Much confusion continues to reign as to whether the world’s financial system is suffering from inflation or deflation.  Given the brilliance of some of the commentators on today’s financial woes, I would think that the issue should be settled, but it is not.

The classical definition of inflation is an increase in the money supply; deflation is the opposite: a decrease in the money supply.  All other things being equal (They rarely are.), inflation (an increase in the money supply) results in an increase in the general price level, deflation (a decrease in the money supply) causes a fall in the general price level.

The confusion rises from the misappropriation of the use of words inflation and deflation by persons not familiar with the classical definitions.  To most news commentators and writers, and, sadly, many members of the financial world, inflation has come to mean an increase in prices, deflation a fall in prices.

Even Richard Russell, whom I consider a brilliant stock market analyst, goes with a confused concept of deflation.  He writes about deflation in the stock market and deflation in the housing market, referring to falling prices.  But, as Gary North has explained in a several treatises on deflation/inflation, which can be found on www.lewrockwell.com, the terms are used to indicate what is happening to the money supply.  Inflation and deflation are not words to indicate which direction prices are moving.

For example, the prices of computers have been falling for years.  Computers that deliver increased capability are cheaper almost by the month (albeit the rate of decline is slowing.)  Yet no one writes about deflation in the computer market.

I suspect that deflation crept into financial jargon because the stock market is a “money world.”  It is where money is made and lost.  And, during the housing mania, houses became investments.  When I was a kid, a house was a home, a place where you lived, and something that most adults wanted to get debt free as soon as possible.  (There was never any debt on the house in which I grew up, a concept that has probably as dead as the dodo.)

So, when stock prices fall over extend periods, financial analysts write about deflation in the stock market, and falling home prices elicit comments about deflation in the housing market.

Getting back to the macro-view, is the world’s financial system suffering from inflation or deflation?  It depends on what you mean by the definitions of inflation and deflation.  (Thank you, Billy Clinton.  “It depends on what the meaning of the word is is.”)

If by inflation you mean an increase in the money supply, we are definitely suffering from inflation.  Central banks around the world are cranking out their currencies, but none as massively our central bank, The Federal Reserve System.  The world is awash in paper currencies, or, worse yet, digital dollars that reside silica chips in computers.

However, if you define deflation as falling prices and look at stock prices and house prices, we are suffering from deflation, or, at least, deflation in two very important segments of our financial world.

What does all this mean to investors who opt for gold investing, who buy silver?  Should they buy more gold?  Should they lighten their positions by selling gold?  This topic will be revisited on this blog, but for me it is scary to have a lot of money sitting in banks, I do not care if we are seeing falling prices in some important sectors of our economy.

“I fear this means there is mischief afoot,” Sherlock Homes would say to his associate, Doctor Watson. And, off they would go to bring criminals to justice. Where is Sherlock when we really need him?

The Group of 20 (G20 in today’s parlance) is meeting in London to seek solutions to problems with the world’s financial system. Because the attendees are acting under the government umbrellas, anything the do will be “official.” Therefore, I suspect official mischief is afoot in London. Additionally, anything the Group proposes will receive wide publicity.

Undoubtedly, some choice programs will be proposed to “address the world’s financial and economic problems.” Insomuch as there has been talk of a “new world currency,” or a “single currency,” ideas coming from the meeting should be of interest to all gold/silver investors.

It is likely that the dollar will officially be reduced in standing in the world’s monetary system. However, the dollar will remain a major part of the system simply because it is the world’s most widely used currency. Further, the U.S. economy remains one of the world’s largest, and that cannot be dismissed. Still, the dollar remains on a slippery slope to a reduced standing in the world’s monetary system. The value of the dollar relative to other currencies, and gold and silver, can be expected to continue to fall.

Of specific concern to gold and silver investors will be the advancement of the idea of selling IMF gold to fund IMF programs. I’ve posted an article titled Will G20 actions exacerbate problems? in CMIGS’ article section. The article notes that gold investors faced IMF sales in the 1970s and gold afterwards climbed to $850, a high that stood for twenty-eight years. IMF sales are not to be feared, although announcements of IMF sales may cause some downside movement in the price of gold.

I also suspect that other actions as a result of the London G20 meeting will make things worse economically. See the article for my reasoning.

In a video interview by CNN’s John Roberts, Congressman Ron Paul condemns (in his polite, gentlemanly way) Obama’s bailout of the financial system. Further, the Congressman does not miss his chance to blast the Federal Reserve as the primary culprit of our financial nightmare.

Roberts accurately notes that “trillion-dollar” has replaced “billion-dollar” in today’s discussion of the financial matters. We’re now discussing government debt in numbers that only a decade ago seemed an exaggeration. Now those numbers are reality.

It is delightful to see the Congressman not back down when Roberts noted that Nobel Prize recipient Paul Krugman says that a big stimulus is needed and needed quickly. Basically, Paul replies with “How can doing the same thing that got us in this mess get us out?”

Paul notes that the financial system is falling apart because people are losing faith in it. He further notes that when the world loses faith in the dollar that will be an even bigger crisis. Any wonder that gold buying is at record levels?

The video is only four minutes and 27 seconds long and is packed with Paul’s insight into what’s wrong and why Obama’s plan will not work.

John E. of Phoenix writes:

In approximately one month we got a sample of Obama’s change: The continuation of the Bush-Paulson give away of taxpayer money and pork programs, little of which will have any stimulus on the economy…much more of the same is coming down the road. The expansion of the war in Afghanistan with 17,000 more U.S. troops, and there will be social-religious changes as taxpayer money will be used to fund abortion…has your church made a stand against abortion on demand?

Oh, yes, there will also be taxpayer relief to some (including illegal aliens) that got themselves into financial difficulties by over extending themselves with mortgage finance. Those that were prudent and are servicing their debt obligations will pay for the mistakes made by others. See Forbes article on Community Reinvestment Act.

For a commentary on Obama’s policies, read Tooth Fairy Economics, posted on Ron Paul’s Campaign for Liberty website.

Instead of government spending and the redistribution of taxpayer wealth, why not dismantle our overseas military empire of more than 750 military bases, bring our troops home and have them defend our borders, which would reduce our military-industrial complex to a manageable level. We spend more on defense than all the rest of the world combined.

Then, maybe slash the payroll tax, capital gains tax, taxes on various forms of savings accounts, and then provide big tax incentives for start-up businesses with emphasis on a program of creating basic manufacturing industries.

Then bring back the Glass-Steagall Act, and top things off by eliminating the Federal Reserve. (I’m sure the part of the Glass-Steagall Act that John likes was the prohibition on bank holding companies from owning other financial institutions, prohibitions that were repealed in 1999. That repeal contributed greatly to our financial crisis by letting banks own investment firms that invested outside normal guidelines. The repeal blurred line between banks and investment firms and gave an implicit guarantee, which banks have had since the Great Depression, that the federal government would never let them fail, and that’s exactly where we are today. Merrill Lynch was forcibly rolled into Bank of America with government guarantees. When investors do not have to worry about risks, they make more risky investments, such as collateralized loans, the root cause of the financial crisis. Now, back to John’s comments.)

Oh, sorry I was dreaming again…back to the real world of media cult-like adoration of Obama and failed socialist policy. Speaking of Obama, has anyone seen the “vault copy” of his birth certificate?

Enough dreaming. We don’t want a patriot like Ron Paul with sound economic and social policy with a proven record in politics…we want more of the same NWO globalist Keynesian policy with the captivating persona of Obama… That is why we elected him…right? It had to do with all the fine people with whom he associated and his long proven record in government?…right???… well, of course. (John got a little cynical here!)

Finally, John provided an excellent six minute Youtube Bill Maher interview of Ron Paul, where Paul explains why Obama’s approach to the financial crisis will only make things worse. The video caps off John’s thoughts on today’s political circus. Any wonder why the price of gold is within dollars of its all-time high?

A recent mineweb.com article, Is gold the only salvation from this financial Armageddon?, suggests not only that gold offers a solution to the financial crisis but notes something of which many Americans are not aware: that European banks may be in worse shape than American banks. The author further asserts that the worst is yet to come as far as European banks are concerned. Massive inflation lies ahead for Europeans.

Gold aside, the Establishment solution to the problem is to print more money, both dollars and euros. I maintain that any official use of gold in the world’s monetary system will not come until forced upon governments by the people’s rejection of paper money. When freshly printed money will not longer buy what governments want, they will be forced then to return to gold. Until then, we will have inflation.

Meanwhile, the article is an excellent read in that it further clarifies the extent of the financial crises. Still, there is an issue I take exception with.

The author declares that silver is not really a monetary metal any longer. This position is often thrown around as a reason for not buying silver during financial crises. I disagree and submit that investors who eschew silver because of this position miss an opportunity to make still greater profits during this financial meltdown. (Actually, “profits” is not the right word. Generally, gold and silver buyers are not seeking profits but hedges against inflation and currency devaluation.)

Regardless, my studies and observations of the precious metals markets convince me that silver turns in greater returns in bull markets than does gold. The writer acknowledges as much when he notes that “even though history tells us that silver’s volatility leads it to perform better than gold in percentage terms on the upside and worse on the downside. . . We are in a different situation with silver not really a monetary metal any longer. Industrial demand pressures on silver may well mitigate any price rises here.”

Both metals have been used as money for thousands of years. Now, just because there are many industrial uses for silver, this writer – and others – assert silver is no longer a monetary metal. While it is true that the IMF, which keeps track of how much gold nations hold, does not care about silver, in the end it is really people – not governments or the IMF – that determine what is to serve as money.

Yes, today we’re using government-issued paper currencies and computer entries not redeemable in gold or silver as money. But, the flaws of such currencies are becoming readily apparent. Governments around the world are inflating their money supplies in efforts to stave of recessions (depressions?) And, the people are starting to move to protect the “fruits of their labors” from inflation by buying silver as well as gold.

And rightfully so. More people have used silver as money than have used gold. Because of Roosevelt’s 1933 gold call-in, Americans have not use gold as money for 76 years. Silver coins, however, were minted until 1965. Actually, silver has nearly always been the circulating medium in hard money monetary systems because gold has too much value for day-to-day transactions.

All this brings me to this point: when the masses come to the gold-silver market, they will buy silver instead of gold because with silver they get more physical metal for the money. Buying by the masses will, in my estimation, propel the price of silver much higher – on a percentage basis – than gold, driving the gold-silver price ratio to 30, perhaps even 20.

Now, that’s a bullish outlook for silver, a longtime monetary metal that just happens to have a myriad of industrial uses. The industrial demand for silver is not a negative, as the writer of the aforementioned article says, but is, in fact, a strong positive for silver.