A few weeks ago we wrote about the true cause of hyperinflation, which is a major break or failure in the bond market. It has nothing to do with demand, bank lending or the velocity of money as many have suggested. It is a confidence issue. It is not a rise in inflationary expectations but a loss of confidence in a country being able to repay its debts. As confidence is lost, interest rates rise. Monetization occurs when the cost of servicing the debt consumes too much of the overall budget, so that the government can’t provide basic services or loses its ability to function on a day-to-day basis.

The important point to note is that deflationary forces lead to hyperinflation. Once again, it is not demand, bank lending or increased velocity. Those things do not trigger severe inflation; they merely can be a symptom after the trigger. And by the way, increased velocity is basically another form of increased demand. Fundamentally, they are no different.

Is anyone paying attention to the first domino in the sovereign debt crisis? Take a look at this Bloomberg Story:

http://www.bloomberg.com/apps/news?pid=20601087&sid=awXzaHHx8T6M

Iceland’s Economy Shrinks 8% as Prices rise by 11%. Deflationary forces are causing severe inflation, as Iceland’s government is bankrupt. Moreover, bank lending in both the US and the UK has been sliding, yet we see price inflation increasing in the UK and starting to pickup in the US. Even amidst deflation in the private sector, Gold has risen to an all time high against both the Dollar and the Pound and also the Euro.

The deflationists have it backwards. As we’ve illustrated, severe deflation is what leads to hyperinflation. Debt crisis’ go hand in hand with currency crises. In fact, if we had an increase in bank lending, consumption and velocity, we’d be assured we wouldn’t have hyperinflation. We’d end up with rising price inflation for certain, but not hyperinflation. Hyperinflation has never occurred at a time of strong or growing demand.

So what is the real debate then?

The debate and discussion should be about the bond market. If one were against the hyperinflation scenario, then they would have to think the bond market is going to hold up. If one believes we will see severe inflation then they have to believe in a major break in the bond market. We don’t believe in Weimar or Zimbabwe style hyperinflation. That is just too extreme. We do believe that we will see severe inflation worldwide as a result of a loss of confidence in governments and currencies. Falling bond markets and rising interest rates will reflect this.

For Gold watchers, now is the time to start watching the relationship between Gold and bonds. According to Wikipedia, the worldwide bond market is $82 trillion and the US bond market is $34 trillion. Clearly, the crowded trade is bonds. Gold’s bull market will accelerate when money starts to move out of bonds and into Gold.

First let’s take a look at a Gold/Bonds ratio. This is Gold against the Barclays Corporate Bond Index. Against stocks, Gold us up more than five-fold, yet against this bond index, Gold is up less than three fold.

Here we show Gold against the Dow Jones Corporate Bond Index, which is a total return index. Gold has broken past its 2008 peak against literally everything except the Yen and Corporate Bonds.

A breakout in this ratio will be very significant for global capital markets. If and when we see Gold breakout against Corporate Bonds, it will be a major signal that inflationary expectations are increasing. Moreover, it should be a major catalyst for Gold as the fixed income markets dwarf the tiny Gold market.

For more analysis like this and complete coverage of Gold and Silver stocks, consider a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com

Although the economy absolutely sucks for job hunters, the fierce competition has caused a counter-intuitive phenomenon: students are now paying to get unpaid summer internships!

Last week the Chicago Tribune uncovered the new trend and showed how companies such as Fast Track and University of Dreams are charging anywhere from $799 for a standard internship to $10,895 for an internship at the Washington Center in DC.

If you or your parents have the money to burn, by all means pay to work. However, this type of arrangement is just another example of money wasted on excessive schooling in an economy where most students remain heavily in debt long after flipping their tassel to the graduate side.

This weekend my wife and I were discussing this very topic. We know people with expensive graduate degrees in social work from Columbia University. These friends are now complaining they will need decades to pay off their debts. Some of them have even become pharmaceutical sales reps in hopes of paying off the debt and starting their desired career in social work.

Paying money for an unpaid internship creates the same problematic mindset. Don’t get sucked in. There are millions of people who are very successful in their career and they never paid for internships or went to expensive schools. Instead, they used common sense, worked their asses off, and got ahead by doing valuable things.

I don’t think these internship services are a “Fast Track” or “University of Dreams”. Rather, they are a fast track philosophy which leads to bankruptcy or the fulfillment of deadbeat dreams. If you want a fast track to success, find a job that pays you!

What do you think about paying for unpaid internships? Let us know in the comments below or click here to chat in our new Forum.

I think I’d shoot myself. [Laughing] I don’t think I’d go to work in the morning.

All along, the problem has been that we haven’t been willing to take any pain. So, after all the Greenspan years we always come in and support the markets with low interest rates. At first they cut rates to three percent, then one percent in the 2002-4 time frame. Now it’s zero percent and we have negative real rates.

Each time we cut this low, we never let the free market forces work their magic. The free market forces would be painful. They would lead to a recession. If this had been allowed to happen — meaning, the government would have not interventioned over the last couple of decades — we would probably have had very brief and sharp recessions … but they would have ended quickly.

Now, we’re in such a mess that the pain will be severe. That’s why I don’t think the Fed will raise rates. We can’t take the pain. They’ve almost gone past the point of no return.

If I were Chairman of the Federal Reserve I would let free market forces unfold. I would let rates rise to where they should rise. These are not normal rates that we have now. I would have to raise rates. I’d have to do it over time.

On the other side, I would need some help from the Congress. They would have to cut spending. Over the last eleven years or so federal spending went up 110%. Inflation went up 27%. This is not a sustainable path. The Fed has been funding this. They’re monetizing the Nation’s debts.

I wouldn’t monetize the debts. I wouldn’t buy mortgage bonds and treasury bonds. I wouldn’t be quantitative easing. I would get rates to a normal level. So, we would take pain for the first time.W e have a recession going on now, but once again we stepped in with ever more dramatic means to try to keep the pain from being too great. Therefore, stock markets never correct themselves completely — they don’t go to your traditional bear market levels.

It’s the cleansing of the system that brings in value buyers like me. We haven’t had too many opportunities. Normally, bear markets end with P.E. ratios between six and eight. That didn’t happen this time — not even close. However, that’s what would happen if the free market system was allowed to correct itself. We would have a giant bear market. The market would go to low levels. We would cleanse the system, and buyers would come in. That’s what I would orchestrate as Federal Reserve Chairman.

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Last year, the US Dollar was the butt of monetary jokes. In fact, some suggested it was worth as much as toilet paper. With Trillion dollar deficits and 0% interest rates, those with common sense looked to other currencies for capital preservation.

In a moment of cosmic irony, some global investors are now fleeing to the safety of the US Dollar. Headlines about Greece possibly defaulting on their debt has investors wondering which is truly the worst of all possible worlds?

Last week, Ben Schott put together an incredibly valuable chart showing the S&P credit ratings of countries and US states. This is an excellent resource to keep on hand for those Candide moments when your mind wanders:

(Hat Tip: Barry Ritholtz)