Wednesday, November 23, 2011

Back to Basics

From my fundamental understanding of the world around me, there are only two solutions to a debt crisis depending on who you are. 

1. If you are a currency user (like me, Apple, or Greece) and you have a huge debt that you cannot pay back through taxation of your people or peddling your skills/labor for that currency, then you have to declare bankruptcy/stop payment and hope your creditors leave the shirt on your back.

2. If you are a currency issuer (like America, Britain, Japan, China), you have two choices.  Your central bank can refuse to purchase sovereign bonds from the market, thus leading to choice one.  Or your central bank can buy any and all sovereign debt funded with newly printed money backed by nothing.  In essence, this is why yields in Japan and America are so low even though our debt to GDP ratios are comparable to Greece and Italy.  The danger is inflation through increase in money supply.  Japan is actually a better case scenario as their inflation has not spiraled out of control, ironically because their economy is still in the toilet after all these years.  Indeed, I wonder if that was the purpose all along as a roaring Japanese economy would have engendered another boom and bust.

At this point, the market has been pricing in option 2 where the central banks print our way out of the debt zeitgeist, devaluing every fiat in the process.  This is expressed through the meteoric rise in precious metals for the past ten years.  THAT IS IT.  There is nothing else that matters in the market.  Fuck all your GDP, unemployment numbers, earning reports.  All that matters is reading the central banks.  If you believe they will continue to print, buy buy buy.  If something happens, like Ron Paul becomes president of the world, go to cash, no matter if it's pesos or yen.  Everything will cost less. 

Inflation is not fundamentally bad.  Deflation is not fundamentally bad.  They are both dependent on how the individual is positioned.  I only prefer deflation since I have a lot of cash on hand and I don't mind my chicken and steak costing less.  Just like the guy who prefers bailouts because he's balls to the walls long equities.