As the financial crisis continues, a lot of people are asking a lot of questions and a lot of people are trying to answer them. I have yet not heard one account of what will happen that has left me feeling sure about what's going on. I've written a few times on this blog about some of my different takes on what's going on - still I'm pretty much in the dark as everyone else and I'm constantly re-evaluating the situation.

By far the most common thing talked about is the great depression. A lot of people seem to think that this is just another depression with a possible inflationary twist - I would count myself as one of those people - from time to time. Just recently I wrote a piece partly covering the IT-bubble, where I was trying to point out that it was overcome fairly painlessly; and from some recent considerations I think that this crisis could actually be overcome with far less pain than what many are saying.

I've mentioned it myself before (as have many others), that the debt-GDP ratio in particularly USA has risen a lot since the late 70's. This is generally the argument to show that this has basically the same premise as the great depression (GD). But the debts causing the GD had come about in only a few years time (roaring 20's), whereas the debts of today have come about over the course of 30 years. When comparing the debt-GDP graph to the one of interest rates it looks pretty clear that the two follow each other. When things crashed in the beginnings of the GD (or during it's entire course) - there were certainly never zero interest rates like today.

The debt that preceded and made the GD come about was created in a financial environment that was very different than the one of today. The loan-economy, if you will, was something new and the people in charge of interest rates were unfamiliar with the impact that too high interest rates would have. Today pretty much everyone has loans and most of us see loans as a great way to afford things that we want and that we will be able to pay off during the course of our lives. It's all very simple - if it is possible to borrow a lot of money without it ever becoming too expensive to maintain, then people will be doing so - it's a very handy way to get cars, houses and so on, without having to save all that money first.

So, what might be passing most people by is that this could be a new type of economy, where a very large part of the population want to use loans to make their lives better and easier; Therefore, one might actually have to adjust economic thinking to a new healthy level of debts in society that runs much higher than it used to back in the early 1900's. To me it's a bit annoying reading these constant comparisons of what happened at a specific time in history and how todays events seem to follow the same pattern - almost as if it is the exact same thing - which it never is.

It's no big secret that the current financial crisis started with too high interest rates which then created the housing crash which in turn gave us the derivatives meltdown (which may or may not be over). All these problems have given a large contraction in demand and a loss of asset values. Still it is possible that all this is temporary and that lending and the world economy will resume pretty much as it did after the IT-bubble. There are real imbalances and deficits that need to be sorted out as well, but that does not have to mean that people will be loosing their jobs (for example read my investing in china or america posts).

Will things resume as normal, or is this debt-hype for real? I know this contradicts what I've said before, but there's a real possibility that things could resume as before, even though things look very gloomy. If people can borrow almost for free, I strongly suspect that they will begin to do so sooner or later - they can't really hold out forever. One should neither discount the generally much higher accumulations of wealth in the world today as compared to the days of the GD. All that money could easily be put to use in still plentiful opportunities of wealth creation.

I could be very wrong here and it's possible that I had it right in my first assessments. Maybe things are falling so hard that they cannot start leveling out or turning up at this point, perhaps we have to suffer a very long time of low economic activity (while people pay off their loans) and perhaps the imbalances created by free trade are too big. Or maybe the real pull-back has already happened and the smart money is already moving back into good stocks that have dropped heavily and are now beginning a long period of appreciation - while 'contrarians' and all the scared analysts are saying that this is just a dead cat bounce...

And perhaps further 'toxic assets' will be paid for by monetization - furthering the inflationary scenario, under an otherwise fairly normal economy. I've talked about the derivatives meltdown before and the AIG-linked milking of US-taxpayers - this thing is perhaps not so much anymore a financial bomb, but really a political one... I urge everyone to watch this interview:

Around the beginning of the new millenium the world suffered huge losses in stock markets, mostly attributable to the speculative boom of the IT-sector. There are a lot of people around today who are still mentally scarred over the incredible losses that they suffered there. We all know of the response to this contraction - a strong lowering of interest rates that created a housing bubble in most of the west.

The losses suffered from the housing bubble are much greater and at the same time we've had huge bank-losses from derivatives and bad loans along with a very broad stock market crash. Now jobs are starting to disappear and people who are deep in debt stop spending money - furthering the fall in demand. This outlook is indeed grim - but the responses this time have been much more dramatic.

Just the other day the G-20 promised to throw another tsunami of money at this thing and with zero interest-rates and yet more money being thrown around - how can we not 'recuperate'? I know that I've said that things are bad - and they are - but by the looks of it, the crazy spenders in the governments and central banks could yet prolong this from being a total crash by another couple of years.

Very often during the last year there have been comparisons made with the great depression, where some have claimed that the actions taken back then were no good, since they didn't put a stop to the depression. Well, the situation is very different - back then the interest rates were never at zero, only briefly did they touch 2% and then stayed around 3-4% most of the time. Governments did not throw money around like today - one big reason for that would be the basis of money in gold.

Pretty much all governments of the world have vowed to spend money until this thing is over with. And why doubt them? They really have no restraints - except for the belief in the value of paper money. And this is where inflation comes in. As people become more and more aware that the boom is created falsely out of the printing presses, then as confidence in the money wanes, inflation will begin hitting us hard.

As paper money becomes more worthless everyone will finally be even more broke than they would have been if the governments would not have started throwing money around. But by then the problems will be so huge that the world would have to somehow start over - monetarily speaking.

Can anything stop the inflating depression from happening? Well, as I mentioned - the politicians might notice the danger in loss of confidence in the paper money; so the thing to worry about would really be if they actually start to show restraint - as paradoxical as that is! Because then they'll be doing what they did during the great depression, that is, just prolonging the agony. If we want to get this thing over with somewhat quickly it is either through severe inflation or severe deflation - not something in between. The politicians have taken the inflation road already, and although its certainly not good - it would be better if they would stick with it.

So, unless they show restraint - which I doubt - we will see an artificial boom in all assets in the coming years that will be followed by severe inflation and finally a complete break down of the system. I guess one important signal to watch closely would be if the auto industry will be bailed out - if not, then bunker down for a great depression deja vu!

As I stated in my post on PGM's, one of the things that has been pushing down prices for PGM's is the assumption that electric cars will become more common and therefore demand of catalysts (along with PGM's) will decrease. This assumption seems justified since all major auto-manufacturers have been presenting new electric-driven models lately.

The type of electric cars that will probably be most viable are the ones with plug-in and a combustion engine recharging system, like the Chevy Volt. I assume this because it allows an easy switch between gasoline/oil and electric power generation as prices fluctuate. Therefore I also doubt the long-term potential of great depreciation of oil-prices, but neither do I see any real potential for greater appreciation.

Because of the rise of the electric car some have called out for a great rally in lithium. Lithium is the chemical element with the highest electrical potential of all the ions, and therefore makes for the best ion-/rechargable batteries. Only last week the junior-explorer TNR Gold Corp. announced some new acquisitions of lithium-properties, whereas they had previously only focused on the common precious and base metals. The TNR-stock rallied because of these news.

But there are a few problems in the belief that lithium will appreciate perhaps somewhat like uranium did. First, lithium is the 20th most common element in the earth, and secondly, batteries can be recycled. For these simple reasons I wouldn't buy into a lithium hype, but it is very possible that there could be a quick surge in the price before the new paradigm sets in.

So, if not lithium, then what are we supposed to investment in? Well, the PGM prices have almost crashed completely on the basis that the demand for catalysts will go down. But, if a lot of people want to buy these Chevy Volt type of cars (I know I do) then the catalyst demand could actually go up, because that's a lot of new cars to be made, and they all come with combustion engines.

Then there's the actual batteries. There are a few real good battery manufacturers out there like EnerSys or the Korean supplier of GM's batteries, LG Chem. Companies like these will be the new greatest auto-suppliers in the coming years, and should make some good profits from it.

I know that I myself have been wanting an electric car for a long time and I know a lot of other people who have been saying the same thing; actually I've never heard anyone say that they wouldn't want an electric car. I think that there will be a strong demand for these cars as they start coming out and people feel more willing to spend money again. Based on the potential for investment-demand (and the trouble in South Africa) for PGM's as well as a renewed demand for catalysts and the overall strong growth that's coming for the batteries-business, I see this as a really great investment opportunity.

I'd say that the best places to invest would probably be in PGM ETF's and some good looking battery manufacturers. I doubt that these investments would make you a lot of money in the coming year or so, but in the long term there should be a fairly comfortable appreciation - just like watching paint dry, as someone once said.

People in the US are angry becuase the bailed-out gang at AIG got a few million dollars in bonuses. At the same time the government has thrown away millions of millions of dollars (trillions, that is), subsidising total incompetence and corruption, without expecting any of that money back.

Now the Obama administration is declaring its intent to buy up all the remaining toxic assets to finally put a stop to the crisis. It's been estimated that this would cost the tax-payers/government another trillion dollars - but this is getting a little old, isn't it? One trillion here, another trillion there, a third trillion, a fourth... and so on. And the message is always the same - we have to bail them out because they're too big to fail, besides, we're the government, we have infinite resources, so why not share it with our buddies at the big banks?

It's no big secret that big banks were among the top of Obama's contributors, besides this is true for most 'major' US-politicians. If the Obama-administration really is serious about buying ALL the toxic assets from the banks, then the dollar really is dead, and the US-government will go bankrupt. The economy of a nation is no different from a personal economy, it's only politicians and a joke of an educational system that makes people think differently (which is true for all western countries).

If you've borrowed so much money that you can't pay the interest, do you keep borrowing more? If you've lent your neighbour a few thousand bucks and then he turns out to be a few million deep in debt from the bank, do you pay his bank-debt in order to get your borrowed money back? If you and your friend are broke, do you take out a loan to have him build you a bridge that you don't need?

You might say I'm presenting a very skewed image here, but if you consider that a personal economy is more short-term and a national economy is more long-term, it actually makes sense. You might argue that a nation can lower interest-rates; yes it can, but only in the short-term! Money wasted, is always money wasted, no matter on what scale. And borrowed money is also always borrowed money, no matter on what scale. The same goes for productivity and consumption. Therefore, if a nation is acting like an insane person, it is going to go broke, probably piss off it's neighbours and eventually end up in the asylum - or the morgue.

A final analogy: If you've made bad decisions in the past, and you stand around chanting "change!" and "hope!" on your front lawn - will your neighbours think "this is change we can beleive in!" or will they call the police?

When comparing gold to other metals that are considered precious, there does seem to be a pretty large discrepancy. Silver would be in a pretty fair relation to gold in terms of its price-'preciousness' ratio (somewhat undervalued), but when you look at the PGMs (platinum group metals) the picture is different.

In 2007 the world produced 78.7M Oz gold compared to only 7.1M Oz palladium, 6.6M Oz platinum and 824,000 Oz rhodium. Price per Oz in same order (approx.): 930 - 200 - 1000 - 1000. Obviously there is a huge price difference here in relation to production, and these are all considered precious metals, which means that they all are very similar - for example they don't oxidize particularly easily.

So why the big differences? All of the PGM's had about 50% of their demand coming from the auto-industry for catalysts (in 2007), and we all know what's been happening there lately. In the summer of 2008, rhodium was priced at ~$10,000, while the price-changes for palladium and platinum were not as dramatic, but still a lot larger than for gold or silver.

It's generally considered to be because of the (previously) growing auto-industry that the prices of PGM's went up so much, for example rhodium was at only $200 in 2001. It wasn't the only reason however, the other thing that made prices rise was the trouble of power-generation in South Africa. Today South Africa has ~70% of world production of PGM's. The electrical power shortage in the country is a long term problem, because the country has a monopoly that opposes private initiatives and then there's also the black empowerment laws that sometimes puts poorly qualified people in charge (which is clearly related to an otherwise large shortage of skilled labor in the country).

Apart from the auto-industry there is a pretty large portion of demand coming from other industrial demand, as well as jewellery (less than 20% on average); the demand for PGM's as investments are, although clearly existing, very small.
If the PGM's really are precious, shouldn't they be just as interesting for crisis-investment as gold or silver? I think that the main reason for the firmer position of gold and silver would be the fact that they've been used as money in the past, and might be so again, and also the much more easy accessibility of gold and silver. And by the looks of it today, much of the PGM-prices are ruled by the assumption that there will be a large shift toward electric cars in the coming years and that the problems in South Africa will not be large enough to work against the fall in demand.

I suppose in the end, if you want to somehow invest in PGM's, it would be on a more ideologically motivated basis - because they are more precious than gold or silver, no doubt about it - but if only a very small portion of humanity actually sees them as truly precious, then they will be ruled by industrial demand. I guess the most important lesson to take home from this comparison of gold-silver/PGM's is that gold could be considered high priced on a preciousness/price ratio, but considered as a potential future currency it would have to be compared to the preciousness of pieces of paper, which would be about infinite to zero. If gold will be used as a currency, then there could be a slight chance that someone would want to use the PGM's as well... which would mean humongous price-appreciation - I wouldn't bet on it, but the prospect would definitely represent one of the largest gains ever - if it were realized.