An exchange with Jay Taylor about deflation


12:16a ET Sunday, July 29, 2007

Dear Friend of GATA and Gold:

Newsletter writer and longtime GATA supporter Jay Taylor had an exchange with your secretary/treasurer about Saturday's GATA Dispatch on the chance of deflation. Taylor has kindly agreed to let his comments be distributed here, so they are appended, along with a few more comments from me.

If there's a more prodigious and conscientious writer about the metals sector with a better record of picking winners than Taylor, I would like to meet him and read his stuff. Many of us in GATA rely heavily on J. Taylor's Gold and Technology Stocks letter, and you can learn more about it at the Internet site he shares with Roger Wiegand of the Trader Tracks letter:

Taylor's comments are appended.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

By Jay Taylor
J. Taylor's Gold and Technology Stocks

I have straddled the inflation/deflation fence. But in his most recent essay, GATA consultant Reg Howe speculated that Federal Reserve Chairman Ben Bernanke may be a wolf in sheep's clothing -- meaning that if the dollar is ready to tank and no longer can be supported by trashing gold, Bernanke might resort to a Paul Volcker policy of slamming on the monetary brakes and causing very high real rates of interest.

I believe that this is about the only way we could get to deflation. But why would the policy makers do that?

I think they might do it for the same reason Volcker did it in 1980.

You will recall that no one wanted to hold dollars then. People were trading in dollars for Swiss francs, deutschmarks, and gold.

The only way the Anglo-American empire can survive is if it has the leading currency. So Volcker did the unexpected. He ordered real interest rates of 6 to 8 percent, the highest rates since the Civil War. That is what killed the gold market and made the dollar strong again. It paved the way for another generation of growth and world domination by the Anglo-American superpower.

It was quite painful. The United States had the deepest (not the longest) recession since the 1930s. But the dollar and the empire survived.

We are at a similar point now, only this time we are in much worse shape. Broadcaster Al Korelin and I spoke last week to U.S. Rep. Ron Paul about the prospects for another Volcker-like policy. You can listen to the interview here:

Paul acknowledged that the empire will not survive if the dollar doesn't. I think he believes that any Volcker-like policy is at least a couple of years away if it is to come at all. But what if it does?

If such a policy is implemented, we will not want to be long in the inflation plays like base metals and most likely not so much in energy as well, though, given its unique situation, uranium may be an exception. If we get a serious deflation, then money will buy more but gold will buy more than money. And money in banks won't be safe, so you will want to have gold and cash under the mattress and, I would argue, gold shares as well, though perhaps concentrating on advanced-stage gold companies and preferably those with some production. In such circumstances the cost of producing gold is likely to go down, making gold the best investment of all -- better, I think, than silver, which derives much more of its value from industry than gold does.

As my good friend Ian Gordon points out, it is in the Kondratieff winter (a deflationary depression) of the 60-70-year cycle when gold is the best thing to own.

I do not have an opinion on which way this pathological economy of ours will tip, which is why I put together my Inflation/Deflation Watch (IDW). Inflation and deflation are two symptoms of the same fiat currency disease.

What I can tell you is that one of the key data points in our IDW is the Global U.S. Dollar Liquidity statistic. I learned of it from Charlie Clough of Merrill Lynch. He started calculating it during the Asian Crisis. Back then this measure of liquidity actually fell by nearly 5 percent over a 52-week period.

Since then, however, the Fed has been printing mountains of money from thin air, and as of this week every sign is in place that we are inflating, not deflating. The 52-week growth rate of the Global U.S. Dollar Liquidity statistic is now 15.64 percent, which is already above liquidity levels that drove the stock market bubble.

The high-water mark for the housing bubble was over 22 percent, and now it looks as if dollar liquidity is leading us toward the third bubble since the Asian Crisis.

Whether deflationary pressures dominate or whether Bernanke's helicopters can overcome deflationary forces remains to be seen. If the Fed continues to print as it has been doing and if suppressing the gold price no longer orchestrates a strong dollar as it did during the Clinton years, then who knows?

Perhaps Bernanke indeed will prove to be a wolf in sheep's clothing. If so, God have mercy on debtors. But as long as my IDW shows inflation as it does now (though there was a sharp pullback in the indicator this week), I'll stick with my long positions in inflation hedges like gold, silver, base metals, and energy stocks.

* * *

Dear Jay:

Thanks so much for your thoughtful note.

For whatever it's worth, I think that today there may be a few important differences with the situation in the dollar crisis that faced Volcker:

1) Today there are more potential alternatives to the dollar -- not just the euro but the yuan and even the ruble.

2) There are stronger bases of political and economic power outside the Anglo-American empire.

3) There are the vast dollar and dollar-debt surpluses held by countries outside the Anglo-American empire. Each of these countries can pull the plug on the dollar BY ITSELF and AT ANY TIME. That doesn't mean that they WILL do so, only that this time the fate of the dollar is largely beyond the control of the United States.

4) The U.S. economy is vastly weaker now than it was when Volcker was Fed chairman. Volcker brought down a Democratic administration and caused enormous political turmoil. A policy of high real interest rates now well might bankrupt everything that's left of the U.S. economy, which isn't very competitive anymore to begin with. The wreckage probably would include the banking system, via mortgage defaults and general business loan defaults, and thus the payments system. The Fed will protect the banking and payments system even if it means sacrificing the dollar, for the Fed IS the banking and payments system.

As an anti-imperialist, I'd be glad to sacrifice the Anglo-American empire so that our COUNTRY might be saved. Let those who want to "save" Iraq and Darfur and every other benighted place buy some guns and boots and head out there on their own. But I don't claim to know how things will turn out. I know only that the price of gold is being suppressed by open and surreptitious dishoarding by central banks, that the central banks are sure to run out eventually, and that as a result gold is a pretty good bet -- as well as the way back to some sanity and decency.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Join GATA at these conferences:

The Silver Summit
Thursday-Friday, September 20-21, 2007
Coeur d'Alene, Idaho

New Orleans Investment Conference
Sunday-Thursday, October 21-25, 2007
New Orleans, Louisiana

* * *

Help Keep GATA Going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at

GATA is grateful for financial contributions, which are federally tax-deductible in the United States.