We had a good discussion on the concept of money developing after the last three posts. Here are a few of my comments, re posted by request:
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This first one was a response to a question about a potential dollar rally during another global liquidity crisis...
Hello Anonymous (6:05PM),
Here are some thoughts and comments as you requested:
We need to keep a few principles in mind in order to understand what is being discussed in these confusing discussions about a liquidity crisis, currency swaps, and supposed dollar strength. My apologies if I simplify this too much for your taste, but my thoughts are simple ones...
1) First of all, what are all banks and bankers afraid of? A run!
2) Hyperinflation coincide with a multiplication of the monetary base (which is the natural response to the market devaluing "broad money", near-cash credit assets), not with the credit expansion of broad money through commercial bank lending.
3) The USDX measures the supply and demand of actual base money needed for transaction clearing, not the willingness of banks to stick their necks out further. Base money is the "reserve" in the term "fractional reserve banking". We could call it "fractional base money banking".
4) Currency devaluations are long term and permanent. USDX quotes are short term and temporary.
5) There is no difference between the $ and the $-financial industry ($-FI). What is bad for one is bad for the other. A run on the system is just as bad as a run on the banks, or a run on the dollar. Any run screws them all.
6) Much of what we all think of as money (dollars) is not really dollars in the same sense as the dollars needed in a liquidity crisis. We think of money mostly as M2. But a liquidity crisis requires MB (Monetary Base, or base money)
7) "The system", meaning the worldwide financial industry is divided into sub-systems; The Federal Reserve system, the Eurozone system, the British system, etc... What differentiates these sub-systems from one another is their own currency, which can be created on a whim by the central bank and lent to banks that need extra funds with the CB taking collateral from the borrowing bank in the form of assets denominated in that currency.
8) Each sub-system is a completely interconnected network of financial institutions, including commercial banks, investment banks, brokerages, etc... 99% of all transactions within each sub-system clear without ever having to move money (dollars). For example, within the bigger banks, most transactions clear in-house. One person might buy a house, taking out a new loan for $100,000 while some other bank customer sells his house paying off his $100,000 loan. These two transactions cancel each other out in-house. Inter-bank transactions cancel each other out as well. For the most part, finance and banking is a zero-sum game within each sub-system, from stock transactions to bond transactions to new loans to settled loans to you writing a check to your dentist. If one bank ends up with more at the end of the day and another with less, then the central bank clears the trade with a book entry transferring "reserves" from one bank to the other. Even new loans do not really create the kind of money that is needed in a liquidity crisis. They create credits issued by the bank, liabilities that are counterbalanced by the debt papers you signed. Those credits entitle the bearer to dip into the bank's actual dollar reserves, but do not create new dollars. The only new dollars that get created are when the bank must move funds to cover fractional reserve requirements. Those funds then become new monetary base. THOSE are the kinds of dollars needed in a liquidity crisis.
9) Each sub-system has a TREMENDOUS amount of flexibility since the CB acts as the ultimate clearing house between all the financial institutions in that sub-system. And since we are now on a purely symbolic fiat currency, the CB can create any liquidity the system needs. If one bank comes up so short at the end of the day, owing another bank more reserves than it has, then the CB just creates new reserves and lends them to the bank that is short and the CB takes assets (from the borrowing bank) onto its own balance sheet to counterbalance and collateralize the loan of fresh new money. This flexibility has virtually eliminated all banking liquidity problems within any given sub-system. Only an actual bank run on physical cash within a sub-system presents a real threat. And if that run happens to only one bank in that sub-system, then that bank is sacrificed. If a sub-system-wide run on cash were to happen, we would have a bank holiday while they figured out the best way to devalue the monetary base and increase it.
10) Viewing the whole worldwide financial system, in which the BIS acts as the ultimate clearing house, there is much less flexibility because the BIS does not print the currencies it clears. The BIS would prefer ITS central clearing to be done in gold bullion, stored in its vaults and moved from one countries slot to another when necessary. But the $-system doesn't want to play that game. Even still, 99% of the worldwide transactions clear without the need to transfer any funds around... as long as it is a "business as usual" day.
11) Problems start to arise in the international clearing house when daily transactions become unbalanced, meaning too many people trying to do the same thing all at once, with no one willing to do the opposite thing. The two sides of a zero-sum game are never in perfect balance, but they are usually close enough that market pricing takes care of the difference. (If there are too many sellers then the price drops until the sellers equal the buyers.) But sometimes an event happens that spooks the markets and sends everyone to one side of a trade all at once. Prices go into free fall which spooks the markets even more. Then the exchanges are shut down "to let cooler heads prevail". But this only spooks the market further. Finally, at the end of the day, the clearing house is left with a big one-sided mess to clean up.
12) Here is the big problem. Each of these sub-systems has its own currency which its CB can print at will... flexibility! But with the dollar being the global reserve currency, there are lots and lots of dollar-denominated assets held by financial institutions in many non-$ sub-systems. So when there is turmoil in the dollar-denominated markets, the non-dollar sub-systems run into a clearing problem because they can't print dollars to help banks that owe other banks more dollars than they have. So they turn to the BIS, who also can't print dollars. Only the Fed can. So the Fed ends up being the de facto CB to the world. But it is not the clearing house for the world, and it does not take assets onto its books from those foreign banks that got into trouble. Instead, it lends directly to the other CB's which print some of their own new currency and send it to the Fed in exchange. This is why it is called a "swap" instead of Quantitative Easing. They are swapping freshly printed currencies instead of assets for currencies. All base money! The same as cash. TWICE as potentially inflationary as QE on a global scale because two sides are now exposed to currency risk.
13) When the Fed makes these international currency swaps, it doesn't send pallets of hundred dollar bills on a plane. It simply makes a contract with the foreign CB and a book entry. The contract is a two-way promise to later provide pallets of physical cash if anything goes wrong and cash is needed. And with this promise in hand, the foreign CB makes a similar contract (promise) with the European bank that got in trouble. The foreign CB promises to later provide physical cash if necessary (if something goes wrong), and the bank submits assets to the CB as collateral. Next the troubled bank passes those dollar promises (IOUs) on to the bank it owes the dollars to and that bank credits its customer's account with dollars it doesn't have, but now has indirect access to (if needed). The idea is that as things return to normal and transactions start clearing in a more balanced state that ultimately the dollars that were needed will be able to be gotten on the open market without causing a spike in the price and they can work their way back to the foreign CB. The troubled bank, for example, can later trade assets for dollars and pay back the foreign CB which will then pass those physical dollars on to the bank holding the IOU. And now that the European problem has been cleared, the foreign CB can cancel that portion of the two-way swap agreement with the Fed. And no physical dollars need cross the ocean. And that portion of the currency risk is eliminated.
14) Base money is either physical cash or a liability (IOU) that traces directly back to the Fed, which includes reserves held at the Fed. In other words, it is physical cash, or the promise of physical cash from he who can print physical cash. The Fed is willing to issue these promises willy nilly but hopes it doesn't actually end up having to do the printing.
15) The USDX is a measure of dollar exchanges with other currencies that happen on the open market. The Fed can counteract a rise in open market dollar demand by providing a supply of dollars directly to banks within its own sub-system, or indirectly to foreign banks through swaps with other CB's. Last year the Fed had a lot of practice doing this fast. I am sure the contractual transaction with the foreign CB's took several hours and included recording video teleconferences in which the agreements were legally bound. But now that they have experience doing this in a crisis, next time it will probably be almost instantaneous.
16) So as long as there is more demand for dollars than supply, the Fed can control the price of the dollar on the USDX by its own willingness to lend dollars at zero interest with toxic assets or foreign currency as collateral. This costs the Fed nothing, except currency risk and bad PR at blogs like mine. But where the Fed loses control is when there is more supply than demand. And that is what is coming because of this very inflationary policy of providing dollars to save the system at any cost.
17) The problem is with the assets that are being swapped around for dollars, whether with the Fed or with the foreign CB's. These assets are becoming less and less liquid because they are not valued correctly. If they were valued correctly, the banks would be insolvent and have to file bankruptcy. They wouldn't even have enough assets to settle their debts by swapping with the CB's. This is why the assets need to remain marked to myth. But this makes the assets only sellable to the CB's. The open market doesn't want them. So the clearing mechanism that is needed to reverse the flow of supposedly temporary base money into the system is breaking down. The Fed tells us with a straight face that it can reverse everything it has done so far. But that is only the case if the free, open market is willing to take up all the slack the Fed put out there by private investors buying toxic assets at marked to model prices.
18) So the next time the Fed has to create a trillion new dollars of liquidity, it is likely going to stick in the system as base money that cannot be removed. Ultimately the Fed will be contractually obligated to print actual bills and supply them to the banks and CB's that hold the contract for them. And this is what devalues the dollar.
Conclusions: The USDX is a rather poor metric by which to judge the dollar, even in the short term. As long as there is a demand for base dollars, like there is in a panic or a crisis, the Fed has total control over whether it wants to let that demand bid the dollars on the open market, or provide them itself. And the Fed cares more about the financial system than the value of the dollar, so it will surely provide any liquidity that is needed.
The next crisis, if it is mainly in the US financial system, will likely not spike the dollar because the Fed has total control and flexibility within its own system. If it is spread throughout the world it may spike as foreign banks bid up dollars on the exchange, but the Fed is now more experienced than it was a year ago and will likely put a lid on it very quickly.
But this next dollar shock will probably be irreversible, unlike the last. And in such, it will increase the global supply of dollar monetary base by a large percent. Perhaps by 100% or more. This alone will devalue the dollar and be the cause of the next shock which will require a similar response by the Fed, perhaps increasing the base by another 50% as China and others dump the last of their bonds onto the open market in a highly one-sided transaction sending the value of the bonds to zero, US interest rates to something so high they are non-existent, and the purchasing power of the dollar down into the stinky, Zimbabwe dirt.
So in short, I guess I agree with David Bloom. Of course it COULD rally, but I don't think the Fed will let it (unless it happens to have some T-bonds to sell that week!). Letting it rally too high would crush the financial system (by driving asset values into the dirt) which the Fed wants to save at any cost. Even though the cost will be the crushing of the system. The ol' Catch-22.
Sorry if this seemed a bit simplistic or a little elementary. Of course there are more complicated issues involved, like the $ carry trade and cross-currency investments. Derived foreign exchange activities become very complicated very fast! Too complicated for the banks, obviously! But I hope I at least covered the basics of the problem, enough to explain my answer. You all will be sure to let me know if I got something wrong... I am sure of that! ;)
Sincerely,
FOFOA
PS. This is the big secret that George F. Baker didn't want to tell Congress in 1913. That most all of what we think is money is really just promises issued by banks to supposedly credit-worthy entities giving them the right to withdraw value from a small reserve of actual money, but at the same time praying to God that they don't! It's like saying, "here you go, it's all your's, whenever you want it come and get it" with their fingers crossed behind their backs hoping you won't ever actually "come and get it".
But whatever happens in the short term, the USDX will ultimately collapse just as Jim Sinclair says because ultimately it DOES represent a preference of currencies for use in international trade. And we know where that is heading, especially while the Fed hyperinflates the monetary base trying to save its own precious global $-FI!
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And in response to "Then why is the FDIC closing so many banks?"...
Hello Allen,
The FDIC is closing banks because they are insolvent. This is actually a system-wide problem as so much of the asset base is built upon the housing and commercial real estate sectors. But the bigger banks are being protected by accounting rules that let them lie about the value of their complex derivatives.
The smaller banks still hold a lot of raw mortgages, not yet securitized. These losses are harder to conceal. Many banks are still lying by not foreclosing even on badly delinquent homeowners. But this is only making the problem worse and "kicking the can down the road".
These smaller banks don't have the assets to acquire the loans they need to cover their liabilities. They are insolvent, just like the big banks, but they can't hide it anymore, thus they get closed.
This is what people mean when they say, "this is not a liquidity crisis, it is a solvency crisis". "Liquidity" means being able to get money for your assets from the CB (or from the open market). "Insolvency" means you don't even have the asset values to do that!
Sincerely,
FOFOA
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Some comments on Fekete's latest...
Wouldn't it be great if they just did away with all legal tender laws? Perhaps they could just keep one stating how they want you to pay your taxes. But let the courts defend any and all contractual agreements no matter what they are denominated in. And open the mint to free coinage! Of course this is all part of the world that SHOULD be, not the one that WILL be. So it doesn't give us much guidance for preserving (and increasing) the purchasing power we have NOW.
Isn't it interesting that the legal tender laws came out in 1909, just two years after the panic of 1907? As Fekete says, they led to the governmental ability to finance the world wars. But is legal tender really the problem? Or is it that the people continued to confuse the store of value function with the other monetary functions? If we now return back to the system of 1906, are we not returning to a system that has already reached a less than ideal end several times? Perhaps it would be better to embrace the separation of monetary functions as this will take away the ability to finance wars the same as a new gold standard would. Right?
Is it really the forcing of paper to be used as money (medium of exchange/unit of account) that allows the collective to rob the citizens? Or is it the conning of people into holding said paper as a store of value?? I think it is the latter much more than the former. Both to some extent, but more so the latter.
If people only hold the currency for the short time period of the medium of exchange function, then there is much less for the inflation tax to tax. The higher they turn up the inflation tax, the shorter the time people will hold the paper. In this case, the inflation tax would only be on the difference between your work contribution to the economy and what you could buy with your paycheck two weeks later. And the tax base would be limited to the amount of currency in circulation. But if people hold paper as wealth, the taxable base is orders of magnitude larger, and the inflation tax can be administered more slowly and surreptitiously because of the larger "tax base".
Imagine if every saver in 1909 started holding only gold coins in his possession as soon as they passed the legal tender laws. The parity between paper and physical gold would have snapped long before even the roaring 20's. Roosevelt would have confiscated gold valued in the many hundreds. But people trusted their governments back then. So it was easy to CONvince people that it was better to hold paper with a "yield"!
Fekete notes that no one hoarded gold until AFTER war started in 1914, at which time gold "went into hiding". But imagine if gold went into hiding in 1909 right after the legal tender laws were introduced. Perhaps then, there would not have been war at all. Or at least it would not have been so well funded!
It would sure be nice if Fekete would apply his brilliant mind to this Freegold concept! But alas, he is advocating for a new gold standard. A non-inflationary system, so we can all hold the same money we use in trade as a store of value.
Perhaps the next step in monetary evolution after a period of Freegold will be the elimination of legal tender laws in certain zones in order to gain economic advantage. This would likely be followed by the re-emergence of Fekete's "real bills". Of course I am only speculating way out into the future.
My point is that I like Fekete's analysis. It has great value! Hopefully he can help steer the direction that economic study turns as we pass through this crisis. But what are the odds that the governments of the world will suddenly listen to Antal Fekete and reverse the course of the Titanic in time? Zero perhaps? And even if they did, what would be the immediate consequences? The unintended ones?
My only point is that any superficial differences between Fekete and this blog boil down to the perspective with which we attack the problem. As you say, Shanti, "another angle"!
Fekete takes an activist approach while I take a passive one. Fekete would like to fully remonetize gold, locking it into all three monetary functions. I, on the other hand, can see that we are already in the process of fully DEmonetizing gold, which will unlock a tremendous hidden value that is desperately trying to bust out of its shell. In the end, Fekete says that he wants people to have "the right to park their savings in gold coins, as they did before 1909." But they DO have that right already! They just haven't realized how good it will be... yet!
Sincerely,
FOFOA
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On "is it possible that most of what we think of FED is mistaken?"...
Hello Anon,
You are inching closer to the truth than you may think. The whole system is an elaborate, global illusion. The money itself is an illusion. Why do you think banks are now offering CD's with no early withdrawal penalty? It is a gimmick. It is a carefully constructed illusion. The main goal is to keep people from withdrawing their perceived value from the system. And to create a believable illusion, they have to say, "look, you can withdraw it whenever you want". Study the logical reasoning behind Certificates of Deposit and you will see that a CD that you can close at any time is an oxymoron. It is a new gimmick for desperate times. The whole system and all Fed statistics are a gimmick now, to keep you in their system.
FOFOA
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And finally, a little bit from FOA...
It is the dollar and all of its flaws that have led us to this place in history. Because of the dollar's obsession with gold, we are now entering a period where for the first time the monetary functions will separate out of necessity. It didn't have to be this way, but now it is. As FOA said,
"To their amazement, it turns out today, that digital use demand was the best function that supported their efforts all the while; by increasing the world's use and need for currency. Had they understood this modern economic function early on, they could have somewhat printed the currency outright with almost the same result while arriving at today's destination. They could have let gold float, not to mention they could have skipped a large portion of the debt build up that will now end the dollars timeline."
What he meant was that the post 1971 "purely symbolic dollar" architects thought they needed to cap the price of gold in order to keep the dollar in use. But in fact, it was the dollar's ease of use in the trade function that kept it in demand. Not its illusion of being a store of value. And had they realized this concept then, we could have had freegold soon after 1971 and the dollar would have lasted well beyond 2010. But instead, they set in motion a sequence of events that could only end one way, in the permanent backwardation of the gold market, meaning the emergence of a physical-only gold market at a much, much higher price, and also the end of the dollar's use in global trade.
This is where we are today. And as you watch the volatility in the markets (look a the Dow over the last few days!) think about this statement FOA made eight years ago...
""""""It's not that price inflation may erupt --------- It's not that the massive dollar debts won't be paid--------The risk is; that our money system requires dollar (goods prices) and debt stability -------- so without said stability the currency system fails""""""
Without an international floating gold reserve pricing, to balance against their devaluing debt reserve, the entire dollar banking system can only rely upon extreme dollar inflation to float its accounts. Price inflation will have to be ignored. To this end the group of dollar supporting countries, we refer to as the dollar faction, has locked itself into a box. It must find a way to float gold prices"
"The entire dollar banking system can only rely upon extreme dollar inflation to float it's accounts."!!! It must ignore the (hyperinflationary) consequences of this policy and just do it. This is what S(herlock Holmes) uncovered!
Sincerely,
FOFOA
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Please continue discussing.... :)
68 comments:
raptor:
FOFOA : I found this link from one of posts on one of your articles.
http://www.dani2989.com/gold/goldprod0509gb.htm
This was the last nail in the coffin.. I mean I'm sold on the freegold idea (from the time I read it) don't get me wrong.
But I was still "afraid" (if i can paraphrase), that the gov's-et-all will again pull some fraud scheme and prolong the time until gold take its place.(as they did in 1997, 10y++ already)
FOFOA arguments albeit true from psychological and fundamental-theory perspective probably wont fly to the true believers of paper interest generating investments.
But after I read this article I can be even more certain of the outcome.
By this I mean several key observation :
1. Gold production is declining, for sure continue to decline ad infinitum.
2. The biggest increase in production is in countries which don't like $ hegemony.
3. Conditions are perfect for investors to look at gold as reasonable thing.
a) over 1000$ and stable
b) currency crisis
c) countries calling their reserves
d) china hoarding its total production
e) big investments companies publicly announcing of big gold purchases
f) and all the other reasons ..:)
raptor:
"Had they understood this modern economic function early on, they could have somewhat printed the currency outright with almost the same result while arriving at today's destination."
I seen this idea first in one of the Armstrong articles i.e. why don't gov+fed just make a contract with the creditors to just print couple of trillions with precise plan how to withdraw them over time .. instead of borrowing... or may be I answered my question interest now is almost zero (not for long though).
But they are not contractually obliged to withdraw the money.
raptor:
me again ;), FOFOA and others, do you think there is possibility of mopping the excess $ into SDR.
Dollars have the biggest % in the SDR basket. Most of the countries excess $ can go there.
One example let say China gives 500B ty's and get X SDR's. Problem solved ;?
Can SDR be used for balance payments, collateral,etc...
We know this is just another electronic money, but worldwide it can be used as life saver to the current situation and make ppl believe this is the new panacea.
First is such thing possible ? Who benefit and who does not ?
@Raptor
Be careful with those conclusions.
Gold production is declining, for sure continue to decline ad infinitum.
At the momenten it is increasing rather than declining I believe. That is off course normal in a 'free market'. As desire grows, more people will start producing.
over 1000$ and stable
Stable? Is has only been above a 1000 for a bit. I wouldn't go as far a calling that stable already. If so, it has been stable under 1000 for far, far longer.
Besides, why would the 1000USD mark be so significant. It is not that big a jump from 900, now is it?
And for all the other reasons: if any of those things would have happend in another sector you would have probably called it a bubble.
Besides, although freegold is a great concept, a timeframe is not part of it. No guarantees on that one.
Wow! Asian markets down and dollar down and Gold up. Should be interesting when US markets open today. Especially with CIT going BK. Will the dollar strengthen and Gold take a hit or will the trend keep going?
Man, we're really close to this thing happening.
Its like looking at a big fat pregnant lady and saying; Whens that baby going to pop out?
The dollar up is not that strange. It was massively oversold and the carry trade is on it. Hence a correction triggers lots of shorts.
Asia down.. They had been up quite a bit, so that is not that strange as well.
For who's interested in inflation/deflation, I would advise starting to read Mish again. Not that he is necissarily right all the time, but he does put forward interesting material.
Fm = Fb + MV(Fc)
Fm = Fiat Money Total
Fb = Fiat Monetary Base
Fc = Fiat Credit, the amount of credit on the balances sheets of institutions in excess of Fb
MV(Fc) is the market value Fc
Inflation is an expansion of Fm
Deflation is a contraction of Fm
I know credit is not really money, but it is how money is created. As the fed prints and credit dries up, the printed money does not reach society - at least not for now.
Many point out that base money is rising at an amazingly high rate. However, as we have seen, base money is irrelevant until the money is lent. The key issue is that the market value of credit is collapsing at an amazing rate.
This is deflation.
One can choose to say in strict Austrian terms there is no deflation because money supply is rising. However, the money supply theory falls flat on its impractical face when it comes to accurately explaining what is happening in the real world.
So the fed prints money, but that money does not reach the man in the streets. I flow into bankers bonusses, commodities and stocks instead.
As the fed continues to monetize, the pressure on the dollar does however increase.
Hence we are seeing deflation and fading confidence in paper and the US budget. If trust in paper collapses we will see massive inflation. Until that time we are likely to mainly see deflation. Uncharted waters indeed.
Theyre going to have to smack Gold down hard when the US wakes to read this story.
http://finance.yahoo.com/news/CIT-files-for-Chapter-11-apf-1202955938.html?x=0&sec=topStories&pos=main&asset=&ccode=
I thought with deflation the dollar went up. Looks like its going down, and CIT going BK is highly deflationary in my book. Honestly I dont play the inflation/deflation game, I just believe one day soon everyones going to wake up to the scam that is paper money, and run for Gold.
I thought with deflation the dollar went up.
With deflation in the US while other countries stay 'normal' the dollar would go up.
However, worsening US budget deficits are not that positive for the USD, and we are seeing those a lot these days.
People waking up to the paper scam would be speeded by dynamics in the field such as inflation/deflation. Therefore I do tend to follow that game a bit.
CIT BK is deflationary indeed I reckon.
["the right to park their savings in gold coins, as they did before 1909." But they DO have that right already! They just haven't realized how good it will be... yet!]
I think they don't. Right now, one can only do it illegally. If you were to convert your purchasing power to gold bullion, store it for ten years, then attempt to convert it back, you'd be taxed heavily, on a full amount of inflation tax that you have skipped. This, government calls "the profit", while of course there could not be ANY profit from holding gold, it is that same purchasing power you had in the beginning, now expressed in devalued dollars.
By Martijn: [One can choose to say in strict Austrian terms there is no deflation because money supply is rising. However, the money supply theory falls flat on its impractical face when it comes to accurately explaining what is happening in the real world.]
Austrian monetary theory is the one and only theory that explains monetary events correctly.
Provided, that we know the numbers and the flows. But we don't. We judge on the basis of disinformation we receive from FED and mass media. All of it is a lie.
We simply have no idea of what the correct, actual numbers are, and who is receiving what.
This is why it looks like Austrian theory doesn't work.
If I told you that a truck weighting 5 kilogram hit a cat weighting 5 tons and made it into a picture on a pavement, you'd say that physics doesn't work.
Bottom line: None of the numbers emanating from FED or mass media are correct other than accidentally. This situation is typical of any empire immediately before it's demise.
@Anon
Perhaps indeed. However, in my opinion the case for deflation in the streets (not in bankers pay, stocks or commodities) is growing stronger these days.
If any of you were wondering whether stuff still gets sensored today: click
@FOFOA
Thanks for your explanation of the CB swaps, that too was a missing part for me.
Do you know where I can get CB balance sheets or estimates how much foreign currencies the different large CB's have taken on? Or is this number not published?
FOFOA,
what are your thoughts on M Maloney.
@ Anon 11:51,
Here are a couple links...
Fed:
http://www.federalreserve.gov/RELEASES/H41/Current/
Treasury:
US International Reserve Position
@ Anon 12:20,
Mike Maloney, "Rich Dad Advisor"? Is that who you mean? I don't know much about him but he seems to have solid thoughts on gold from what I have seen.
@Raptor,
"Can SDR be used for balance payments, collateral,etc..."
Switching from dollars to SDRs doesn't solve the imbalances that have developed, nor does it solve the problem of decades of debt accumulation. If it is structured in a way that removes the US printing advantage, the US will never agree to such a structure. I can't see SDRs working as a reserve. And I can't see them working as an international transactional currency either. I still believe that SDRs are nothing more than a strawman when we hear non-$ support for them, I don't expect them to take hold and actually work.
I believe all the SDR talk is simply a strategic middle ground for discussion purposes only. It doesn't actually satisfy either side.
Sincerely,
FOFOA
IMF sells 200 tonnes of gold to India for $6.7 billion:
http://www.bloomberg.com/apps/news?pid=20601091&sid=ac4.u0JfPtWE
Thanks Anon! Big news...
Nov. 3 (Bloomberg) -- "The International Monetary Fund said it is selling 200 metric tons of gold to the Reserve Bank of India for about $6.7 billion...
The transaction, which involved daily sales from Oct. 19-30 at market prices, is in the process of being settled, the IMF said in the statement. The average price in the transaction with India was about $1,045 an ounce...
The lender has said it is ready to sell directly to central banks and later make transactions on the open market if necessary. The IMF official declined to say whether other central banks have expressed interest in purchases."
Wow. That's a pretty fast sale of 200 tonnes of gold! Sucked up like a black hole! Sounds like they agreed on an average price over 10 trading days. Anyone want to do the math? Was $1,045 the average NY spot closing price? Or London PM Fix...? Just curious what kind of deals they are doing.
Any bets on who gets the other half of the 403.3 tonnes?
According to Wikipedia, that's a 56% increase in India's publicly held gold.
Perhaps the IMF should have listened to Jim Sinclair and waited until November. The price is already $22 higher! That's an extra $141,000,000 the IMF could have made. Maybe this will turn out to be the embarrasing equivalent of "Brown's Bottom" for the IMF! ;)
Does anyone know how much Gold the IMF has?
Yes M Maloney was the 'Rich Dad's' advisor i was referring to.
I agree with his thoughts - he says there are brief moments in time when Gold & Silver out perform all other asset classes...
but from what i take from you - FOFOA
- you are saying the next transfer of wealth that takes place will be permanent?
Gold will not collapse like in the 1980's?
Wikipedia (World Gold Council) says the IMF has 3,217.3 tonnes of gold. That Bloomberg article says that the 403 tonnes represents 1/8th of the IMF's gold. These two sources match. But many serious questions remain about IMF gold. The IMF is not a nation. Its gold was contributed by its members.
The bottom line is that you must take all official gold statistics and statements with a grain of salt. Too many games have been played with "political gold" for 38 years now. But at least it seems clear that 200 tonnes of physical are changing hands now. I guess India prefers the real thing from the IMF to the paper gold the bullion banks put out, huh? The ship taking that gold to India should try to avoid the Somali coastline. ;)
You are correct, gold will not collapse like 1980.
The fact that the $-IMF sold 200 tonnes to India instead of China, is a "geo-political" maneuver.
On the LBMA conference, the ECB confirmed that the CB goldsales (of the past decade and present) are to optimise the proportions of the CBs' gold holdings in relation to their reserves.
China needs MUCH more goldmetal reserves in proportion than India.
I expect China to react pragmatically. Increase (fast and substantial) the gold output within their borders and import via Hong Kong.
It is the first time we are informed of the idendity of a big gold-Buyer (India). Shall we know who gets the other 200 tonnes ?
Note : 200 tonnes gold ($ 1045/oz)= $ 6.7 billion. And there are $ 5 Billion $-digits labelled as CB $-reserves !? "Talking", about -proportions- (a factor 1,000) !?
Ask yourself : What is the architecture behind these CB (proportionate) gold REDISTRIBUTIONS ? What is the final purpose ?
B.
Demonetarization of gold RE-confirmed !
Gold To Remain Important Asset Of European Central Banks-ECB
EDINBURGH -(Dow Jones)- Gold will remain an important asset for European central banks as risk diversification becomes a more significant issue, the European Central Bank said Monday.
Speaking at the London Bullion Market Association conference, Paul Mercier, deputy director general of market operations at the European Central Bank, said gold is no longer important from a monetary point, but is important as an asset.
"Gold makes sense as a contributor to risk diversification," Mercier said. " Even if some central banks continue to sell and there is a new potential seller with the IMF, I wouldn't conclude that gold holdings in central banks will decline in the coming years."
He said the Eurosystem holds 10,800 metric tons of gold, roughly one third of world gold reserves
B.
I hope you guys did not mis this on the petro dollar!
Jasser was responding to journalists' questions about whether it was possible that Gulf oil exporters would reconsider the issue of pricing oil in dollars.
"But pricing in dollar does not necessarily mean that you receive in dollar and does not necessarily mean that you will invest in dollar," he said
"That's why I think that it is important not to confuse between the three roles for any currency, whether it is the dollar, sterling, the yen or the euro," Jasser said.
Let me translate...
"We will continue using the dollar as FOFOA's "pure concept of money", the unit of account, because that is what the world is used to. But we will no longer use the dollar in either the transactional function, medium of exchange, nor in the store of value function for our wealth."
Extracted from the State Bank of India annual report:
Gold Banking
• The Bank has taken several initiatives to undertake bullion business in a big way.
• The number of branches for retail sale of gold coins has increased from 250 in 2008 to 518 in 2009. The Scheme will be extended to cover all important centres of the country in 2009-10 by increasing the number of branches selling gold coins to about 1100. The Bank also undertakes supply of customised gold coins to corporates.
• The Bank has re-launched Gold Deposit Scheme at 50 branches to mobilise gold from domestic market for deployment as metal loans to jewellers.
• The Bank is in the process of setting up a dedicated Bullion branch at Mumbai to undertake bullion business in a focussed manner.
http://brontecapital.blogspot.com/2009/10/goldsmith-as-retail-bank.html
Fofoa,
What is happening here?
Is this freegold?
Hey, I'm from India and I can tell u that SBI as popularly called is safest and biggest bank in India. Its a symbol of Indian Banking. Despite huge problems, it didn't had an iota of weakness and it went to hire more than 20k people last year. Its a good bank...
...Despite this, Indian banks and MFs have a weakness in the form of real estate. I believe this is huge and serious concern. I think some cover up is happening. Lets see, what happens in future?
Interesting development.
Right, now Greenspan is at it too.
Bloomberg
The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said...
...“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.
Being a paperbug is not an easy thing to do these days.
ok..so you know by some comments i post on here that i'm a little sensitive to spikes...and i'm watching even more closely bc of sinclair's predictions...but what just happened?
sorry...huge spike in the PMs
is this just timing from the india news? what was significant at 10, or 11 am? could it just be reaction at the take down of gold over the past several weeks for india to buy, and china is not getting that deal, so they are all in? i'm just outright speculating here..but curious to hear some other thoughts, since i can't find any other "watchers's" comments :)
Check what I've posted on India above. I guess India is quite relevant indeed.
Besides that it seems that mentality is changing a bit. Check my comments on Greenspan and that Saudi guy on the tree functions of money.
These quotes are a rather big thing I believe.
These spikes really are huge btw!
Was CIT doing anything in the gold market that they are not doing anymore?
If the debt-service serfs stop paying the fiat casino is closed.
India was just the first player to cash in their chips for real money.
Bear taken over by JP to hide a massive short position in silver?
Old article from Ted Butler I just bumped into.
martijn, i was just catching up (and doing some things around my place).
i guess my question is this...why are these moves up continually happening at 10-11am? i realize why they happen when London, Tel Aviv, and NY are closed, as Asia is buying. I realize why they go down often at 2:30am - 9:30am, but why the 10am-12pm time? that's been happening more and more.
Is that when london closes? so that they lose a strong arm in the suppression of price? you'd think these guys could manipulate signifcantly 24 hours a day, if only by algorithms and software alone.
i'm kind of confused on thsi though. i've been noticing more and more spikes up at around the 11/12/1pm hours or so (for those clearly not trying to buy for the best price, the same criticism we point to when we suggest manipulation on the way down).
I'm wondering what the specific angle on the India news is, though. Obviously it's long-term bullish, but who would want to spike the price? i would think china would not. even if they were pissed, they still want to get in for the lowest possible price. India has played the west's game much more than china has, seemingly, with accepting GMOs and other regards.
There are many (including me at times) that think that there is no way that the western elite are going to allow the BRIC nations to keep an alliance, so despite the Reuters article asking why India would want to buy, my question is why the IMF sold to India. Are they trying to promote some competition and completely blow up the region in Northern Pakistan, Indian, and southern China, per Brzezinski?
obviously way too many questions at the moment, but i'm curious to go deep on this one.
For 10-11 buying I do not have an explanation, but it´s a good question.
As for the IMF sales: China could have pressured them (e.g. by threatening to dump the dollar).
Apart from that: this was perhaps their best shot at buying 200 tons without spiking prices too much. Who knows how much their will be on the market in a year - if you're not into tungsten.
As a side note: Marc Faber recently said that the only central bank in the world that was doing a somewhat reasonable job these days was the Indian one.
martijn, good points. but i'm confused on your china pressuring the IMF comment. If china threatened the IMF would the latter be more inclined to sell the china and not india? as you, or someone said above, china was in greater need of these to offset their huge reserves. was the IMF simply rewarding the indians for playing ball w/the western CBs?
I know we don't know who's buying the other 203 tons of gold yet, and it could be china, but I find it interesting that they sold to india, of all banks.
it also made me wonder if the point of the west selling all their gold over the years was further to setup the west as banana republics and third-world countries. Not that we don't hear regularly over the past decade or so that that is the plan, but that might be one of the mechanisms by which they make that happen. sell the gold, move the industry, indebt the nation, unleash defecits (trade and budget), oh, and sprinkle a few quadrillion in deficits to ensure the madness gets out of hand.
just speculation on my part...but today has me thinking...and that's always dangerous.
Don't know.
India's foreign-exchange reserves crossed $200 billion for the first time on April 6 [2007].
China has about 800 billion in US bonds.
Perhaps India threatened as well. Perhaps they did not want it all to go to China in plain sight. India is located near Pakistan.
Guess its not that hard making a backroom deal.
As for the spike: "The news emerging in the early evening N.Y. time that the Reserve Bank of India has bought 200 tonnes of the 403.3 tonnes from the IMF is currently empowered to sell, is likely to be a decisive tonic to the bullion market. Removing half the overhang, especially in the context of the ECB [European Central Bank] echelon of banks apparently virtually not selling, is obviously positive. And the fact that a Central Bank has, in fact, stepped in to take the gold... is likely to greatly excite those who have been predicting such an event."
Finally make no mistake about the stock market rally. It wasn't based on strong fundamentals. People knew that, but participated to reap some profit.
Now they're probably backing off averting risk. Unwinding carry trades pushes the dollar up, and risk aversion is good for gold, hence both were up.
This has been about to happen for a while, and perhaps the news on India was (part of) the trigger.
martijn
re spike: just as you said, we all knew a CB would be buying it. but my question is how/why they wanted India to have it.
Can anyone answer how that process works? I could think of dozens of mechanisms.
India has been helping iran destabilize pakistan, which makes the alliance that much more strange (since the west is now obviously supporting india). moreover, w/their terrorist event a year or so ago, i'm sure the west helped them consolidate more control over their people. but i am no expert in these regions, just an observer over the years. I'm curious to know what those w/more experience in those areas believe.
re: the market rally. that's a very good point. this could be signaling the exiting flow of $$into a safer means by the 30% of the market which was not govt spending. We'll have to see how that plays out in the future.
I think we should have a post on here talking about our backgrounds...FOFOA, i would love that. Identities aside, I'm so curious to know what our various backgrounds, perspectives, experience, and knowledge are from.
Satya
also, could this article on GATA suggest just how quickly this thing may go (and backup FOFOA's and others' theses):
Barrick in more hurry to close out gold shorts
Submitted by cpowell on Mon, 2009-11-02 19:35. Section: Daily Dispatches
Barrick May Close Hedge Book Ahead of Plan
By Jan Harvey
Reuters
Monday, November 2, 2009
EDINBURGH, Scotland -- Barrick Gold, the world's biggest miner of the precious metal, said it may complete the planned closure of its hedge book announced last month before the end of the 12-month window it had set.
another comment from Powell @ GATA:
http://gata.org/node/7971
But whether the Reserve Bank of India will use the gold for market intervention, open or surreptitious, is another question, and such use must be suspected. After all, India is the biggest market for gold, and the transfer of IMF gold to India could facilitate the dampening of that market if the Reserve Bank of India is inclined to try intervention to support the rupee or the U.S. dollar.
Even so, the proceeds of the IMF's sale to India, $6.7 billion, seem like peanuts, not even half as much as would be needed for a respectable bailout on Wall Street. Even if this gold was to be quickly resold into the general market, it probably would not go far.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
FOFOA,
S def not for Shedlock - LMAO
tin hat story circulating re the G20 and the US trying to get China/India on board for a dolalr destruction/replacement monetary regime. Your point on SDRs is right on - the question isn't over construct as the structuralists argue rather it is about power. Any change is a dimmuniton to the US and given the precarious financial position and how central it is to projection, the US finds itself confronting zug-zwang perhaps checkmate. Therefore, it seems the conversation needs to graduate to what the concessions are that the US is willing to offer in exchange for a move to another standard that however retains some facit of a veto. Such an agreement begins and ends with the Chinese. If I am not mistaken they demanded a while back that technology (certain core ones at least) be shared. No reasonable person can believe that those confronting these issues believ that salvagaing the current system is remotely feasible. It can also be safely assumed that a defacto metals standard amongst those in power across the world doesn;t necessarily innure to their benefit. While Freegold makes perfect sense in the context of a antural evoltuion, it flies in the face of everything that centralized power stands for - which is to say the ability to act with decree. Therefore it will be opposed at all costs. Can they constrain it, well the question need come back to what the US is willing to trade for such an agreement. When you inventory the assets of the US - putting aside selling off states - the road points in one direction: technology (military/civilian).
A quick inventory of the ancially players sums to indifference:
Japan - systemic backetcase
Europe - outside of Germany.French axis an unwilling to lead; horsepower dilution fropm rest
Asia ex:Japan - wed to incumbant system/some derivation thereof
Russia: commodity complex makes it a defacto derivative of "global growth"
MENA: commodity complex (see Russia)
Characterize all as demographic timebombs, one way or other.
That narrow narrows the field to the two bohemoths. neuither really has an interest in collpasing the system - China from an economic loss/control standpoint and the US from a power standpoint. Leaving gold and the market to recolcile the chasm doesn't seem optimal from either side (at some point).
@11:34’s Anonymous B.
I find it most interesting that they actually named a big buyer. Sure, everyone knows that India buys lots of gold metal, but CBs are not generally – openly – involved. This move – is – a pivotal moment that we should all take note of. In an environment of CBs openly buying gold, it seems pretty clear that never again will multi-ton gold announcements move the market in a negative way.
With every passing day, the dollar ‘price’ of gold looks more and more ridiculous! These sales are like selling furniture to pay the mortgage on debt that is 1000 times the price of the furniture. When done, the debt is settled for another month, but the house is empty of substance and unusable.
This sale gets a little more interesting when you read WikiPedia. From this link, (http://en.wikipedia.org/wiki/Official_gold_reserves) “It is also not clear whether the gold reserve is the property of the IMF or of member countries.” Did India effectively call home its support of the IMF? Is there real gold metal changing hands? or is it purely an open political movement? Seems unclear to me.
In any case, B., can you expand a little on your note? “200 tonnes gold ($ 1045/oz)= $ 6.7 billion. And there are $ 5 Billion $-digits labelled as CB $-reserves !? "Talking", about -proportions- (a factor 1,000) !?”
I guess my question is, where does the gold come from that the IMF sells?
Ender.
And the $ 5 Trillion reserves are only the tip of the $-debt pit. Stocks and bonds represent $ 140 Trillion !
The gold-actions of the past decade and present are "re-distributions" organised by the CBs with the freegold concept in the silent background.
These extremely small amounts of physical gold that are re-allocated to other owners are for the time being completely irrelevant up until the great gold-value revaluation and freegold.
Naming India as a gold-buyer means (most probably) that the political will for having/installing freegold is slowly reaching critical mass. The debt-hole is already too deep. The virtual equity-maintain too high and the physical economy cannot grow sufficiently without producing more and more debt. A very big catch-22 on a global scale and astronomical proportions.
It doesn't matter that the physical gold stays at NY or London : The whole world has to go on freegold if it still wants "globalization" with a fiat regime.
China (& Russia) has most probably sufficiant underground gold within its borders. The major petro-$ loyalist succeeded in having sufficiant goldmetal accumulated during the past 4 decades.
Only the small (unimportant) states will suffer from gold shortage.
The new block in the globalizing world will set the new playing field and succeed in having gold freed from its $-monetarization.
If the $-regime can't beat them anymore, the regime will have to join.
The general public doesn't has to know all the gold-forces that have been being build over the past decades.
B.
@ Ender (continue): We all expected China to be the receiver of the IMF gold.
The India surprise is therefore suspect for many observers.
But how much EU gold has been silently shipped (allocated) to China (xxxx tonnes-?) during the past gold-action decade ? In exchange for what ? Freegold support and privileged trade partner ?
Will India help the $-regime in Pakistan (China ally) ?
Can the West buy Turkey back into its camp with IMF/US, gold ?
What matters most is the increasing openess on gold's power during the $-(survival) war.
@ Ender :
Gold still important to Central Banks - ECB's Mercier
--------------------------------------------------------------------------------
The European Central Bank's Principal Advisor in Market Operations Paul Mercier told the London Bullion Market Association that sales represent reserve optimisation, not an expression of disaffection
Mineweb - GOLD ANALYSIS - Gold still important to Central Banks - ECB`s Mercier
B.
IF the bullions are so short - JPM - it most certainly presages a move to crush gold down. it also makes sense in the ABX and NEM talking up acquisitions and south african mining minister talking about nationaliazation. note that NEM was talking about going after Newcrest in Fruiendly Aussie - I wonder what the regualtory issues would gbe around that deal - would be a very interesting referendum on how the gov;t of aussie really feels about the $ block.
FOFOA - what is yours ense of the timing of the transition - seems like the move to crush the shorts in the near term and allow covering is coming soon. Doesn;t matter LT but the story about GS not liking gold or silver on the props side adds foder to the conjecture.
Also, maybe a comment on two on why the india deal and the shuffle spreaks to freegold outside the obvios realignement.
@ B. above
Ha. If you can’t beat them, join ‘em.
If a small amount of gold has bought oil backing for the dollar for years, one has to wonder what kind of backing this buys? Does 200 tons make for a good trade partner?
The re-positioning of these large holdings seems to hint harder that the world is positioning to value gold as the ECB does. One has to wonder what the predefined ratios were/are regarding gold to currency in all the different trade regions. If India has 400 tons of gold now, it still seems significantly small relative to the number of people in that region. Yet, any spike in the price may allow India’s CB to gather from their people – form those that hedge with gold.
In any case, for the dollar system to have any legs to stand on, there must be gold in Fort Knox. Or, there must be physical possession on US Soil. Maybe this has occurred, in some reasonable way, under the cover of ETFs. Time will most likely show us the truth.
For now, let the ants gather their coins in silence for the death of the dollar reserve is at hand.
Is there anything out there that would cause Gold to drop to say $700oz?
What kind of trick could they use?
Martijn said:
"So the fed prints money, but that money does not reach the man in the streets. I flow into bankers bonusses, commodities and stocks instead."
I get your reasoning but aren't exec bonuses part of the "street" as you say? What do they do with their bonuses? Buy houses, cars, etc. That money is entering the economy in a real way. If it flows into equities or commodities, triggering a rise, won't some people take profits? What do they do with the profits? Buy stuff.
@Andy
Perhaps we shall see inflation in Maserati's and Villa's, but is will take quite a while before the normal guy is affected.
Again, how are these countries going to prove what they got? Does physical actually trade hands in these IMF deals? Is there Gold at Fort Knox?
These CB's and the IMF can say whatever they want but until they are parading it down the streets of their capital cities on flat bed trailers, how do you know whos got what?
Anon 7:02,
Short of killing off the worlds population with a man-made flu, theres not much they can do now to take the price way down. The system is really "just that broken."
Everyday, Im more and more amazed at how the average person has no clue this is happening right here and now.
As for knowing a bit about all of our backgrounds, I think it would be interesting as well. Its a shame that the nature of the subject we discuss requires that we stay anonymous.
Its strange that out of everyone in my life right now, people on this blog are almost the only ones that can truly understand how I feel about what is about to take place in our world.
Its a real pleasure hearing from all of you!
By the way, most people that I know and read about, that understand whats about to happen with Gold and the dollar are Engineers.
Something about the problem solving mind of an Engineer allows them to see through the smoke and mirrors I guess.
anon 2:53: very interesting. it's funny you mention engineers. as for me, in the past 10-12 years I have been trying to help people understand much of what's going down (from my own perspective w/my own biases, fears, and expectations), and how to position themselves accordingly (I suggest permaculture, or permanent culture, as a means of positioning and changing the way we live, even if it did nothing for so many indigenous populations throughout the world). But ironically, do you know who gets it the least? academic-educated middle class white america. The wealthier and more elite-educated friends of mine get the way the world works (they live in it and see it), many of the lower socio-economic classes and minorities have no problem understanding (or believing, maybe), and especially those from non-western, non-english speaking countries seem to (africans seem to get it all). just my experience, but i think it's funny that middle class white america and some of western europe, is so intoxicated with programming, to even see the surface of it.
hopefully FOFOA does a list where we can stay anonymous and list what city we're from, our backgrounds, etc. It's not like those who might really want to monitor us can't tell from the very IP addresses we use. so we're only truly hiding from each other.
satya
Satya,
Yeah I know about the IP address thing, thats why I sleep with my running shoes on;-)
Your right about Africans the ones Ive met easily understand. Asians and Arabs cant get it either when I talk to them. They value Gold of course, but they cant explain why except that they just like it and they feel it has value.
I dont know about Central and South Americans. North Americans and Europeans dont understand it for sure.
To educated people, Gold is a fantasy or conspiracy. In their minds its about cartoon leprechauns.
But for some reason in my experience, Engineers seem to understand with very little problem.
I dont think poor people in the US and EU understand any better then the middle-class though. Their minds are so confused by the constant media bombardment, and their living standards dont give them the opportunity to even come into contact with truth and these ideas.
We are the fortunate few that have
made it this far in the truth.
i definitely consider myself fortunate, but then again, i'm a voracious seeker of truth (or that which smells of it).
For me, the transaction cost of Gold
is a big limiting factor. It has to
improve quite a bit in price for me to break even. It ain't a bit free!
If Gold Bugs want to get people to transact in Gold(even as a store of
value) it has to be available to the common man.
I propose selling bullion in smaller increments.
If gold were offered as 10 mg,100 mg, and 1 gram(approx $.35,$3.50, and
$35.00) bullion foils in plastic carriers, the average guy could store
a little value in Gold without being forced to pay a dealer
premium for each transaction. I even have a name for it; Liquid Gold!
This probably just means I don't understand FOFAO's concept of Free Gold...
Hello Anon,
In The Gold Trail, FOA did speculate some about the uses of gold in the future. Here is one little sample, "Probably, gold will be used for large purchases because gold will carry a very high price by then. And too, 1 gram coins will be the norm; being the size of our one ounce now, but with alloys."
Actually, in Europe right now you buy gold from your bank just like buying stamps from the post office. Same in India. And the picture at the top of my latest post is of a gold vending machine, which does vend 1 gram wafers for around $40. So you may not be far off in your understanding.
Sincerely,
FOFOA
I observe the same grammatical error again and again in both Another's posts and the FOFOA posts. They are the same person, it appears.
This error, by the way, always distracts from the content of the posts, so I recommend that it be corrected.
The error is in using "it's instead of its."
Its is a possessive pronoun, as in "gold has its merits." That movie has its moments.
It's means "it is." It's is a contraction of "it is." When we say incorrectly that "gold has it's merits", we are saying "gold has it is merits," and that is senseless. Those of us trained in correct grammar are immediately distracted by such errors. Our brains translate it into senseless material.
I notice that the writer has a related error. It is to omit the apostrophe where it belongs. He writes "Thats all it takes." This should read "That's all it takes." That means: "That is all it takes." The letters "Thats" are not a word at all.
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