All the Gold in China

So how much gold does China really have?

Occasionally a discussion in the 'comments' section is the genesis of a Thought that warrants a new post. Hat tip to Martijn and Max Keiser for this one.

Watch this 10 minute video. It is a good discussion about what is needed to create a new reserve currency...



In the video, Max Keiser essentially says China is not a worthy adversary to the dollar because it only has 600 tonnes of gold.

Max is referring to the World Gold Council's official accounting of CB gold when he says that China only has 600 tonnes. These numbers are based on voluntary reporting by the members.

If you go to the Wikipedia page, you will notice that China is the only country in the world with a nice clean number reported, 600.0 metric tonnes exactly. All the other countries have reported fractional numbers like 765.2.

While you are there, you can click on the History tab at the top, and then go to the earliest version of the page, which happens to be back in 2004. You will notice that the numbers haven't changed much. In fact, China hasn't changed at all.

And remember, China recently announced it's desire to obtain 4,000 tonnes of gold... officially.

Back in 1998 Another wrote about China accumulating a lot of gold through back channels that would not affect the price or show up on official records. According to Another, the special ongoing deal between the dollar faction (US and UK) and a few Middle East oil producers was noticed by China. And China wanted a piece of this deal. Here are a few references from Another...

Sir, Some think my thoughts are as "hogwash"? Several CBs use "agents" to buy gold. Some agents, small, some large, some "BIG". They buy much from $365 down, all last year. Even today, it does not show. This world, it is strange, yes? I would say "Big Trader" has little time for "washing the hog"! But you sir have a large shovel and dig very deep!

It is written, "all holes in earth lead to china"!

Any nation/state can put it's economy/currency on a gold standard. They only have two requirements. Own a stockpile of gold and raise the price very high!

In the past, when currencies were gold, a nation could not lower the amount of gold backing it's currency ( raise the price of gold ) because it lowered the currency unit worldwide and created payment imbalances. Today, no nation/currency is on a gold standard. The first country that starts will own the rest for some time.

Find me a country with many needed resources, little debt in relation to the assets and a national pride to lead? Let them price gold at many thousands not only in their currency but also in their resources! The world would buy from them, cheaply in gold but dearly in all other unbacked currencies. The markets would do the rest!

The large modern currencies, of today have only debt ridden economies to back them. They cannot change as debt blocks their path. "To change is to live and to live, some debts must die". The owners of much of this debt must lose if change is to occur. Even the new EURO will not be backed by gold! It will HOLD gold only as insurance against the worst outcome, war.

Yes, an oil state comes to mind! It could even be China!

I think, China was buying a great deal of gold and gold commitments ( paper gold ) thru a HK trader. They became much of the "not enough physical gold " problem for the oil/gold trade. China dumped much of this paper and continued to take in gold even today. Japan is a story of "no happy ending" as they are seen as "not aligned with Europe" or the BIS way of things. The EURO may send Japan down with the USA dollar! Asia will be lead by China, as they do understand a "Euro world". The ECB does know that "all holes in earth, lead to china"!

They brought the Chinese onto their side by neutralizing the rest of the Asian competition. China hates Japan and would like nothing better than to watch them die as they stick with the US and the dollar. China also picked up huge gold holdings these last few years with the help of the BIS. They will easily fit into the Euro world and enjoy a massive trading block with Europe!

Sir, I feel he is correct in this thought. Europe does grasp for a relationship with Asia as the US did have with the Japan. It would build a mighty economy on a foundation of oil and gold as backing for new money. As China and Arabia was once a part of the Europe economy, in a small way. They may now return with no fear of Russia. Britain? A lost nation. Japan? This one is "of the American Economy" and is to live and die by it! They will seek your Alaska oil before loss of face with gold. A dead Yen be a dead Japan.

Mr. Powell, In China, persons own gold for reasons that reach far from the past. They see the price of gold, in dollar and Yaun terms, not as gold value rising or falling but as these currencies rising or falling. As such, gold is viewed as "the stable wealth" and currencies as the "changing asset value"! Not unlike the Dow Jones stocks, always moving, so it is of the paper currencies of today. . Much is written of how gold does not come to China, as it is "expensive" and "citizens have no money to buy"! I say, they have money, just not your paper money, as they were taking in gold from before the birth of currency and will do so till the end of time! In that country, China, where gold was purchased in great quantities, from before the existence of America, this will not change if the Yuan is devalued.

What will change is the currency China uses in world trade. They have yet to "secure" the Euro against their US dollars held in Hong Kong. They will make this trade for the benefit of their "old trading partners" that ended with the "Orient Express"! If traders sell gold as the Yuan is devalued, I think that gold will ride this train route to Berlin, Yes?

Poland and China are good customers for the BIS. This is real physical gold they are taking out of circulation, not the pay me back when you have a chance lease deals. They really do have the IMF/Dollar countries over the barrel. Under these conditions it's easy for them to drain the Canadian gold reserves. Soon, these goldless countries will be left with nothing but high yield US dollar treasury notes. Later, when new issues of this paper is yielding 15%-20% these Central Banks will wish for the day when they held an assetthat offered no return! Gold!

The world currency crisis is heading for resolution. I think most of the reallocation of reserve assets is complete. Now the war can commence. The Dollar NEEDS a lower gold price to keep it up. London tried to use the Russian gold story as an excuse to send it down. My understanding is that whatever collateral was freed up from the USSR , the BIS picked up for others. It left the brokers selling leases for almost nothing or 1/2% or so. No one was buying them so the rate just fell on no volume. This was a lucky move for them as the perception was that massive sales were taking place. I don't think the BIS wants to be seen as a currency destroyer so they are doing the buying quietly.

As Martijn said, "the plot thickens..” Let's dig further, this is getting interesting... In 2001, FOA mentioned 'Big Trader' in this post...

Japan is a different problem. They have been locked into the US dollar economy for so long that they cannot escape. There is simply no way that China will let them into the Euro house. The HK / China central bank system, also known as Big Trader, simply wields too much economic sway between Asia and Europe. In historical precedent, the orient express always headed to Europe and never saw "The Japans".

Actually, Japan doesn't want to go there and has risked a decade of time waiting for some economic change in the US. I have said from way back, that Japan will go down with our (US) inflationary tide. They will waste away their dollar assets following our lead. Those that think that these peoples want to be part of a third world currency block do not know them. I do,,,, but that is another story.

With this in mind, let us jump back to 1997 and peek at a few times Another mentioned 'Big Trader'...

When everyone that has exchanged gold for paper finds out it's real price, in oil terms they will try to get it back. The great scramble that "Big Trader" understood may be very, very close.

Now my friends you know where we are at and with a little thought , where we are going.

If real physical gold trading dries up it's price will rise forcing down the value of oil. All this year physical gold volume kept drying up as paper short volume exploded. But,each time before a squeeze started to run the price the CBs would sell thru LBMA . You see, when paper trading ( of anything ) volume dries up it's a bearish sign but when real physical gold volume drops it's bullish! Thats because gold is being cornered on a scale never seen in history. LBMA is doing it's best to show real volume exists! The problem is, "if the CBs don't expand their roll as "primary suppliers" LBMA will implode and in the process create the greatest bull market in oil and gold the world has ever seen. That is why some "Big Traders" are holding ONLY gold as events unfold. Interesting, don't you think?

A big change in the gold market actually started last spring. You couldn't tell by the charts or news stories but it had the CB trading rooms going nuts. Up untill then they were using 3rd party transactions to sell, then the boomshell hit that the Merchant Banks were doing deals for 10 to 20 times what was offered! Well "boys will be boys" and someone is now stuck, big time! That's why "Big Trader" and his bunch closed out all paper and pulled in bullion. Don't worry about the CBs selling everything, the market is huge compared TO WHAT THEY HAVE! And Comex is nothing, if "only a silly game". Worldwide trading in gold could be cut in half and still equal all the metal in existance!

Well a funny thing happened right after the Gulf war ended. What looked like big money before turned out to be little money as some HK people, I'll call them "Big Trader" for short, moved in and started buying all the notes and physical the market offered. The rub was that they only bought low, and lower and cheaper. They never ran the price and they never ran out of money. Seeing this, some people ( middle east ) started to exchange their existing paper gold for the real stuff.

One more thing, Big trader left HK some time ago and is now in a waiting game.

Big Trader is ( was ) from HK and is in the business.

Date: Sun Nov 09 1997 21:58
Shek ( home ) ID#287279:
Another, 6-7 months ago, a poster ( BigTrader ) made similar predictions to yours. He even gave timeframes. His final and boldest prediction coincided with a big drop in gold prices. BigTrader vanished from this site.

Shek,
Big Trader has vanished from view, but he and his gold still exist.

The great mistake by the BIS was in underestimating the Asians. Some big traders said they would buy it all below $365+/- and they did. That's what forced LBMA to go on a spree of paper selling! Now, it's a mess.

At some point the fire in Asia will drive all of them into gold. It will end at that time.

ALL: I do not offer to prove my thoughts. If what is written was easy for all to find, the information would be of no use to you.

"Today, the paper gold market only affects the physical as the price is pushed down! It is the physical market that destroys the paper gold as price rises. In a falling market, paper can be settled in physical gold or cash! In a limit up market, paper can only be settled in more paper or cash!"

It is of this knowledge that wealthy ones and some CBs are taking in physical gold.

Look to LBMA, for currency looking for gold! Compare the Comex average open interest with it's average daily trading volume. Now use average daily trading volume at LBMA and convert to open interest in London, using comex ratio. Here you will find "real currency" in "paid for" gold derivatives ( not futures ) ! This money is now looking to convert to physical! It is caught in this paper with no way out! Know that this amount covers not CB gold moved by big trader! That wealth is safe, as it is for the good of all in those countries!

On a closing note, I will point out that nothing at all happens in China without the blessing of the Communist Party elite. It is truly a two-tiered society in China. There are the people, and then there are the Communist Party insiders. These insiders live extremely well. And they use the Communist system for personal gain in any and every aspect of life. So if the "official" gold held by the BOC belongs to the people of the People's Republic of China, rest assured that the actual decision makers have also set some "unofficial" gold aside for themselves.

Sincerely,
FOFOA

Countdown to the G20

This is the top headline on Drudge right now, and it was the same last night when I went to bed. So the link is likely getting millions of visits:


Pat Fields on the Honestmoneyreport forum posted this notice regarding the above article earlier this morning. It is very interesting, though not terribly surprising.

Bias Times UK

Hi Folks,

It appears that the Times Online of the UK has an Orwellian Newspeak opinion editor hard at work to filter out public commentary on its articles when drawing too much attention to the basic problem of world finance, as having its real basis in paper money.

Over the past three hours, in response to 'Brown snubbed over tax - Germans wreck ‘global new deal’: http://www.timesonline.co.uk/tol/news/politics/G20/article5993184.ece I posted two separate mentions, suggesting that the world's governments should consider abandoning paper money in deference to Honest Money. While some 10 additional notes were added, neither of mine made the llist. Only those nebulously offering purely pro or con opinion on the political ramifications are shown.

Try your own attempt ... let's see what happens.

Pat

Pat's observation aside, this article is interesting in that it speaks to the widening gap between the dollar faction (Barack Obama and Gordon Brown) and the Euro faction (Germany, France, Spain, etc...).

The assault by European Union leaders also represents a defeat for President Barack Obama, who is desperate for other big economies to copy his $800 billion stimulus plan.

The US and UK who already have visible smoke pouring out of the proverbial printing presses they are running at a clip, desperately want the Eurozone to join in this orgy. But the Euro is resisting.

UK officials have not given up on the idea there could be agreement on a fresh boost for the world economy later in the year. “It is likely that there will be another heads of government meeting probably in Asia in the autumn,” said an official.

Fresh boost! Autumn is a long ways away.

There are growing fears that protests at the summit venue, the ExCeL centre in London’s Docklands could be marred by violence. Scotland Yard will be deploying specialist officers trained to use 50,000-volt Taser stun guns.

EconomicRot has some protest videos up. G20 Protests

Funny thing about the protesters. They want socialism. This isn't people like Pat Fields protesting. This is hard core socialists. And what they don't understand is that they are protesting against the greatest socialist shift of all time. Whether it's massive stimulus or massive printing (same thing really), it will lead to a massive socialist world-state and a redistribution of wealth from the savers to the spenders. But the banking sector's big salaries have drawn such ire that everyone is protesting simply to protest. It's quite funny if you think about it.

Did you see the sign, "How to keep warm at the protests... burn the bankers"? That really says it all. That is what these protests are really about.

Paper is already burning. Why not throw the bankers in too? Brown and Obama want to fight fire with fire, to keep the fire burning by throwing more fuel on it. The protesters think the bankers themselves will suffice.

Here are some comments that DID make it onto the article:

We in the US are fairly new at being socialist. Forgive us of our stumbles as we attempt to throw ourselves into the abyss that enslaves most of Europe. With Barrack at the helm, we too shall soon be totally reliant upon our government for happiness.

Erik, Miami, USA

Who are the countries who are most responsible for this mess. The US and the UK and their investment banks etc.
Why should the rest of the world go further in debt to solve problems caused by these two countries? They are the ones who benefited most by the excesses that led to this problem.

Tim, Toronto

Brown and the G20 leaders have missed the point. The G20 summit must focus on delinking economic growth from increased energy use. This in itself will give the economy a massive boost and take us out of the CO2 trajectory that will spell disaster for millions.

More of the same is no solution

Peter, London

Here are some headline samples from Mikal on USAGold:

New reserve currency idea needs work-German minister
Reuters - 03/29/2009

Obama Will Face a Defiant World on Foreign Visit
NY Times - 03/28/2009

Now the Long Run Looks Riskier, Too
NY Times - 03/29/2009

No Time For T-Bonds
Forbes - 03/28/2009

Optimism about U.S. banks might be misplaced
Reuters - 03/28/2009

Goldman Bailed Out 2 Executives
NY Times - 03/28/2009

Inflation looms over deflation risk
Financial Times - Chancellor - 03/29/2009

Stay tuned. This could be an interesting week.

FOFOA

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Addendum A:

I just saw this interview on the weekend edition of Glenn Beck. You probably saw my post on Wednesday of Daniel Hannan.
The devalued Prime Minister of a devalued Government

I found that video on Drudge, and at the time it had about 150,000 views. It now has 1.6 million views, not counting those people that saw the abbreviated version on TV. Anyway, going viral got this guy on the Glenn Beck show. Here it is...

Some thoughts from FOA

Below are some thoughts from FOA in 2001.

With the G20 coming up and with all the talk of a "new world reserve currency", perhaps these thoughts are worth reviewing once again. The big players in this game are still basically the same. And so are the fundamentals... Gold! So I offer these few select thoughts at face value. As always, do your own due diligence and seek out your own understanding for peace of mind.

From FOA on The Gold Trail:

_______________________________________________________

Just as Koan (a USAGOLD poster) long ago expressed bewilderment at how gold moved as fast or faster than silver and most gold stocks after the WA, the coming true break in the system will make that percentage comparison to paper look like nothing at all. Investors that do not believe this should rejoice for the experience, it will be a chance to see something few ever get to see (smile)...

We must not confuse a currency's "total demise" or "falling out of use" with a "loss of identity". In our time there have been few major moneys that went away. Today, we have a whole world of national fiats "in use" and "not demised" that still carry their nations identity. They lose value at an incredible rate, are mismanaged to the highest degree, are laughed at and despised. But, still they are "in use" as they function for their governments and economies. Usually, they function along side whatever major reserve currency is in vogue...

NO, "this country will not turn over and simply give in" as you state. But, we will give up on our currency! Come now, let's take reason in grasp. Our American society's worth is not it's currency system. Around the world and over decades other fine people states have adopted dollars as their second money, only to see their society and economy improve. Even though we see only their failing first tier money. What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over valued dollar that we spent without the pain of work...

Debt is designed for default as fiats are for debasement.

--- My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)

At $30,000 POG the US [dollar?] as we know it will be no more, agreed?

-----Agreed, but still in use. Just like all those Pesos around the world! But remember, at the very least, the first $10,000 of that figure would represent the current purchasing power of the dollar today. We will most likely get there long before price inflation jumps way up. Once the current dollar gold market fails and gives way to a free physical price, we will see that figure even as our economic function drives all other hard money metals into the toilet. I'm talking about .50 cent silver. while gold races past it's first grand. When we see it we will understand it.-----------

What advantage would it be to the Power Elite to destroy the dollar.

-------- Wrong context. What advantage does the Power Elite gain by expending assets to save an already failed currency. Better to do what major players have done for centuries and are doing now, buy gold and evolve your power base to use the next reserve.-----------

Your (Randy's) words:

--------China is simply lagging by one Century in performing this act. Many of the other nations of the world unleashed their silver reserves near the arrival of the 1900's when the usage of silver was abandoned as redundant within the banking sector. And in contrast, not surprisingly, global gold reserves have GROWN since those days. Further, the dollar can be expected to suffer a worse fate than silver when it, too, loses its particular reserve and settlement role within the international banking system. And gold? All reasonable signs show that it shall maintain the king position as THE reserve asset par excellence for a long time to come. Get you some. ------------------

Following your chain of thought about China silver,,,, I noticed a comment from Bush that we would fight them over Taiwan. Then silver gets hit real good (the day the comment was made). Could it be they are unloading silver so as to buy Euros and gold prior to calling it splits with us? They do have more silver than their needs require (possibly more than all of us require).

If they are, indeed, going to run with the Euro later and the ECB is marking gold (not silver) as their main "wealth reserve", then it makes sense for China to position themselves this way. It also makes sense because as an addition, Hong Kong has so many dollar reserves they, too, could never unload them. Following the Euro system lead, they could afford to let their dollar reserves burn as long as they had even 15% of that value in gold prior to full "Euro roll-in"...

The big difference today (from the HUNT problem then) will be in the nature of this default. His was brought on by private investors buying a commodity. Today, gold market default and failure will be forced upon the dollar gold world by a sudden lack of "price setting" credibility. And that loss of credibility will stem from the stressed conversion of dollar contracts into Euro denominated units that demand "market based performance" (physical priced valuations) or an escalated (higher) Euro based cash settlement. This all will manifest in a lack of credibility in paper dollar gold trading that can no longer be marked to the market at the same value of physical gold.

This failure of price matching,,,,, this failure of contract conversion into metal,,,,,, this failure in the world gold market to any longer be able to correctly price real bullion,,,,,, will lead to a wholesale dumping of all dollar contracts that have US based performance,,,,,,and start a fall away of all dealings based on present protocols dollar market gold exchange.

As a side note: This will not apply to the paper silver markets as silver will not have the Euro vs. Dollar political struggle. A struggle where the ECB members are trying to loosen their main asset (gold) as a reserve wealth backing to replace the massive loss of dollar reserves. Remember, further back on the trail we covered how these reserve dollars will be simply cast down. In this light, silver trading will bear the brunt of selling in an effort to balance loses from a gold exchange that no longer works. Because silver has no hope of an official free market, it's paper pricing system may run amuck until it's price plunges to ??? This is the reason so many countries that are contemplating a switch from dollar to Euro use are selling physical silver and buying gold (China, India, etc). It also explains to movement of gold between countries that planned outright Euro conversion....

Suddenly the tide has turned and the ECB is seen as ahead of the curve while still in a non inflationary management position; relative to the dollar. Going forward everything the fed does will be seen as stoking US price inflation. Perhaps this is the reason Another said that Mr. D, of the ECB, can and is about to leave. His hard job is done! Only to see Mr G, of the Fed, beating a hasty retreat! Truly, no one wants to reside over the transfer of our US horde of political gold as prices soar,,,, both of gold and all local goods!

Even further:

This not only has "everything to do with a gold bull market", it has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, everyone that is positioned in physical gold will carry this storm in fantastic shape. This is because the ECB has no intentions of backing their currency with gold and every intention of using gold as a "free trading" financial reserve. None of the other metals will play a part in this.

Clearly, the coming drastic constriction in dollar financial trade will trigger a super "print press" response from the Fed. They will not be pushing on a string; rather picking up the ball of twine and throwing it! All the while using the old 1980s "monetary control act" that opens their use of monetizing almost anything and everything. They won't be adding reserves to the banking system in the future; rather buying any and all debts from anyone that needs fresh cash. Believe it!

For the first time,,,,,,,, our industrial production, along with the demand for industrial metals like silver, will fall away even as hyper inflation in prices takes hold.

For the first time,,,,,,,, demonstrating that no other asset is equal to gold, even though promoted to be!

When the coming paper illusion price of gold is destroyed, sending its trading price way up and way down, several times, before shutdown,,,,,,,,,,,,,, the thinner paper markets of lesser metals will be absolutely devastated. Yes we will see $50.00 silver in our time,,,,,, $50.00 for a hundred ounce bar,,,,, that is! No less a relative price decline for the other metals is in store. Even if these actual dollar numbers prove incorrect,,,,,, relative inflation adjusted prices will show the exact same ratios to gold. The gain will truly be in gold!

Gold,,,,,, a wealth for changing times,,,,, a wealth as new as it is old!

thanks
TrailGuide

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FOFOA: I do not wish to pick a fight with silver. On a weight basis, I personally own more than a pound of silver for every ounce of gold. But I will confess that I stopped purchasing silver quite a while ago. The way I look at it, go with the guaranteed winner.

The above quoted thoughts are considered taboo on most hard money websites, and they are rarely discussed. This leaves many newcomers with the impression that they do not exist. So I offer them to you as only an independent blog that doesn't rely on popularity or ad revenue can. Not as gospel, but simply as another piece to the puzzle.

Perhaps in the paper market game, silver will see some wild fluctuations soon that will reward the bulls with paper profits. I hope so. And perhaps silver will play an important role in a future (temporary) barter economy. But in the end game, I tend to agree with FOA. Silver may well be "the poor man's gold". But just think about that statement.

Sincerely,
FOFOA

Disclaimer: The above is presented for educational and/or entertainment purposes only. Under no circumstances should it be mistaken for professional investment advice, nor is it at all intended to be taken as such. The commentary and other contents simply reflect the opinion of the author alone on the current and future status of the markets and various economies. It is subject to error and change without notice. The presence of a link to a website does not indicate approval or endorsement of that web site or any services, products, or opinions that may be offered by them.

The devalued Prime Minister of a devalued Government

The wave is rising.

Daniel Hannan, MEP for South East England, gives a speech during Gordon Brown´s visit to the European Parliament on 24th March, 2009.

All Paper is STILL a short position on gold

Think about this great business idea for a minute. Let's borrow some surplus stuff and sell it for whatever we can get. We'll buy a futures contract to get it back at some certain future date, so we're covered. Meanwhile, we'll earn an interest spread plus commissions. While we're at it, let's sell puts and calls against the stuff even if we don't have it on hand. Our mathematical models will guarantee that our position is always neutral, and we'll clean up on commissions, interest and other fees on the options too.

The foregoing approximates the rationale of the present day, little-known gold derivatives pyramid. John Exter, a famous gold analyst almost two generations ago, was the first to suggest that gold related to paper assets in the form of a pyramid. He described the relationship of gold to paper assets as an inverse pyramid balanced on trust. Currency at one time was a gold derivative. Government issue was backed by physical gold held by central banks. Because currency was a claim on gold, it was in effect a short position against a physical asset that was relatively easy to calculate. Governments hated the idea because they could never seem to stop issuing new paper. Even the pretense of a link has been long abandoned. Since currencies no longer have gold backing, and the world still appears to function, nouveau central bankers assert that gold is superfluous.

The gold derivatives pyramid is a vigorous free market creature. It cannot be put down with a simple declaration that the paper is no longer redeemable in gold, as governments did with currency. It is a short selling scheme that has become a trap from which few short sellers will escape. Paper claims in the form of derivatives far exceed the underlying physical metal on which they are based. The trust, which balances this new pyramid, is based on false assumptions and lack of information. Paper gold claims have proliferated at a pace rivaling any government printing press. A surfeit of paper gold has driven down the price of the physical on which it is based.

The above was written by John Hathaway in 1999. Here is John Exter's inverse pyramid:

Click on images for a larger view

Today I read an article titled "Hyperinflation is Impossible: Part 1" by Matt Stiles. It articulates the position of the deflationists well and it makes some powerful arguments in this regard. The most powerful argument is quoted in this article. It is:

It is often said that we live with a "fiat currency" or with "paper money." This is not entirely accurate. A very small portion of our total supply of money and credit is in the form of physical currency. It depends on how you count it, but regardless, it is under 10% of the total. This is what differentiates our monetary system with that of Zimbabwe or Weimar Germany circa 1920's. Their economies were based on nearly 100% physical currency because nobody would accept the promises of government in order to issue credit.

The vast majority of our money supply is in the form of electronic credit. Electronic credit can be destroyed, while physical notes issued by a central bank cannot. This is why deflation is possible in a credit based monetary system, but not in a paper based monetary system.

This is an argument that seems very convincing on first glance. So I decided to make a few comments on Stiles full article. Here they are:

Hyperinflation is Impossible: Part 1
by Matt Stiles

The government and Fed only control a small portion of the total supply of money and credit

I get a lot of emails and questions from readers and friends about whether I think the U.S. Dollar could collapse and start a bout of terrible hyperinflation. The questions are usually stemmed from watching an interview on TV with extremely biased energy/gold analysts. People who have every reason to sell you on hyperinflationary doom in order to make themselves a quick buck. I have no respect for these people, so I will not publish their names. They know who they are. I call them the "opportunistic hyperinflationists."

FOFOA: With the people he says he greatly respects in the next paragraph, I'm not sure who he is referring to here. Are Jim Sinclair and John Williams out to make a quick buck? Perhaps he is talking about Jim Willie who charges for a newsletter, but also writes many public articles as well. Chris Laird? Same story. Even some of the deflationist newsletter writers like The Privateer are now talking about a hyperinflationary collapse. So I'm not really sure who it is that he disrespects so much that he won't name. Maybe it's Glenn Beck.

But there is another group of "inflationists" who I do respect greatly. Guys like Peter Schiff, Jim Rogers, Doug Casey and Jim Puplava. These guys have spent years, if not decades, railing against the growing debt bubble and warning that it would end badly. A large faction of the Austrian School of Economics (of which I consider myself a student) had been doing the same. They are the "ideological hyperinflationists."

However, this group of economists/pundits/analysts have been terribly wrong in predicting how this debt bubble would unfold. And I am certain that they will continue to be wrong as it continues and reaches its ultimate conclusion. Typically, these folks have a fundamental dislike of our current system of currency. They feel it is immoral, illegal by the U.S. constitution and is doomed to failure as all paper currencies have been since the beginning of civilization. I agree with them on all counts. But as a function of their dislike for paper money, they have been enchanted by its most obvious replacement: gold. They carry it around with them and flash it at interviews. They become walking salesmen for the return to a gold standard. And they point to a rising price of gold as proof that they have been right all along.

They haven't and aren't.

FOFOA: Matt, in this section I think you expose your anti-gold bias, and you also draw into question your statement that you are a student of the Austrian School. I realize from later statements you make that you are paying attention to the psychology of the markets instead of just the math (which is an Austrian tenet), but that may be where your Austrian similarities end. Let's see.

Their arguments are usually the same. That in order for the massive amounts of debt to be repaid, the Federal Reserve and other central banks are going to have to resort to monetizing that debt via the "printing press." Their claims are well documented. Even the chairman of the Federal Reserve has promised to do this, should it prove necessary, earning him the nickname "Helicopter Ben" (after promising to drop money from helicopters to prevent deflation). And it appears he has already started. We can see it in their own figures. By now, I'm sure all of my readers are familiar with the Monetary Base "Hockey Stick" graph below that shows how the Fed has essentially doubled the monetary base in just a few short months. This, claim the inflationists, is visual evidence that hyperinflation is already occurring and will inevitably start showing up in everyday prices:


Another common claim by these folks is that inflation is running at far higher levels than what is reported by the very flawed CPI measurement. For proof of this claim, they'll point to John Williams' "Shadowstats" counting of inflation in charts like the one below. It shows that if we only counted inflation like we did pre-Clinton Administration, inflation would be much higher than we're told.


In this article, I will explain why these arguments are wrong.

Money and credit

First and foremost is the apparent misunderstanding of the differences between money and credit. At times, they may appear to have the same characteristics. At other times they act completely opposite from one another. As an economy is expanding, an increase in the total amount of credit would appear to have the same effect as an increase in physical dollars because credit is widely accepted as an equal to money. In a sense, they are the same. They are both "fiduciary media" (in english they are both a representation of something else, rather than having intrinsic value themselves). But when the economy is contracting, the prospect of default is thrown into the equation. When this happens, money increases in value relative to credit. Money is more valuable than credit because in the event of default, the physical dollar holders are king. Yes, the U.S. treasury could default on it's obligations. Holders of treasury bonds would get a big, fat zero, while holders of physical currency would still have a claim. In effect, they act similar to a preferred share as opposed to common stock. They are a step above in terms of priority.

FOFOA: You make a very good point in this paragraph. Physical currency (M0) is farther down on the inverse pyramid than the higher M's, and certainly farther down than debt like TBills. And during an asset deflation, capital flows down the pyramid. In deflation "Cash is King", a point I made in On "Hyperinflation". But the question is what is really the "cash" that statement is referring to? What is really the bottom of that inverse pyramid that capital is striving for? Is it government paper? Or is it still the old foundation, gold?

It is often said that we live with a "fiat currency" or with "paper money." This is not entirely accurate. A very small portion of our total supply of money and credit is in the form of physical currency. It depends on how you count it, but regardless, it is under 10% of the total. This is what differentiates our monetary system with that of Zimbabwe or Weimar Germany circa 1920's. Their economies were based on nearly 100% physical currency because nobody would accept the promises of government in order to issue credit.

The vast majority of our money supply is in the form of electronic credit. Electronic credit can be destroyed, while physical notes issued by a central bank cannot. This is why deflation is possible in a credit based monetary system, but not in a paper based monetary system.

FOFOA: The differentiation you are making here needs to go even further. Yes, electronic money credits can be spent just the same as paper money. But the actual electronic money credits that can be spent, cannot be destroyed, unless a bank fails and actual M1 deposits are not replaced by the government (FDIC). The only credit which is destroyed is money that has been stored in assets (asset deflation) and the ability of people to draw money into the present from their future productivity (credit cards, financing, etc...). The destruction of those do not reduce the money supply. They create "asset deflation", but not monetary deflation more commonly known as "price deflation".

So yes, we have more electronic money, and less actual paper money in circulation than either Zimbabwe or Weimar Germany. But that electronic money, especially if it is backed by the government through the FDIC, is just as hyperinflationary as the paper in Zimbabwe. In fact, it may be even more so, as it can be created cheaper, faster, and easier than physical printing. (See my last post, New Stimulus Plan).

There are hundreds of trillions of dollars floating around the world in credit. Much of that is an insurance contract on top of another insurance contract, on top of a securitized mortgage, on top of an asset. The total value of all the aggregate claims on the asset vastly outnumber the value of the asset itself. That is what this crisis is about at its very heart. Picture an inverse pyramid with assets occupying the bottom bit, securitized mortgages in the middle, and credit derivatives at the top. A stable economy would have a right-side-up pyramid with assets occupying the bottom, etc.

FOFOA: Here, let me help you out with this picture. During a credit expansion like we have had for the last 27 years or so, capital flows UP the inverse pyramid. And as the private sector leverages up and creates credit money in many multiples of real money, it creates new products to buy. New places to store this "wealth". John Exter created his inverse pyramid in the 1970's, so let's add some new, monstrous levels for the 21st century. The arrows show how capital flows during a credit expansion:

Our problem now, is not that the assets are going to go to zero. It's the value of the much larger derivatives and mortgages that back the assets going to zero. Their values were derived from faulty computer models that grossly underestimated risk in the underlying asset, but more importantly in the ability for a counterparty to make good on their promise in the event of a default. The counterparties, like AIG or Citi, issued 30 or 40 times more in insurance than there were in assets to back them up. Their models told them that the possibility of all the different assets declining at the same time was negligible, therefore justifying such enormous leverage. Now that the assets have fallen by at least 20-30%, the holders of the securities that were tied to them want to be paid for their insurance. Only there's nothing to pay them with. So the people that hold these contracts are trying to get rid of them as fast as they can, and for whatever price, because they fear that if the counterparty goes belly-up, they'll get nothing. If they can sell, they take the loss. If not, they keep the asset off their balance sheet in what's known as a SIV (Special Investment Vehicle) until they can be sold. While they are kept off the balance sheet, they are still considered to be worth 100% of their original value.

FOFOA: Here, let me help you with this one too. Again, it is the flow of real capital that we need to look at. And which direction is it flowing now?


That's right, it's flowing down the inverse pyramid as those upper levels shrivel and dry up. There is much loss of perceived value in this downward flow. In fact, that's what's causing it. But as we bail out entities like AIG so they can pay off the winning tickets held by Goldman Sachs and others, we are feeding more good money into this downward cascade. What should have been a loss of perceived wealth is actually being converted into REAL, SPENDABLE wealth at the taxpayer's expense. "Whew!", says Goldman Sachs as he collects on his winning ticket. Do you think that fresh digital money he just collected is going to go back UP the inverse pyramid? Not a chance! It will go down to safety along with everything else.

The total amount of these assets is far greater than the equity banks have and their sum represents future losses that eventually need to be realized. No, the value of these assets is not completely nil - because the value of the underlying assets are not nil. But for all intents and purposes, it might as well be zero because it dwarfs their tangible equity.

FOFOA: In the inverse pyramid, each level you go up is essentially a derivative of the lower levels. And during expansionary times those derivatives yield a little more than the lower levels. That is why capital climbs during the good times. But when PRINCIPLE is destroyed, this dwarfs the meager benefits of a yield and the capital scurries down the ladder to safety.

That was a very long-winded explanation of what the difference is between "money" and "credit" but it is essential to understand this difference. Not only if you want to be an econo-weenie like myself, but in order to understand the very essence of our economy, banking or investing. Any other information is essentially useless unless you can wrap your mind around this concept.

FOFOA: Got it! Thanks. But wasn't that more of a long-winded explanation of the difference between "money" and "assets" (or let's say between "wealth" and "perceived wealth")? Credit is essentially the ability to pull future capital into the present. Digital money credits are different, they are actually money, just like printed paper money. And wealth held in shitty assets is neither credit nor money. Right? It is simply an asset, or a derivative of an asset that gives you the perception of holding wealth, until "all that paper starts to burn".

So the next time you hear that the Federal Reserve is "printing money," please do not automatically assume that they are printing physical notes. They are creating electronic reserves (credit) to support the balance sheets of the big banks. There is absolutely nothing inflationary about this. The banks are simply taking it and using it to cancel out their derivative losses or are hoarding it in order to prepare for future losses. Previously, banks would have used the electronic reserves to go out and make 10x that amount in loans to consumers or businesses (in reality the order was the other way around - loans first, then reserves). That is not the case anymore, and until the bad assets are completely liquidated, it will not be the case again.

FOFOA: With all due respect, I think you are wrong here. If the Fed "prints" electronic reserves (credits) it is absolutely as inflationary as printing physical notes. These "electronic credits" are being used to "make whole" some investments that went bad because of counterparty failure. And when someone's misfortune is reversed, when they are made whole, they now have real spendable currency. And with that currency they are able to pay their people. And those people (that may have otherwise been out of a job) can now go spend their bonuses on whatever they want. It is not credit at that point, it is spendable money they wouldn't have had if the Fed had not created "electronic credits".

Thus far, we have a total of $9.7 Trillion dollars in total government/central bank assistance in the United States. An amount equal to that and more has been provided by their counterparts around the world. More is promised. But the fact remains that the minimal inflationary impact these actions have are negligible in comparison to the amount of "problem assets" being devalued around the world. Much of it is just in guarantees - that is, more insurance. The Federal Reserve will offer to swap good assets for bad. All this does is cancel out debt from somewhere else. It's like moving money from one pocket to another. The act of putting money in your right pocket does not make you any richer.

FOFOA: No, it is making a bad investment that should have been a total loss whole again. In fact, it is turning an "asset" into "money", which the free market already ruled should be a loss. Those top levels of the inverse pyramid are already dead. And you will notice that the lower levels of the pyramid are much smaller. So it will only take a small portion of the capital from higher up being made whole and flowing down to overwhelm the bottom of the pyramid. We are already seeing this in the Treasury bubble and the US dollar bubble. But you've got to ask yourself, are those really the final destination of this downflow?

Zimbabwe and Weimar Germany never had those higher levels of the pyramid. They never had the credit system to create them. But as those levels collapse here they offset all that credit that made them possible, and the downflow of remaining capital here in America will be like Niagara Falls trying to fill a plastic kiddie pool.

All in all, the central banks are not nearly as powerful as they'd have you believe. The amount of the total money supply that is controlled by them is minimal. They won't tell you that. They'd prefer you to think that just by them moving their lips they can affect the entire economy's decision making processes. It simply ain't so.

FOFOA: This is a true statement, but not for the reasons you think and not to the ends you expect. See my posts on Freegold.

This begs the question: why is gold going up? Who knows. It has a mind of it's own. But if it really only moved due to inflation concerns, it wouldn't have declined 75% over two inflationary decades (80's, 90's) would it? If inflationary concerns were real, we would see TIP yields rising along with the gold price. They're not. We'd also be seeing other typical inflation hedges rising - like property prices. That is obviously not the case. A better explanation is that gold is rising because of increased instability. People want to own a little bit "just in case." As they should. But an even better explanation is that it is going up because it is going up. Pure speculation.

FOFOA: Matt, you must be talking about "paper gold". It is true that the prices you follow are heavily driven by speculators in the paper markets for gold. But what you are missing is that real physical gold is not an inflation hedge, it is simply a wealth reserve. And it is a wealth reserve that will survive and prosper even through the nuclear annihilation of paper assets. It is a hedge against the collapse of the system. This, and the official control of the gold price as presented by GATA, are the reasons the price of gold stagnated through the 80's and 90's. But that era is over now. We are entering a new era.

But I do understand why you think the way you do. You are 26, right? Born in 1982? You see, ever since 1971 the establishment has convinced you and almost everyone else that they successfully moved the very foundation of the inverse pyramid and placed it up amongst the investments categories:


But ask yourself this. Did they actually move it? Or did they just create the illusion that they moved it? As John Hathaway said at the top of this post, "The gold derivatives pyramid is a vigorous free market creature. It cannot be put down with a simple declaration that the paper is no longer redeemable in gold, as governments did with currency. It is a short selling scheme that has become a trap from which few short sellers will escape."

All Paper is STILL a short position on gold!

No matter how much credit is issued, it cannot make up for the massive contraction elsewhere. The net result will be deflation - even though it will be less than it would be without any interventions. Japan has discovered this over the last two decades - and they had huge demand for their exports, whereas the current situation is global. America discovered this in the 30's - and they had a far smaller debt burden than now. We will discover the same.

FOFOA: No, the net result will be ASSET deflation, not deflation. Japan had a slight net INCREASE in the CPI during the lost decade even though they had massive ASSET deflation. Asset deflation and monetary hyperinflation are completely compatible with each other, they happen at the same time, and they happen together in all cases of hyperinflation. Hyperinflation and currency collapse are basically the same thing. Hyperinflation and deflation are almost the same thing. And hyperinflation and inflation are similar in name only. Please read the Daniel Amerman articles linked at the bottom to learn about the differences between asset deflation and monetary or price deflation. You will also learn that what was discovered in the 30's was actually the opposite lesson. It was that a determined government CAN stop deflation on a freaking dime whenever it wants to. Yes, we will discover the same... very soon!

Will the U.S. Dollar collapse?

Closely tied to the belief in imminent hyperinflation and a skyrocketing gold price is the misplaced belief that the U.S. Dollar is on the brink of collapse. Essentially, they are one and the same. Many of my arguments against hyperinflation are the same against a dollar collapse. But there is even more evidence stacked against such an occurrence.

Ultimately, the Dollar will end up at zero - but that is not going to happen any time soon, and I would argue is likely decades away. Until then, the massive amounts of deleveraging will increase our appetite for dollars to pay back debt. There is too much credit in the system, and as we rid ourselves of it slowly, we need to acquire dollars. A large portion of the credit derivatives I mentioned above are denominated in dollars even though the underlying asset may be priced in another currency. This is a theoretical short position on the dollar. A "carry trade" in other words. It must be unwound, just like the Yen carry trade.

FOFOA: It is all about the flow of capital. You will notice that the dollar is at the bottom of the inverse pyramid, right above gold. So as capital flows down the dollar certainly sees a rally. But that will be short lived. You see, the dollar is not the true foundation of the pyramid and it is neither an asset nor real money. It is merely a "symbolic currency". And as such, its value can be EASILY controlled by the Fed. We saw a hint of this last week. It is not decades away, it is happening right now. Sure, it is true that we need dollars to pay off our debts. That is because it is legal tender. But we don't need to store our extra wealth in dollars. That would be silly. And foreigners don't either. That would be even more silly. And the higher levels on the pyramid have simply become too dangerous for storage of wealth right now. So there is really only one place for capital to flow to. Gold!


If everything above the dollar is a "theoretical short position on the dollar", then it is all (including the dollar) STILL a theoretical short position on gold. Think about it. Yes, this carry trade WILL be unwound!

This is what is meant when we call the U.S. Dollar the world's "reserve currency." Most people hear the word "reserve" and automatically conclude that because many other countries hold the dollar as their primary currency in their foreign exchange "reserves," that is what is meant by "reserve currency." It is not. Total foreign exchange reserves of dollars are far smaller than total foreign credit contracts denominated in U.S. Dollars (reserves worldwide are "only" ~4.6 Trillion). It is the reserve currency because it is the default currency for international trade and commerce in general. In order for that to change, 100's of trillions in contracts would need to be re-written. Not practical.

As such, demand for U.S. Dollars will persist.

FOFOA: Close, but not quite. The dollar is the reserve currency because it currently supplies the "usage demand" of the world. That is changing. As such, demand for U.S. Dollars will die down. Once necessities on the world market, like oil, are priced in something other than the dollar, no one will need to hold dollars, dollar reserves, or contracts denominated in dollars anymore. The global flight from dollars will be so fast we will likely hear a sonic boom.

Additionally, the U.S. Dollar is not alone in its state of affairs with an overindebted government and central bank getting itself in all sorts of trouble. In fact, nearly every other currency has the same issues facing it. And even though the numbers aren't quite as dire elsewhere, they are far more likely to collapse than the U.S. Dollar due to the reserve status. Fair? No. But neither is life.

FOFOA: True, all fiat currencies are in a race to the bottom. And as such, the floating exchange rate system which first appeared on this planet in 1971 is likely to be the greatest systemic threat out there. Time will tell. But one thing the dollar has that all those other currencies don't have is an Achilles heel. That heel is the fact that the dollar has been spread so far and wide being the reserve currency for decades that when it collapses, the flood of dollars coming home will make the collapse of other currencies seem like a local boom in comparison. The dollar itself was hyperinflated long ago as it was shipped off by the boatload to all of our trading partners and creditors.

In summary, there are many multiples more debt than capital in the world economy. Debt is being liquidated and will continue to do so until it reaches a sustainable level relative to capital. The process of this debt liquidation puts a higher value on dollars relative to debt, thus ensuring an oversupply of dollars is impossible.

FOFOA: So in your view, Ben Bernanke, Geithner, Obama and our fine Congress can keep printing and buying their own debt with more printing for years and years to come? And those newly created dollars will keep increasing in purchasing power the whole time? The government can build bridges, trains, museums, wind power, and all the other great projects with newly printed money and each year that money will buy more and more because it is increasing in value? All because an oversupply of dollars is impossible?

Matt, I have some reading recommendations for you as I mentioned earlier.

Here are the two articles by Daniel Amerman that will explain the difference between asset deflation and price or monetary deflation:

Puncturing Deflation Myths, Part 1

Puncturing Deflation Myths, Part 2

I also recommend that you read Another and FOA to give you a different perspective on gold, the new gold market, and the possibilities for the future of gold, Freegold.

Most sincerely,
FOFOA

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Update:

Here is a "derivative" of John Exter's pyramid found on Zero Hedge. Notably absent is the gold foundation.

New Stimulus Plan

April 19 (Bloomberg) -- Former head of Treasury's Office of Financial Stability, Neel T. Kashkari, was named today as the director of the new Department of Homeland Economic Stimulus. The 35 year old Kashkari said in his first statement to reporters that the much needed stimulus cards will be in the mail as soon as May 1.

"People will be able to spend the entire $400 billion stimulus into the economy by Memorial Day", said the giddy Kashkari, "and the lottery system will ensure that they do."

The emergency stimulus bill rushed through Congress last Tuesday included the creation of the National Stimulus Lottery System, in which specially earmarked 20 year Treasury notes will be sold to the Federal Reserve Bank in order to finance the new $1 billion dollar lottery. 1,000 lucky Americans will have $1 million credited to their new Stimulus Debit Cards as early as July 4, 2009.

In order to qualify for the lottery, one must be in the top 25% of the fastest people to spend all of their $1,500 stimulus money. Fed Chairman Ben Bernanke said in a statement Friday that this incentive should significantly improve the velocity with which this stimulus impacts the economy. He noted that last year's $600 stimulus checks were slow and in some cases invisible to the economy as people either hoarded the money or paid down their debt.

Bernanke explained that the control available through the use of debit cards instead of checks combined with the added incentive of the lottery will totally eliminate this problem.

Included in the stimulus bill was a list of restrictions to the use of the Stimulus Debit Cards. Banks will be blocked from receiving deposits or administering cash through ATM machines with the new cards. Mortgage companies and credit card companies will also be blocked from receiving payments from the cards. "The idea is that we want this money to be spent into the system, not to be hoarded, saved, or used to pay down debt. These things are simply not healthy in our consumer driven economy", said Kashkari.

Bloomberg has figured that the most enterprising recipients should be able to spend their $1,500 within 30 minutes of receiving the cards in order to qualify for the lottery. The recent deflation has brought the price of 52 inch LCD televisions down to only $1,499, which are expect to be a hot item in May.

The new Stimulus Cards will be issued to every adult over the age of 18 with a Social Security number. People without a current mailing address on file with the IRS will have to wait in line at their local post office beginning on May 10. The cards will be imprinted with the recipients name and social security number and are non-transferable.

All recipients are being told to retain the cards even after the $1,500 is spent. If another stimulus is required to jump start the economy, new cards will not be issued. Instead, the Director of Homeland Stimulus will be able to credit new money directly to the original cards. The idea has also been floating through the halls of Congress that the new Stimulus Debit Cards would be a great way to strategically inject stimulus money into very specific areas of the economy that need the money most, like the unemployed, the homeless, and the inner cities.

Critics of the program say that it opens the door to hyper-inflation. But proponents argue that countries like Zimbabwe don't even have this kind of cutting edge technology available to them. They also say that the US dollar cannot be hyper-inflated because there are simply too many of them out there in the world, it is already "too big to fail".

Reported by Karl Shedlock in Washington
Email at KShedlock3@bloomberg.net
Last Updated: April 19, 2009 10:16 EDT

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Attention: The above story is not a real news story. It is satire, and it is dated in the future. It is not meant to be a prediction, only to make a couple points and to make you think about the possibilities for hyperinflation.

In Defense of the AIG Bonuses

What most average people don't understand is that in the "Wall Street world", bonuses are different than in the "Average Joe's world". They are not ONLY for a job well done. They are a contractual part of the normal compensation. Only the SIZE of the bonus is determined by the results of the job.

For most of these guys, they are only paid a small percentage of their annual salary as regular income. This is done for the ease of bookkeeping and tax reporting. The "bonus" portion is actually more like a 1099 that an Average Joe independent contractor gets. Kind of like a plumber on a large hotel project.

The regular income for these guys is usually only around $300K to $400K per year, and the balance is paid all at once at the end of the year.

Another thing that most people don't understand is that these AIG Traders are used to getting much more. The AIG guys that got $1 Million bonuses are used to getting more like $10 Million or $20 Million bonuses. So this is a serious reduction in their income.

And the last thing is that these guys worked the desks during the toughest time in AIG's history. Over the last year, some of these guys were in the office 9 or 10 hours a day! There is no 9 to 5 on Wall Street, especially when the financial markets of the world are collapsing. They even had to come in on the weekends, especially on the weekends before each of the bailouts. They had to get all their papers photocopied and three-hole punched.

So if you find yourself wishing they would just commit some sort of Asian suicide ritual, just remember, they have mothers and fathers, sons and daughters, just like you do. And their families count on them for the money they need to go on vacation every month, just like yours do.

And lastly, remember that there are two sides to every story. There is the truth that you are told, and then there is the truth that someone else might tell you. So don't always judge a story based on only one truth. An honest day's pay for an honest day's work, right? That's what it's all about. And look how they worked. They were practically penned up like children in a Chinese sweat shop. How can you put a price on that? And how can you put a price on the humiliation they have suffered for the past six months? How about cutting these guys some slack? After all, it's not like they destroyed the world or anything.

Click to enlarge

(Photo is not actually AIG in order to protect the innocent)

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FLASHBACK (October 7)

Comments

I can see that there are many visitors to this blog, but that only a handful of people are viewing the very best parts. In my opinion, the best things that have come out of this blog are the discussions found in the comment sections. The interaction brings out some (THOUGHTS!) that go much deeper than my posts.

Over the months I have probably spent as much time and thought on these discussions as on the posts that I put up. So I would encourage people to look and maybe even participate.

Right now I am having a nice lengthy discussion with Guess here about why I think gold is the only place left where you can safely store your savings if you want to financially survive the approaching wave.

And I recently had a nice conversation with The Mad Scientist here regarding hyperinflation.

But the seminal discussion on this blog was with Ender, on the subject of FreeGold, beginning here, and carrying on to later posts. This one is a must-read for any of my fellow FreeGold spectators out there. The show is moving on to its final act. So take your seats, fasten your seatbelts, and take a deep breath, because the real action is about to begin.

Sincerely,
FOFOA

G-20 finance ministers meet

I cannot comment on this video any better than Jim Sinclair...

Jim Sinclair’s Commentary

After the advertisement, the statement of the G-20 is meaningless for an economic recovery, but does contain a commitment to hyperinflation. Whatever is required in what amount required should be done. Even Geithner looked amazed. The G-20 statement is directed to the US Treasury and Fed that WILL via swaps provide what is needed, thereby extending the FUBAR.

You think Geitner’s facial expression betrays his knowledge of what is coming at his and the Fed’s hand? Of course he knows!

There is no difference between what is being done by the US Treasury and the Fed from what the IMF and World Bank lectured all the developing nations not to do because of the hyper-inflationary implications IMPLICIT therein.

The USA is headed for the financial condition of a Banana Republic and is already if the truth was to be known. All of this is delivered to you and I by the manufacturers and distributors of OTC derivatives now at the truthful notional value number of one quadrillion, one thousand, one hundred and forty four trillion US dollars. That is cement shoes on the Western Economy.

How about that look on Tim's face??


What do you think?


Or...


Or...

Sell Your Sole, Not Your Gold

"Sell your shoes before selling your gold!"

"I would really put gold and silver at the bottom of the list of any assets to sell right now. They will be the way in which many people will go from rags to riches."

Hear me now, what the wealthy and powerful know: "real value does not have to always be stated or converted thruout time. It need only be priced once during the experience of life, that will be much more than enough!"

Sir, the world is going to change, and the rules of engagement will also change. Gold will be repriced, once! It will be enough for your time of life.

As it has always been, time moves the minds of people to change, and with this, the thoughts of value also change. In this day, as not in the past, the loss of paper value as a concept will destroy the very foundation of wealth that this economic system is built on. This drama has started and is well underway!

There are nations that will try to "resource a new currency" as the old financial system implodes. Oil or gold or both may be used. If it is done at the correct time, much will be gained by all! Fail this Attempt, and gold will never trade on an open exchange again, in our lifetime! We will see this end in our time.
-ANOTHER (THOUGHTS!)

Argentina's Economic Collapse

This is a very good film. I highly recommend it. Over decades, the resources of Argentina were stolen from its people by the corrupt government enabling the centralized ownership of capital outside of the country. In a free market, capital resources will never become so centralized because they are most efficiently and profitably used when deployed in service to their regional populace. Only with the help of a corrupt government can capital ownership become so centralized (and separated from reality) that people end up dying.

And in my opinion, the real crime is that this was all done in the name of Capitalism!

This film demonstrates to me that the debate over public versus private ownership of capital resources is far too simplistic. The debate should really be about centralized (read: globalized) versus localized ownership, be it public or private.

Capitalism in practice is the most efficient use of capital resources as directed by the free market through the invisible hand described by Adam Smith, protected but unencumbered by government. In the case of Argentina, its previous socialist state ownership of its most valuable resources was far closer to real capitalism than the private ownership by global corporations which the corrupt government enabled. This caused the highly inefficient neglect and ultimate destruction of local capital resources for the enrichment of corrupt politicians and the global conglomerates in far-away lands they assisted.

This was also enabled by the centralized monetary and debt system of the international US dollar reserve system and the International Monetary Fund.

In Argentina, this culminated in economic, monetary, and political collapse beginning in late 2001. We, the rest of the world, are at the very beginning stages of this same collapse.

This film, however, has a positive message, a message of hope. And the hope BEGINS with the collapse in 2001. I think this is the most important message we can take away from this film. That the coming collapse is failure to the criminals and corrupt politicians, and opportunity to the rest of us.

We do not need a New World Order and a single global currency. That would be centralization in the WORST way. We need all regional currencies only in competition with Freegold as a wealth reserve. Public debts which were taken on in the name of the many but only benefited the few should either be written off or else charged to the few that benefited if they can be identified. This will be the result anyway, in the case of political failure. Corrupt and misguided politicians can only keep such a flawed system going if they remain in power.

Part 1


Part 2


Part 3


Part 4


Part 5


Part 6


Part 7


Part 8


Part 9


Part 10


Part 11


Part 12

Connecting Dots

The purpose of this post is to redirect you to the comments section of my previous post, where I have been connecting some dots today. If you have spotted some dots of your own out there in dot-land, please feel free to add to the picture. The dots start on comment #6.

Thanks,
FOFOA

New Essay from Martin Armstrong

Is it the Time to Turn Out the Lights?


Martin's original typewritten essay

Edited version on Contrahour.com

That Accursed Propensity To Save

by Antal E. Fekete

“Thank Heaven for little Keynesian Nobel laureates… without them what would little Keynesian Treasury secretaries do?...”

At the long last we got the official explanation how we got into this mess. In his March 2, 2009, column in The New York Times under the banner title Revenge of the Glut Paul Krugman tells us that it is all the fault of the Asians. They save damn too much. They test the endurance of unhappy Americans’ who bankrupt themselves in trying to work off all that darned excess saving fast enough. Even though they do their best, they could not keep up with the prodigious output of the Asians and “global savings glut” is the result. It was the cause of the U.S. current account deficits in the first place; now it is causing more mischief by creating turmoil in the financial markets and in the banking system. In this scenario, the good guys are the Americans. They are heroically trying to stave off disaster through their unselfish consumption. The bad guys are the Asians, tormenting their American victims in force-feeding them with overdoses of consumer goods all the way to the bankruptcy court.

Although Krugman does not say it, the implication is all too clear: there is one especially pernicious form of saving, namely, saving in the form of gold. Keynesians, through half a century of hard work, ably assisted by their Friedmanite comrades, have developed a highly efficient system to embezzle superfluous savings in an antiseptic way. Their sophisticated contra-saving devices through currency debasement anesthetize those bastard savers so that they can be pilfered and plundered without touching a raw nerve. It is a clean job, causing a minimum of commotion.

Unfortunately, these methods do not work on those who do their vicious anti-social saving in the form of gold. These guys will have to be taken care of by other methods, such as threats of central bank gold sales, bubble-bursting and price-busting techniques in the paper gold markets, and other similar tactics. If everything else fails, the guillotine could be reactivated as an instrument of monetary policy, last used in this way during the French Revolution. At that time, if you were found in possession of undocumented gold, your head would be chopped off in summary justice.

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It is very doubtful that in the long and checkered history of science there is another episode comparable to this deliberate misuse and abuse of knowledge for the exploitation of those who do not have a full measure of it. What makes it particularly odious is that Keynesian obscurantism and anti-scientific propaganda is put in the service of a hidden agenda: to cover up the mismanagement of the economy through Keynesian precepts, the sabotaging of human cooperation under the system of division of labor, and the destruction of capital through the corruption of the monetary system.

The monetary system was developed to serve and protect society as a whole: savers as well as consumers. After all, at some point during our lives we are (or ought to be) savers, so that later, in our harvest years, we could be consumers. If it does not work in the opposite order, Mother Nature is to be blamed for that. Saving always had to precede consumption. Saving has always been primary and consumption secondary, like it or not.

But Keynesians have overthrown Mother Nature. They say that it is possible to have consumption without prior saving. Having corrupted our monetary system and having destroyed society’s capital, Keynesians have rendered people unable to fend for themselves. They treat them as they would treat livestock in the feedlot. In exchange for fattening them (in preparation for the slaughterhouse) livestock is being relieved from the need to gather feed in the summer for winter consumption. Keynesians, self-styled directors of the national economy, reserve the job of the feedlot operator to themselves. They declare savings and capital obsolete. Synthetic credit manufactured at the central bank in the service of collectivism is used as a substitute.

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Apparently it never has never occurred to Krugman that his imaginary savings glut may have something to do with the imperfections of the monetary system. Why can’t we have a monetary system that allows people to save to their hearts’ content? Why do we have to have one that sets up the Treasury and the Federal Reserve as partners in the crime of check-kiting? Maybe the idea of delegating unlimited power to these agencies was not such a good idea after all. Maybe the U.S. Constitution imposed a wise limitation on the power of government in refusing to sanction irredeemable currency. Maybe no one should have the privilege of issuing liabilities without countervailing responsibilities. Maybe our corrupt monetary system carries the seeds of self-destruction in allowing structures like the quadrillion-dollar strong derivatives tower to get conceived and to grow beyond all limits until it topples on the people of Babel. Questioning the efficacy of our monetary system in particular is taboo. All these questions are neatly side-stepped by Krugman as he trots out that old Keynesian war-horse, the theory of oversaving.

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There is just one disturbing element in Krugman’s centrally planned economy. It is the golden thorn in the Keynesian flesh. It is gold, the barbarous relic. Man’s greedy little palm is itching to touch the stuff. Visual contact in museums, churches and art galleries will not suffice. Keynesians have a job here cut out for them: they have to ‘educate’ people that wanting gold is like wanting the moon. They can’t have that; at any rate, green cheese is just as good, and the government has an efficient green cheese factory, the central bank, that can manufacture it in unlimited quantities. Those who like gold had better learn to like green cheese.

By the way, this is vintage Keynes. It is in the Bible, the green cheese factory and all, entitled The General Theory, written by the Prophet in 1936. Go look it up, and see it for yourself. It shows the endless cynicism and contempt for the intelligence of others by the author.

We are anxiously waiting to see how the pupils of the Prophet will deal with this piece of unfinished business: to cure man of auri sacra fames, “the accursed hunger for gold” (Virgil, Aeneid, III. 57.)

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Krugman ends his piece on an alarmist note. The savings glut is still out there, ready to gobble us all up. In fact, it is bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift; now that the worldwide boom which provided an outlet for all those excess savings has turned into a worldwide bust.

One way to look at the international situation right now, Krugman says, is that we’re suffering from the “global paradox of thrift”: around the world savings exceed the amount that businesses are willing to invest. And the result is a global slump that leaves everyone worse off. We are being prepared to swallow the conclusion, one that may be coming in the form of future Krugman pearls of wisdom, that we need a savior. One to save us from ourselves and our own destructive saving habits. The government is our savior. It can tax savings up to 100 percent if need be.

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It is hard to imagine a worse way of standing facts upside down upon their head. The exact opposite is true what Krugman has the cheek to suggest. The falling interest-rate regimen inspired by Keynes has destroyed capital across the board. The only way to replace or to replenish it is through saving. Krugman adds insult to injury in suggesting that there is too much saving in the world, instead of too little, with the result that businesses will stop investing. So it falls upon the government to take up the slack and start spending ourselves into prosperity. Krugman’s is a recipe for the ruination of what is left of the world economy. The trouble is that he and his cohorts at the Treasury and the Federal Reserve have all the means of coercion at their disposal to finish off the job. They control the monetary system, they control taxation, they control the White House. They also control the guillotine that is being dusted off just in case it may be needed again as an instrument of monetary policy.

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There you have it: Krugman’s theory of the saving glut, and my theory of wholesale capital destruction in the world as a result of serial halving of the rate of interest by Keynesian monetary policy. I am ready to submit my thesis to a public debate that it was Keynesian measures that started capital destruction that I warned about eight years ago. If they had any decency, Keynesians should admit that they were wrong and let others come in with the new Obama administration and repair the damage. After all, Keynesians have amassed unprecedented power in Washington with their savings glut fable once before. There is absolutely no reason why they should be given a second chance to try their hare-brained schemes of oversaving on innocent people. But the idea of giving up power has never crossed their mind. They just won’t, even if blood is flowing on the streets of Detroit and Los Angeles. That’s the nature of the so-called Keynesian revolution. It is not a branch of economic science; it is a branch of Leninism, a blend of collectivist ideology with unmatched expertise on conspiracy, street fighting and barricades.

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In a nutshell, here is my theory of wholesale destruction of capital as a result of Keynesian monetary policy of serial halving of the rate of interest. The regime of falling interest rates is lethal to businesses, whether financial or producing, as it clandestinely wipes out capital through increasing the liquidation value of debt on past borrowings. Lower rates are not helping business as the issue is not the cost of future borrowing.

Chartered accountants and bank examiners ignore the erosion of capital due to falling interest rates, most likely with the connivance of governments if not on direct order from them. So there is no advance warning, and the destruction of capital presents a surprise fait accompli when it is already too late to do anything about it.

The wholesale destruction of capital is a social disaster of the first magnitude, in many ways worse than the destruction of physical capital due to war, precisely because wartime damage is expected and preparations are made to cushion it. Capital accumulation is the result of decades or even centuries of arduous saving by hundreds of millions of individuals that, nevertheless, can be frittered away in a matter of a few years. To rebuild the capital base of society will take a concentrated effort to save for decades to come. This great task of reconstruction is certainly not being helped, rather, it is being retarded, by the vicious Keynesian agitation about a mythical savings glut.

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Gold offers a ray of hope in an otherwise thoroughly gloomy picture. Gold represents that hard core of capital that cannot be destroyed by the credit collapse. Gold is the only asset that survives any consolidation of balance sheets. Other bank assets are canceled out upon nationalization of the banks. At any rate, they are subject to counter-party performance that cannot be taken for granted in a credit collapse. If civilization survived, it would have a head start in rebuilding capital through enlisting gold in the reconstruction effort. One ounce of gold would go farther than all the make-belief credits created out of the thin air by all the defunct central banks of the world. This is the triumph of gold: it can be bad-mouthed all the Keynesians want. But gold and those who control it will have the last laugh.

E-mail: aefekete@hotmail.com

March 8, 2009