Paul Brodsky on Gold, Paper Currencies, Inflation and Deflation

Longer term readers and those that know us personally will find Paul Brodsky's comments from his presentation at the BCA Fall Investment Conference on October 25 very familiar.  Read the full text at Ritholtz's Big Bicture blog, but we'll highlight select areas:

• From 1994 until 2006, the Fed's overnight credit facility distributed term-funded throughout the global economic system, first flowing into financial markets until 2000, then into housing, and then in 2007 it flowed back to the Fed.
• The global boom that resulted was simply based on credit, and was not a real generation of wealth.  The end result is that most of the standard of living that people have is not based on wealth generated, and thus will be at risk.
• Today we have a major debt bubble that needs to deflate.  History shows that governments will not allow them to deflate and will debase the currency instead (inflate).
• The Fed would have to created 7x more dollars than exist today for the Treasury to cover its obligations (side note: expect QE3, QE4, QE5....)  The US is levered at roughly 35:1 today.
• Forget what policy makers say or intend and rely on logic and history as a guide in these times.  (side note: Amen!)
• Western economies are too big in nominal terms to support real production.  Debt must be defaulted upon, or devalued.  The latter option is more appealing to indebted voters and governments, so it will be the option chosen.  (side note: He correctly defines inflation and deflation.  We're dancing for joy!)
• Most investors are not prepared for inflation.  They weren't prepared in the 1970s either until it was too late.
• It's a race to the bottom in currencies.  They'll all be devalued.  All fiat money is in trouble.
• Only scare resources are good investments (side note:  How long have we been pounding the commodity table?)
• Greatest upside/least risk is in gold.  Dividing US monetary base by (supposed) US gold holdings yields upwards of $8,000 per ounce for a target gold price.
• The Fed will ultimately devalue the dollar against gold and then policy will focus on the gold/dollar exchange rate.  (side note: Jim Sinclair has been calling for this for some time.)
• Gold is still underinvested in.  All miners together have a lower market cap than Google, and pension funds have 0.56% of their investment in gold.