Monday, April 27, 2009

The Judgment of Value

The central banks, the printers of money, the governments, the treasuries, the powers that be have no say in the value of a dollar. That judgment of value is reserved for the recipient of those freshly printed dollars.

Even those of us that hold dollars, that hoard them in our mattresses or bank accounts, have no say in the value of those dollars. The people that we offer those dollars to have the power to judge their worth, and to decide how much time, labor or real goods they are willing to part with for a piece of paper.

Think about the fact that Ben Bernanke said that he can control the value of the dollar with the printing press (or today's electronic equivalent). Can he? Does he have that control? So far he seems to be printing with reckless abandon yet we, the people, still receive those dollars and judge them to be worth the same as before. Have you insisted on a raise at work? Have you told your boss that you will not come back to work unless you receive more dollars for each hour of your valuable time? Of course not.

So by what mechanism will the recipients of dollars finally tell Ben that he cannot have as much "stuff" for his magic paper? Ben truly does not have control of this. Everyone EXCEPT Ben does.

The problem is that most of us don't have a choice. The only thing we have to part with in exchange for paper dollars is our time. And at that, we are living right at the margin. In other words, we trade time today for what we need tomorrow. And paper dollars are the medium of this exchange. So we don't have the luxury or the power to pass judgment.

Those that DO have the luxury and power of passing judgment on the value of the dollar are the people that have great surpluses of wealth and real goods. Those that control the industries of the world and those that control the stockpiles of real wealth and the stuff we all want and need.

The mechanism by which they pass this judgment is an enormously complex and recondite concept. Our government tells us this concept is called "inflation" (or "deflation"). They tell us that these people of great control either "inflate" prices or "deflate" them. But in reality, these people are simply trying to balance the goods they can receive in the future against what they are willing to part with in the present. To do this, they weigh what they have in stock against what they need and want. And they pay close attention to the cost of those other things as well as the availability and time horizon for acquiring them.

Of these people of great surplus, there are actually two groups. One group controls the distribution of wants, and the other the distribution of needs. In the simplest terms, think about the people to whom you offer your paper dollars. There is your grocer who exchanges food for your dollars in the latter group, and there is the electronics dealer who exchanges televisions and iPods in the former. Together, these two groups bid for your dollars with the amount of goods they offer in exchange. And in this way, they judge the value of the dollar. The central banker has no say in the matter.

The wants and needs groups can be differentiated by saying that wants are subjective and needs are objective. In other words, EVERYONE has certain needs, but WANTS are subjective to the individual and to current circumstances. Needs require very little marketing. They do not have to convince you that you need something like food. But wants require a great deal of marketing. Those people that control the "wants stockpile" must convince you that THEIR want is actually a need, especially during hard times.

So it follows that one group has greater control of the judgment of a dollar's value than the other. One group will always have people lining up to offer their dollars for judgment, while the other group must actually line up FOR your dollars. Do you see the difference?

When it comes to needs, people are in a long line with money in outstretched hands waiting for that money to be judged. When it comes to wants, SUPPLIERS are in a long line with "wants" in outstretched hands waiting for their WANTS to be judged by you and your dollars. So in a way, they no longer have control of the judgment of the value of currency. They have LOST that power during hard economic times.

Ben Bernanke says he is worried about "deflation", or his definition of deflation which is these suppliers LOWERING their prices. So in order to fight against this, he is attempting to double and triple the amount of currency in circulation. The idea being that with more dollars out there, these suppliers won't want to part with their goods for the same amount as before. They will want more.

The problem is that Ben (and the deflationists) are looking at the suppliers that NO LONGER HAVE CONTROL OF THE JUDGMENT! Ben is reacting to the actions of people who are only reacting to the bad economy. These people are not lowering their prices because they judged the dollar to be more valuable. They are at the mercy of collapsing bubbles and a bad economy. So Ben is printing in vain based on his theory and his objective.

But on the other hand, there is a sinister undercurrent to this situation. That group of suppliers that still DOES have control of the judgment of the value of dollars is still out there. It has not lowered its prices and it is watching these developments. It is watching Ben's frantic and reckless printing and it is wondering, "as I part with these life necessities in exchange for your dollars, will I be able to later recoup a commensurate amount of stuff?"

This group is watching this very closely. It is weighing its own stockpile of "needs" against what IT wants and needs, and it is paying close attention to cost, availability and time horizon for acquiring stuff.

This group is being completely ignored by Ben Bernanke and the other deflationists. But the fact of the matter is that this relatively small group of people is like the Supreme Court of Judgment for the value of the dollar. Once this group decides that the dollar will no longer work as a medium to transfer to them a commensurate amount of stuff with what they are parting with in the present, watch out!

This group which is being ignored is a little jumpy right now. They know they are being ignored and they know what is going on. They know that they are sitting on stuff that everyone needs, including themselves. And they are paying close attention to the size of their stockpiles. They are worried about the resupply lines. They are worried about getting "caught with their pants down". They are worried about waking up one day and finding themselves with empty shelves and a bag full of worthless paper.

So far they have not acted on this worry. They are still playing along. But make no mistake, they alone have the judgment power that makes ALL the difference. Be nice to them, because THEY will ultimately judge the value of your dollars. And if this makes you nervous, then why not exchange a few of your dollars for something they will judge well once they have sent the dollar to the stockade? Then, when empty shelves are everywhere, you will still have something they will want in exchange for what little they have left, hidden in the back.


Martijn said...


In response to article of the IMF contemplating on selling bonds, I was thinking along similar lines as you were in this post, picturing the value streams in the economy as rivers flowing down a mountain.

At this moment the river of value is starting to find a more efficient path (that of intrinsic value cq gold). However, as many people in our economy are growing their crops near the streams that are now threated to run dry (loans, bonds, dollars), they are doing everything in their power to keep the value flowing past their acre (stupid consumer goods).

Martijn said...

Btw: it remains funny to see how many (expert) people continue to ignore central bank policy and continue to blame this crisis on something else.

It's like blaming a kid for not brushing its teeth while its parents have been handing out candy all day long.

FOFOA said...

Yup! Bonds are a "want", not a necessity, and they suck capital from the stream.

And by sucking capital, they reduce the amount available for others that need water, like the US Treasury, European countries that don't have a printing press, and failing businesses like GM.

The amount of capital in the world that will buy bonds is a finite amount (except for maybe those Caribbean accounts which have tapped the well).

Think about Evans-Pritchard's piece. Those governments need all the capital that is available. So the IMF is very selfishly tapping into a pool or stream that is drying up as I type!

The IMF is trying to justify its very existence. It may end up justifying its own execution.


Anonymous said...


And another nice piece of work !

Do you believe in miracles....?
I think i saw just one passing by at on the chart at Jesse's blog :-)

Would that graph be in line with the path of a fractal....


FOFOA said...

Hi Shanti,

Thank you.

Reserves as a percentage of Total Assets soar. I wonder if 'Total Assets' is a positive number, or a negative number. I suppose when you ignore liabilities and allow assets to be marked to "model", you can end up with a positive number.

With funky accounting it is hard to glean information from graphs these days. But soon I think they will all look like that one. Except maybe the graph of the dollar.


FOFOA said...

I think in the commercial banking world they purposely confuse assets and liabilities. Because people's deposits are actually liabilities to the bank, not assets. And the bank's assets, which are the notes they hold over debtors, are what we call toxic sludge these days.

Anonymous said...

Then, when empty shelves are everywhere, you will still have something they will want in exchange for what little they have left, hidden in the back.

Interesting scenario - with gold at fantastic amounts, how exactly do you conduct that backroom transaction?

Anonymous said...

Nout Wellink (ECB) on China gold :

Note, that every gold-question is still being answered with the same "standard" CBGA-sentence.

Martijn said...

As was already discussed, perhaps the Fed will be the next bank requiring a bailout.

FOFOA said...

"Interesting scenario - with gold at fantastic amounts, how exactly do you conduct that backroom transaction?"

As I have said before on this blog, I like "junk silver" for this purpose. Bags of pre-1965 dimes, quarters and half dollars. They will come in very handy. I have each kind. Also, any kind of one ounce silver will work well. The more common and recognizable it is, the better.

Anonymous said...


To forecast a financial happening is one thing. The hardest part however is "Timing" when it is to happen. For Gold and Currencies it is even harder as Authorities are doing all they can to damper any unwanted price evolution.

Government has always intervened but the free market always wins. Yesterday, it took only a couple of hours to bring the Euro down from $ 1.33 to $ 1.30. Just like it takes no more than a couple of hours ( around the close in the EU and before or on the opening in the USA) to hammer Gold. Similar situations occurred in the past (the Gold pool) with Gold and also with currencies. Today with Swaps and other paper weapons (Gold leasing, COMEX) it is even easier to corrupt the free market action. But all of this - and history proofs it over and over again - only lasts so long. Next, when nobody expects it the inevitable happens. Like a ball who was pushed under water for too long, prices jump up. This time won't be different. [interesting is that the last action created a Gap on the $-Gold chart]. - today has A LOT of similarities with the Gold pool.

FOFOA said...

"To forecast a financial happening is one thing. The hardest part however is "Timing" when it is to happen."

"It's OK to forecast the end of the world, but don't ever give a date."
-Burt Blumert

"You see, it doesn't matter so much what happens along the way. It will make perfect sense to us once we are well beyond the end and can look back. Hindsight is always 20/20. And what happens along the way will most definitely appear chaotic to the close observer. But the pattern will ultimately emerge from the chaos and, in the end, the whole system will be shown to have been deterministic from the beginning. "

Anonymous said...

The WGC : The Word gold Council (WGC) said it is closely monitoring developments at other central banks to determine whether they will follow China’s bold and thought-leading move, especially in emerging economies.
Welcoming Friday's announcement by Hu Xiaolian, head of Beijing' State Administration of Foreign Exchange (SAFE) that the country’s official gold reserves have risen from 600 tonnes in 2003 to 1,054 tonnes, the CEO of World Gold Council, Aram Shishmanian, said:
“The Chinese government’s decision further demonstrates the leadership it is increasingly taking and its public recognition of gold’s proven role as a store of value and portfolio diversifier.


Anonymous said...

More of the same (QE) :

If the $-index (84,5) plunges through the 82,5 and the USTB-30yrs goes through the 4%...the $ might crash and $-goldprice might go parabolic !?

Anonymous said...

CPM-snip :

CPM reckons this transfer is particularly important in that Chinese government leaders were interested in buying gold over the past several years, but that there was a great deal of internal debate as to whether such gold should be added to monetary reserves held by the Central Bank, or as investment stocks to be held by China Investment Corporation or other non-monetary Chinese government entities. As CPM points out, the real news is thus that that discussion has obviously now been resolved, and the gold has been added to the monetary reserves held by the Central Bank.

>>> Inspired by the ECB freegold (MTM) concept !

Martijn said...

There happens to be another source of money printing in the US, it's called naked short selling, as explained in this video.

The guy in the video mentions in 2005 that naked short selling in combination with cheap credit will bring down the United States.

Martijn said...

In this video one can view the previous lecture, but in a bigger screen, and with time slider the topics in the side bar.

FOFOA said...

Hi Martijn,

Yes, I remember a similar lecture given by Patrick Byrne of about a year ago. That second one you linked looks pretty good.

I think you will find this interesting and perhaps related: Quadrillion Playing Submerged Elephant in the Room!


Martijn said...

This lecture discusses Patrick Byrne.
In the end also a rather interesting view on wikipedia is presented.

FOFOA said...

Good article from Peter Schiff!

...However, in order to provide this apparent benefit, governments had to discard what they perceived as a burdensome relic of the past: inelastic gold-based money. When civilization first began 5,000 or so years ago, societies almost universally developed mediums of exchange to replace the gross inefficiencies of barter-based economies. Many things were tried (shells, beads, cooking oil, salt, etc.), but eventually nearly all civilizations settled on precious metals -gold, in particular - as the best form of money based on its durability, uniformity, scarcity, and divisibility...

During that time, money generally increased in value as greater efficiency expanded the number of goods that a given weight of gold could buy. [FOFOA: what we call "deflation"]

But modern economists tend to ignore the period of history before the Great Depression - which is, in fact, most of history - and instead focus solely on the period since the supply of non-gold "fiat" money has been expanded at will...

Automation, computerization, plastics, transportation, and digitization all helped to significantly expand productive capacity...

I would argue that these forces have been so powerful that they have largely outweighed the harm done by currency debasement. We can only imagine the global prosperity that may have resulted if the world's reserve currency had increased in value. Instead, Keynesian economists largely ignore these factors and pin the successes of the past 60 years on the back of wise monetary policy.

This is a dangerously selective and myopic view of history. What is closer to the truth is that the world has embarked on what will likely be a relatively short-lived experiment in trading worthless currency...

When the dust settles the world will once again understand that money must have a value that is not arbitrary or subject to the expansive will of central bankers. When that day comes, gold will re-emerge as the single most reliable form of money. (This is not to say that we will abandon electronic transactions in favor of the scale and the change purse. It simply means that the underlying value of the electronic pulses will be tangible.)

Wise investors will see this change coming. They will stock up on gold now, while the price is still deceivingly low relative to the collapsing U.S. dollar.

FOFOA said...

Outstanding article on inflation by Steve Saville...

The effects of monetary inflation are three-fold. First, it brings about an unwarranted transfer of purchasing power (resources) to the creator of the new money and/or the first user of the new money. Another name for this unwarranted transfer is theft...

This will make the deflationists look right for the next few quarters even though they will be wrong. They will be wrong because even while prices decline, the inflation will be taking a heavy toll on the economy by facilitating the transfer of resources to the government and to failed businesses...

Our expectation is not outlandish because economic weakness will not prevent a currency from losing its purchasing power in response to substantial growth in its supply. In fact, it's the other way round. The less stuff that gets produced by the economy the greater will be the eventual decline in the currency's purchasing power...

The effects of monetary inflation will work their way through the economy over the next few years, but the theft is happening right now. We suggest that the deflationists stop going on about how the amount of money created 'out of thin air' is small compared to the declines in asset and debt prices (and thus encouraging the Fed to counterfeit money at an even faster pace), and start emphasising the problems inherent in the inflation...

Martijn said...

Will read the articles you've posted. In the mean time here is an excellent commentary from Max Keiser, who diggs into the reasons why Americans let this all happen. And he does have a good point.

Martijn said...

Schiff does have a point. You should still read money, markets and sovereignty, which explains it even better.

FOFOA said...


Max makes a good point that Americans are invested in the system through their 401K's. This is true. I believe the current market rally is a giant pump and dump scheme targeting this money. I have long said that most of the big money funds that are driving the markets are people managing OPM... other people's money, pronounced "opium" like the drug. These managers have raked in gigantic bonuses over the years. And a lot of those bonuses are still trapped within the markets. So they are no longer managing the OPM for future bonuses. Instead, they are pumping the markets with OPM and then taking the profits out with their personal money. They buy a stock that they already own with someone else's money to drive up the bid and then they sell their personal shares. It is the preliminary endgame.

In the final endgame they buy gold with that money as the dollar collapses.


Martijn said...


This is indeed a strong point of Max's. People are too invested and are stupid enough to focus exclusively on their own perceived interests, therefore loosing the bigger picture. And because they are so focussed on their own money and still believe that this problem is so big no one can understand it, they just let everybody who claims to help ride it. People are really failing to think for themselves here.
I have also enjoyed the boss-nappings in France, it is good to see that finally some people are taking some action.

FOFOA said...

New Eric Janszen: Everyone is wrong, again – 1981 in Reverse Part I: The Great Divide

"Humans extrapolate the recent past into the infinite future..."

Aleksandar said...


I have not much to say except kudos for the award, it indeed was a good article.

As for the experiment goes, since you asked in one of the previous threads, I think that I now have a bit more clear view on the horizion. Lets wait for the summer and see if LEAP2020 has its bearing right.

BTW, it is alek_a, I made a google profile.

FOFOA said...

Hi Alek,

Missed you. How was your vacation? Glad you got a profile. Don't forget to click the email notification button.


FOFOA said...


Have you still been following Zero Hedge? Here's his latest. It is quite astonishing.

The more I think about what is going on with GS and the NYSE, the more I am amazed that there is ANY confidence left in paper investments. Especially those traded in New York City. Short selling of stocks and bonds with no delivery. Banks dropping like flies. Blatant manipulation. It's practically out in the open now.

This behemoth that has been tasked with ensuring a fair, equitable and liquid market for some of the world's premier stocks is now making 90% of its trades for its own benefit. Through a liquidity program established just 6 months ago. And now makes 50% of the trades in the entire NYSE. Sounds like a real racket is going on, with the blessing of the government. It stinks to high heaven.

This reminds me of skimming. The practice whereby a bank takes a small, almost invisible skim off of millions of transactions. You never notice it, but they add up in volume.

Makes you wonder what other corners they are cutting. What other rules they are applying loosely. Like frontrunning. Obviously they don't worry about actually having the product they sell. And when the quants buy, I don't think they are buying "to hold", so they are not interested in dividends, only in price movements.

The only advantage I can see in a company like GS agreeing to do this for the sake of "liquidity" is if it has figured out a way to skim the profits of all other market participants. And perhaps they are using PPT money to do this. The implications are almost unthinkable. If ZH all of a sudden disappears from the web, I think we'll know what happened.


FOFOA said...

This from Richard Russell yesterday. He is the 80 year old godfather of newsletters, and master of Dow Theory...

"Today the Dow was up just 3 points five minutes before the close. Desperate situation. Then in the last two minutes the Dow popped up 44 points! Who came in the last few minutes to "save" the Dow? Talk about manipulation, I think we're seeing it. Doesn't matter, the Dow will do what it has to do, regardless of last minute manipulations."

Aleksandar said...


Continuation of financial and general economic order is of utmost importance to anyone smart and experienced enough in the matters of statemanship. It is thus that the greatest attention is paid to "providing liquidity", "orderly markets" and unconditional support for all the sorts of trade within the $-financial industry will be offered. Even if it means that the connection between market fundamentals and technical analysis is no longer there as the measures I mentioned above supercede all normal market forces.

The credibility of the $-financial brotherhood (equivalent with the Western Society as a whole nowadays) as the most advaced and efficient way of doing anything in tis world must hold. They can always accept downturns, recessions and depressions, violence on the street etc. but they will never expose themselves to even an iota of criticism about the fundament of the $-brotherhood.

What separates this crisis from the Great Depression and other ones is that the $-FB (The West) has been under attack from the rest of the world. You can not imagine what do people that have been victims of the imperialist wars in the past decades think about the West and particulary the US. This crisis is only but a continuation of a process started in the early 90s.

If the West does not lose the battle with the rest of the world, it will eat itself apart as completely new diseases caused by flawed consumption models (ex. mass food production) and philosophical loops in the way the young are raised to think (elitism etc.) will bring the verdict of history.

The West, with its already flatlining culture and socio-economic models that cant keep pace with reality, is in a state of decay and stagnation. The winter begins soon. This will not be the first nor the last time such a thing happened.

If one cant see this, he/she is truly blind. There is no need to analyse further, the force of historic cycles is overwhelming. Only thing we need to do is to work to be positioned for the perpetuation of oneself's being but not the way of thinking of our neighbours and countrymen.

ZeroHedge is only seing the symptoms of the enormous masking and paintjob effort of the current elites that live in denial.

Aleksandar said...

BTW, I am not supporting the "jihadists" and all other forms of extremist violence against the West in the name of a religion or as an excuse to impose a regime infinitely worse than the current mindset. I even think that those extremists are "planted" there in order for the $-FB to have credibility for their imperisalist campaigns, aka the crusders in the middle ages.

I am speaking about something much greater, working in ways similar to the passive resistance of Gandhi. Even if a small doubt persists in the minds of all that interact with the wetsren way of doing things, the result is of a insumountable force that cant be ignored.

Aleksandar said...

And I was rude and didnt answer your polite question about my vacation.

We went to Paris for a few days. You can probably do all other "attractions" in Paris in a day or two and spend the rest of the time in the Louvre with a good guide. We didn't have one unfortunately and relied on the electronic PDA-things that you can get at the entrance. I think that the museum is spectacular.

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