Thursday, October 2, 2008

FreeGold is like a Giant Sponge that could Clean Up This Mess

The world is awash in dollars. It is also awash in assets and derivatives that are quickly deflating in value. They are deflating because the holders of those assets are frantically trying to convert them to dollars. There are reportedly $1,100 Trillion worth of worldwide assets and derivatives that are bidding on only $60 Trillion worth of dollars (including all currencies). When all is said and done, that would be a deflation of 94.55%!

Can you imagine our stock markets crashing 95%? How about the value of your savings?

That is what we are currently facing!

To fix the problem, the Central Banks of the world are printing money as fast as they can. But they can never print fast enough to keep those assets from having a catastrophic collapse in value. Besides, what would those dollars be worth even if they could? Remember, that value was a phantom value. It was only based on what the last one sold for. There was never $1,100 Trillion (1.1 Quadrillion) dollars in existence.

So the pain we are watching, while real, is still just a result of imaginary values being placed, and spent, on pieces of paper.

After watching Karl Denninger's 2 minute video, I have been able to read between the lines on some of the statements by other Senators and Representatives that have spoken in public. And I believe his thesis is closer to the truth than anything else I have seen.

Here's how I see America's problem put simply:

America has 20 credit cards all maxed out. No available limit left. Each year we apply for a new credit card and max it out just to pay the minimum payment on the previous 20. We are only paying the interest, not the principle. And then the next year we must get a newer and bigger credit card to pay the interest on the previous 21.

Well who is issuing us those new cards each year? It is the foreign central banks that buy our debt, like China and Saudi Arabia. They are giving us a fresh credit line JUST to pay the interest on the previous debt we already owe them.

So now they are threatening to not give us a new card this year (fiscal year starts Oct. 1st). And we have no way to pay the trillion dollar interest payment on our other 21 credit cards. So without this new credit card, we will go into default on those 21 bills sitting on our desk.

What does that do to our credit rating? Are we now bankrupt? And who's to say that even if we buy back $700 billion of bad investments from them that they will honor the deal and give us one more year?

This is a pathetic situation we are in. If I ran my house this way, they would lock me up.

So where do we go from here?

FreeGold! That's where.

Imagine all the gold in the world was melted down and minted into... oh, let's say 2 rands.... no, how about 1 ounce Gold American Eagles... like the beautiful Liberty on the right side of this blog. If all the gold was minted in that way, there would be about 4 Billion of those.

Now I know that FreeGold is not about a number (Ender), but just for the sake of this experiment let's use the number from my previous post of $100,000 per ounce. That would mean that each of those 4 Billion coins was worth $100,000 US dollars in today's dollar value. I know that's a lot, but consider this. That would mean that all the gold in the world was worth $400 Trillion. That's more than all the paper money in existence. And it's a full 36% of the perceived value of all the paper assets in the world. Do you see where I'm heading yet?

Okay, now let's say those $1,100 Trillion in "junk" assets are now going to convert to currency with a pool of $460 Trillion ($400T worth of gold plus $60T worth of paper money). Sure there are still going to be major losses for those who hold the worst of it, but the fall will be much softer.

Also, now imagine the US Treasury's position in this new world. Assuming the bailout goes through, the net worth of the Treasury is something like NEGATIVE $11 Trillion. But with 8,000 ounces of gold valued at $100K, the US Treasury's net worth would jump to a healthy POSITIVE $15 Trillion.

Let me say that again... from NEGATIVE $11,000,000,000,000. To POSITIVE $15,000,000,000,000. And that would happen literally overnight!

That value is already there!!!! It is simply suppressed!

I could go on and on about this, but I'd probably just bore you. Please, I know some people are reading this, so ask your questions! Express your skepticism! How can I say these radical things if I am not crazy?

So there you have it. FreeGold is like a giant sponge that can sop up all the dollars in the world seven (7) times over. And in the process it can bring order, confidence, national pride, and free trade back to where it belongs.... in our lives and not in our history books!

7 comments:

Ender said...

Ok, so let’s not say that it’s about a number, but rather, a balance in the system. You’re idea here, if I’m reading this correctly, is to balance the monetary debt with a monetary asset. Correct? In this case, the world’s debt will be balanced by the world’s gold. That’s an interesting concept, it’s like backing all the currency in the world with gold. Would seem that if this were to occur, everyone would simply exchange their currency for … gold. At that point, we wouldn’t need … currency if gold could work?

But you know that it’s more valuable to a government to be able to print currency.

What if we massage this a little and say that we simply want to settle the deficits in gold. And, possibly, require that banks hold assets on the books that are not debt based as their fractional reserve. With these modifications, gold can settle the currency claims that need settlement while allowing currency to perform its function. Also, real assets on the books of banks can have real marked to market prices.

Now is it possible to get there from here? That is the real question, for it might not be as simple as you think.

Top discovery – does the US hold 8k tones physical gold on reserve? This is truly unknown. If the US does NOT hold this gold, the power associated with holding the reserve asset of the world will NOT be held by the US.

Consider - revaluing gold transfers banking powers to those that hold gold. Thus, the ladies in India will control a significant portion of the world’s asset value.

The US has everything to lose by going to a functioning gold system, whereas, the rest of the world stands to gain.

Side notes. In order for gold to function as money it has to shake the burden associated with Commodity gold. In other words, in the entire system, you must be able to FREELY exchange currency for gold and gold must be allowed to travel (import, export). Conversion taxes will not do. Travel taxes will not do. And most importantly, governments must embrace the function of gold side by side with currency.

There are political implications to adopting a functioning gold system. Those implications must be considered.

FOFOA said...

Ender,

Thank you for responding. I wish the few others that are reading this would as well. I think it is healthy to discuss possibilities and to take thoughts as far as they can go. That is hard to do with just one head.

First of all, I fully agree with you that TPTPB (the powers that presently be) will never actively embrace or voluntarily pursue something as far out there as FreeGold. And I understand why. It is far more valuable to be able to print the money. However, that system is currently failing as we can see with our own eyes on the CNBC comedy show.

My thesis is that FreeGold will be the natural and unavoidable consequence that is coming at us with all the momentum of a heavy train loaded down with 1000 ounce bars of gold. And that it will not be as bad for America as TPTPB would have you believe. It will be bad for TPTPB, but not for America, unless, like you say, America doesn't have the gold.

But in some senses, that doesn't matter either. America has gold mines which can be nationalized, and it most likely has the IOU's with which to do that legally.

In a world of FreeGold, gold will flow to value. That is the point. If the POG rises to it's natural place, those that now hoard gold will suddenly feel the freedom to let some of it go where it is needed. As for currency claims and paper claims, gold will only flow to those that are worthy of final payment. So allowing deficits to be settled in gold will bring true Mark To Market pricing on a worldwide scale. Even whole governments will suddenly be "marked to market".

I believe that in this coming world of FreeGold, there will still be the massive casualties that are now facing their imminent demise, but that "the outbreak" will be contained and will not be as bad for the rest of us who did not play in the banker's games.

Is it possible to get from here to there? I believe it is unavoidable. Unless Paulson and Bernanke and the CB's of the world can pull off a miracle, I can't see an alternative. I'm not saying it will be a smooth ride or that it will happen fast. In fact, the more they fight it the longer it will take and the bumpier the ride will be. But what can they do? It is out in the open now... their desperation!

I agree that the world's power will shift mightily in a world of FreeGold. That is the price we will pay for the last 30 to 100 years of our money games. I am not happy about it. I am not saying it is good or bad, simply that it is.

Perhaps in this new world the ladies in India will join the oil Sheiks as the newest class of private jet-setters.

"The US has everything to lose by going to a functioning gold system, whereas, the rest of the world stands to gain." I think TPTPB in the US have everything to lose. But in my mind, this is not a "top down" movement to "a functioning gold system". It is a "bottom up" move. For all the power that TPTPB have, public confidence is much more powerful. If they lose that, they have nothing but martial law to fall back on. But if that happens, the rest of the world will lose it's confidence in the dollar and we move "bottom up" toward FreeGold.

It feels right now like gold is in the process of shaking the "commodity burden". As the world's gold travels into the hands of "holders of physical", less and less is available for commodity trading. And commodity trading can only work as long as physical gold can flow from the system TO the big traders. The signs are out there that it may not be happening any more. I am suspicious that the weakness of gold on the COMEX may be coming from the demand side now.

"And most importantly, governments must embrace the function of gold side by side with currency." FOA said that governments will encourage citizens to hold their wealth in gold and trade in dollars when this comes to pass. They will have no choice but to realize that is the best for society AND for governments.

"There are political implications to adopting a functioning gold system." There are also political implications to a failed fiat system. Which are worse?

FOFOA said...

Nouriel Roubini gives us a good rundown of what is happening in the wake of Congress passing TARP ver. 2.0+Pork and what else we can expect from the government and the Fed in the coming days and weeks.

It all sounds like massive printing to me. Am I wrong?

This should further drive a stake through the heart of the "gold commodity" markets IMHO.

Ender said...

Well said FOFOA.

The biggest move the entire world can do to remove itself(themselves) is to embrace gold and let the dollar go. A huge part of the political influence with go down with the change. As you say, that may not be a bad thing.

Believing in this type of system gives me hope that humanity will survive in the decades to come.

Now, will the people of the planet please go out and make a claim on their gold?

Ender said...

Didn’t read all Nouriel Roubin’s article, but it seems reasonable.

It’s all about confidence. We are witnessing the loss of confidence and its repercussions. It has become apparent that the claims in the dollar system will be no good. One would expect that those holding claims will reevaluate their situation in the coming days and possible flee to another system (not necessarily gold).

The bailout bill runs completely contrary to what they needed to do to rebuild confidence. The world wants transparency with regards to calculating risk when giving loans. Is that too much to ask for? Instead, our lawmakers as saying – no, we will allow the deception to continue.

At the same time, the rest of the world has already said that they will play by the new agreed upon rules. Thus, the fed+treasury will now be forced to act as lenders of last resort. As this unfolds, I would not expect anyone to compete with the non-earned credit provided by the fed+treasury. Thus, the dollar has been cornered and it will now die.

How long will it take? Who knows…

What will be the outcome? Who knows…

Is gold good insurance? Magic 8-balls says “yes”!

FOFOA said...

This is interesting. PM Gordon Brown this morning said on TV something like, "Over the next few weeks we are going to have to change the way we do bussiness with oil producing nation's!"

Link

I wonder what he meant...

FOFOA said...

The AIG, Basel II, Goldman Sachs connection explained brilliantly by Porter Stansbury.

Link

Quote: "Around the world, banks must comply with what are known as Basel II regulations. These regulations determine how much capital a bank must maintain in reserve. The rules are based on the quality of the bank's loan book. The riskier the loans a bank owns, the more capital it must keep in reserve. Bank managers naturally seek to employ as much leverage as they can, especially when interest rates are low, to maximize profits. AIG appeared to offer banks a way to get around the Basel rules, via unregulated insurance contracts, known as credit default swaps."

Also, I will be making a new post today which I think will shed more light on this capitalization problem and perhaps the ONLY solution...

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