Thursday, December 17, 2009

Paul Mylchreest – Thunder Road Report…

A lengthy but worth it read from Paul this month. In this issue he is right-on in discussing the risk filled events that are happening in Europe and the Middle East. He also discusses his theory on inflation, and again he’s one of the people who sees both inflation and deflation occurring together. I have to comment on that as what he and others see is capital flowing from one asset group to another, not inflation or deflation. By definition only ONE can possibly happen at once. The definition being that inflation is an increase in the total supply of money and credit (I add in the leverage of credit via derivatives), deflation being the opposite. Again, only one is possible at a time.

Now, within that context, it is possible for asset classes to bubble up at the expense of others. I am sticking to the fact that overall DEFLATION is occurring… the asset classes that are losing and overpowering all the other bubbles are three fold: 1. Derivatives within the shadow banking world; 2. The supply of Credit; 3. Real Estate. The bubbles that everyone sees elsewhere are simply overwhelmed and will continue to be overwhelmed until either one of two things happens: 1. The Fed unhinges money printing from DEBT; or 2. The stimulus and other programs are pulled. Pulling support will immediately lead back to another deflationary episode – this is the best case scenario if the goal is to extend the life of our current debt backed money system. Option 1 results in a loss of confidence in our currency making the gold bugs correct in the long run.

When debt goes out of control, deflationary episodes result and are nature’s way of trying to force the debt out of the system. When the quantity of money gets out of control, then confidence is lost and the money system is destroyed. Since our money is backed by debt, until they disconnect that backing, another round of deflation is likely. It may be that the next bout of strong deflation forces them to unhinge money production from debt. Either way the math does not work and the destination is the same – the demise of our current monetary system and with it come the “other events” unless we do something about it first. This is why it is necessary to "do something" about it now - that is exactly what I'm proposing.

Paul also gives Martin Armstrong a lot of credit in this report and sums up his thinking from his point of view. Of course all of Martin’s papers can be found right here in the right hand margin.

Thanks for sharing all your thoughts and hard work, Paul, appreciate it!