Dollar Repudiation

Every day I read new articles about how and why a purely symbolic unit of account, a book entry, a piece of freaking manmade paper is going to RISE in value simply because a couple hundred million sheep can no longer be trusted to pay their bills. Are you kidding me? It is the SYSTEM that is failing. The system IS the dollar. The dollar IS the system! And the trusted administrators of this system are right now FLAUNTING their power to create new digits at will TO BUY THEIR OWN FREAKING DEBT!

Sure, I have some dollars. I have just what I need to pay my bills for the next few months. But not in my savings. Not in my portfolio. I just gotta wonder how confident these deflationists really are, that they have gone to 100% cash. 100% TOILET PAPER! Or are they just trying to conjure up some confidence through repetition? I suppose if you say it enough, it must be true! But I'll tell you, it sure feels good to know I'm holding real physical gold right now, not some silly piece of paper. Or worse, some quack's digital book entry that says I'm entitled to some silly paper!

What exactly is a dollar? And what value does it hold?


Of course a dollar holds the momentary value that producers and hoarders of real goods and services are willing to surrender for silly paper at any given point in time. The key is that value is determined by producers and hoarders of real stuff (not by printers and hoarders of paper stuff), and that their opinion of paper changes its value over time.

During the credit expansion phase of the system there are opposing forces that magically manage the value of a dollar. The first force is that credit creates many new plastic digits that bid on the same stock of real goods and services, putting upward pressure on prices. The second force is that the credit expansion process creates a paper Ponzi profit pyramid which lures producers and hoarders of real stuff into the paper world, putting upward pressure on paper. These opposing forces keep common prices in check. Another see-saw balancing act that makes price and value appear stable when it is most certainly not.

Then in the next phase, as the paper Ponzi profit pyramid pops, we see these forces play out in reverse! A flight from Ponzi paper and at the same time a disappearance of plastic phantom digits bidding on real stuff. More price and value stability! Well I'll be...

This economics thing can sure be confusing! By the way, please review my April post, The Judgment of Value to see who exactly sets the value of a dollar. It is this "judge" who is currently and temporarily dazed by these confusing forces!

What formerly made this "judge" want our worthless paper (the paper Ponzi profit pyramid) is no longer functioning properly. Yet he is still accepting our paper at the same previous rate. At least he is for the time being, probably because we are shoveling into his wheelbarrow a little slower now. But what is he going to do with all this paper now that it is paying 0% interest, and now that the paper Ponzi profit pyramid seems to have morphed into a black hole space vacuum monster?

It is true that we did hit him upside the head pretty hard with our shovel last September. And he may still be dazed and confused from the blow. Or maybe he is only pretending to be as he plans his escape.

About these "value judges", from The Judgement of Value:

The mechanism by which they pass this judgement [on our dollar] is an enormously complex 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.

So these "judges", these price-makers and value-setters are actually looking at the dollar's "store of value" function. And they are analyzing it relative to their own time horizon for purchases. Presently they cannot count on interest or the paper Ponzi profit pyramid to protect their paper holdings over time. They can only look at their own FUTURE JUDGEMENT as it pertains to and creates either future inflation or future deflation. They must judge the present based on a guess at their own FUTURE JUDGEMENT!

The problem right now is that these "value judges" are seeing the trend AGAINST future goods being offered in exchange for US dollars. Sure, the US will always offer its exports in exchange for dollars. But the main export of the US is paper Ponzi pyramids, which have fallen out of fashion. It is the rest of the world's "real stuff" exports being PRICED EXCLUSIVELY IN DOLLARS that gives this paper any value over time. And on this front, the future looks grim.

Of course we are now talking about the "medium of exchange" function of the dollar. And while this function will continue INSIDE the US, the only thing that matters to our "value judges" is if it will continue OUTSIDE the US. And remember, the dollar, like a drunken sailor, has sowed its seeds far and wide! But it is not the holders of those global dollars that determines their value, it is the holders of the real stuff they buy!

Of course, over time some of these producers have also become hoarders of US dollars in the form of Treasury debt! These dollar stockpiles are now stored in the central banks and sovereign wealth funds of some powerful judges. And based on this knowledge, we silly Americans tend to think, A-HA, we've got them! They are caught in our paper trap! They are in a Catch-22! They HAVE to keep shipping us their real stuff in exchange for our worthless paper! But do they? Is there really no escape from this "trap"?

There is no way these powerful judges could ever sell or unload all of those dollars they hold as US debt. But remember, it is held by their central banks, not private interests. So, the CB's would not be looking to "spend" these reserves in the usual way. They obtained them as their local economy generated excess sales to the US (for them a trade surplus) and their private citizens wanted to hold local currency assets, not dollars. So the CB's printed local currency and traded it with their citizens for these excess dollars. Then they traded the dollars for US debt so as to earn interest.

Now, exactly what good are these debt holdings as long as their country continues to run a trade surplus? Not much if the locals don't want to hold dollar Ponzi pyramids. In the end, if the CB's were to sell these Treasury holdings it would crater the US debt markets long before any real value was obtained. And, to further their problem, the real value could only come after spending the dollars to buy something real. Now what does a CB spend its reserves on, cars, TVs, other currencies?

No, the way CB's balance paper currency Ponzi value risk is through the age old asset of gold. Indeed, if a CB already has enough gold, all it needs to do to secure its net value is to use the medium in jeopardy, the dollar, to bid on its counterbalancing asset, gold. Then as dollar assets crash, gold rises in value to fill any void left by the dollars... and then some!

CB's deal in paper and gold. When the value of one starts to fail, they transfer that value to the other. This is what they do.

They certainly aren't done yet. But they have definitely started.

India Times
Central banks turn net buyers of gold in second quarter of 2009: WGC
19 Aug 2009, 1905 hrs IST, Devangi Joshi, ET Bureau

Another interesting development during the quarter was that Central banks were net buyers for the first time since at least 2000. They bought 14 tonnes of gold, more than what they sold.

And it appears that some judges have already ruled.

The Times of India
China world's 5th largest gold holder
Saibal Dasgupta, TNN 25 April 2009

BEIJING: Large scale hoarding of gold by China may have been partly responsible for the near tripling in prices of the yellow metal in the past six years. Figures released by the country’s State Administration of Foreign Exchange shows Beijing boosted its gold reserves by 76% since 2003 to become the 5th largest holder of gold in the world.

And others are taking notice.

Gulf News
Oil pulls Saudi economy down
By Vidya Diwakar, Staff Reporter
Published: August 19, 2009

"I think that eventually we are going to need to run an exchange rate more independent from the one fixed to the dollar, but this should best wait until there is a GCC currency," Dalton Garis, an Associate Professor of Economics and Market Behavior at The Petroleum Institute in Abu Dhabi, told Gulf News.

The dollar repudiation has begun!

China to Boost Yuan Swaps, Payments on Dollar Concern
By Bob Chen and Judy Chen

April 2 (Bloomberg) -- China’s leaders, increasingly concerned about the nation’s $740 billion of U.S. Treasuries, are making it easier for trading partners and consumers to do business in yuan.

The People’s Bank of China has agreed to provide 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency- swaps. More such arrangements are being planned so importers can avoid paying for Chinese goods with dollars, the central bank said. In Hong Kong, which has pegged the currency to its U.S. counterpart since 1983, stores from Park’n Shop supermarkets to jewelers accept yuan.

And the endgame may be sprung at any time.

How China Will Handle the Yuan
Minyanville
Aug 28, 2009

Lance Lewis: You notice the extra chunky volume in the Chinese Yuan ETF (CYB) yesterday at the same time that the dollar reversed violently?

Ryan Krueger: I do now. And the cash markets in beans are way above the futes even with this ramp job. Hmmm...

Lance: I’m telling ya. Something is up with China and the yuan. It would explain a lot. What if it were close to revaluing against the dollar?

...

Lance: Exactly! That’s my point. It’s the only thing that fits. If so, the dollar would get smoked, literally, “overnight” and gold would explode. Bonds would probably get crushed, too.

So what happens when a currency is repudiated by the world?

Let's take a look at what happened in Iceland ten months ago. Practically overnight the Krona lost more than half of its purchasing power. Luckily the Krona was a small fish in a big pond and a number of bigger fish came to its rescue including Germany, the Netherlands, the UK, Norway, Sweden, Finland, Denmark, Poland, Russia and the IMF. These big fish put a bottom under the Krona waterfall, but for the local Icelandic population, the damage was already done.

Call it a currency collapse, a hyperinflation, a devaluation or a repudiation; call it whatever you want. But the cost of everything people use and need in Iceland doubled or tripled in one month. And at the same time, the things they counted on as a store of value, the banks, real estate and the local financial industry collapsed. Hit from both sides! A brutal double whammy!

You see, in Iceland almost everything produced is an export, and almost everything needed is an import. And imports and exports are the hardest hit in local hyperinflations.

Local hyperinflations primarily affect imports and any domestic product that can be exported. In other words, if it can be sold somewhere else for better money then it EXPLODES in price. But locally produced and consumed products and services become quite cheap in real terms. And by real terms, I mean for those who have some gold! This includes real estate, which is difficult to import or export!

But who is going to come to the rescue of the biggest fish of all? Who is going to bail out the dollar and put in a bottom? The aliens? I have a sneaking suspicion that the dollar's collapse will be a little different (read: worse) than past recorded events. It will certainly be a sight to behold. Just think about it; Where will you be, what will you be doing, how will you react, and how will you be feeling when it starts? Gold delivers a LOT of peace of mind in this regard!


Where is your nest egg tonight? Is your portfolio all "in cash" right now, ready for the deflation? How nimble are you? Are you fast enough to swim up a waterfall?

FOFOA

No Free Lunch

Modern fiat currencies are not going to disappear, no matter how hard Obama and Bernanke try to destroy them. They are simply too good of a medium of exchange. The ease with which labor is divided over the whole globe and capital exchanges are transacted across thousands of miles, instantaneously, is a planetary first! It is a marvel of the modern computer age!

Even in collapse, man has shown his resilience in using these modern fiat mediums. Just look at Mexico. Still using the peso, albeit in a slightly different form. Mexico is proof that in most cases there is a riverbed somewhere down the waterfall. Zimbabwe is proof that this is not always the case.

The electronic form of fiat digits occupies no physical space whatsoever. Think about this. And even the paper form can explode in face value and continue holding only the same amount of space. So as a medium of exchange, it does not really matter the value of each individual digit. I can do a good day's work for you and you may pay me $100 or $1,000,000,000, depending on the value of each digit. The value of the digit doesn't matter. The currency still functions fine as a medium of exchange.

Then of course there are adjustments to be made. Like "lopping off zeros" and printing colorful new bills. In the virtual world of electrons these adjustments a are minor task for a computer programmer. You see, managing a fiat currency is easy. Heck, even Gideon Gono and Ben Bernanke can do it!

Here is the problem though, kids. Most mature investors retain their life savings fully invested within the financial industry, denominated in dollars, and will not get off these tracks even when they see the train coming. They will stay there because it is impossible for them to believe they occupy the wrong position! Who can blame them or call them fools? They have been trained their whole life to believe in saving for the future inside of a monetary system that serves no purpose other than as a medium of exchange.

Worse, they perceive that all of their assets are correctly valued by this system that does not care about the value of a digit. How can they possibly be correctly valued in a system that only functions properly as a medium of exchange, not a store of value? How can assets meant to be stores of value be correctly valued when denominated in a unit whose value DOESN'T EVEN MATTER in the context of its primary function? They can't. They shouldn't. They aren't. And soon this FACT will be known by everyone.

This fantasy illusion that the dollar can be a store of value is built upon a foundation of raw sewage, that all people in the world using the dollar in its PRIMARY FUNCTION will continue to act NORMALLY no matter what happens. That homeowners will continue to make dollar payments on loans that are twice the size of their house. That retirees will continue to buy and hold crappy investments. That toxic financial instruments will continue to yield interest and trade at par even when the underlying cash flow has been declared DOA. That holders of physical gold will continue to surrender their precious at the rate of one ounce per 950 US dollars. That oil producers will continue to ship oil to the US military at the rate of one barrel per 70 US dollars, even when those dollars smell like fresh ink. That a nation of 1.3 billion will continue to work their hands to the bone in exchange for US dollars that stink of wet ink. And that the entire planet will continue to honor the US leadership with the amazing privilege of being the only entity in the entire solar system that gets a free lunch.

You see, the truth of the matter is that there is no free lunch. Yet the US federal government is now funding its fantastical folly at the rate of TRILLIONS per year through the Federal Reserve's printing press, nicknamed POMO. If the dollar doesn't collapse in purchasing power, this could go on FO-EVAH!! Free lunches for everyone (in the United States)!!! We can all work for the government!! Be a G-man! A nation of G-men!! How cool would that be? Look, they make more DOLLARS too...


There is only one way this madness stops. It is not going to stop by Ben Bernanke telling Obama "no more!" It is not going to stop by Congress suddenly slashing its pork-laden budget to sustainable levels. It is not going to stop by the real economy suddenly rising to the occasion. Yet it WILL stop soon. This insanity is sucking the very air out of the global economy like a pyromaniac's fire that extinguishes itself in an airtight space once the air is gone.

It is a truth about inflation and hyperinflation that only the VERY FIRST entity to use the newly created money profits from the exercise while everyone else suffers. This is because newly created money draws in real economic goods and services to the printer at the same rate as they were offered in the open market before that new money was created. And the printer receives this SUBSTANTIAL PORTION of the real economy at precisely ZERO cost when that new money comes via Ben's mouse named POMO. This 'first spender' effect can be seen both in the BOOM TOWN that Washington DC has become in the middle of a damn depression, and in the LAVISH lifestyles lived by Gideon Gono, Robert Mugabe and all of Mugabe's cronies and friends.

If you can imagine the real economy, the gross national product of everyone's efforts in the whole country for one year, as a bloody red flow animated on a map of the United States, then imagine that at least 20% of this lifeblood of the US (all goods AND services) are flowing right into Washington DC! No wonder 3 out of 10 people in this country work for the government! No wonder DC is the only place in the country that is THRIVING right now. It is receiving 20%+ of EVERYONE'S efforts at ZERO real cost. Is that freaking amazing or what??!!




Is anyone getting the feeling that something just isn't right here? I sure am. And I'm not here to talk about karma or some kind of magic universal justice. I am here to talk about the invisible hand of the planetary market organism. It is this giant invisible hand that is moments away from cutting off the power.

There are some clever deflationists that will tell you that the dollar is going to rise in value giving Ben, Tim, Barack and the entire DC gang a lengthy free lunch, all because of the giant debt overhang in the economy that backs the US dollar. The thinking goes something like this. The world is full of debt. The dollar is backed this debt, and is therefore balanced by it. As long as the debt remains, it must be serviced with dollars which drives up the demand for dollars, and therefore the value of dollars. If the service of the debt starts to fail then the dollar will start to fall making the service of the debt easier (with cheaper dollars) and the service will then resume, raising the dollar back up. I call this the see-saw theory. I see what you're saying, now let me saw it in half.

You see the biggest debtor of all is the very printer of the currency all that debt is denominated in. And this debtor is now picking up ALL of the slack left behind by everyone else. Only his debt service will never fail, because he can print that service with the click of a mouse. And since he doesn't have to seek dollars on the open market, his debt has the OPPOSITE effect of all other debt. Instead of driving up demand for the dollar, it drives it down (and drives up supply at the same time)!

Normal debt = dollar demand up, dollar supply down.
US Fed Gov't debt = dollar demand down, dollar supply way the f up!

As the dollar starts to fall in value, this has no effect whatsoever on the ability of the world's biggest debtor's ability to service it, and therefore has no see-saw-leverage effect that raises the value of the dollar back up. Instead, it has the exact OPPOSITE effect... once again. Because now this biggest debtor must print even MORE dollars to suck in the same SUBSTANTIAL AMOUNT of the real economy at ZERO cost. It is a brutal cycle, and it has just begun! Notice that I said substantial AMOUNT this time, and last time I said substantial PORTION. That's because as this cycle proceeds, the AMOUNT of the real economy that the government sucks in at ZERO cost actually grows in proportion to the real economy that is shrinking. If the deflationists are right, then someday we WILL all be G-men!!

Additionally, there are some misinformed hyperinflationists that believe hyperinflation will be our savior. That it will alleviate all the debt and free up the housing market to rise once again. In response to this view, some deflationists have argued that hyperinflation or currency collapse will never come in time to save the debtors. Very quickly, I would like to dispel this malformed (from both sides) argument. Hyperinflation, by its very nature, will come well before all of the debts are cleared. It will be "the cleaner" called in by the invisible hand to mop up the massacre. But it will not deliver a free lunch to the many debtors who have no real savings, and certainly none in REAL money. They will find out that even though their debts are now payable in much smaller dollars, that even those smaller dollars are hard to obtain in necessary quantities. They will wish they had hoarded some miniscule savings in physical gold before the crash with which to settle their debts. As hyperinflation or currency collapse takes hold, they will find that debt settlement requirements race just slightly ahead of the ability to pay through normal economic means. You see, hyperinflation is really just a deflationary collapse party with Gideon Gono or Ben Bernanke spinning the tracks we all dance to.

"So what are you saying FOFOA? Just spit it out already!" Okay. Here is what I see coming. I see the US dollar, a medium of exchange, devalued by the external world sometime soon and its CHARADE as a store of value exposed and brought to conclusion. This is the only way I think things can play out now based on what I have seen over the past year. Furthermore, I believe there will be a flood of "dollars" as the dam breaks, spilling from the make-believe $600Trillion+ financial paper economy into the $60Trillion global REAL economy. And I believe a highly disproportionate amount of this flood will be absorbed by gold! I believe this may actually be a primary plan for some very large physical gold holders in some very high places. In fact, I would bet on it!

Furthermore, I believe that if you are not already positioned in the safety of real physical gold when this happens, you will not be able to get there until after the flood recedes. I believe that things could get ugly and life could get real hard if and when this all goes down. But I also believe that having some gold will make life easier on you, by quite a lot. Of course there are some other obvious preparations that everyone should make, like stocking up on food and water, the necessities of life. But it is very expensive and difficult to prepare in a survivalist kind of way for every possible scenario. Some can do it and that is a great thing. But for the rest of us, gold is a good substitute for the unknown. A substitute with tremendous upside potential at this particular time in history!

I have made a few 'survivalist' purchases myself, that go beyond metal and beyond the norm. I have a specific thought and use that goes with each one. In most cases they are items that could a) become very useful in a lifesaving way under certain scenarios, and b) become valuable for barter because they will be scarce. I do not recommend these items for everyone because we all have our own unique situation. But this list should at least give you some food for thought, and I'm sure some of you all can add more things in the comments. Anyway, here is my short 'beyond gold' list:

Guns, including large home protection and small concealable
Ammunition stockpile
A concealable bulletproof vest
A generator
Gasoline storage
Plastic water storage
Water purification tablets
A portable ceramic water filter
Freeze dried food
N95 masks
Camping gear

There are some other low cost, low probability, high impact items that I like. These include IOSAT tablets and surgical kits. They say it is easier to find a doctor than it is to find a doctor and an OR! Others, like my gasoline will definitely be used in one way or another. The generator is still in the box, so it could be a barter item or a necessity at some point. Who knows? But I doubt it will lose value like the dollar will.

So there you have it. No Free Lunch! For ANYONE! Do what you can to take care of your family. And if you think the government will carry you through this on its own Free Lunch program, guess again! The power is about to be extinguished by a giant hand.


Sincerely,
FOFOA

PS. Here are some online vendors that I have used successfully. These are not recommendations nor are they paid advertisements. They are simply where I bought my sh-t.

http://www.nitro-pak.com/
http://www.ammoman.com/index.htm
http://bulletproofme.com/

Happy Anniversary

Confiscation Anatomy - A Different View

Foreword

Please do not take this post as a definitive, final statement on this very complex topic. This is only one view of many that explains why confiscation will not happen. Once you understand the dynamics of a completely demonetized, free, non-fractional, physical-only gold market (freegold), it will become clear that this is where the river of time is taking us. This particular post is meant only to encourage a focused discussion on this "concern", for the benefit of us all. In fact, think of this post as a primer or introduction if you will. Or if you prefer, think of it as a dose of ocular Xanax for your "gold-angst".

Anatomy of a Straw Man

This tired old topic of gold confiscation seems to surface far too often within the online gold community. In the spirit of colorful analogies I'll liken it to a noxious vial of fox urine strategically placed to scare hungry little bunnies away from the delicious golden strawberry patch. Fox urine seems more appropriate than a simple scarecrow. But as we all know, a scarecrow is not really alive, and urine does not really eat bunnies.

The most important thing to keep in mind during this discussion is the macro, or global economy. The US is but one global player among many. This is not a simple story about stupid US politicians versus helpless US citizens. Instead, it is a grand story of giants. It is a story about the US government versus the rest of the world. And it is not just about this present crisis. It is a story that covers many crises and 96 years in the life of a single paper contract called the US dollar. In this global macro view, that a 1933 confiscation happened at all means that a 21st century one will not. That option has already been fully exhausted!

Anatomy of a Dollar Collapse

The dollar is going down, and there are a couple of ways this could play out, but one is more likely than the other. To understand why this will not lead to the confiscation of our gold, we must first understand the corner the dollar has painted itself into, and what its future options really are.

As I have explained many times, freegold and hyperinflation are separate events. Freegold is the establishment of a physical gold market after the paper gold market is arrested through default, breaking the dollar's grip on gold, and also breaking the dollar's international settlement function.

The first way this collapse could play out is a quick devaluation of the dollar, say, over a couple weeks, followed by the emergence of freegold. Think of it as the riverbed at the bottom of the waterfall.

The second and more likely way this will play out is with hyperinflation thrown in, perhaps lasting many months or years after the initial plunge/devaluation. The overwhelming evidence that this will be our path is the political control the Executive Branch is exercising over dollar monetary policy. Jim Sinclair believes this is a serious threat:

China wishes the annihilation of the Fed policy of “Quantitative Easing.”

The Fed wishes to accommodate China.

The US Treasury is absolutely opposed to any such consideration as it would cement the present Administration into a one term wonder.

The US Treasury must win this battle because the boss of this opposition has the power to appoint the new Chairman of the Fed, either Summers or Geithner.

Political control of the US Fed and therefore of monetary policy is in the cards...

...political control of monetary policy is CERTAIN as the Fed cannot win this contest against the Administration in the form of the US Treasury.

Bernanke becomes a team player or a team player will replace him.

The latter is becoming a probability as it is hard to trust a prior adversary. (Link)

I suppose you could picture this one as a waterfall with no riverbed at the bottom. Instead, the water falls all the way to the fiery pit of Zimbabwe hell where it burns into nothing but a curiosity for future historians and possibly a cheap eBay collectable, "The $11 trillion bundle - Now even YOU can pay off the US national debt".

Anatomy of a Gold Run

In the 1920's, if you had a dollar you held a contract for 1/20th of an ounce of gold. In essence, you had loaned your gold to the US Treasury and the dollar was your note on that loan. You could walk into the bank and present your note and it was the bank's job to provide you with gold or to die trying.

The problem was that the Federal Reserve system issued more notes than it had gold. So the whole "fractional reserve system" relied solely on the confidence that you COULD receive your gold, knowing full well that all people could NEVER receive all their gold.

By taking a look at the modern paper gold market, a striking similarity should start to emerge.

COMEX is primarily a betting operation that pairs up long bettors with short bettors. Only a very small percentage of these bettors actually take the physical gold. So the COMEX relies on the market's confidence that you COULD receive your gold, knowing full well that all the bettors could NEVER receive all of their gold at the same time (or ever for that matter).

So COMEX is essentially existing the same as the banks during the Roaring 20's.

In the crisis of the early 1930's, too many people went into the banks to withdraw their gold. And fulfilling their duty to provide gold or die trying, many banks died. This is the fate the COMEX has to look forward to.

Imagine if one favored entity, say Goldman Sachs, decides to take delivery on futures contracts that amount to perhaps 3% of the total open interest. Then imagine that all the short sellers exit the market through a cash deal with an offsetting long position. Where does the Goldman gold come from? Let's say for convenience that the entire registered stock of COMEX gold is eligible to meet Goldman's delivery. Great! The bank (COMEX) was able to cash Goldman's check! But what happens when the other 97% open interest sees this action and wants delivery too? Or even just part of it?

In any bank run, the first few people in line do get their cash. But ultimately, it is the flood that ensues that kills the bank. An innocent bystander might hear a rumor that the bank is about to fail. When he arrives at the bank he sees the long line and starts to panic. But then he sees a few customers coming out with their cash, so he calms down and gets in line. But will he make it through the doors before the bank closes for the "holiday"?

Anatomy of a Gold Default

In its role as the global reserve currency, the dollar must have two vital things: value and function. It is indisputable to rational minds that gold is true money. The universal way fiat currencies are measured for value is by how much gold they can be exchanged for. So the dollar has value on the global stage because of its ability at any given moment to buy gold. For function, the dollar is needed to repay all dollar-denominated loans and contracts around the world. But a dollar will always be able to pay one unit of any dollar-denominated loan, no matter what the value of that dollar is. So a failure of the dollar would be defined as a failure of value, not function. A dollar collapse would be defined by its inability to be exchanged for true money, gold, at any reasonable price.

What does it mean for a bullion bank to fail? Just as a regular bank would fail from a massive withdrawal of deposits beyond its ability to pay, we could say that a bullion bank has failed if it can't supply the gold necessary to honor its obligations. You can be sure it will first exhaust itself by trying to obtain whatever gold can be obtained on the spot market to fill its obligations prior to failure as an institution. But this is where the price would race away on the spot market paving the way for a complete run on all physical gold, permanent backwardation in the forward gold market, the withdrawal of all offers to sell physical gold, and a complete failure of the spot market to exchange gold for dollars at any reasonable price. And so, we would have the official failure of the dollar as well.

This is how a failure of the paper gold market, a DEFAULT on paper gold, will mean the collapse of the dollar. You will have the dollar on one side, gold on the other, and COMEX contracts in between the two of them. This will essentially pit gold and the dollar against each other, forcing them to arrive at a settlement in a dollar-rich/gold-starved arena. Could the dollar ever deliver on its physical gold contract obligations? No way. Which do you think will be left standing?

Back in 1933, the dollar DID default on its contractual gold obligations. In essence, the US government kept the gold that its citizens had loaned it and told the citizens to eat the loss. The government told them to simply keep the paper promissory note and pretend it was still "as good as gold".

At the time, the Bretton Woods agreement was more than a decade away, but there were still a whole lot of dollars floating around the international arena. So in order keep international trade goods flowing into the US, the US government said that dollars that worked their way into the international central bank clearing system could still be exchanged for physical gold.

To facilitate this convertibility in a time of dire crisis, it took three more drastic steps. First the government defaulted on 41% of its outstanding international gold obligations by devaluing the dollar 70%. (The world DID take notice of this 41% default!) Second, it called in the local gold to establish a fresh hoard for backing the international dollar. And third, it made gold ownership illegal in the US, a capital control move to prevent capital flow out of paper and into physical gold on the open market.

Then, in 1971 the US did it again, this time defaulting on 100% of its gold obligations to the rest of the world. Something to think about: The US did this while it still had a lot of gold. Why was that? If it was going to take the world off the gold standard, why not do it when the gold ran out? At least then it doesn't make you look like a cheat. As Another liked to say, "think long and hard on that one"!

Gold is off the table

The US gold hoard is now off the table. Think of a poker cheat who pockets his winnings yet still wants to play. When he loses he writes paper IOU's to the other players. Can he ever pull his money back out of his pocket without having it taken away? Think of an individual who declares his own insolvency and defaults on his obligations to pay, only to resurface later with a windfall inheritance. What problems will he face?

In 1971 the US refused to ship any more gold. It defaulted on its international obligations. It took its golden chips off the table but continued to play in the game. But the dollar didn't change. It still remained an international contract for gold. Watch the announcement:

Nixon Closes the Gold Window
As a politician, the President did not want to interrupt television viewers watching the tremendously popular TV series Bonanza, not wishing to potentially alienate those voters who fanatically followed the cowboy series. He was advised that the practical decision was to make an announcement before the stock markets opened on Monday (and just when Asian markets also were opening trading for the day). On 15 August 1971, that speech and the price-control plans proved very popular and raised the public’s spirit. The President was credited with finally rescuing the American public from price-gougers, and from a foreign-caused exchange crisis.



This was cheating, plain and simple. The international financial system and the global market place run on procedure protocols that are not binding. They are not binding, but without them, international trade would stop altogether. Just because a rule is not binding does not mean it is not important. And just because a non binding rule is broken, does not mean it disappears.

Why do you think the US gold hoard was never publicly audited after this? And why do you think the book value of that gold was left frozen at $42 per ounce, never marked to market bringing it "back into play"?

There are two international bodies that facilitate the international financial and monetary system, the IMF and the BIS. These two bodies are in opposite camps. The IMF is in the dollar camp. Its sole purpose is to ensure that third world countries can pay their dollar-denominated debts in order to keep the dollar alive. If that debt from third world countries could no longer be serviced, it could no longer be held as an asset within the financial system. Therefore, the IMF issues highly leveraged dollar loans to these countries to make sure that payments continue. In exchange, it locks up real world capital as collateral for the loans. This is NOT a system that supports third world economies. It is a system that supports the dollar's reserve function at the EXPENSE of third world economies. If the IMF stopped functioning, so would the dollar. And the US government would lose its external funding.

The BIS, on the other hand, coordinates central bank transfers to facilitate international trade balance. If the BIS stopped functioning, so would international trade. This clearing system is fractal in that imbalances are first cleared locally, then regionally, then nationally, then internationally. If the BIS didn't deliver, food would not arrive at your local store, at least until a local production, distribution and clearing system was set up.

This leaves us with a one-sided dependence dynamic in which the BIS and the rest of the world could, if they wanted to, stop supporting the IMF and let the dollar die. But on the other side, the dollar cannot survive without the BIS. But why does this matter? What could make the dollar even think about abandoning the BIS?

Well, if the US ever put gold back on the table through another confiscation of its citizens' gold, the BIS would call in all of its outstanding claims in gold at the rate of $42 per ounce. And the BIS would not be alone. Other entities would have legal claims for gold at $20.67 per ounce, and others at $35 per ounce. How much gold was either confiscated or defaulted on without due process of law? Claims of perpetual entities never go away. If the US government ever exposed its own gold (or its citizens' gold through confiscation) to the light of day, it would expose itself to all kinds of claims and an international legal mess. Under international law, the US is still an OUTLAW when it comes to gold!

This is why gold is off the table. This is why we can never go back to a gold backed dollar. It is also why they cannot call in gold AGAIN under the same dollar that they did in 1933. To call in gold at a specific exchange rate now, the US would first have to back the dollar with gold at that rate and then call it in. That would expose the US gold to international legal challenges for redemption. If they simply called in the gold without backing the dollar, the US government would be exposed to thousands of internal law suits. These law suits would rightfully demand a retroactive reversal of 1933 before any new confiscation could take place. They would demand that US official gold be distributed to all citizens at $20 per ounce BEFORE it could be turned back in to the government.

The US government will never take this risk! It will never expose itself to this legal nightmare! The US is already a golden outlaw!

If the coming dollar collapse takes the first waterfall route and hits the riverbed, how would an insane and illogical confiscation play out? Well, if the US dropped out of the BIS to secure sovereignty over its confiscated gold, the BIS would halt all international dollar traffic and probably try to use those dollars to buy gold on the international free market. The dollar would be instantly dead.

But what if the dollar falls all the way to the pits of Zimbabwe hell? What if the US simply declares the dollar dead, confiscates the gold, and then starts a new gold backed currency? Wouldn't that work? I will tell you now that it would never be accepted on the international market as an exchange contract for gold! Even at $10,000 or $100,000 an ounce. The world is not that stupid. The US has defaulted on its gold obligations to the world TWICE now. The first default was 41% and the second was 100%. What will it be next time? No, the US will never be trusted to issue paper promises for gold again! Freegold is the only option!

The US government and the US dollar is caught up in this massive Catch-22 because of its own past cheating actions. This is why a future gold confiscation is simply not in the cards. This is why the Fed will appear more and more INSANE in its futile attempts to save the current system, all the way to the fiery bottom. And this is why freegold is the only possible end to this system.

Bottom Line: It takes AAA credibility to gain the confidence needed to run a fractional reserve paper gold scheme. The US government spent all of its credibility on a failed scheme long ago. And now the current COMEX scheme will face the same fate, thanks to the inflating of paper contract supply to meet demand, far in excess of physical supply, in the sole support of the US dollar printing authority that needed support since it had already defaulted TWICE!

And when the dollar finally collapses in value, a THIRD and final default will take place. The US government's existing dollar-denominated debt of $11 trillion will become instantly worthless.

And once the printing press source of funding is gone, the US will be forced to settle its trade deficit with real money on a 1 to 1 basis, no more fractional reserve shenanigans. If this is done centrally, as it is now, then the government will face a whole world of claims saying the gold already belongs to them. For its past sins, the government cannot take this chance. The other way to settle an ongoing trade deficit is on the local level, through millions of small transactions.

This is freegold. And this will pit trader against foreign trader, rather than government against government, or central bank against central bank. It will allow for trade goods to flow across borders and keep the economy alive so that the government can continue to collect taxes. This system will become very clear, very fast. It may be hard to imagine right now, but once it is forced into action by necessity, it will be clear. Even to the US government.

Freegold is not about huge profits for owning gold. It is only about the protection of wealth for everyone in the world. The huge profit only happen once, during the waterfall. It is a one time event. After that gold becomes the only store of value that keeps up with inflation... automatically!

I had wanted to end with a recent comment on this subject which prompted this post. But rather than extend this already long post any further, I will end with a simple link. Here is Ender's excellent explanation of why a freegold financial system is the only option left to a government that cornered itself long ago. Ender's comment will give you a glimpse at how this new freegold system will actually benefit governments while gold confiscation would hurt them. Remember, the government already has a monstrous system of confiscation in place. It is called TAXES. And freegold will stimulate the exact activity that generates the most confiscation, er... taxes. That would be local business investment! So take a break and then come back and read Ender's great two part post.

Sincerely,
FOFOA

FOA to Martin Armstrong - 1999

Here is an interesting "open reply" FOA wrote to Martin Armstrong in 1999. This was less than 5 months before Martin was jailed for contempt of court. Martin's original letter was to someone else on Kitco who then sent it by email to FOA who responded openly on USAGold...
________________________________________________________

FOA (08/20/99; 12:46:41MDT - Msg ID:11630)
Open Reply To Mr. M. Armstrong
I must reply to this private letter that was sent to me. It was written to Cage Rattler by Mr. Martin Armstrong.

Date: Sun Aug 15 1999 07:28
Cage Rattler ("Gold was a store of value throughout ancient times, however money NEVER was!" - M Armstrong) ID#33182:
Copyright © 1999 Cage Rattler/Kitco Inc. All rights reserved

Armstrong:

Dear Bob:

You are making the opposite mistake of Karl Marx. Marx assumed that everyone in the private sector was corrupt and therefore that property held in the hands of government would be fairly managed. Marx never accounted for human nature and it doesn't matter if control over money is private or public, both have historically tended to exploit it for personal gain.

Money is ONLY a medium of exchange and it is NOT, and has NEVER BEEN a store of value. Gold in itself has been a store of value as demonstrated in Korea and Asia. Gold was a store of value throughout ancient times, however money NEVER was! These are two separate issues that should not be confused.

FOA:
To the contrary, Mr. M, these are two separate confusions that deal with the same issue! Your assumptions always conclude that the values established in a public "marketplace" represent the private views of the majority of people. In other words, if someone trades anything using the marketplace price and using the accepted mediums, the mechanics of that trade must also represent the mindset of the person. Throughout history, it rarely has. Your view is further skewed with the "control over money" issue. The world has always assumed that the "people" want someone to control the money, be it public or private.

When one looks closely into the private actions and reactions of people during various civilizations, the mindset of the majority (the average citizen) was always that we don't need "money at all". Just let us alone so we can trade our things. The modern argument of the Public vs Private "control" always found the banks as representative of the term "Private" and the government put forth as "public". The "free market citizen" was never considered as a viable contender to pick the trading medium.

Banks, long ago assumed the role of making and controlling money for private interest because they saw that the "free citizen marketplace" seemed to always use gold to trade with You say:

Money is ONLY a medium of exchange and it is NOT, and has NEVER BEEN a store of value

The problem with this is that in the old "free" marketplace, these people never thought of their use of gold as using "money"! It was only a "thing" that most of them found to be the best item to trade with. For them (again average people) gold held its own particular independent store of value just like anything else they owned. Indeed, in their mind it wasn't the "medium of exchange" money concept of the bankers in a later time. I submit that even the term of "money" in the early bible was not in the same banker context. Back then it was more closely associated with a "thing of personal value" that could just as easily be "used" as traded. Therefore your statement,

Gold was a store of value throughout ancient times, however money NEVER was!

does not present a valid conception for comparison. It was the banks that, in the assumed role of creating money for commerce, decided to make and control the "CONTENT OF THEIR CREATED MONEY". In this action, by no means did they represent the perceptions of people who can be depicted as the third party in this debate of control. Yes, banks were owned by private interest, but that should not imply that they presented the private viewpoint. Yes, the people did use the created money (both coin and paper receipt) for trading, but the mindset of that early evolution did not hold that this "bank money" was solely a "medium of exchange" Rather it was a receipt for a tradable item of use. The "medium-only" concept came into play as the banks lent out more receipts than they had or they could not collect upon failed "real gold loans". That excess of gold receipts in circulation could then be perceived as the "medium of exchange modern banking concepts refer to". We then clearly proceeded to the era you next present ( as it is explained in reverse):

The Greeks, Romans and everyone along the way ALWAYS and WITHOUT EXCEPTION played with the gold content of their coinage which led to Gresham's Law - good money drives out bad money. Whenever money was debased, older issues of higher metal content were hoarded. They then ceased to be MONEY (medium of exchange) and became a (STORE OF VALUE).

With the clear viewpoint that I presented above, we can see that this next statement does not apply to a post contraction "free market trading arena". Rather it is the present conjecture, using the present thinking in a prosperity-mode mindset that assumes the private and public terms as the only viewpoint. They are only two parts of a three part society.

If you think that a return to a gold standard in some way will eliminate these issues, you are wrong! No matter if it is the private sector or the public sector, whoever ends up in charge will always play games.

Indeed, if a true free market in gold was established and all gold was coined and sold into the market place, games would still occur. However, new concepts for hard times would require mines to make all coins to conform to set standards and pay their taxes to governments with the same (however high that might be). In addition, they would pay their help and buy supplies with the same. Private stores of gold (both government and private) could choose if they wanted their bullion coined or not for a fee. Yes, the value of gold would go very high compared to real things, but it did that long ago, before banks called it a "medium". Anyone that owned gold would be rich. So what? Anyone today with a lot of cash is rich, again so what? Gold money is spent and loaned and, in general, always circulated. Just as in the early days before banks when gold was just another thing of wealth, but not the only store of wealth in a person's portfolio of things. Yes, banks and governments would fail and go bankrupt as they always did. Yet, the money supply would never be changed because of their failures. People that loan gold money would learn not to count that asset loan as part of the money supply as today.

Further on you state:

Gold is a store of value today - but it is NOT money. It is NOT acceptable to pay your VISA, rent or to buy food unless on a barter basis. Only dollars ( money ) is acceptable in the US, and now Russia while it may be yen, marks francs, deniers or whatever in other nations.

Again, you assume that gold is not money because it is not accepted as "the medium" in the Government / Bank operating economic system. I submit that this perception represents a short conclusion. If we extend the thought we find that no government or bank said that gold was not money. They only decided to not "use" gold as "legal tender money". Both of these entities chose to pursue this route because they wanted to create more "money" than was in existence. Something they could not accomplish using a money that possessed a "store of value".

As I pointed out, the "citizen" and their trading are the "private free market" that the world economy is and has always been based on. This market place does not need "more created money" as it worked fine using the old "store of value gold" as long as the market could increase or decrease its purchasing power as measured against all goods and services. Banks and governments fought hard to stop this function because it took power away from them and returned it to the economy.

As a result, history proves how poor of a job government and bank paper money has done without using gold. Your description that follows is an excellent example of the battle between the first party governments and the second party banking systems. The third party private person will be impacted from this abuse of the money system, however, our heart was never in it. Your words:

I simply disagree with your interpretation of 1929, the Fed and the wildcat banking era. Your view of anti-central bank was shared by Andrew Jackson who was bitter because he had lost money and was turned down for loan in his youth. When he became President, he destroyed the Bank of the United States and with no central control, the entire banking system quickly fell into trouble. There are countless "broken bank" notes that collectors can buy today from every little one-horse town in the country. Some were in the hands of local politicians who quickly exploited the system and bankrupted their communities. The Constitution specifically prohibited the States from issuing money and because of the hyperinflation of the 1700's.

You are also misinterpreting dictating private investments with restrictions of asset class and leverage. You now have a perfect example of your no interference policy for the private sector. Long Term Capital has just blown up by leveraging positions to the extent of $1 trillion. The uncontrolled activity of this one hedge fund is going to disrupt the free markets everywhere in ways you have not yet even noticed. There needs to be a rule of law that establishes the basic guide lines. It should NOT expand into regulation of every aspect over investment. What an individual does with his own money is his own business. However, when institutional money is gathered and used at the discretion of fund managers who buy into the latest hype like Russia, then allowing this type of investment to be carried out with ANY restrictions whatsoever, is extremely dangerous. LTCM is a significant threat to both bonds and stocks right now. A few other funds are now rumored to be in a similar position. Such unbridled leverage threatens to bring down a lot more than anyone suspects. I think there will be investigations and a whole new set of regulations that will come out of this debacle. The Fed is currently calling around the street in an attempt to assess the damage. There will come a day when you will see that the proposal of that I have made to merely regulate asset class will be far more attractive after the next set of regulations come storming out from all government bodies that will seek to restrict every aspect of investment. What they don't understand - they ultimately kill.

Your argument for no regulation will not even be seriously considered by any government body I have ever testified before. In reality, there may be no way out, because the people themselves will demand action because they have lost money in stocks caused by hedge funds in Russia and interest rates like LTCM. They will in the end bare the blame and a host of new regulations will spring forth in an effort to appease the people who demand government action.

-Martin Armstrong

FOA:
Sir, I have commented on your thoughts because it is important to present the flaw in this perception. Some of your analysis is in the context of a rebuilding of the government/banking financial system after a great contraction. It places little support to gold as a choice to preserve wealth during this event as gold will not be in demand.

I submit that you have misread the historical attraction to gold that private citizens impart upon this metal. The human factor always has and always will gravitate to using things as trading items. We were born a people of earth with senses that touch, see and feel for value. Whether our trading things can be considered money, a medium of exchange, legal tender or a store of value, was never the issue. Governments and banks made them an issue so as to circumvent our value of trade for their benefit.

As such, when the next downturn threatens to destroy the perceived values created in fiat currencies and securities, people will then circumvent these modern concepts and return to trading the most convenient things. History, not modern computer research, has shown that we will return to gold.

Thank You for your time.

FOA

Open Forum

Bernanke Diverging With King Means Dollar May Decline
Aug. 20 (Bloomberg)

“The question is not whether the dollar will weaken over time, but how it will weaken,” said El-Erian, a former deputy director of the International Monetary Fund whose firm runs the world’s largest bond fund. “The real risk is that you will get a disorderly decline.”

‘Orderly Fall’

An orderly fall of the dollar would be good for the world economy as it helps the U.S. continue to expand while consumers retrench, El-Erian said, declining to be more specific about currency levels. Such a drop would also help other countries including China wean themselves off their dependence on exports, promoting growth worldwide in the process, he said.

Derail Recovery

Without that coordination, there’s a danger of a disorderly dollar fall that would destabilize financial markets and could derail the recovery, he said.

Treasury Insanity In Support Of Grift

*US TREASURY TO AUCTION $27 BILLION IN 52-WEEK BILLS
*US TREASURY TO AUCTION $42 BILLION IN TWO-YEAR NOTES
*US TREASURY TO AUCTION $31 BILLION IN THREE-MONTH BILLS
*US TREASURY TO AUCTION $28 BILLION IN SEVEN-YEAR NOTES
*US TREASURY TO AUCTION $30 BILLION IN SIX-MONTH BILLS
*US TREASURY TO AUCTION $39 BILLION IN FIVE-YEAR NOTES

This is the price of supporting the grift and fraud in our banking system.

I count $207 billion, coming two weeks after a $250 billion dollar week.

Let's annualize - that would be about $5 trillion a year in annualized issuance. My-oh-my how long can this continue?

The Countdown To The Implosion Of The Dollar
Posted: Aug 19 2009 By: Jim Sinclair

My Dear Friends,

You can take your waves, percentages, algorithms, quants and quarks and throw them directly into the basket. The time for lines and squiggles are behind us. The common shares of the US dollar are and have been in a long term downtrend. That downtrend is 81 days from implosion. The selling of the US dollar and US dollar instruments is increasing in international markets, making it ever more difficult to manipulate the popular US dollar index, the USDX.

The price of gold is all in the dollar, times 100.

The manipulators have built a fundamental spring into gold by their capping activities.

COT has cooked its own goose.

Where the price of gold is concerned, there is no other focus of interest as all points of interest have but one common denominator.

That entity is the US dollar.

The Fundamental illustration below is dollar flow momentum.

China holds in its hands the future of the category, “Foreign Purchasers of US bonds.”

China wishes the annihilation of the Fed policy of “Quantitative Easing.”

The Fed wishes to accommodate China.

The US Treasury is absolutely opposed to any such consideration as it would cement the present Administration into a one term wonder.

The US Treasury must win this battle because the boss of this opposition has the power to appoint the new Chairman of the Fed, either Summers or Geithner.

Political control of the US Fed and therefore of monetary policy is in the cards.

China as spokesman for the BRICs has publicly stated their desire for the institutions of a Super Sovereign Currency. This is not an intended as an immediate substitute for the dollar as a reserve currency but rather an alternative in new commitments.

Only the misinformed assume the desire for an SSCI is a desire for a total exchange of dollar reserves.

The desire of the BRICs and in truth all other major trading nations is for dollar diversification in order to break away from the dollar dictating their futures. It means a significant decrease in purchases of US dollar denominated instruments.

Selling is not required for substantial depreciation in a major currency.

Momentum collapse in buying is all that is required for a severe depreciation in any major currency.

The USA in all probability will not be able politically to deliver support for the SSCI, however political control of monetary policy is CERTAIN as the Fed cannot win this contest against the Administration in the form of the US Treasury.

Bernanke becomes a team player or a team player will replace him.

The later is becoming a probability as it is hard to trust a prior adversary.

The depreciating dollar was a tool of Roosevelt’s failed anti-deflation program that like monetary stimulation is believed to have been abandoned too soon in the 30s by Administration intellectuals. Because of this, the US dollar is out of the picture for serious Administration consideration other than as a sales issue on US treasuries.

It is my understanding that the BRIC countries, not China alone, have given the US until early November to deliver.

As a result of the above I see 81 days left for the US dollar.

The gold price has but one criteria and that is the US dollar. Armstrong and Alf are correct on the levels awaiting the gold price.

I know $1224 and $1650 are certain.

Note: Eric’s humility is the sign of his maturity and genus. Well done eric.

Respectfully yours,
Jim

Guys,

I know that Dan’s TIC work is far superior to mine, but I find this simple chart so ominous I had to send it. Decelerating year-over-year inflows and outflows across the board. Stick your head in the sand if you like, but string this trend out a little longer and you’re going to have flight from the dollar.

CIGA Eric

The Waterfall Effect

Well, the inflation-deflation debate has surfaced once again. Not in a big way, but in a way that drives me to clarify my position a little. Perhaps you will be surprised.

Divergence

Today's economy consists of an expanding divide driven by opposing forces. Like the jaws of life, they are ripping open a gap between reality (real economic goods) and fantasy (the US dollar). On one side we have the collapsing real economy, and on the other we have unprecedented electronic reproduction of the base unit of measure. On one side we have the exponential expansion of social promises denominated in trillions of dollars, and on the other we have a real economy incapable of delivering such value.


This divergence has been ongoing for some time. But in 2009, the angle of opposition has finally reached 179 degrees. The graph of opposing parabolic trends is almost complete. The only possible outcome at this point can be the Waterfall Effect as described by Martin Armstrong.

The Waterfall Effect describes the "overnight" collapse of a complex system, without even the forewarning of a run up (like gold in 1980 or the dot com run up). The following two graphs demonstrate this effect as seen in the collapse of Roman money in the 3rd century AD. The similarities to today are chilling.



The economy is such a complex organism with so many variables that it simply cannot be controlled. It is the height of arrogance that our politicians and so-called economists think they can control it. And it is the absolute height of arrogance that they attempt to do so in such a way as to ALSO benefit their selfish goals. With this level of stupidity, unintended consequences become many orders of magnitude more probable than the intended consequences. In fact, betting on the exact opposite of stated political goals is a sure bet for the long run right now. And the payoff will be tremendous!

In "How ALL Systems Can Collapse Overnight", Martin Armstrong uses the concept of entropy. Entropy is the amount of chaos, disorder or unknowable elements in any system. A system has low entropy when it is highly organized, ordered, controlled, contained, and all the elements are known. A system has high entropy when it is disordered, chaotic, out of control, and many elements cannot be known. Science teaches us that everything in the universe ultimately ends in absolute entropy (chaos) through the passage of time. In other words, ashes to ashes and dust to dust.

One thing that can affect the natural progression of entropy along the way is adding energy into a system. In certain closed systems with a high degree of order and control, adding energy can actually reduce entropy, increasing organization and order. This can be seen in the wonders of life and reproduction. In the closed system of a baby, we add energy (food) and watch it grow. Ultimately, though, entropy wins out and we return to dust.

But adding energy to a system usually has the opposite affect. It speeds up the journey to absolute entropy. This can be seen in an explosion. A bomb can take an entire building from low entropy to high entropy in a fraction of a second. Another example is a forest fire. The fire is energy added to the system (the forest) and it speeds up the journey from order to chaos. A fireman can slow this process because he has the knowledge that adding water, another form of energy, will affect the progression to entropy in a positive way. But what if the fireman was acting without perfect information? What if the fireman sprayed gasoline on the fire?

I will say it once again because it is worth repeating; the economy is such a complex organism with so many variables that it simply cannot be controlled... ESPECIALLY by politicians. The same fuel that ignited this fire is being used to put it out!

The fact of the matter is that this entropic journey our economy is on must be played out to its natural end. There is no amount of information or energy the politicians or so-called economists could come up with that would be able to turn back time. Nature must play out. And by adding imperfect, frantic energy, by adding fuel to the fire, they are doing the equivalent of setting off a time bomb. They are ensuring that we will all have to ride the waterfall!

Deflation Talk

Deflation is the shrinking of the money supply relative to the economy. It causes the purchasing power of money to rise and prices to fall. But according to our modern deflationists, today's deflation comes at a time of shrinking economy and rising money supply. According to them it is driven by the lack of demand from the collapsing economy, and it is defined by the falling price of assets like homes.

Robert Prechter is out and about today talking about the deflationary depression, with stocks, commodities and real estate all falling together. He says that we are just coming off a top the likes of which have not been seen in 200 years. He says that the best way to ride this out is in the "safest possible cash equivalents".

Basically, he sees this next major down-leg in the depression taking stocks, commodities and real estate down another 85%. He says that oil will ultimately fall to between $4 and $10 per barrel! The danger in making a prediction like this is while it may be fundamentally sound, it is still denominated in the dollar, a piece of paper with shaky credibility.

While I view Robert Prechter as extremely bearish, I must say that I agree with him to a certain extent. The extent at which I do not agree with him is the steady state of the dollar. Prechter views the world through his Elliot Wave cycle theory, which is not unlike Martin Armstrong. But the problem is that the waves he measures are against the backdrop of a steady state dollar.

Like Prechter, I expect all aspects of the economy will continue downward to depths below that of the great depression. But during the great depression, we did not have Ben Bernanke and we did not have a purely symbolic currency as a measuring stick. We had a gold-backed dollar.

Think about this for a minute. The average retiree on Social Security receives about $1,100 per month, or $13,000 per year. This is a dollar denominated promise. If the crash from top to bottom is 90% or more as Prechter predicts, this would give each and every Social Security recipient the equivalent purchasing power of $130,000 per year when purchasing real estate, the stock market or even commodities. Basically everything.

And this will be true not only for Social Security, but for anyone on the receiving end of a dollar denominated promise, including all pensioners, anyone with a tenured job, like teachers and government workers, and including everyone in Congress. Virtually everyone with an income or cash savings will see their purchasing power rise ten-fold!

The problem with this view is that the real economy right now cannot even afford to deliver real economic goods at TODAY'S dollar purchasing power, let alone another 800% rise in purchasing power, with Ben printing new ones the whole way there.

So Bob and I both see a waterfall approaching, but how can we reconcile our seemingly opposite views on deflation?

Currency is the key!

Take another look at the first chart at the top. Something has to give, and soon! Think of those two diverging lines as fingers stretching a rubber band. Then ask yourself, what IS that rubber band? I'll tell you. It is the dollar, the unit of measure for everything economic.

There is a quote I like that comes from Le Metropole Cafe. It goes, "we will have deflation in everything we own, and inflation in everything we use". This is partly true. It is true during the run up to the rubber band snapping. It is true until we hit the waterfall. At that point I have my own version of the quote. "We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars."


So, just to clarify one more time, we will see hyperinflation in gold as the dollar collapses on the world stage and loses its global reserve privilege. This will be followed by nominal hyperinflation in all things priced in dollars as the US frantically prints more and more to support its dying dream of a socialist paradise. The distribution systems for these new dollars will be wide and varied. But distribution will not be through wages tied to economic increases in production (traditional inflation). It will be through a variety of programs that will be called "stimulus". (See my "New Stimulus Plan" and "Free Money" for clues).

The deflation that Prechter sees (as well as Mish, Denninger, Ackerman, Weiss and many others) is very real. It is the collapsing economy and paper financial structure. It is real deflation in real terms. But unfortunately for them, the dollar is not the true base of the pyramid, and it will only benefit temporarily as a "pass through level". (See "All Paper is STILL a short position on gold").

Hyperinflation (a currency event as Jim Sinclair so eloquently tells us) is always concurrent with deflation (economic malaise) when measured in real terms (gold). The dollar is only paper, and it is being printed like crazy. So to measure things in dollars becomes very confusing when looking to the future. The above-mentioned deflationists cannot imagine the hyperinflation event that I describe because they are stuck on their cycles and technical analysis that has always been measured in dollars. But in this crisis, the currency itself is the key. All else is noise.


Sincerely,
FOFOA

References:
Images 1, 3 & 5
Image 2
Image 4
Prechter 1
Prechter 2
New Stimulus Plan
Free Money
All Paper is STILL a short position on gold
Jim Sinclair "Currency event"

Brown's Bottom

The day after Brown's announcement...

FOA (5/8/99; 20:16:12MDT - Msg ID:5772)
BOE!

ALL,
Well, by now everyone must be aware of the "open management" of the gold price. "Another" had been bringing this picture to light long ago. In puzzle form, he offered ideas, Thoughts and directions for consideration. Only a short time ago most analysts completely wrote off such "thinking" as being absolutely "on the fringe of reality"! Today, the "absolute fact" is that gold is used and managed as a "world currency" of major importance. After the BOE announcement on Friday, currency traders are grasping the concept that gold is, as never before "at the center of reality"!

Many different factions are maneuvering gold these days, and each has their own agenda. The IMF / dollar faction, many years ago, went along with Europe in lowering the gold price in dollar terms. It made the dollar look stable and enforced its continued use as the "currency of settlement" for strategic commodities. Any country running a balance of trade surplus of dollars, was free to buy gold at a stable to lower price, and partially replace the paper dollar reserves. Because the dollar is the "world reserve currency" many countries ran dollar surpluses with trading partners outside of the US. In this light we can see how the integrity of the dollar was expanded, even in countries of nonnative dollar origin!

Not only was physical gold purchased, but paper gold with distant CB backing was also accepted. Ever wonder how all of this gold was placed? You see, over the last many years, there has been a quiet boom going on in gold ownership. The sheer number of world gold buyers has more than doubled, along with the amount of gold owned! The problem is that the amount of physical gold in existence has not doubled, only the warehouse receipts.

Most of it never, ever left the vaults, as the true placement was done in receipt form. Yes, slowly, over the years, even major private bullion holders offered up their physical for "convoluted, future delivered, leased and released gold". Much of what is now held is little more than a form of gold options for "future deposit". Not unlike the "cash dollar that is supposed to be in your bank", but really isn't? As the bank only holds your deposit as a "credit" to your account, so is much of the world traded gold "only a credit of account"!

When Central Banks (mostly the European, at first) began to lease / lend gold, they were beginning what was to become "the master plan". The creation of a broad, liquid paper gold market that would ultimately undermine the dollar, in time. As I said above, initially it was offered as an "appeasement" for continued dollar use. However, even the IMF / dollar faction never expected the successful creation of another competing reserve currency, the Euro! Right up to its offering, the political money was on the side of a complete failure, 100% with ten to one odds.

Not only did they lose, the Euro even accepted a percentage of gold as Euro reserves. If that wasn't enough, the ECB also instituted a policy of "marking to the market" its gold reserves and effectively blocking any new sales or leases. These actions, as subtle and misunderstood as they were have had the effect of officially making gold money again. Yes, this new broadly traded paper gold market, standing side by side with the physical market has become a world currency.

The problem this creates for the IMF / dollar is that most, if not all of this new gold market is settled in dollars! Dollars that broke a contract with the world in 1971 and went off the "gold exchange standard" at $41 to the ounce. The same dollar reserve currency that is not supported when the gold price rises. If the ECB does nothing but stand firm by not allowing physical out of its vaults, the dollar will be trapped by gold. The US treasury cannot use gold as a backing reserve as the ECB does, because the BIS would claim it at $41 to settle trade imbalances. They have that authority and as such it leaves the US the only option of outright gold sales. However, with the dollar as "the" reserve currency, we can expect many nations to bid "aggressively" for any US gold. China, among others comes to mind! That is what America found when they tried to auction its gold in 1978. The Euro carries no such baggage.

This all leaves us in the present political situation, where the IMF entity, that was formed to replace the gold standard, is now trying to back the present paper gold with physical to prevent a run on the dollar. It is a futile effort as the ECB / BIS have grown the gold market into massive proportions by encouraging the many year expansion of holders through paper securities. All denominated, ultimately, in dollars. We will see $10,000 gold, count on it! It's the only way this can be resolved. That same figure will create massive backing for the Euro and hasten its journey into world reserve currency status. Expect most of the ECB liability for gold to be easily converted into Euros at the dollars expense.

Free Money

I can smell the fear emanating from Washington. I'm sure the wolves can smell it too. Things aren't going well and our "fearless" leaders are starting to panic. The signs are everywhere. Everything under the sun is imploding and exploding at the same time. Fannie Mae, FDIC, Cash for Clunkers, Health Care reform, state financing, Geithner's cool. The only thing they seem to be able to control is the stock market.

As I have said before, the only thing they really have control over is Bernanke's mouse. And that poor thing is working overtime these days.

As we all know, no government program is cheap. Whatever the output, the cost of getting there is always many times higher. Remember the $600 toilet seat? Well, it seems that the $4,500 free money for clunkers is actually costing somewhere between $20,000 and $45,000 per car!


Not only that, but this program is destroying actual real-world capital in the US and replacing it with paper! They are destroying paid off, working vehicles and putting people in new cars they can't afford. You know, last time I bought a brand new car I first found the car I wanted, then I shopped around making low offers to various dealers to find the best deal. I ended up getting a $42,000 car for $36,000. That's $6,000 off! And I didn't even have to turn in my trusty old work horse. It's easy. Anyone can do it. But not right now. Not while Cash for Clunkers is going.

This program is simply free money for bureaucracy, car makers and the UAW. It is actually NET-DETRIMENTAL to car buyers and to the US economy. It will do nothing but harm to the economy. Where do you think these new cars will end up once the people who formerly had paid-off clunkers can no longer pay $400 per month for their new wheels? And right now, the used car business is crippled by this government program of free money competing with it.

This is possibly the DUMBEST program ever. How do I know? Well let's just say that certain CNBC personalities think it's great.

Anyone remember my New Stimulus Plan? It's getting closer!

We have made some serious progress on the road to you-know-where...

Man receives cash for clunker