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From David Rosenberg at Merril Lynch (now Bank of America) today:
"Money supply will increase but money velocity will not"
We are getting asked repeatedly these days how it is that the government debt creation we are about to see is not going to be inflationary. After all, aren’t we going to see a boom in the money supply? Well, we’re sure that the money supply is going to increase, but at the same time, we are going to see the turnover rate of that money, or what is called money velocity, decline. This is exactly what happened in that 1989-93 period when the Fed massively reflated. Money velocity contracted 13% and this is the reason why the inflation rate was cut in half that cycle and bond yields rallied 400 basis points, though no doubt that downtrend in yields was punctuated by intermittent corrections – as we’ve seen take place in the Treasury market over the past week."
In Gold, Oil, PMs: More Hedgies Get Whacked I wrote:
“Forget about oil demand from the BRIC countries. The whole globe is grinding to a halt. Believe it.
Forget about inflation. There has never been in the history of the world an inflationary run while land prices were declining. The amount of debt being destroyed as the monster of a debt bubbles implodes will suck down all asset prices and just absolutely collapse the velocity of money.
Factor in some serious de-leveraging by every single kind of market participant, and there is no way commodities can resume their ‘secular Bull market’ for years to come.
Take a look at copper for example. Copper just smashed through a multi-year trend line after putting in a long topping formation. Since 2006 prices have been hitting the same highs and getting rejected. This break down is of utmost importance.
Game over.
I’m firmly in the deflationist camp.”
As soon as the fear and panic subsides, the easy money will be made SMASHING gold short as people finally realize that inflation is what we HAD and that deflation is what we will HAVE.
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