not inflationary. For one thing they are borrowing money not printing it. And for another, the money that is going to bailout companies is not re-entering the economy. Banks, for example, are using the money to shore up their capital, not lend it out. They are buying Treasuries with the money.

Following are excerpts of an article from someone who believes the opposite of what everyone else believes. It provides interesting insight. He believes the stock market and gold will crash not rise as the public is being led to believe.

Here's the inside story Wall Street doesn't want you to know. The
entire global fnancial and baking system is built around the presumption of

They desperately need you to believe inflation is still here. In fact,
they need you to think it's about to make a roaring comeback.

It's the only way they can sell you more loser investments. To sell their investment products, Wall Street must convince people we are NOT in a depression. They must persuade you prices are not falling.Instead, the masses must believe we are about to enter a period of massive inflation...or even hyper-inflation, due to government bailouts and massive deficits.

If we had inflation, prices would be going up. But prices are not going up. They are going down. In fact, they are plunging.The world isn't just in a recession. We are in a full blown depression. People are buying less. Paying less. And most definitely spending less. This is going to last a decade or more.

The politicians' schemes to "save the economy" will not work,
any more than band-aids cure cancer.

Remember how Wall Street tried to get you to buy more real estate teh past
few years? How they told you $150 oil was cheap and here to stay...and
that the 14,000 Dow was "a buying opportunity?"

People from New York to New Delhi are losing their jobs. People without
jobs do not go on shopping sprees. They don't buy things like homes or
cars. They don't sell them. They can no longer afford them. They desperately need to raise cash. And massive selling brings pricess lower and lower.

Wall Street wants you to believe that the U.S. government is printing money
and "monetizing the debt." That will supposedly inflate the money
supply, sending prices higher.

Truth is, the U.S. government is getting all the money it needs by borrowing, not printing. It does this at Treasury auctions that are 3 times over-subscribed.

Bottom line is that government borrowing is NOT inflationary. Just the
opposite. It sucks money out of the economy. It decreases the total
money supply, and is deflationary.

In normal times, banks wouldn't hold the trillions of dollars in bailout
funds. They would loan it out, over and over. The bank loaning
multiplier would go to work: the trillion of dollars would get
leveraged up to 100 times. Banks would create upwards of $100 trillion
in new debt. This is how new money is created.

In the past, all this new credit would bring about an explosion of economic
activity. People would buy cars and houses. They would go on
shopping sprees at WalMart. That would be inflationary and prices
would climb.

Not now, though. Now those trillion of dollars never get into
circulation. Banks do not loan the money out.

You see, the Fed is not giving money to the banks so they can make loans. Banks are getting bailout money to shore up their shrinking capital. To cover their bad loans and derivatives, that are still going broke en masse.

Guess how banks keep those trillion of dollars in bailout funds? They
buy T-bills from the Treasury. U.S. Treasury holds these T-Bills for
the banks. They keep them as the banks' reserve requirements.

The money ends up right back where it came from.

Over the past 10 years 1 quadrillion in derivatives has been created.
That is 20 times the entire worlds GDP.So how did Wall Street get away with this out of control debt creation?

They devised a mathematical formula, that supposedly "valued" derivatives.
It's called the Black-Scholes formula. Supposedly, Black-Scholes predicts
market moves and teh value of derivatives - not just now, but 10, 20, even 50
years in the future.

The Black-Scholes model claimed banks didn't have to book current losses from
derivatives. It said banks didn't have to value derivatives at their
current real market prices. (Called "mark to market.")

Instead, Black-Scholes said the derivatives would bounce back, and make huge
profits decades in the future.

And here's the kicker, Black-Scholes said banks could book those theroetical profits now - and ignore current losses.

This is why derivatives traders - like Warren Buffet - trade derivatives 20,
30, 40 years into the future. Even though they are losing money.

Buffet's company, Berkshire Hathaway, booked the biggest losses in its
history. Its stock lost 50% of its value in one year, and Buffett's
net worth dropped by half. All due to the derivatives trades gone

But Black-Scholes says by the year 2040 these positions will be
profitable. So Berkshire keeps holding the biggest losing bet they
have ever made, just like the dead broke banks.

You've seen the incredible losses in commodities. In stocks. In real estate. In corporate debt. All because of derivatives.Black-Scholes claims these losses will magically become profits some day. And banks can book those profits now!

It is why banking executives say they are not losing money. Why they
claim that, in fact, they are profitable. Even as they losse every
last dollar of their capital...and every month need $50 billion more in
bailout funds.

Government regulators have bought into this mathematical hocus pocus, hook,
line and sinker. Remember when government was going to buy up all the
toxic derivatives? They were going to put them into a so-called "bad
bank". That was the original plan, but it was quietly dropped.

Because once derivatives are sold, they must reflect real valuations.
Not Black-Scholes fantasy valuations. Banks would have to admit their
huge losses. The world would know they already lost more money than

Politicians and government regulators have no concept of the amount of money
banks have lost. They do not understand derivatives, the valuation
tricks Wall Street uses, or what's really going on: That banks are
permanently broke...the derivatives losses can never be reversed...and will
keep getting bigger and more and more of the loans that are at
the heart of these derivatives go bad.

Top echelon traders and corporate CEO's know this, but will never breath a
word of it. So month after month you see the same thing. More staggering losses that seem to come from nowhere and that the government must rush in to cover.

The article goes on to say how Black-Scholes is responsible for the destruction of capitalism and how the failure of AIG could lead to a catastrophic event. It's main thrust is that inflation is not coming back, the U.S. is in a depression and not to buy into the gold mania about gold soaring to $2,000 an ounce.

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