Various comments I received (many thanks to everybody for the kind words, comments and criticism) in relation to my precedent essay compel me to face those questions one more time, hoping to better clarify my view.

I have to start again with the definitions of inflation and deflation. In economy, both are just monetary phenomena, even if the common language uses them in a wide range of meanings, all of them flawed. So, I repeat once again, the proper economic definition of inflation is an increase of the money supply in the system, while deflation is the exact opposite.

A collapse in the price of financial and real assets is not deflation, but liquidation. This event would have no effect on the level of money stock in the economic system. Bonds, shares, houses are not components of the money stock present in the system, even considering the broadest measure of money supply. In fact, they represent money already drawn out from the system. Paradoxically, their liquidation even at always lower prices would result in an increase of money in the system.

At the same time, an unwillingness of the banking system to lend or of the public to borrow, like a preference of people to save and hoard cash, is not deflation, because it would not affect the level of money present in the system, but just its circulation inside it.

Again, an economic stagnation would not be a deflation, but just the outcome of the severe misallocations and imbalances in the productive system, which may be consequences of monetary phenomena, but never their essence.

In a fiat-money regime, inflation and deflation depend exclusively on the will of the Central Banks. It’s just for this reason that I affirm deflation to be impossible under such a regime. It’s not that it could not happen in theory, but depending only on that it cannot happen in practice. This is because it’s inconceivable that men could want less money to spend or that the banking and political gang could give up this incredible and base privilege. Twenty-four centuries ago, Aristotle was aware of this.

In fact, we have never experienced a deflation since this fiat-money regime came in existence, never. The increase in the money supply has been unbroken with accelerations and slackenings, but inexorable. And history has never witnessed a deflation in the precedent fiat-money experiments. And very probably we’ll not witness it in the future.

Don’t you believe me? But maybe you’ll believe them, the creators of “money”:

“We are creating money.....on whether there is a limit as to how much we can create – in central banking there is no limit as to how much domestic currency you can create. Now the domestic balance is a little over HK$ 3 billion – it can be HK$ 4 billion, it can be HK$ 30 billion if there were a need. There is no limit at all.”
-- Joseph Yam of the Hong Kong Monetary Authority)

“The aim of monetary policy is higher inflation.....it is appropriate to be particularly vigilant in monetary policy when inflation does not increase as projected.”
-- Executive Board of the Norges Bank

There’s no need to cite Bernanke of the Federal Reserve, because its vision is universally known.

The only deflation possible in practice in a fiat-money regime is the Final One. That happens when people withdraw their trust and cease to recognize paper as money. And that has been the outcome of all the precedent experiments with a fiat-money system. However, there is a thing to consider: all the precedent experiences were limited in the space, while today that regime is applied in every part of the planet. So, today we have a peculiarity. Perhaps this could involve a different outcome. However, for the moment, the pattern developed is quite the same; that is, a constant depreciation of the fiat-currency, accelerating as the time goes by.

In such an environment to talk about an appreciation of the value of this paper-money is a sort of self-deception. Considering that there is just a human will to preside at its creation, the doom of this money is to become always more abundant in the economic system and therefore to be increasingly worth less in comparison with the resources, goods and services. Again, you have just to observe the evolution of the purchasing power of this money all along its history in this last, global experiment with a fiat-money. Your dollars, my euros, and his yen have bought ever less things going through the years. We can experience a fall in the price of some products thanks to competition or innovation or overproduction, but the cost of living--the money you need to buy what’s necessary to survive--is always more. Don’t expect anything different in the future in whatever scenario, economic expansion or recession, assets appreciation or liquidation, whatever; just the magnitude will be different, more or less marked.

You can very well define the enormous debt level in US as a “synthetic short position” against the US dollar, but you have at the same time to specify a couple of things.

First, this thing would concern just the American household. To carry on its debt, the US government needs just to issue more debt. If nobody wants it, the Fed will provide for it with just printed money of course. On the other side, foreigners own a quite impressive “synthetic long position” of the US dollar and therefore don't have such a worry, but rather the contrary.

Second, on the other side of that “synthetic short position” there are shares, houses, bonds, SUVs and the last type of electric bean-shelling. There are no foreign currencies and there are no gold or silver holdings, but in a negligible amount. There are gold and silver shares, but again in a negligible percentage.

So, that is not suitable to construct a case for the appreciation of the US dollar on the Forex or against the precious metals. In fact neither against the cost of life, because a debtor can certainly renegade his debt, while he cannot cease to eat or to warm himself. The only things more cheap would be common stocks, houses, probably bonds, and maybe some kind of products.

Therefore, the notion that the recent carnage in precious metals finds its cause in the fear of a coming deflation goes close to nonsense. The only deflation possible in a fiat-money regime is that determined by the distrust of people, who deny at a certain moment the status of money to the paper imposed as such by the political power, turning towards real money or other paper-money recognized more trustworthy. And its outcome would be the destruction, the final one, of the current paper-money. In any case, honest money is the ultimate winner.

By the rest, this fear of a coming deflation has struck with a particular violence just in the precious metals. The thing is suspect. Above all, it has struck silver. Last Wednesday its price has fallen 78 cents (more than 11%) in just one session and almost 30% in less than two weeks. In short, it has struck just the metal whose current price is the most “deflated” since the last Glacial Age, if you factor in the increase in the cost of living. And which offers the most bullish picture on the demand/supply side. RISUM TENEATIS!

It’s quite possible that we are going towards a dramatic liquidation of assets. It’s quite possible that we are on the verge of a severe economic contraction, with consequent negative outcome for commodities’ price. And it’s quite possible that the majority of people don’t perceive silver as money but every speech pretending to establish the actual value of silver, in whatever scenario, without addressing the:

paper manipulation at the COMEX;
a structural productive deficit lasting a decade and half;
above the ground inventories decreasing without a break; and
a price flat to negative during these events, and independently from the economic cycle
is just a waste of breath.

Each of these factors are tied and each of them finds its evidence in the others.

And when I say to address them, I mean to address them seriously. Not the way some folks do periodically, showing an incomprehension of the meaning of the word “deficit” or chattering about above ground inventories more than abundant failing every time to inform us where those are. And I warn you: “in China” is not an acceptable answer, because it’s not verifiable.

I wish now to turn to the small investors in silver and I know they are several thousands. I urge you to don’t try to face the gang at the COMEX on their paper game, because in that case you are doomed to be defeated. Those people are professionals. They have close to an infinite availability of paper money. The rules of the game are set to their advantage. The arbiters is on their side always. And anyway, they enjoy ample political protection. It’s not possible to unfold a crime for a so extended period of time without having pervasive political protection. In fact, I think their fraud answers to precise political dictates. So, don’t put much hopes on some intervention by Mr. Spitzer or other Procurors, because it’s quite possible they are too strong even for Mr. Spitzer.

I will show you their unique weak point, their Achilles heel: that is Silver, the physical, the real stuff. If you are a small investor, just go to the COMEX if you want to buy real silver. There are currently less than 51 million ounces of silver in the registered category at the COMEX to support their endless paper selling. Take them at this subsidized price! Let’s denude the Emperor!

It will be the cheapest insurance you ever bought in your life.

The advice is good for large investors and speculators too, at least if they are finally tired of subsidizing the gang as they have done until now. Forget charts, technical analysis, and moving average. They are just the paraphernalia they use to rob you. Don’t think you can win at the paper game with them as neither of you can! No matter how much paper money you have, they sit at the right of the paper money creator. No matter how much paper silver contracts you buy, they will always sell more than you can buy, because you have limits while they have not. Amazing, isn’t it? You can’t buy more than 1500 contracts even if you have all the money needed, while they can sell all the silver they want to, notwithstanding the fact that they possess just a tiny percentage of the metal. So much for the free market. Therefore, they will always overwhelm you at their paper game. But if you take delivery every active month for some of your positions, even for a small percentage of them, say 2-5%, their fiction will be over in less time than you may imagine. Let’s denude the Emperor!

At the same time, if you are investing in some silver stocks, urge the management not to sell their whole production, but to retain a good part of it. As much as possible, but not less than 10%.

If the management don’t accomplish it, sell those shares. It’s time those people understand who feeds them and their family and cease to deplete the precious and not renewable resources of the Company for an obscene price, fruit of an obscene scandal.

And avoid as a plague the hedgers at current price. They are your worst enemy!

© 2004 Castrese Tipaldi
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Castrese Tipaldi
Riga, Latvia
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