Friday, September 12, 2008

The Collapse!

So how close are we? There has been a lot of talk about "the collapse". In fact, "the collapse" is poorly defined. It could come as either hyperinflation or depression. There's also the combination of hyperinflationary depression, but that's really just hyperinflation. It is hard to become Zimbabwe and still have a booming economy.

So how close are we? I think we are very close. The following concept comes from Richard Maybury of the Early Warning Report (EWR). Don't bother looking for it on the Internet because it's not there. It will cost you $300 a year for 10 issues, $15 each for past issues, or $99 for a year's worth of past issues. I'm not trying to spread it for free, just this one concept, in my own words, and giving Richard full credit. He takes Visa and Mastercard at [/advertisement]

So how close are we? The Federal Reserve's conventional monetary policy is to constantly inflate the money supply at a controlled rate that will keep us in a "safe zone" between double-digit inflation and recession. As we head toward recession we print more money and inflate. Then inflation gets too high and we pull back increasing interest rates and slowing things down. Think of this in a graphic sense. Two parallel lines, the top one is hyperinflation and the bottom one is depression. In between these two lines we see the fluctuations of the Fed's printing press. Here is the graphic Richard used:

That seems all well and good. But there is a problem with this "standard model"; in a word, malinvestment. Every time the printing presses go to work money flows into the system. That money distorts prices. Businessmen who rely on prices to make good decisions end up making bad decisions based on distorted prices. This causes malinvestment. We can see this right now in the housing sector.

So when the money stops flowing, these malinvestments go bust, companies go broke, and people complain. That is called a recession. So the printing presses go back to work pushing out more new money. But the Fed can't control where this new money goes. People are complex animals and usually this money doesn't go back into the bankrupt industry of a few years ago, it goes into something new.

Thus we have a boom bust cycle that seems to pass from one place to another. Have a look at the DotCom boom, then bust, followed by the housing boom and bust if you are confused.

So what's the problem? Maybe our next bubble will be renewable energy, right? Wrong. The problem is a flaw in the chart above. What if those lines aren't parallel? What if they converge? There IS evidence of this. Here is Richard's second chart:

What this means is that in each cycle of boom and bust, the maneuvering room the Fed has becomes smaller and smaller. Each time it takes more money to reinflate a bubble, yet more money causes ever higher inflation. And if the lines are converging, then they must eventually intersect. I think we may be at that point.

The lines have been converging since WWII. Here are some examples: In 1949 a recession was halted with "only" $10 billion. In 1982 a recession required $100 billion to reverse. The mild 1990 recession took $350 billion. And in 2001 it required $250 billion, but that one was so mild there is a debate about whether it was even a true recession.

The government stopped reporting the M3 in 2006, so it is hard to compare apples to apples, but the MZM is a fair measure of what is going on now. And so far the MZM says we have "printed" $2 trillion for this current crisis. And it isn't even close to being over.

So in 1949 it took $10 billion to keep all the malinvestment afloat. Well you might say that $10 billion in 1949 would be worth a lot more today. True. But if you factor inflation (which of course is the main problem to begin with) into this, we have already printed 22.3 times as much money, in 1949 terms, to get to where we are today. And from where I'm sitting, we are still deep in it.

So where does that leave us? Basically any printing big enough to avoid a depression leaves us with hyperinflation. And anything short of hyperinflating the money supply will not be enough to dig us out of this hole. The Fed is backed into a corner. So what will Ben Benanke do? Will he lower the rate? Will he raise it? Will he keep it the same? Does it even matter? I don't think there is a way out at this point.

So what happens to gold? Obviously it goes up. But there is already a shortage. And the hole that the interventions have dug requires that "official gold" must be released to keep the credibility of the COMEX alive. No one else is selling real gold. The mines can hardly afford to take it out of the ground at these prices. Only the stock of the US Treasury and other Central Banks can keep the paper market alive at this point. But they are getting low. And soon they will not want to part with their gold.

ANOTHER said this in 1997:
In any event, LBMA has traded so much paper/oil/gold that any rise in the currency price of gold will implode them. The CBs must become the full primary suppliers of gold or the system as we know it is done.

One last note: No form of paper wealth will survive the financial crush once the CBs stop selling!


I'll end with some of Richard's own words. I hope he doesn't mind. Maybe someone will sign up for his newsletter because of this post. Here they are:

And by that measure,I think virtually the whole
economy is malinvestment. During its 94 years of
existence, the Fed has injected so many dollars that
hardly anything is where it should be, doing what it
ought to, at the correct prices.

If these estimates are anywhere at all in the ballpark,
they mean we may be close to the end point of
the channel. If the Fed does not do additional massive
injections, we will fall into a depression, but if
they do make these injections, we'll go into a runaway

Any injection big enough to avert a depression
triggers runaway inflation.

Please read that last sentence again, I
think it describes our present situation.


Dave said...

Interesting piece. I agree with the converging lines theory, although it can be viewed another way as the oscillations are simply getting bigger and harder to cope with.

The fundamental problem with our entire global system of economics and commerce is simple: it depends on exponential growth on a finite planet. Obviously, the quest for exponential growth will eventually smash into the wall of finiteness, in fact, I think it just did.

The only hope we have for long term sustainability and survival is stasis. We have to figure out what is the optimum number of humans we want, find ways to consume food and energy that are 100% replenishable. We have to completely discard the notion of infinite - i.e. exponential - growth.

The main reason we have to seek exponential growth is to pay interest, which is an exponential function. In a system like ours, based on fractional reserve banking and leverage-based asset purchases, the exponential function of interest is baked into the system. Everyone participating in it has to seek the same thing, exponential growth.


FOFOA said...

Good points Dave. I agree that because the oscillations are getting bigger, the lines may simply feel like they are converging.

If that's the case, then the lines would never actually intersect, leaving the Fed with an ever smaller margin of error relative to the increasing oscillations, but a margin of error nonetheless.

FOFOA said...

I just had the image of speed wobbles on a skateboard, when you're going down a steep hill. Anyone remember that?

You start wobbling back and forth but you are also accelerating at the same time. So your corrections become greater and faster until you finally plant your face in the asphalt!

I did it once while being pulled behind a minibike. Bernanke probably feels like he's being pulled behind something even faster.

FOFOA said...

I just realized this link was bad where I previously posted it. It is an interesting article where James West of the Midas Letter asks and answers the question "Can Gold Be Suppressed Indefinitely?"

Dave said...

In control systems, such increasing oscillations are known as an unstable positive feedback loop, succinctly described by your wobbly skateboard analogy. A design prone to such instability is, unsurprisingly, not a good one.

Many non-technical systems - politics, economics, societal mores - work similarly, in which feedback can induce a bigger reaction in the opposite direction. As someone who's spent decades designing control systems, the pattern of unstable positive feedback in our economic system seems evident to me.

I've asked several popular writers whether the government can manipulate indefinitely and they gave me equivocal answers. Personally, I think they can continue to manipulate as long as the rest of us let them. As long as "investors" keep playing their rigged game, as long as foreign countries keep lending our country money, as long as the media keeps acting like a propaganda organ for the government, they can keep it up, at least until the dollar is seen as worthless. So who knows how long they can keep it up.


FOFOA said...


The concept of a feedback loop is very intriguing to me. I'm imagining the feedback in a PA system that starts low and very quickly reaches intolerable levels.

I think this applies to the emergency meeting last night. The government is "encouraging" a completely private solution to Lehman's insolvency, yet it has to deal with what it has already fed into the psyche of these bankers with Bear Stearns and Fannie/Freddie. I imagine the feedback is deafening. I mean who wants to be the sucker that steps forward to take this risk? Perhaps only the next in line to fail will see it as a final hail mary.

Perhaps this is why we saw a possibly troubled organization like Zions Bancorp absorb the failed Silver State Bank.

It will be interesting to see what the workout ends up being for Lehman. And I can only imagine the Fed will not change the rate this time. Not that it's the right thing to do, but in an unstable positive feedback loop it may be better to do nothing than to risk going in the wrong direction, right?

Dave said...

In a simple feedback-control loop, you can mitigate the oscillations by applying less control. What causes such a feedback loop to go unstable is the lag between the control and the ensuing feedback. For example, if you're controlling a temperature, there's a lag between the time you turn on the heater (control) and the temperature changes (feedback). If your control system fails to take that lag into account then when the temperature does begin to change, so much heat has been pumped into the system that the temperature soars upward. When the system becomes unstable and starts oscillating, each new feedback signal is bigger than before, and each new control input is bigger than before (so applying less control will help break this positive feedback cycle). Eventually the system usually pegs at one extreme or the other. In the case of a temperature control system, the heater might end up all the way off or all the way on.

That's sort of the analogy I see with the economy. The lowering of interest rates and the liquidity injections are akin to heat from the heater in my example (they are the control inputs), and asset prices are akin to the temperature (the feedback). (Asset prices are just one of many feedback signals.) As with the temperature control analogy, there is a lag between the application of the control in the economy and the feedback. Looking at things simplistically, one might conclude that the current powerful controls being injected into the economy are laying the groundwork for a powerful reversal of the asset price deflation we're seeing now. In other words, after a time delay of unknown duration, stock prices, house prices, etc. could start shooting up uncontrollably in response to the control inputs being applied today. Carrying the analogy further, if the economy were to peg at one extreme or the other, those extremes might be deflationary depression or hyperinflation. Interestingly, there seems to be a lot of uncertainty of opinion about whether we're heading toward deflation or hyperinflation. Perhaps that's just a tacit acknowledgment of the oscillating nature of a system that's going out of control. Perhaps we'll get both deflation and hyperinflation in succession.

The world of economics is not as simple as a temperature control circuit, though. The economy is comprised of thousands of overlapping control circuits, making it difficult to predict how it will respond to the control inputs. (The economy is analogous to another technical phenomenon: music. Music is comprised of hundreds of overlapping individual simple sine waves, but one cannot discern each individual wave. Feedback control loops tend to produce oscillations - the smaller, the better - that are akin to periodic sine waves, which is why I drew in the analogy of music.) So answering your question about whether doing nothing at all is the best thing is difficult. The few control inputs being employed - interest rates, liquidity - affect many feedback loops at once, and those play off each other. So while reducing the control inputs might have a favorable effect on one such control loop, it might have an undesirable effect on another.

Bear in mind, I'm not an economist and this does not attempt to explain the economy in terms that economists might use. All I'm trying to do here is offer an alternative way of looking at the economy from my perspective of having a lot of experience with feedback-control loops.

Dave said...

One more thing...

The reason it's good to avoid intervention is precisely because there are so many different systems operating in parallel. The crudely limited set of control inputs that interventionists use is inadequate to address every possible circumstance.

That's why a true free market is such a great thing, because each person, controlling their own little system can make adjustments and decisions that are tailored to their circumstances. Centrally planned intervention takes that decision making power away from the individual actors and transfers it to the central authority, which, as I said, has only crude tools to work with.

So I definitely favor eliminating all forms of central control over the economy, while recognizing that eliminating them might produce disastrous consequences in the short term.

Central planning and control, however, isn't about guiding the economy along a healthy path; it can do that on its own if allowed to. Central planning is about control and enriching the connected insiders.

FOFOA said...


I appreciate this discussion we are having. It is stimulating many thoughts around this oscillation concept. Yes, the economy is SO complex as to rival some natural systems not fully understood by science. So the hubris involved in interventions is almost humorous.

One thing you said, "Music is comprised of hundreds of overlapping individual simple sine waves, but one cannot discern each individual wave", actually changed this year.

Watch the video on this page. I think it will blow your mind! They should hire this guy to write a program that will disect the economy.

jerry said...

Hey you guys, I have been reading your comments. There is no free market. There never was and never will be. There is too much power at the top to allow for a laisse-faire market. Manipulation for the very wealthy and connected is critical for the rich and powerful running the Treasury and the Fed, as well as the rest of the government.

Didn't Alan Greenspan have the philosophy of a hands off free market theory? He basically applied such a theory during his reign. Look what happened. Leveraging got out of control. Little assets/capital to back the paper securities and derivatives. It got so away from the capital, it ended up a 60 to 1 leverage. That cannot work. It ended up failing.

Without regulation and oversight, it will all happen again. Remember, the bankers, brokers and dealers are not always that smart. But greedy, YES!

There are so many variables impacting upon this positive feedback loop that it cannot really be figured out in regards to the economy.

The job losses, declining wages and expendable income, foreign wealth funds and their reserve currency configurations, oil and gas prices, what about Russia going on the gold standard?, and, of course, an attack against Iran.

This is really not like a chess game, but more like jacks. The pieces get placed in the hand, and then tossed up in the air as they fall to the ground. Hopefully, while grabbing for the bouncing ball, one can pick up the individual jacks in an orderly and controlled manner. Yet sometimes, the player just cannot hold onto the entire lot and they all spill out back onto the ground.

This effort by the Fed to hold onto the entire lot may or may not work depending on how much he is trying to keep within the palm of his hand.

FOFOA said...


I agree that the markets are less than free. Today is just such an example. But greed, as you say, will ultimately be the key to what happens.

At some point these individual entities will start acting like individuals and move hard to protect their own survival. We already saw some of that this past weekend with no one stepping up to the plate to take Lehman.

Up until now, it seems like the survival instinct has been on the personal level, while on the institutional level they are going along with the Paulson program because they are still playing with OPM, other people's money.

But I think we are starting to see the shift now to institutional survivalism. I could be wrong. But if I'm right, I think that it will put great stresses on the derivative situation as well as the general stock market.

Calls are being made from institution to institution to pay up what is owed, and the owing institution must then put out calls to those that owe to it. Along with this feedback loop, money will be (and is being) pulled out of the stock markets in great amounts. This is happening world wide.

I made a pretty big financial move late last night as I had a very bad feeling about what is happening. I put in the order to liquidate my Europac account. Peter Schiff has always said that the rest of the world will abandon America and let us fall. But I am getting the impression that may not happen. At least not before they go down with us.

In other words, Peter's theory was that the foreign Central Banks would dump their dollars and Treasuries causing a calamity here. And that this would happen BEFORE there was a world wide stock market crash.

I don't see that happening and I just happened to reread a part of ANOTHER (THOUGHTS!) where he said the same thing as I think we are seeing. He said:

"Remember, all currencies are the same now as they are "digital paper"! Nations will defend the system at all cost They will never sell US$ treasury debt as that debt is their currency! The dollar will soar as a final defense! As part of this defense they will allow oil to rise as oil is priced in dollars. How do you get oil to rise? Today, we stop our CBs from selling gold!"

My fascination with ANOTHER is that I think he saw and predicted what was coming on a very large scale. But he thought it would happen within 3 or 4 years. Instead it took 10 years, partly because 9/11 caused a response which delayed the inevitable.

One more quote just because I find this fascinating. Both of these quotes are from November 1997. Just imagine this sentence was written today and that the writer had unique insight.

"the price of oil in US$ terms is about to roar! It will crush the Pacific Rim and South America. It will drive the US$ sky high in terms of other major currencies but the dollar will collapse in terms of gold! Short term interest rates in the USA will be driven thru the floor much the way they have been in Japan from the early 90s. This will be done to combat an imploding equity market. Long government bonds will almost stop trading as their yield soars from the oil price fears of "inflation"! Because of todays "new digital paper markets" this entire act will be played out in 30 days or less. Yes, you are right! During that time we will have inflation and deflation."

Thoughts on this?

jerry said...

WOW! What heavy thoughts and predictions. This person was deep in his mind over what might evolve. The world's nations are somewhat of a counterparty to one another, but I could see some nation or two, such as Russia, along with an economic ally of theirs, trying to manipulate the currency and/or commodities market. They aren't buying gold for nothing.

What you say about the Domino Effect of those at the top calling in their payments from those underneath is interesting. It makes sense. I guess, those underneath who are extremely leveraged might not have anything to cough up.

It is like the mob shaking down individuals who owe them a lot of cash. They make their visit and threaten harm unless they pay up. But there is nothing to pay, because that person lost it all in a gamble. So, the MAN comes back and cuts off some fingers or breaks a couple legs, or puts a bullet in the head.

Just how much can those at the top, which leveraged 60:1 their derivatives, shake down those down the line, especially in Dubai or Singapore?

We have to ask, "Is the dollar that desired around the world, or can Europe, Asia, and the Middle East do without them? Yes, we buy the most, but that component is shrinking. Our oil consumption has shrunk, I believe, by 600,000 barrels per day.

The price is falling because our wallets are thinner. Jobs are disappearing and not coming back anytime soon. Real wages are shrinking due to inflationary pressures.

Milk costs more than oil.

"The debt is their currency...". HUM!

Oil is traded in dollars. Oil producing nations get our dollars, and have nothing else they can do with them but buy our limited manufactured goods, and our financial, real estate/ insurance goods and services.

China keeps their Yuan low and pegged close to the dollar. China buys other currencies with their currency creating a good portion of their GDP and budget surplus to be in the hold of foreign currencies. Now, those nations have the Yuan because China bought their currencies, therefore, those nations now use the Yuan to buy Chinese products. Their own currency comes back to them.

They do the same with the dollars used by Americans to buy Chinese goods. China then buys our Treasuries, and professional services, as well as real estate, because there is nothing else to do with the dollars.

Now, is the debt really their currency? The debt is their "investment" or insurance policy, which is to make sure that they have a place to sell their stuff. But, instead of using their return of our dollars to improve our nation's economy, infrastructure, etc. , we use it for Homeland Security, war and the war machine, which is a really big bonfire burning up those dollars.

China gives their companies tax incentives to sell their items inside the country, and encourages their consumers to buy their own stuff via tax breaks.

China could decouple from us. Europe could very likely, too.

What is the incentive for Europe or Asia to see the price of oil rise? Just to save the dollar? That would be cutting off their noses to spite their faces. Don't you think?

They have every reason to protect their own economies by trying to buy oil and natural gas from Russia and elsewhere at a price that would be tolerable for their consumers.

The stock market will unwind, eventually, especially when Bernanke has to give up the grip and manipulation because he will need to print money not for propping the market up, but to supply FDIC.

I see foreigners just holding their dollars and Treasuries in limbo, while they try to do business with more viable nations. At some point, interest rates will need to go up, in spite of the repercussions, in order to re-attract those dollar-holders sitting on the sidelines.

But of course, it would all change if we attacked Iran. That would be a way to mess with the world's economy forcing their currencies into a war machine scenario.

I have no idea about gold and silver. With a somewhat operating Europe and Asia, the price might not really move to its former highs. But if there is a war with Iran, it will likely jump up out of panic. Most Americans don't really have much available cash to buy gold or silver, only bread and milk and college tuition and car payments and mortgages. They are hoping once their bank fails they can get their cash out.

But I am likely rambling on about things you guys already know about.

I am sorry for taking up so much space--but you asked, "Thoughts on this?"

FOFOA said...


I have no time to respond fully to your comment, but I will do so tomorrow. Until then I just wanted to toss you this morsel from ANOTHER. This one written on Friday, November 7, 1997. It seems appropriate to your comment:

"What will be the new world reserve currency once the dollar is hyper-inflated to zero or devalued? E-gold, gold itself or nuclear weapons?

I don't know, but we will all find out!"

jerry said...

Hi there,

Good question, again. I had talked about that in one of own blog writings. What will be the new world currency once the dollar deflates? I am not sure that there will be a world currency. I suspect gold and silver could rise up, but nations will not want to part with it, since it takes so much energy:human and fossil fuel to own it. It may just end up as the definer of world power, just as the tribal chief had worn it defining his dominance over others.

Gold and silver, as it does today, make one nation's currency more valuable over another. As Russia acquires more gold, and continues to produce oil and gas, the life blood of a nation's veins, at least today, the ruble might be desired for its purchasing power.

China may end up pegging their yuan to the ruble. I cannot predict. Their industrial capability, their rice, and innovation capacity might make their currency valuable. They prefer to make their yuan flexible, in nature.

The euro might remain strong because those nations have people who are accustom to living frugally, commuting by rail, riding a bike for transportation, living in smaller spaces, shopping locally, and more. The euro will continue to be a valuable currency for trade, for the simple reason that many countries use it interchangeably, and just as Barter Bucks are gaining momentum in the U.S. And now, even here in Pittsburgh, one neighborhood will be attempting their own personal currency to promote their own micro-economy.

Food will likely become another way to back one's currency, like it does now, and just as gold could be for others, a foundation that would hold the value of that country's currency in higher standing.

Nukes will remain a way for a nation to be heard above the voices of others, as it is today. One nuke talks louder than no nukes. Saddam had no nukes, but just the threat of having one or several was enough of a reason for the current administration to make a case to the American people to invade, even though it was debated that he really had none.

The thinker you reference as Another poses good questions that have been propelled from the past into the lap's of today.

I wonder what that person would be saying today about our current events.

Until later....

I appreciate the chance to express myself in your community.

FOFOA said...


This is in response to your post from a couple days ago.

Everything but physical gold has counterparty risk. It is everywhere. The counter party to the dollars in your wallet is the US Treasury, ultimately the whole of the taxpaying American public. That can and is being defaulted on by printing new money and deflating the value of what is in your wallet. Everything the investment banks hold on their balance sheets has even bigger counterparty risk. For one bank to live up to it's counterparty obligations requires another bank living up to it's obligations, and on and on ad infinitum.

The mob enforcer is these banks short selling their peers into bankruptcy. When they don't live up to their counterparty obligations, their peer bankers take them out. Bye bye Bear Stearns, bye bye Lehman. And there's always a next on the list until they are all gone. Buh bye.

You ask appropriately "Is the dollar that desired around the world, or can Europe, Asia, and the Middle East do without them?"

ANOTHER would answer this question with, "The world currency system has, for years been little more than digital credits backed by "usage demand"."

So as long as the majority of "things" (oil being the biggest) is priced in dollars, the usage demand will be there. That may end soon.

Also, these foreign countries find economic strength (falsely) in keeping their currencies weaker than the dollar. They see this as helping their economy by making their products cheaper on the world market. But all it really does is make their citizens holding their money poorer on the world market. Yet still they buy dollars to keep their currencies lower. This still goes on today.

Then, ANOTHER would say, "In the long run it was oil backing the US$ that kept it all together! It truly is strange, that in the end it was gold that backed oil! In a even more strange twist, [the Central Banks refusing to part with their physical gold just to support the failing COMEX gold futures market] will bring the system down!"

I think this too is coming. If the dramatic rise in gold continues in the face of physical shortages, look for a major default within the next 90 days.

You say, "Oil is traded in dollars. Oil producing nations get our dollars, and have nothing else they can do with them but buy our limited manufactured goods, and our financial, real estate/ insurance goods and services."

This brings up one of ANOTHER's biggest points. He claims to have inside knowledge about some deals that were made, presumably with Saudi Arabia, and presumably in the early 80's. My post titled The King and his Gold was my attempt to present briefly what ANOTHER said over 3 years. It's probably not totally accurate. That's why I made it into a story. But I think it captures the message he was trying to get across.

The point in a paragraph is that they aren't interested in the dollars or the goods, etc... only in the gold that they can get for those dollars. Because they have a different view of gold than we do in the West. We view it as a commodity and they view it as wealth. But to trade gold for oil on the open market would explode the price of gold, so instead they keep the price of gold low and let the Saudis buy it from the mines which are forced to produce it and deliver it at the price on the COMEX.

If gold were to trade freely, the Saudis would get much less gold for each barrel of oil, but they would be just as happy. And the longer it takes before that happens, the more wealthy and powerful the Saudis will be once it does happen. And it will happen. It is one of those inevitable consequences of a manipulated system.

You say, "Now, those nations have the Yuan because China bought their currencies". This is not totally true. A lot of the dollars bought by the Chinese Central Bank come into the country through the trade of goods. The Chinese people sell goods to us for dollars. Then the banks buy those dollars from their citizens. So instead of holding the Yuan, we hold the goods it makes instead. By buying these dollars from the citizens, the Chinese banks keep the dollar valuable, and keep the Yuan down.

Of course the Chinese could do us great harm by spending all the dollars they hold in reserve. But so far, they do not think that is in their best interest. They don't yet fully realize that they would be fine without the American consumer.

Dollars ARE debt. Remember, the counterparty to the dollar is the American taxpayer. So as long as the dollar is the world reserve currency, our debt is their currency. And their government is STILL trying to keep our debt valuable. Why? Because it will be painful to make the transition, and pain is politically difficult to sell.

I agree that everyone could uncouple from us. But so far they are too timid to do that.

The incentive for, lets say China, to see the price of oil rise, is that they can get all that they need. If the law of supply and demand is alive and well, then a correct price puts the product where it is most needed. If the price is lower than supply and demand says it should be, there will be shortages where it is most needed. What good is a loaf of bread for 99 cents if the store is sold out? Wouldn't you rather pay more and always be able to get some?

You are right about the FDIC. I think that will become the most hyperinflationary problem in the next year.

The problem is that there are more "digital credit units" (dollars) out there locked up in banks and investments than there should be. If everyone ran to the bank to get theirs out and spend them, there wouldn't be enough. And this goes for investors cashing out their holdings as well. There are just too many. There's should only be about $60 Trillion worth of dollars out there in the whole world (including all currencies). Yet there are between $600 Trillion and $1 Quadrillion worth of "digital units" of derivatives and other stuff out there.

So as we bail out banks, and ultimately the FDIC bails out individual accounts, we will be converting those "ghost credits" into real, spendable dollars. That is hyperinflationary.

Your final paragraph is this, "I have no idea about gold and silver. With a somewhat operating Europe and Asia, the price might not really move to its former highs. But if there is a war with Iran, it will likely jump up out of panic. Most Americans don't really have much available cash to buy gold or silver, only bread and milk and college tuition and car payments and mortgages. They are hoping once their bank fails they can get their cash out."

This brings up another one of ANOTHER's main points. That we of "Western thought" see gold as a commodity. You use the word "price" with regard to gold. Would you say "the price of the Yuan"? More likely you would say the exchange rate of the Yuan. Would you say you don't have much cash to buy Yuans because you are buying bread and milk? No, because there is a difference between what you hold for wealth and what you spend to live. "Western thought" has programmed us to think of gold as a commodity. But in reality it is an artificially suppressed currency. This is proven by the fact that foreign Central Banks hold gold as part of their "foreign currency reserves". In the Euro countries, the members are required to have 15% of their foreign reserves held in gold.

So as you can see, the GIANTS of this world see gold differently than we the people do. Perception rules our world right now, just as in The Matrix. But after the collapse, the Matrix will be destroyed and reality will once again rule. At that point, those that hold physical gold, including countries, central banks and individuals, will have infinitely more wealth than anyone left holding worthless paper.

ANOTHER says that upon the crash gold will stop trading everywhere. And for a long while it will not trade. It's value will not be readily known. During that time, holding a bar of gold will be like possessing an original Van Gogh. It is not the most liquid of currencies. In fact, you probably have to auction it off if you want to spend that wealth. That is because it is so rare and yet it is valued by many people.

So imagine a world where the US dollar is carted to the market in wheelbarrows as it is in Zimbabwe. There is no Kitco gold price website anymore, because gold is not traded. It is simply a valuable store of wealth. And it's value must be calculated by it's rarity with respect to the amount of people and things in the whole world when they are compared to the amount of gold in the whole world.

Also, gold mines will not be producting much gold at this time because they will either be nationalized or they will be so heavily taxed that there is not much profit in them.

That is the picture ANOTHER paints. It is rare AND valuable.

FOFOA said...

I think this theory is playing out right now. "Any injection big enough to avert a depression triggers runaway inflation."

Everything has accelerated since Mayberry wrote this in early September. If he's right about the graphs, that the channels converge, then we are there now. And the amount of money injections needed to stop a depression essentially go to infinity, thereby swinging us to hyperinflation.

It is actually happening right now. The lines have converged. The feedback loop is at uncontrolable levels.

BoilerGold said...

I ran across your blog during a recent post on Zerohedge, and I have been reading the blog from your first post forward. In particular, I find a couple interesting points in this post.

First, I find it interesting that modern society fails to understand the exponential function's effect on interest and debt when the Jews seem to have understood this long ago (Year of Jubilee). However, this failure is obviously not isolated to money as demonstrated

Second, as a chemical engineer I find the idea of a feedback loop to be quite useful. So in regards to your comment from last December...
If the lines have truly converged, it does not necessitate the system is uncontrollable in the short term. I think you can still control the system, but you must correctly guess your next move before the effect of your previous move is known. Obviously, this is quite a dangerous game to play when catastrophic economic failure is the consequence of a wrong move. Nonetheless, this is what I think central banks are doing...making policy moves based on their historical outcomes and hoping it gives them time to head for the exits. Over the long term, they know that they will eventually guess wrong, and the inevitable collapse will ensue.

This brings me to my questions. They may have already made their fatal move. I don't know, but I am increasingly leaning towards this conclusion. If this is the case, what are the subtle clues that people are missing? How much longer can they keep the general public from knowing? My second completely unrelated question is why do you (or Another) not see silver reestablishing its historical place as money at a gold/silver ratio of between 1:10 and 1:16? Gold has generally been the money of kings, silver has been the money of the common man, and debt has been the money of slaves. Why would this relationship change when people revert back to a hard money system?

FOFOA said...

Hello BG,

Austrian economist Ludwig von Mises (1881-1973) wrote:

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

I believe we passed on the former alternative in 1999 and again in 2001/2002. The latter is now upon us in my opinion.

You ask, "If this is the case, what are the subtle clues that people are missing? How much longer can they keep the general public from knowing?"

I believe it is unraveling right now. I believe the various timings we read that the collapse will come in Sept, Oct, or Nov., like Jim Sinclair's "countdown" and others, each have a grain of truth. Each is based on a solid piece of evidence. Of course it is possible that Geithner and Bernanke could get incredibly lucky once again and somehow kick the can down the road another 6 months. Last time they kicked it a year. As the feedback loop progresses, it gets exponentially more expensive to kick the can shorter and shorter distances into the future.

I think we are seeing this effect right now. Perhaps in Barrick's announcement. It has become too expensive to cap the price of gold!

I look for new evidence of the unfolding collapse to emerge more and more frequently as we proceed through September and October.

On the question of silver. You must understand that I do know the arguments of the silverbugs like Ted Butler, David Morgan and Jason Hommel. For a brief time in 2008 I bought into all of their arguments and during that time I bought a lot of silver. I even corresponded with Hommel and met David Morgan in person at the Money Show. But once my eyes were opened as to what is really happening before us, I realized that the bullish arguments for silver are actually bearish when viewed from a different angle. And in this realization, I joined someone who I believe is a wise and knowledgeable insider, FOA.

The arguments are bullish in the context of a functioning status quo commodity market. They become bearish in the context of collapse of the dollar's hegemony.


FOFOA said...


Here is a list of arguments made FOR silver which are actually bearish when viewed from my perspective:

1. There is less above ground silver left in the world than gold.
2. The CB's do not have any silver, so they can't come to the rescue with fresh supply.
3. Investor demand is rising while industrial demand is falling.
4. As recently as 136 years ago the gold to silver price ratio was 16:1.
5. All the gold ever mined is still with us, but silver has been mostly used up by industry.

Each one of these arguments has the opposite effect as is purported by the silver community. When you can see this, you will know what I am talking about.

One last thought. The gold price manipulation scheme was done with the support of the CB gold and miners like Barrick with its hedgebook. So gold was suppressed with the help of physical supply added through surreptitious means. Silver is a different story altogether. The CBs don't have silver and a lot of the silver mined is a byproduct of base metals. So when I think of the metals as a compressed spring, or a beach ball under water, I am not so sure that silver is as compressed as people think it is. But gold, on the other hand, bears the weight of 96 years of compression (and more).

As I have stated, I have not dumped the silver I bought during my silverbug phase. I still have it. And I still have hope that it will spike before things get really ugly (or that it will come in handy as a barter item). But when it DOES spike, I plan to treat that spike like the 1980 spike and exit my position. Gold, on the other hand, I expect to plateau and assume the role of THE world class wealth reserve. So when viewed this way, silver is a speculative investment play and gold is a pure wealth reserve.

Given this context, I see no reason to choose silver over gold as long as gold is available. The only reason given is that you will receive greater leverage and greater profit through silver. But this is pure speculation in my mind. It may or may not happen. I think it will not. And even if it does, I think it will be temporary and there may not be the opportunity to transfer those profits back into gold. I believe the real leverage is in gold!

If I am wrong and silver shoots the moon and becomes more valuable than gold, than I will be one rich SOB! By weight, I have much more silver than gold! I call that a hedge.


BoilerGold said...


Thank you for your quick yet frightening response. If the unraveling is happening now, what do I do now? How do I prepare? These are questions that have been fraying my nerves for the past six months. I don't expect you to address these questions here. I will continue reading and pondering.

In regards to silver, I think you summarize the argument quite nicely. In particular, you capture that the goal (for me anyway) is to convert silver ounces into gold ounces as the 16:1 ratio is approached. Thus, I hope to own more gold in the future by playing the leverage.

However, I fail to see how less existing above ground is bearish. The other four arguments are interesting but not as important. I fail to understand a new paradigm where silver does not greatly appreciate. As I said before I will continue reading to capture a fuller picture of your perspective. Still, will silver not serve as the second best store of wealth if gold is no longer available on the market? If it does not function as a store of wealth, is silver's usefulness in electronics, medicine, etc. no longer meaningful in this new world/paradigm?

Best Regards,

Motley Fool said...


3. Investor demand is rising while industrial demand is falling.

This one I would see as bullish, but the rest are bearish.

The King and his gold, proved a AHAH! moment for me.

As I have time, I'll read all your posts.


The Fool

FOFOA said...

Hello MF,

If you liked The King and his Gold, you should read this one as the sequel:

It was written by Aristotle and has been posted three different times here, under three different names.


Daishestor said...

Hello there,
Fist of all, sorry for relating to such an old post, but it struck me to read Dave´s comments about feedback loops. It looks like he has some knowledge of system dynamics. I took a System Dynamics Modelling Course back in 2003 and it fits exactly. Too bad I could never apply it to my work for one reason or another, but it´s a fascinating field to dig into.

Welll, that was it. Great blog, by the way, I enjoy very much reading it, also reading FOA IV in parallel, trying to connect the dots and fill the blanks since 2001.
Best regards,

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