Thursday, May 13, 2010

Hair of the Dog?


The ever wise Dennis Kneale, in the video below, quotes "most economists" as saying the cure for today's debt crisis is "the hair of the dog that bit me", or "load up on debt", "the hang-over cure".
A shot of whiskey in the morning? Is this the $IMFS in a nutshell?
Yes indeed it is.

Nassim Taleb, on the other hand, calls our mountain of debt a tumor. He says we must remove the tumor and do to everyone, including the US, what we did to the Greeks: force austerity. But he goes on to point out this is impossible in a democracy. It is only possible when you are doing it to someone else.

So, he says, we will proceed into hyperinflation. And this hyperinflation will be brought on one day by people "buying gold", or "running to currencies without a government". Nassim also mentions that "Larry Summers seems to be treating the US economy the way he treated Harvard, with his bogus projections". (Please see: "Harvard Swaps Are So Toxic Even Summers Won't Explain" in Gold: The Ultimate Hedge Fund for more on this perspective.)

Here is the interview...





Did you notice Nassim's body language at the end of the interview? He was leaning far away from the hosts. I think the phrase "don't shoot the messenger" applies well to theoreticians like Nassim Taleb who try to warn us that some big event is coming, unmistakably, unavoidably, inevitably.

Some time ago I wrote, "There is an important difference between practitioners and theoreticians both in science and economics. Practitioners have always ridiculed the warnings of theoreticians and philosophers in almost all areas of human endeavor. Their attacks usually begin by pointing out the lack of practical experience of the theoreticians. But it is a very important role that theoretician play in society, to point out things that have been overlooked by the practitioners.

"The problem today is that our markets are built, run and enforced entirely by former practitioners with a clear disdain for theoreticians and their warnings of low-frequency, high-impact inevitable events. This dynamic sets us up for catastrophic failures every once in a while."

You probably noticed that Nassim is not only a theoretician, but also a practitioner. (Join Nassim's 12,590 followers on Twitter here.)

I would like add that I agree 100% with Nassim Taleb here. I have been following him and writing about him, Benoit Mandelbrot, Black Swans, Chaos Theory, Fractals, hyperinflation and inevitable high-impact events ever since the market crash in 2008. Please note from above that Taleb says things are worse now, and then watch this interview that I first posted on October 24, 2008:


Nassim's job as a theoretician is to take the "Black" out of "Black Swan". It is to show us that the collapse of the entire system is a normal event. This is important. Systemic collapse is normal. Hyperinflation is normal. Resets are normal. In this case, normal does not mean common, it simply means inevitable.

James Aitken in his May 10, 2010 newsletter, "Notes from a Small Island" writes...

In September 1999, Charles Perrow of Princeton published Normal Accidents: Living with High-Risk Technologies.

Mr. Perrow uses the term “normal accident” in part as a synonym for "inevitable accidents." This categorization is based on a combination of features of high-risk systems: interactive complexity and tight coupling.

Normal accidents in a particular system may be common or rare ("It is normal for us to die, but we only do it once."), but the system's characteristics make it inherently vulnerable to such accidents, hence their description as "normal."

A normal accident occurs where systems are sufficiently complex to allow unexpected interactions of failures to defeat the best safety measures, and sufficiently tightly coupled to allow the failures to cascade into an even larger disaster, such as the one still unfolding in the Gulf of Mexico.

Hair of the dog, Dennis, really? Here is something Philipp Hildebrand, Chairman of the Governing Board of the Swiss National Bank, said during opening remarks at the High-Level Conference on The International Monetary System in Zurich...

“Arguably, much of the debate surrounding the international monetary system boils down to the following question: how sustainable is an international monetary regime, in which one national currency serves as the international reserve asset? Over the past few decades, this question has been examined under different perspectives.

“A first perspective was the so-called “Triffin dilemma”, discussed in the context of the Bretton Woods fixed exchange rate regime. This discussion highlighted that increasing indebtedness of the reserve-issuing country would in time undermine the very confidence that forms the basis for the reserve asset status.

“A second perspective refers to the alleged “exorbitant privilege” of the reserve-issuing country. It highlights the asymmetry in the adjustment to shocks, as the reserve-issuing country has the privilege of not being under much pressure to adjust to current account deficits, at least over the short and medium term…”

I have been saying this for a while now. What the US federal government and the Fed have done is transfer systemic debt risk into the currency, making it more explosive than anyone can imagine. Europe is undergoing this same transfer of risk right now. But there is still a subtle difference between the euro and the dollar. Here is an extract from my post, No Free Lunch...

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 by 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...

The problem is, 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 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.

And here is another way I illustrated this effect in pictures...

This first diagram shows how private debt service, private reinvestment and productive enterprise normally act as a counter-cycle to credit-based inflation. But the only way it works under the global dollar reserve system is for the debt hole to grow infinitely deeper while the accumulation of paper bonds and bills is piled infinitely higher. There is no balance or reset mechanism in place. Only catastrophic collapse:


This next diagram shows in a simple picture what happens when the private debtor fails to keep up with infinite expansion. This is Greece as well as your neighbor that lost his house. Once you remove the private counterbalance the Fed must pick up the slack. Notice that there is no longer a counter-rotational flow:


This next diagram shows about where we are today. We are monetizing the failing debt. We are replacing credit money with base money, and the US federal deficit is the enabler of this process. As FOA said:

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


At some point soon, in between the above diagram and the next one, the markets are going to repudiate any more dollar debt in recognition of what is unfolding. This event will propel us into this last diagram as the Fed will be forced to print every last dollar spent by the US federal government, and that's a lot of dollars. This diagram represents Weimar Germany in the 1920's, Zimbabwe in the 2000's and the USA in the 2010's:


(The above diagrams came from my post Greece is the Word)

A little "hair of the dog" I'd say. Or maybe a little too much "hair of the dog".

As regular FOFOA readers know, I believe the BIS (the Bank for International Settlements) is prepared to manage the clearing of international trade after the inevitable collapse of the dollar. And the preferred clearing mechanism at the BIS? Gold, of course, at a much higher value than today. A "physical-only" value!

The IMF would of course prefer to be the "global banker", using SDRs which are mostly dollars, but who do you think will win the confidence game this time? The IMF encourages more "hair of the dog", just like Dennis Kneale! What about the BIS?

Here is what the BIS thinks...

The Western world keeps spending its way to disaster
by Neil Reynolds
The Globe and Mail
Published on Wednesday, May. 12, 2010

The Swiss-based Bank of International Settlements (BIS), the oldest international financial institution in the world, has functioned as the central bank of central bankers for 80 years. In a working paper written by three senior staff economists (“The future of public debt: prospects and implications”), released in March, BIS warns that Greece isn't the only Western economy with hazard lights flashing.

Indeed, it names 11 more: Austria, France, Germany, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Britain – and the United States. Without “drastic measures,” BIS says, all of these countries will hit a wall of debt.

When the senior economists at BIS warn 12 of the richest countries on Earth that they must take drastic action to reduce debt, you know that it’s time to check the air bags. The only thing you don't know, that you need to know, is the precise time of the crash. The lesson is already obvious: Governments can't drive recklessly, use only the accelerator for braking and not eventually crash.

The BIS paper notes that the public debt of 30 OECD countries will (on average) exceed 100 per cent of GDP within the next year, “something that has never happened before in peacetime.” But it warns that conventional debt-to-GDP ratios are misleading – missing “enormous future costs” that are already authorized by past fiscal commitments, that will inexorably inflate public debt further still.

By the end of 2011, the BIS economists calculate, U.S. government debt will have risen from 62 per cent of GDP in 2007, not quite three years ago, to 100 per cent. Britain’s debt will have risen from 47 per cent of GDP to 94 per cent. Italy’s debt will have risen from 112 per cent of GDP to 130 per cent. All together, the public debt of the 12 countries will have risen from 73 per cent of combined GDP to 105 per cent.

At this debt level, the risk of sovereign default rises rapidly. But the BIS analysis says this unprecedented debt level will itself increase “precipitously” in coming years. It will not, as each of these countries separately insists, fall.

For one thing, the BIS report says, countries that proclaim spending restraint generally do not actually do it. Normally, they hold the line – temporarily. Normally, they slow the rate of increase – temporarily. All pronouncements aside, the BIS report says, these 12 countries have made such grandiose spending commitments that they are predestined for higher debt. The U.S. debt-GDP ratio will hit 150 per cent in the next decade. Britain’s debt-GDP ratio will hit 200 per cent. Japan’s debt-GDP ratio will hit 300 per cent.

These increases in debt, the BIS report says, are untenable. The financial markets, of course, won't permit them. The only mystery, the BIS report says, is exactly when the markets will intervene. History shows, the report says, that when the markets do rebel, they often do so instantaneously and decisively – often without much warning.

“When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that [these countries] are going to issue to finance their extravagant ways?” the BIS economists ask. “The question is when will markets start putting pressure on governments, not if,” they respond.

When the markets do require a much higher risk premium, the consequences will be felt around the world – on rich and poor countries alike, on the thrifty as well as on the profligate. These consequences will certainly fall on Canada as well. If it takes Europe to save Greece, what will it take to save Europe? Emerging economies have done a better job than the rich countries in controlling debt. Asian government debt stands at 40 per cent of GDP; Central European government debt stands at 28 per cent; Latin American government debt stands at 37 per cent.

In its most spooky, mind-boggling analysis, the BIS economists try to determine the share of GDP that interest rates would require – assuming, across the next 30 years, that the 12 governments kept spending as they are spending now. In the case of the United States, interest payments would cost 22 per cent of GDP in 2040. In the case of Britain, interest payments would cost 27 per cent. For Britain, this would shove the government’s share of GDP close to 80 per cent.

Prime Minister Stephen Harper and Finance Minister Jim Flaherty are right to press the more profligate countries for an exit strategy from stimulus spending. But what the rich economies actually need is an exit strategy from too much spending of all kinds and a return to some pragmatic recognition of the limits of government.

The writers of the BIS report are Stephen Cecchetti, head of the BIS monetary and economic department; M.S. Mohanty, director of the BIS macroeconomic analysis department; and Fabrizio Zampolli, BIS’s senior economist. Their report deserves both attention and action.

© Copyright 2010 CTVglobemedia Publishing Inc. All Rights Reserved.
Presented here unmodified under the
Fair Use Doctrine of International Copyright Law

And just because I find it so darn intriguing, I present this excerpt from a letter written by a retired financial analyst in his eighties,
Mr. Johnston of Houston, Texas to his sons and posted on the
Gold-Eagle.com website back in 1997...

"The BIS, the Central Bank's central bank, was formed in 1930 to handle the collection of German war debt following World War I. Its members are the central banks of the industrial world, such as the Bank of England, the German Bundesbank, the Federal Reserve Bank, the Bank of Japan, and so on. It is almost certainly the most powerful financial institution in the world. Never once in its long history has it ever had to ask for help from any government.

A definite coolness exists between the BIS and the United States. This goes back to the Bretton Woods Conference in 1944, held to set up the machinery for resuming world business after World War II. Even though this conference established the gold-backed U.S. dollar as the only reserve currency, the U.S. did everything it could to torpedo the BIS and give sole power to the American sponsored International Monetary Fund. The war was not over in 1944, but the combatants still got together and defeated this U.S. grab. In the final showdown, the Europeans and Japan never completely trusted the U.S.

As the years went by, the BIS suspicions were justified. The U.S. began to abuse its reserve currency role by simply printing dollars. American companies began to buy control of businesses all over the world. In 1971, President Nixon took the dollar off the gold standard, and introduced the novel idea of floating currencies. Meanwhile, the U.S. national debt began to increase each year, until it now stands at about $5.5 Trillion, an astronomic amount that can ever, ever be repaid. It was clear that the U.S. was out of control.

Along about 1972, I began to spend a great deal of time and effort in studying the BIS and its agenda. The first thing I found was that although the U.S. had turned its back on gold, the BIS were aggressively buying it. By 1990, the BIS were by far the largest holder of gold, with more than one billion ounces. This amounts to an outright corner on gold.

The next thing I learned is that the BIS are extremely closemouthed. It keeps a low profile. Its favorite M/O is the sneak attack. They have their own word for this – "coup". Their ideal coup is one where the victim is taken by surprise, and does not even know what hit him. The BIS tries to leave no fingerprints. Thus their coups often become perfect crimes.

The third thing I learned was that the BIS had two ironclad objectives. Both were so bold that they would take your breath away:

1) To destroy the Soviet Union, as a threat to world peace.
2) To destroy the dollar as the worlds reserve currency.

We all know that the Soviet Union collapsed in 1989. This was done by the BIS without firing a shot. They simply loaned large sums of money to the Soviets, and then called the loans. Just a routine castration! A simple foreclosure. This is how they got the Russian gold.

The second goal, of bringing down the dollar as a reserve currency, has not yet been reached, but I believe it soon will be."

I'll also remind you of this Q&A I posted in "The Gold Man" (not Goldman) at the BIS:

Q: **One other item you might clarify for me is "Who is really behind BIS?**

A: Perhaps, "who control them"?

Q: **The Swiss?

A: Yes.

Q: **The eurocentral banks?

A: Yes.

Q: **Who does BIS really represent?

A: "old world, gold economy, as viewed thru modern eyes" or " way to move from US$ without war".

Q: **Why was Saudi Arabia just included in BIS?

A: answered.

Q: **Has Saudi Arabia gone with Europe?

A: Yes.

As you ponder the above while choking down the bitterness of more "hair of the dog that bit you" being forced down your throat by the politicians, I'll leave you with this tasty morsel from financial advisor and Zero Hedge contributor, Michael Krieger today...

"I feel very bad for the German people. Not only do I feel bad for them but I can empathize. I too am being forced to sit back and watch this comedy of errors as a corrupt, inept and increasingly dangerous class of elitist political and financial oligarchs destroys my nation.

"On Sunday night an ex-client that I have remained in contact with since my days at Bernstein sent me an email with a simple question: “What do you think of the bailout.” I didn’t have time to answer it during trading Monday but when I finally sat down I wrote the following.

"Basically, it’s a total joke as is everything else the politicians have done. No one and nothing is allowed to fail and this relates to the fact that the global monetary and financial system is a complete house of cards. It’s insanely bullish for gold. If Germans rioted they would be in the streets today. They totally got sold out beyond belief. But it doesn’t seem to be in their nature to riot so rather I think they will dump their Euros and buy gold. That’s how Germans riot.

"With every passing day and every new bailout of the global banks (which is all this is, all TARP was, and all everything has been) more and more people awaken to the fact it’s all a total scam. This will just accelerate the process of dumping the paper currencies we use today in favor of hard assets as this system is obviously coming down.

"A lot of people keep asking, is this the same as post Bear Stearns? I mean here is the biggest difference in my mind. Back then people believed in the system, the market and what we have going generally. Not now. Not anymore. Thousands more people every day figure out it’s rigged and it’s a ponzi scheme."


Sincerely,
FOFOA

83 comments:

Tyrone said...

FOFOA, reveal thyself!!!

Thanks for the article, and Cheers!

Museice said...

I keep reminding myself that it was not Greece that was bailed out, it was the banks who made bad loans to Greece that were bailed out. Greece is still screwed.

But in the end debt was just transferred from one system to another.

dojufitz said...

Nassim Taleb seems annoyed at the journo - she just keeps trying to get him to say something about Thursday so she can tell he boss -

'Ya see...i got him to say something ...ain't i good'

.....she is a pest.

Was this a black swan...lol.

costata said...

dojufitz,

+10

FOFOA,

Timely post. Thanks.

Martijn said...

Nice one FOFOA.

running to currencies without a government

According to Duisenberg and some other European bankers the Euro severed its link to the nation state. However, those in charge are trying hard to build a European nation under the fluidity of things in this crisis.

I wonder how it will all end, but some resetting is being set in progress as we speak as FOFOA says indeed.

Ivo Cerckel said...

Taleb is an empirical skepticist, he says in the Black Swan.

How can a skepticist know what is coming?

For Aristotle,
TRUTH as both the starting point and end of cognitive activity
is the DEFAULT POSITION from which ignorance and error are to be understood and not the reverse. (1)

The fact that there are visual illusions proves that not all our perceptions are illusions. (2)

Not so for Taleb.

Taleb should shut up.

NOTES

(1)
Kurt Pitzl, o.p., “Introduction” in: Kurt Pritzl, ed., “Truth - Studies of a Robust Presence”, Washington, D.C., The Catholic University of America Press, 2010, 1, p. 3

(2)
Etienne Gilson, “Le réalisme méthodique”, Paris, Téqui, 2007, 2nd ed. (1st ed. 1935) with an introduction by Thierry-Dominique Humbrecht, o.p., p. 114

mila said...

Great article today! Learned much from this one. Thank you!

RIA in CA

Martijn said...

But it doesn’t seem to be in their nature to riot so rather I think they will dump their Euros and buy gold. That’s how Germans riot.

They're rioting as we speak. Small step for a man, giant leap towards freegold.

bucephalus said...

Hi FOFOA,

sorry FOFOA....you may have answered on another thread....

if you have the time, thanks for your thoughts and excellent insights!

BIS is the central bank's central bank, the market maker and clearing house for gold...

what are your thoughts on these questions, if you have the time, please

does the BIS itself own gold, or only serves as depository (warehouse) for central banks' gold, please?

even though the BIS and IMF may have different views of the evolving currency regime, why does BIS still utilize the SDR as its unit of account?

does this statement from wikipedia.com make sense to you?
"The gold franc was the unit of account for the Bank for International Settlements from 1930 until April 1, 2003. It was replaced with the Special Drawing Right. It was originally based on the Swiss franc, and remained at the value the Swiss franc was pegged (0.29g/fine gold) after the Swiss franc came off the gold standard."

thanks

Bucephalus

S said...

FOFOA,

What is the BIS repsonse to a medium terms trategy to crush fx rates to parity and launch an SDR (if that is the engame)? How do you envisiojn gold reacting (or BIS resisting) and how do the BRICs respond to such a measure. Another article on Bloom today tlaking about China rolling out more international trade settlement in Yuan for 18 more provinces...

S said...

any word anywhere on what the terms of the IMF loan to greece is namely if it includes gold pledge?

Desperado said...

Translated from todays proaurum.ch "daily commentary":

"Undeniably all offices experienced today a previously never experienced storm of paniced customers who where frightened by rumors of a secret meeting about currency reforms. We think these rumors should be ignored. But due to excessive demand we had to shut down the online store and there are currently practically no more items avaiable. But we are getting dialy new deliveries that we will use to restore our online offers. Whoever wants to use the current high prices can quickly and easily sell to our online shop...

Kewl said...

Nice one, Desperado!

Last sentence is priceless... selling into panic is a great advice :)

Martijn said...

This is not the panic yet.

Perhaps the very beginning of it, but so far inventories can manage. It's rather the logistic capacities of some dealers that don't suffice.

Proaurum is back online.

DiverCity said...
This comment has been removed by the author.
GOLD FREAK said...

The panic has not started yet. The only thing I hear when I talk to people is...is it too late? Gold is a bubble..Gold has already gone up 10 years, the people buying now are going to be holding the bag...what good is gold anyway during a collapse..you can't eat gold..Silver historically is 1/16th the price if gold I should be buying that instead..my portfolio already has exposure to gold via a ETF


as I said..no panic but things are picking up. We have reached the stage where panic could be triggered overnight though..no doubt in my mind.

DiverCity said...
This comment has been removed by the author.
Martijn said...

Jim Sinclair’s Commentary

Short the metals up to their eyeballs? Maybe not.

Recall my article on how a metals dealer works?


Unfortunately, I can't find that article on his website.

Does any of you guys know where it is?

Desperado said...

@Martijn, gold freak: On proaurum.ch all gold coins are still only available "on order/auf bestellung"

Below is the text of the passage from the email commentary from proaurum. I translated "aufgeschreckt" as paniced, although a closer translation is probably "startled":

"Durchweg alle pro aurum Filialen erlebten heute, nach dem Feiertag, einen bisher nie da gewesenen Ansturm. Viele Kunden wurden von einem Gerücht aufgeschreckt, dass zum vergangenen Wochenende oder zum Kommenden angeblich eine heimlich vorbereitete Währungsreform durchgeführt werden solle. Diesem Gerücht schenken wir keinerlei Glauben. Furcht und Panik sind keine guten Ratgeber für Investitionsentscheidungen. Der Onlineshop musste zwar von gestern bis heute Morgen geschlossen werden und es sind derzeit sind nur mehr wenige Gattungen online bestellbar, doch bekommen wir täglich neue Lieferungen, mit denen wir versuchen, werden das Onlineangebot wieder auszuweiten. Darum machen Sie es sich zuhause einfach gemütlich und bestellen in dem in Kürze wieder reichlicheren Angebot, online von daheim. Wer die hohen Preise nutzen möchte, um Gewinne mitzunehmen, der kann dies ebenso schnell und bequem online an uns verkaufen. Die Kunden, die sich heute im Goldhaus drängten und trotz Sonderschichten und Zusatzpersonal, sehr lange Wartezeiten einplanen mussten, konnten alle zufriedengestellt werden. Am Schalter in München ist weiterhin eine eingeschränkte Auswahl an Münzen und Barren verfügbar. Viele der nun ausverkauften, gängigsten Anlagemünzen und -barren sind bestellt und werden in den kommenden Tagen und Wochen wieder verfügbar sein."

""

Martijn said...

They expect to be able to deliver all products again soon.

So far it is more an issue of a logistical mismatch than of short supply, although off course that might change if demand rises even further from here.

We'll. There is more (bad) news (e.g. from the UK) to come in the coming months that will boost gold demand, so the direction is clear, but panic has not arrived yet.

I'm still interested in Sinclair's view on JP and other bullion banks and their alleged short positions.

FOFOA said...

Hello Bucephalus,

Yes, the BIS voluntarily reports to the World Gold Council that it, itself owns 120.0 metric tonnes of gold in 2010. This is down from the 194.3 tonnes the BIS reported in 2004, the 185.3 in 2005, 134.9 in 2008, and 125.0 in 2009. These numbers are also slightly off from what Doug Casey wrote in 2006, "BIS gold reserves were listed on its 2005 annual report (the most recent) as 712 tons." Voluntary reporting can be a funny thing sometimes.

As for the BIS utilizing the SDR, this doesn't surprise or alarm me at all. What other choices did it have at the time? The more virtual the unit of account, the more totally demonetized gold is. Gold is extremely buoyant against virtual currencies. It certainly floats better in a sea of virtual numbers than against a gold coin, wouldn't you say? And floating is what makes gold a pure wealth reserve!

As I have written before, the SDR is a completely virtual currency. It is so virtual, it is not even a currency, but a potential claim on one of four major currencies. If you need one, you just pick the one from the basket that you need and that country will then, and only then, print them up for you in exchange for your SDRs. So it is a virtual derivative of purely symbolic currencies. It is designed to behave as gold will ultimately behave after the transition to Freegold, to float against all currencies in a way that exposes over-printing in individual currencies. Only the SDR uses other currencies to do this, rather than gold, making it difficult when its entire basket is printing like crazy.

I'm trying to think of an apt analogy. All I'm coming up with is four skydivers. Instead of looking at the ground or at their altimeters to gauge when to pull their chutes, they look only at each other. They have no idea how fast they are falling nor how close they are to the ground, because they are fixated only on each other. If you ever find yourself in this situation, the safest course of action is to pull your chute immediately and pray it is not too late.

As for the Swiss Franc, the fact that the BIS held that as a unit of account until 2003 demonstrates a pretty anti-IMF stance. The Franc held out the longest against the wishes of the IMF and the $IMFS in the early 70's. Here is part of a speech given by Hans Meyer, Chairman of the Governing Board of the SNB, on 1 October 1999:

"A central issue of these reform efforts, to which I shall restrict myself in the following remarks, concerns the severance of the Swiss franc’s link to gold. In actual practice, this link has been outdated for decades. It is, moreover, in direct contradiction to our commitments as a member of the International Monetary Fund. With the severance of the gold link, we will be free to act according to our own discretion with respect to the evaluation and utilisation of our gold holdings."

Sincerely,
FOFOA

FOFOA said...

As you all know, I don't expect the euro to fail. The euro is designed for transition. It is designed for Freegold. And the specific value of a currency doesn't matter in its primary role as a medium of exchange. Only stability matters, and the euro could handle a big one-time devaluation to a more stable level. It will have to devalue at one point or another. Devaluation is inevitable for all fiat currencies today. The European politicians apparently understand less about this than the central bankers do.

Even still, exiting the euro would be a Herculean task for any country. They'd have to reissue currency and re-denominate all long term private contracts, and then face the old risks of war and hyperinflation once again. For this and other reasons I am highly skeptical about reports of politicians making boisterous threats to leave the euro. They seem pretty empty to me.

Jim Rickards: "Now, political unification has had modest success. Military and foreign policy unification has really had no success at all. But the crown jewel of European unification is their monetary system, the euro and the European Central Bank. So that's the pinnacle of their world historical efforts to unify the continent. They're not going to give that away lightly. I mean, they view it in a much broader historical context than Wall Street and Americans. And so it's of the utmost importance to them. And they're going to do everything they can to preserve it."

Jim Sinclair: "If the EU fails so does the USDX. With no mirror image to hold up the dollar artificially, the US dollar will fall faster than Greece's credit."

ANOTHER: "...If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will hoard all gold and buy any offered if this new European currency does not work"

Dave Narby said...

That was an amazing post.

I look forward to referencing it in my campaign for state assembly.

I salute you, sir!

"Deflation is the midwife to hyperinflation" - Anonymous Monetarist

"Hyperinflation is the midwife to repudiation" - FOFOA

costata said...

FOFOA,

I think it is worth revisiting this passage from FOA in order to keep our perspective on the paper gold market.

As FOA points out below it is the paper gold LONGS who are going to get burned NOT the shorts.

http://www.usagold.com/goldtrail/archives/goldtrailone.html

FOA (06/12/00; 19:48:25MT - usagold.com msg#26)
Put your cards on the table!


The gold poker game as seen at Camp:


My bet for you card players: "Did any in our camp ever express that the Euro would be backed with gold using the current paper system?"

No.

The whole concept behind the Euro thrust was politically driven to specifically include only physical gold in a future "non currency" function. Not intertwining the present dollar paper gold system in some form of currency backing. This position was driven home by the lessons oil learned in the 70s and 80s. It was included in the Euro because a real threat to use gold as a currency for crude would have resulted if it wasn't. This explained the early warnings (years ago) from Another that "All Paper Would Burn" as gold soared in value.

With a future Euro backed by a "free trading" physical market in gold, gold's real value would be later seen! Upon hearing this, almost every analyst took the ball from us and immediately ran with it in the wrong direction.

The usual explanation built on the fact that the world paper gold markets would burn up in a paper short squeeze. There by delivering our projected "soaring gold value". Well, there is something to be said for that, but such a process would be short lived and certainly not be the real play that's coming.

The current paper gold world will die (burn) as it's value to users erodes, not increases! We have to remember that some 85% (or more) of the long side of our world paper markets will not (perhaps cannot) take delivery of physical gold. If the paper trading price is driven ever lower from new derivative supply, these longs simply "trade out" and take their cash hit. The major banks and players in this arena know this and therefore are not at risk from expanding their positions. Truly, they are only playing behind the real political game today.

Indeed, if the Euro function will ultimately burn the dollar and it's paper gold markets and replace it with a physical "free gold" market, then selling paper gold is free money! Right? This is but one segment of the coming currency transition and to date it's progressing right along!

Again, most everyone in the Western Gold bug game is running with the ball in the wrong direction. They are trying to understand just how the Euro zone players are going to get out of our current gold market liabilities when the Euro makes use of the dollar gold market! These same thinkers are looking for some kind of "work out" of our system so it's price discovery function will value gold where it should be! My observation from the "Euro Makers "is that one should "forget this notion"! "Noone" gives a hoot about holding "price discovery" paper contracts as the real thing. Except for those with the real power to trade something for full payment! OIL!

Continued/

costata said...

\Continued

Today, paper gold derivatives are for selling because they will eventually be politically defaulted once their discount to physical drives their value next to nothing.

So who is in danger of being hurt as this unfolds?

That's right, the Western paper gold long! I'm not talking about just the US market! This is about the entire world gold market as we know it today. The real play will be for the ones that get out in front of the move by owning physical.

This stampede out of "paper physical" by the "big boys" will first discount that medium as all the selling comes to play. Then the real buying of physical will ensue. It seems every Gold bug sees only half the trade and has great faith that contract law will favor a short squeeze. Yet, none of them see where it's the long that will be dumping and forcing the discount!

Yes, the Washington Agreement gunned the paper price and was the political signal that gold was "on the road" to super high prices. But, when we said gold we were talking about the same "physical gold" we always point to. The
process that agreement started was really marking the death of our current paper gold market place, not it's new use beginnings!

Whether the paper market was about to default and burn then (as we thought it could / was)or next year, the point of all this is that it's destruction is politically written in stone!

Still, not one Western Gold bug in a thousand fully grasps the impact of this.

Most of them frantically search for a ray of light that shows how our "price discovery" paper market will advance in value.

All the while major players unload on investors all the derivative gold we are willing to bid for. At the same time world traders are buying all the physical gold that comes their way.

Eventually, "Physical Gold Advocates" will own a real wealth asset that's fairly marked to market in a "free gold" Euro Zone marketplace. The same
marketplace value that will back the new Euro economy by pricing "free gold"

in the many thousands. A new world class currency backing a new world class currency!

So how will these big derivative players make out on their paper gold loans and paper gold shorts?

I think they will make a fortune because they understood Another better than the Western Gold bugs could!

Thank you for camping.

FOA/ your Trail Guide

Ed said...

First, the WHY:
In America, intellectual honesty is where you find it.
The establishment are conpersons first.

Second, the WHAT:
See Letter “Unfooling the people” here:
http://www.durangotelegraph.com/telegraph.php?inc=/10-01-14/soapbox.htm

FOFOA said...

Here's an oldie-but-goodie. For those that never read it before, enjoy...

Life Preserver Certificate (An Allegory About Gold and Money)
by Al Lemerande Jr, M.D.

To some it would seem that I have a problem. I run a cruise line, and I have booked 4000 passengers for my next cruise. However, I have only 200 life preservers. I have spoken with many of the passengers and none of them are willing to go on the cruise without a life preserver. This is not the problem that it would seem, however, because I do have 4000 life preserver certificates. Each life preserver certificate is redeemable on demand for one life preserver. I have been operating my cruise line for many years in this fashion.

Where did I get the original two hundred life preservers? Well, in the early days, it was a very small cruise line. My boats only could carry two hundred passengers. I still used life preserver certificates then, but I kept the ratio at one to one. As time went on, I expanded. Because I had never had any serious accidents, being a very careful and conscientious operator (Yes, yes I am so wonderful!) I chose not to expand my life preserver supplies as I increased my passenger carrying capacity. Soon it was 400 passengers to 200 life preservers, then 500, then 1000, then 2000. Well, you can see how the story goes.

Oh yes, one thing I should mention, every once in awhile some nut would and still will want to “take possession” of his life preserver and carry it around on deck to show it off. This works well for me, because he stands out like a sore thumb and looks like an idiot. Sometimes when this happens, I’ll make a show of asking loudly whether anyone else wants to do the same thing, and people snicker and laugh mockingly. I love it.

Another Important Part of My Personal History: One day, some years ago, there actually was a small run on life preservers. One of my ships was experiencing some rough weather, and a good number of people actually wanted to physically hold onto their life preservers, just in case. I was forced, back then, to make a very difficult decision. After I had passed out about 100 or a little over half of the life preservers, I had to close the life preserver window. Basically, I made the announcement that from that moment forward life preserver certificates would be redeemable no longer for life preservers, but for something else that was “just as good” and would be delivered “just in time.” If you ask me, the “just in time” part of this whole little orchestration was the true stroke of brilliance. Whatever these things were, people didn’t have to hold them, because they would only be used exactly when they were needed. That was their “nature.” They were “just in time.” Sometimes I am so smart I scare myself.

Cont...

FOFOA said...

...

To be totally honest, however, back then, when I first proposed this idea to the restless crowd on deck, I didn’t know exactly what would happen. I feared something like a cruise ship mutiny might just break out. But guess what? Nothing happened. Absolutely nothing! Amazing! The passengers just went along with it. I almost couldn’t believe it!

From that point on, I retained the right to refuse exchange of any life preservers for life preserver certificates and would only exchange them for something that would be “just as good” and would be delivered “just in time.” What that something just as good was or is I still, after all these years, am not sure exactly. But it must be something, because all those people wouldn’t just believe in nothing. I must be smarter than even I can imagine.

Still, there was a type of awkwardness back then to the whole situation that left me uncomfortable. If truth be told, it still haunts me somewhat to this day, even if to only a small extent. It was more noticeable on a personal level back then, however, always this creeping feeling that something unexpected, something truly dreadful might happen and really do some serious damage to the whole business I was involved in.

I lived in this type of dread for quite some time actually, this constant unease that potential passengers would, as I did, sense this “awkwardness,” and refuse to ride, or at least be deterred from riding to a certain extent. Incredibly, as it seemed to me back then, this just did not happen. Folks just kept traveling on my cruise line.

I guess people just really like to travel in style. Did you know that I have cooks that can make omelets with over 547 different ingredients, including ice cream? But I digress; the main point to be mentioned now is how much I have expanded my line since then. In fact, now I can carry well over 100,000 passengers on several ships, and I have NO life preservers. That’s right. None! The two hundred that I originally carried, I loaned out to another cruise line. They pay me a fee for the use of my life preservers and I have been assured that I can get them back any time that I need them.

Fortunately for me, I invented something just as good as a life preserver; I just still don’t know exactly what it is. Fortunately, also, for me, nobody else does either. And even more fortunately for me, nobody else really seems to care.

Martijn said...

Funny analogy FOFOA.

Costata, I was thinking of the same quote when I was wondering whether anyone of us would be shorting paper gold at some point.

Martijn said...

Trichet must be pleased with the European gold buying frenzy.

As gold is bought in USD eventually, the Europeans are loading up on gold, thereby driving the Euro lower and the USD higher, but basically they are sending out Euro's and taking in gold from abroad.

I think that in this game it is an advantage to be the first country to go on a gold buying spree.

capt goodvibes said...

@Martijn,

A nice little silver lining, purely coincidental I'm sure.

bucephalus said...

Hi FOFOA!

Thanks for your analysis of bis-sdr-imf, and, your analogies of the skydivers and lifepreservers.

God Bless

have a great weekend

Bucephalus

Martijn said...

Does anyone here know more about the way JPM and HSBC deal gold?

According to Harvey Organ: But look what JPMorgan and HSBC did on the short side, they increased their paper shorts by a huge moonshot: 27,689.

He is always talking about how JPM and HSBC throw 'everything but the kitchen sink to crush gold'.

A the same time Jim Sinclair thinks it works differently as he says about JPM:

Short the metals up to their eyeballs? Maybe not.

Recall my article on how a metals dealer works?


Now either Jim or Harvey knows what's going on, right?

Does anyone here know?

And then off course we still have A/FOA convincingly arguing that the only losers will be the players holding paper longs.

Perhaps JP is long physical and short paper and hence will win twice?

FOFOA said...

Hi Martijn,

Maybe JPMorgan has joined us exposing the truth about gold...

In a research note published this week an analyst for JPMorgan Securities Inc., John Bridges, more or less explains why central banks hate gold -- for its being a competitor with their own forms of money.

The analyst, John Bridges, wrote: "A German banker once told us that gold normally trades like a commodity. However, when investors lose confidence in currencies, because the pool of gold is so much smaller than the pool of currencies, demand for gold can effectively become unlimited. We believe the European version of 'QE' [quantitative easing] is generating serious currency worries. ..."

That observation hints at why Western central banks and the International Monetary Fund backstop the London Bullion Market Association and the New York Commodities Exchange in their sales of unlimited and largely unbacked paper gold: so that the world may be deceived into thinking that the gold supply is a lot larger than it is, so the world is deprived of its traditional hedge against monetary debasement, and so potentially "unlimited" demand for gold can be met with unlimited supply of imaginary gold, thereby sustaining confidence in government currencies and the power of governments to inflate and reap the profits and power of the hidden tax of inflation.


Here's the report: JPMorgan Gold Report

FOFOA said...

Not surprising to see Bloomberg fan the flames of euro discontent...

Euro Breakup Talk Increases
"May 14 (Bloomberg) -- Romano Prodi recalls how he persuaded Germany to allow debt-swamped Italy into the euro: support our membership and we’ll buy your milk, he said.

When Prodi toured Germany’s agricultural heartland after becoming Italian leader in 1996, he pitched “a big milk pipeline from Bavaria,” pointing to a three-year, 40 percent plunge in the Italian lira that was hurting dairy sales. “To have Italy outside the euro, a huge quantity of exports from Germany would have been endangered,” Prodi, now 70, said.

Germany got the message, allowing entry rules to be bent to create a 16-nation market for its exporters. Now, German taxpayers are footing the bill for that permissiveness as Europe bails out divergent economies lashed to a single currency with little control over national taxes and spending..."


But what everyone is getting wrong is that a shared currency is simply a standard. Like a meter or a foot, or a minute. It's how you use that standard that matters. If you have less "standards" flowing in then you spend less "standards."

Expenditure is the adjustment mechanism in a fixed exchange rate zone like the eurozone. It is Goldman Sachs and the 66-year old $IMFS that has enabled the circumvention of the adjustment mechanism in Europe, not the euro. The same goes for the US states.

The Privateer writes, "The claim is that the obvious message of the European debacle is that a sovereign government must have full control of ALL aspects of monetary and fiscal policy if it is to prevent the type of sovereign debt debacle now engulfing Europe. As yet, no argument has been put forward for the opposite proposition."

Here's one: Under the $IMFSystem when relatively small currency zones have control of "ALL aspects of monetary and fiscal policy," hyperinflations are relatively common. Hyperinflation is the adjustment mechanism in floating exchange rate zones under the $IMFS. This is exactly why the euro severed its link to the nation-state... Because a) we are still living under the $IMFS and b) Europe has a living memory of hyperinflation.

If you think austerity riots are bad, you should see hyperinflation riots!

Martijn said...

Perhaps so indeed FOFOA.

I'm still curious as to Jim Sinclair's vision who seems to believe that JP has never really been short the metal, at least not to the extend of suppressing it's price in line with governmental desire.

That would however make Harvey Organ somewhat wrong in his claims that they (JP) fear a rise in the POG and try everything to suppress it.

Unless JP is just opportunistic as perhaps they should and has turned sides.

I don't recall GATA's view on this matter.

FOFOA said...

Here are a few week-old Moldbug snips I enjoyed:

"And now, we hear, JP Morgan is being investigated for evil deeds in the precious-metals markets - more or less confirming, or at least rendering plausible, the longstanding charges of GATA..."

"Remonetization is pretty simple: you have two neighboring countries, Goldenstein and Dollarstan. If Dollarstan systematically dilutes its currency, its savers will move their savings to Goldenstein... (If there was a Goldenstein... its citizens would just be rich for a living, like Kuwaitis.)"

"So people move their savings to Goldenstein because gold is going up. And gold goes up because people are moving their savings to Goldenstein. At the end of this cycle, gold is the standard medium of saving and dollars are a kind of soft, hot-potato currency - a North American Peso."

"Even (perhaps especially) among the goldbugs, there is a considerable confusion between two kinds of artificial gold. Let's call them virtual gold and synthetic gold. Moreover, the (now highly suspect) London gold market itself does not distinguish between these types of claim, considering both unallocated.

"Virtual gold (VG) is artificial gold that's backed, on the balance sheet of the issuer, by some kind of future gold receivable - eg, a gold forward. This is typically maturity-transformed, a stupid and dangerous practice... for instance, Buns & Buns of London might have written a promise to deliver gold in 3 months, backed by a Barrick promise to deliver gold in 36 months.

"Again, if this seems dangerous, that's because it is dangerous. In a gold maturity crisis, as all holders of artificial gold demand allocated gold, gold interest rates spike - gold now is much more desirable than gold later.

"But gold interest rates are tied by arbitrage to dollar interest rates. So what happens when this irresistible force meets that immovable object? Come on. In nature, what happens when an irresistible force meets an immovable object? What happens is a giant sucking financial death-vortex singularity, that's what. Don't ask these kind of things if you don't want the answer."

"Suppose you buy a CDS that pays you 1 euro if Greece defaults. Greece defaults. What do you have? A euro? No - a piece of paper, saying someone is supposed to pay you a euro. Who wrote this piece of paper? Who does it obligate? Do they even still exist?"

"And more practically, if you are one of the people who bet on the collapse of Greece, the people who are going to pay off on that bet are under the thumbs of the people you bet against! No one in Brussels wants to print a bunch of euros, just to pay off speculators and Jews like you."

"In any case, if JPM has large naked short positions in gold and silver, and now is forced to close them, there will probably be trucks of chanting, machete-waving militia driving through your neighborhood by Wednesday or so. Short, dark men - speaking something that isn't Spanish. Arabic? Mayan? Kenyan? Have the Bilderbergers been breeding them, in camps in the Sierras? Is this the New World Order, as Rush foretold? Alas, the television is already off. Arm yourself. Go to the window. Soon, the midget race war will begin."


Source

costata said...

Martijn,

"That would however make Harvey Organ somewhat wrong in his claims that they (JP) fear a rise in the POG and try everything to suppress it."

Recall Another's explanation of the late 1990's crisis. One of the contributing factors was the LBMA had issued so much paper that they drove the gold price below the cost of production.

As Pierre Lassonde pointed out in a recent King World News interview, the major miners' stock prices haven't reacted to the price of gold over the past decade as they did in the past. The stock price increases have been relatively modest.

He explained that their cost of production has been rising along with gold and their margins have been relatively static.

Let's connect these dots. The gold price manipulation allows the price to RISE gradually thus keeping the gold price above the RISING cost of production = maintaining mine supply.

You may point out that mine supply peaked some years ago despite the rising price. This is a game called "living on borrowed time".

JPM, HSBC and the other bullion banks may be wicked, they may even be crooks, but stupid? I think not. The longs will be "harvested" (Catherine Austion Fitts' term) as long as they keep playing the rigged game.

costata said...

FOFOA,

Some interesting observations on the Euro, US$ and gold from Adam Hamilton.

http://www.kitco.com/ind/hamilton/may142010.html

For those short of time:

"And euro gold has powered higher since mid-2005 despite the strong euro. While the US dollar has long been in a secular bear, the euro has been in a secular bull. Back in mid-2001 a single euro was only worth less than $0.84. Then, like today, American analysts had a field day forecasting the imminent demise of the euro currency. How could so many disparate nations, with their own agendas, keep their monetary and political union from splintering? Believe me, the euro-to-zero trade is nothing new.

But somehow, Europe did hold together through all kinds of crises. Its currency grew stronger and stronger in the face of the relentlessly weakening dollar. By April 2008 as the US dollar hit an all-time low, the euro had powered up to almost $1.60. Despite this massive 90.9% bull market in the euro, a strong currency by any standard, euro gold still continued to climb on gold investment demand. To the very days of the euro’s best bull-to-date gains, euro gold still rallied 80.2%. Gold’s bull transcends all currencies!

So even if the secular euro bull persists, euro gold will continue powering higher on balance. Like all bull markets it will flow and ebb, seeing fast and exciting uplegs followed by necessary and healthy corrections to rebalance sentiment. So if €1000 doesn’t stick soon, it is only a matter of time until it will. For those naysayers today who claim €1000 will never hold, realize the same was once said about €500 and €750. And while neither held on their first attempts, it was only a matter of months until each stuck.

It’s not that the euro is a great currency, it is another devaluing fiat-currency scheme just like the US dollar. But unlike the profligate US Fed and Treasury, the European Central Bank is fairly conservative. It runs higher interest rates than the US, making the euro more attractive to global investors. It grows its broad money supply at slower rates than the US does.

(Recall A/FOA) And the world’s central banks and investors are way overexposed in dollars, so they need to diversify into euros and physical gold bullion.

The euro isn’t fantastic, but its fundamentals are superior to the US dollar’s. It is the lesser of two evils." (My edit/My emphasis)

costata said...

Hi All,

Apologies for hogging the comment "window" but this just came into view and I think it is a must read:

http://www.financialsense.com/fsu/editorials/thomson/2010/0514.html

"Gold 1225 is a hugely significant point, and, horrifically, only JP Morgan has noted the “ultimate significance” of price rising above there."

Cheers

Kewl said...

http://www.zerohedge.com/article/fed-causes-art-auction-binge

These art auction houses exceeded all of their estimates on sales this week. Tuesday night Christie's sold a mind altering $231.9 million. On Wednesday evening Sotheby's brought in $190 million at their auction. Then Thursday night, Phillips de Pury, the most interesting auction, brought in $37.9 million. Each house exceeded their pre-auction sales estimates.

Martijn said...

I wonder if Harvey's perspective on JP is exhaustive.

/

For those interested: here is an interview with Trichet.

Martijn said...

Hedge fund vote threatens EU-U.S. rift

Martijn said...

And here's Rick Santelli again.

mortymer said...

Did anyone thought about this EU event from the gold flow perspectivity? When euro went down in last few weeks a lot of people from EU land got gold in their possesion.

Tyrone said...

Nothing new here, but how about a little gold vending for your Sunday afternoon...

GOLD BULLION VENDING MACHINE

Cheers!

FOFOA said...

As the world turns...

An absolute must-read from LEAP/E2020! This is from the European perspective, a good balance to the ubiquitous Ambrose Evans-Pritchard.

GEAB N°45 (May 16, 2010)

Small excerpt:
About England... "they will collide with this public Euroscepticism which they have fostered over the course of the past years. The irony of history was, once again, clearly shown during this historic weekend of the 8th/9th May 2010: in refusing to participate in the Eurozone’s joint defensive and protective measures, the British leaders have, de facto, refused to catch the last lifeline within their grasp (8). The European continent will now content itself with watching them try to find the 200 billion Euros which their country needs to balance this year’s budget (9). And if the leaders in London think that City speculators will have any qualms breaking the Pound sterling and selling Gilts, it is because they haven’t understood the basics of global finance (10), nor checked the nationalities of these same players (11)."

For those of you still betting on the death of the euro, you can sleep well knowing you are in full agreement with Jim Cramer.

Also, I expect to see major fireworks over London any day now. They have some major problems brewing...

Labour hid ‘scorched earth’ debts worth billions

"Billions of pounds in public money was committed in the run-up to the election campaign in a deliberate strategy to boost Labour’s chances at the ballot box and sabotage the next government.

One former Labour minister told The Sunday Times: “There was collusion between ministers and civil servants to get as many contracts signed off as possible before the election was called.”

One former adviser to the schools department said there was a deliberate policy of “scorched earth”. “The atmosphere was ‘pull up all the railways, burn the grain stores, leave nothing for the Tories’,” he added.

Many ministers are spending this weekend going through their red boxes trying to understand the scale of the budgetary black holes facing their departments.

The “black holes” that ministers have already unearthed include:"

FOFOA said...

Something's happening.

Global markets tanking, dollar rising quickly, gold up and US futures falling fast. Euro gold at €1012 and rising.

PPT, where R U?

stibot said...

They will come later. Because 1 % of Americans own 50 % of stocks and 10 % own 90 % of stocks, i don't believe crash is going to happen.

Martijn said...

Martijn

The dollar dies the day the euro fails as a union currency.

Funny how Sinclair seems to off again. First he wrongly predicted the death of the USD in hundred days (at the end of which the dollar rapidly gained strength) and now he's predicting the euro to go first while we shall most likely shift negative attention to the USD soon via Brittain.

Jimmy said...

Martin Armstrong, about waterfall-effect on 6 may 2010

Jimmy said...

For those, who doesn't understand the waterfall-effect: reread FOFOA's Gold: The Ultimate Un-Bubble

Martijn said...

A friend recently provided me with the link to Sinclair's article why metal dealers are the enemies of gold.

Interesting read compare to A/FOA.

Jimmy said...

Someone asked me: "Who is Jim Rogers shorting?"

I answered: "Goldman Sachs, not JP Morgan on this moment."

He declared me for a fool.

But the exposure of derivatives on Goldman Sachs is much, much bigger than on JP Morgan (also is the exposure on JP Morgan so big) (see The OCC treasury report, p26, table 4, GS: 766%).

My opinion is that all big banks ("the big five") would fail...

I don't believe in 100% perfect trading. Impossible, black swan will strike...

The exposure is so big, that one mistake would demolish the bank and blow all bankassets away...


And what is your opinion? Who's Jim shorting and why?

Jimmy said...

And it's also interesting to research The Carlyle Group.

No perfect trading maybe?

Jimmy said...

Niall Ferguson, The United States' two futures

Jimmy said...

Niall Ferguson, The United States' two futures

CNK said...

I follow James Rickards on twitter - excellent commentary. Nassim Taleb is also great to follow. Here's a recent tweet by Rickards:

"U.S. (8,000 tonnes) & Eurosystem (10,000 tones) will play #gold card once world drowns in paper debt. Asia & BRIC's lose big in gold space"

Very interesting view, no? I agree with Rickards. I just don't see any other peaceful way out of this debt crisis for the Western nations.

FOFOA said...

Goldman's "Mr. BRIC" sez...

O’Neill Says Idea of Euro Breakup Within a Year Is ‘Ridiculous’

May 17 (Bloomberg) -- Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill said it is “ridiculous” to suggest that the euro area will break up within the next year and predicted the currency’s decline may be almost over.

“The simple misconception is people trying to equate pure economic logic with social political reality,” O’Neill said in an interview from his office in London today. “The Germans and French are passionately committed to it whether the rest of us think it’s crazy or not.”...

“This is 60 years of history in the making, so the idea that the euro simply falls apart at first test of its credibility, I think it highly unlikely,” O’Neill said. “It might well be in 20 years time it doesn’t exist but the idea that it’s not going to exist in the next year because the market is worried about Spain and Portugal’s funding requirements is ridiculous."...

O’Neill said the overwhelming consensus is that euro will weaken further. Of 600 people he addressed recently, only three predicted the currency would strengthen, he said.

“In my experience of being in the foreign exchange market for 29 years, that makes it virtually guaranteed that the euro isn’t going to go down much further,” he said.



Wikipedia: Jim O'Neill is head of global economic research at Goldman Sachs (since 2001). He is best known for his prominent economic thesis regarding the economically related nations referred to as BRICs, Brazil, Russia, India and China. He coined the phrase in a 2001 paper entitle "The World Needs Better Economic BRICs."

O'Neill has particular interest and success in the foreign exchange market, Gavyn Davies describing O'Neill as "the top foreign-exchange economist anywhere in the world in the past decade" in 2005.

FOFOA said...

Funny-Money Flood
New York Post

"Phony $100 and $50 bills are flooding the city -- and the feds want your help to stop the high-quality fakes..."

From the comments under the article:
"hello. this funny money IS being printed by the Fed."

Martijn said...

Hehe, nice comment.

I guess O'Neill might be right on the euro, I especially value his remarkt about only three people expecting the currency to rise.

And as there where quite some people expecting gold to rise and friday is option-expiration where gold usually gets whacked we might just end this week with lower gold.

Not that it matters as we are almost guaranteed of much higher gold over the long run.

Martijn said...

Here is another vid vrom Taleb @bloomberg.

Isn't it bizarre what sort of visual background they put behind him?

donotreply said...

On Jim Rogers---according to one of his recent interviews, he's shorting a major western bank again:

Mining Stock Talk Interviews Jim Rogers

Martijn said...

Merkel to announce short-selling ban -coalition source.

Figting the $IMFS?

S said...

Are the German's moving on the derivatives complex? The EUR ban on hedging looks a lot like it.

Jeff said...

You can still short the euro, especially in America.

answer2me said...

The article references a possible saudi reserve.


http://700trillion.blogspot.com/2009/10/jesuits-saudi-gold.html

Any truth to this?

answer2me said...

a light afternoon read!

http://www.thirdworldtraveler.com/Iraq/Iraq_dollar_vs_euro.html

komncents said...

How can I verify Mr. Johnson's claim that the BIS
has more than 1 trillion oz of gold?

FOFOA said...

AngloGold Ashanti’s Mponeng mine in the North West Province of South Africa is one of the world’s deepest and richest gold mines...

Proved reserves: 653,000 ounces. Total probable reserves: 9.5 million ounces

There is a wonderful show about this mine that just premiered on the Science Channel on May 13, 2010, on Build it Bigger! I watched it with great interest. Check your local listings...

Show Title: South Africa's Mponeng Gold Mine
Premiere
: May 13, 2010
Travel to the deepest place on Earth, Johannesburg, South Africa's Mponeng Gold Mine. South Africa's economy depends on gold, but recently, productivity has plummeted. Now, Mponeng is fighting back by digging deeper than man has ever gone, towards an untapped gold reef worth $10 billion. Setting a new depth record every day, workers blast through super-heated rock nearly 3 miles down, in the most remote and dangerous construction site on the planet.

Answer2me,

I don't know anything about that Saudi gold mine. But it would probably be the world's richest if its projected reserves were 20 million OUNCES of gold. The mine listed above has about 10 million ounces. Yet that writer claims this mine has 20 million TONS? And that's not just a typo. It's the whole point of his blog and his book.

The author claims to be a student of geography, but even the most basic knowledge of geology would reveal that if such a deposit could exist in one place on Earth, it would also exist in other places. 20 million TONNES (not tons) would be, if it existed, 125 times more gold than all the known above-ground gold ever mined in all of history.

"Any truth to this?"

I would guess not.

Sincerely,
FOFOA

Aleksandar said...

Hey, what happened to the comments at ZeroHedge? Cant see them anymore...

FOFOA said...

A very nice must-read summary from Egon von Greyerz.

ALEA IACTA EST

Snip (I call this a Catch-22):
"So, if virtually bankrupt nations don’t cut their deficits, they will definitively go under and if they try to cut, they will also go under due to collapsing output and tax revenues and colossal debts. Thus whatever actions governments take or don’t take, they are damned."

FOFOA said...

Axel Merk and Lance Lewis:

Lance,

So far, the market has proven me wrong. But if you look at what's happening:

* Germany is calling the shots: German finance minister Schäuble is rapidly putting together a package to change the way the eurozone is fiscally managed. Germany has lots of power as they can use their support for weaker countries as leverage.

* The eurozone is acting at blizzard speed. In the U.S., the Fed provided too much assistance, taking away the sense of urgency. In the eurozone, Spain, Portugal, Italy all have announced and to an extent already enacted further drastic cost cutting measures.

* The reason the eurozone is in trouble is because the ECB has always been much tighter; the ECB phased out its emergency programs, thus contributing the the current issues as both banks and governments did not use the time to get their act together. It looks like they got the message this time around.

* The ECB has bought some government bonds - I certainly don't like it, but for different reasons: it may simply encourage some to dump their bonds onto the ECB; however, the ECB today came out with its approach to sterilizing the debt. While I'm no fan of the bond purchase program, the ECB is far more restraint than the BOE or Fed.

The weak euro is boosting exports in the eurozone.

Taking this all together: where is the UK, US, Japan in all this? They are not tackling their issues, whereas the eurozone is.

The negative sentiment is extreme; Goldman's Chief Global Economist said in a room of 600, only 3 raised their hands when queried on whether they have a positive outlook on the euro.

I would be quick to dump the euro if I saw the eurozone make fatal decisions. But I can't help but, net, believe the eurozone should emerge far stronger. Again, so far, the markets have proven me wrong.

Greetings,
-Axel Merk


Lance Lewis:

I agree completely with respect to the euro vs. the dollar and other pieces of confetti. In world where all central banks are printing money, at least the ECB is showing a tiny bit of restraint. Likewise, as you point out, the EU is actually taking austerity measures rather than simply borrowing and spending even more, like we're doing here in the US. The euro should be rewarded to some degree for all of that at some point.

I like to think of it as an analogy to the housing bubble. During the bubble period, those who levered up the most and did the craziest things (i.e. - the US in this situation) were rewarded the most, while the more conservative (i.e. - the EU) were effectively punished.

When the final tally was made, however, the more conservative home buyers were the ones who survived the housing bust (even though they suffered to some degree as well), while the most levered and profligate during the bubble were completely bankrupted.

I suspect the same will be the case among the sovereign debtors as well, with gold (which is no country's liability) obviously being the biggest winner of all.

Luke Garratt said...

Answer2me:

That blog lost me when I saw the latest article is on Nibiru...

answer2me said...
This comment has been removed by the author.
Dave Narby said...

FOFOA,

You describe the inflation that will take place as "hyperinflation".

I am wondering if instead you meant strong inflation, e.g. a 1:5 gold revaluation upwards, as hyperinflation is usually attributed to Wiemar/Zimbabwe-style inflation.

Currently debating this with a fine mind, so if you could clear this up, it will be much appreciated.

dojufitz said...

What does A. Fekete think of Freegold?

FOFOA said...

Hello Dave,

The circulating medium is what lubricates the real economy. As such, its specific value is meaningless except to say short-term stability of value is important to its function as a lubricant.

But the dollar is so much more than just a circulating medium. It is the very yard stick of a mountain of global debt that has reached its growth limit. And when that debt structure collapses it will bring down the value of a dollar to zero, or as close to zero as is physically possible.

Study the assignat and the mandat in France in the late 18th century if you want to see the future of the dollar. Study John Law's Mississippi paper. Every time a government that runs a debt and a deficit also gets control of issuing money, it always takes it to zero.

This has been coming at the dollar for a long time now. The hyperinflation is already present in all the debt. Every penny of one man's debt is a penny of another man's retirement plan. It will all be liquidated at the speed of a lightning bolt when the US Treasury market finally burps, or when the paper gold window finally mandates "paper only".

The dollar's value will already be decimated before Bernanke even gets started issuing the high denomination bills like we saw in Zimbabwe and Weimar Germany. Yet he will issue them, as that will be the only way for the US government to pay its current account, its debt service and its other liabilities, all denominated in dollars, some structural and indexed to inflation, others simply nominal. But it will be a mad dash to print like "crazy".

"Old money" and "public money" has seen this coming for a long time now. This is why the Central Banks in aggregate have switched from dishoarding gold to hoarding gold. When the debt brings down the dollar to zero and all paper investments tied to the value of the dollar evaporate, gold, in global aggregate, will inherit all the purchasing power lost in the dollar's collapse. Currency is a small part of this loss. Debt is the motherlode!

This is different than past currency collapses because the dollar is the global reserve currency. To view this properly, you have to realize that because gold is globally fungible, and the dollar is the global reserve currency and global accounting standard, gold's value reset will have nothing to do with inflation.

Gold's value reset will be from a shift in function, as it absorbs and inherits the global purchasing power that was previously stored in dollar-denominated contracts, including US Treasury bonds, on the balance sheets of the most powerful Central Banks in the world.

Continued...

FOFOA said...

...Everything else that is a fine store of value like fine art, classic cars, gem stones and commodities, will retain their present purchasing power (or close to it), but gold will be different. Gold will switch roles, from commodity to wealth reserve par excellence.

Central banks like China that hold a lot of dollars and a little gold will retain their present purchasing power at the least. The bonds will become kindling while the gold becomes priceless. A simple balance sheet weighting adjustment.

Anyone who tells you the global debt pyramid scheme has reached its mathematical limit, but then says the numéraire of that system will only see a gradual "strong inflation"; or anyone who tells you that the paper gold market's fractional reserves can fail and gold will only go up 5:1... hasn't thought through the real world implications very far.

We are playing 7-layer, multi-dimensional poker here. You have to be able to see beyond your glass fishbowl if you want to avoid the psychological trauma of reality when it comes crashing in.

Yes, we will see something resembling Weimar and Zimbabwe-style hyperinflation with the dollar. And the level of gold's revaluation will have nothing to do with this currency collapse. It will have everything to do with a separation of the monetary roles in the global collective conscience and on the balance sheets of the richest Giants in the world.

Gold will not rise like an undervalued commodity... 5:1 as you say. It will be more in the range of 50:1 to 100:1, and when you add in the hyperinflation, an ounce of gold will easily pay off the US national debt as it stands right now.

Of course the US will not be able to do that. Not if it wants to keep trading certain "essential" commodities with certain "essential" trading partners. It will have to honor certain paper gold contracts at the rate they were written to keep the "lubrication" flowing. So to speak.

Sincerely,
FOFOA

Dave Narby said...

Thank you FOFOA,

IMO the debate comes down to severity and (most importantly) timing.

AFA severity, I expect it will be anywhere from far more severe than the majority expects to catestrophic (EOTWAWKI).

I picked 5:1 because that would bring the paper currency in line with the modern metal US currency (the melt value of quarters etc. are worth ~20% of their nominal value). Also, it's my gut feeling that they think 5:1 can be 'gotten away with' (which is wrong, naturally, but they will try as there is nothing to lose).

20:1 is slightly less likely, and at that point the pain from a 50-100:1 devaluation is not that much greater, so I can see TPTB shrugging their shoulders and printing away.


AFA timing is concerned, on or around 2012 seems right, not just from the apocalyptic expectations (which will aid it), but because round two of US mortgage resets peak out at that time, making it patently obvious there is no escape.


Any thoughts on timing would be appreciated. Have a big to-do list between now and then, would be nice to schedule it properly. : p

FOFOA said...

Hello Dave,

Money and power, good and evil, right and wrong, grand conspiracies and plain dumb luck all play a role in building unbalanced systems and blowing bubbles. But when it comes time for them to pop or collapse, these human endeavors are all completely irrelevant. I don't employ moral judgement nor geopolitics in my currency analysis for this very reason; they are irrelevant. Collapse is only organized by the Superorganism and it cannot be stopped, although under special circumstances it can be delayed.

The dollar system should have collapsed between 1971 and 1980, but it didn't. It received an assist from Europe, the Middle East, and later from the Far East. The purpose of this assist was to buy the time necessary to build another currency large enough to lubricate international trade in the event of the disappearance of the dollar. That ended in 1999 with the launch of the euro. What kept the dollar afloat since then is anyone's guess. I have a few theories. But they all seem to be expiring in 2010.

The euro was special in two ways. And by special, I mean special on an astronomical time scale. It was the first man-made circulating medium to separate itself from the nation-state, from the very ones who always crush a currency to zero. And it was also the first to sever its ties to gold. In other words, it was the first unbacked, irredeemable paper currency that not only acknowledged but supported an external store of value, gold. This can all be found in a famous speech here.

I don't know how much of my blog you have read, but I don't find the euro's present troubles overly alarming or existentially threatening because I understand why it is the way it is. Some European politicians and political appointees today are doing it great harm, but not existential harm, yet. The currency exchange numbers today are meaningless because all mediums must devalue against the debt paradigm. "It's the debt, stupid" is more than just the title of one of my posts. But please forgive me for meandering "aimlessly" in this reply.

It appears to me that you are expecting a controlled devaluation of the dollar by the Fed and the USG. This is something that is totally impossible in my judgement. First of all, there's nothing to devalue it against today, technically speaking. The only thing they can do is print base money to fill the credit money hole and the USG coffers, and they are already doing this. And they must do this. And they will keep doing this.

For the sake of your question I am trying to imagine how a controlled devaluation might be attempted, were they stupid enough to try. If the USG was the world biggest creditor, they could possibly devalue the denominator of all that debt 5:1 by forgiving everyone of 80% of their debt while printing more currency for their own needs. But the USG is actually the biggest debtor. So it would instead be forgiving its OWN debt and punishing its creditors... out of 80% of their savings. Do you think those creditors will then say, "more please?"

Continued...

FOFOA said...

...The best analogy I can come up with is a steep, avalanche-prone ski area. The ski patrol knocks down some of the snow after every snowfall. Because if you let it pile too high, and get packed, the whole lot will come down all at once. Either by gravity, or by a ski patrol cannon, or by skier, or by a deer farting. Any way you cut it, it all comes down if there's too much of it packed on the mountain. Gravity does all the work.

This snow pack is to the mountain what global debt is to the dollar. There's no way to do a centrally controlled devaluation of the dollar at this end stage of its life. It prices and denominates too many things, too many contracts, too much debt in the world today. This is the real essence of the dollar. Its "unit of account" function is, not its medium of exchange quantity.

And the physical plane that underlies it is completely unaligned with this precarious 'snow pack'. It is not representative of reality, therefore it has no sticking power. It's ready to come down on its own, so shhhh... be quiet and very still and let's hope the wind doesn't blow.

Regarding timing, the best I can say is "sooner rather than later". ;)

Sincerely,
FOFOA

Dave Narby said...

I actually started to think of ways they could devalue the dollar in an orderly fashion (some of which could work!)...

And then I realized that given the fact they couldn't see this coming in the first place, and orderly devaluation is not bloody likely.

The good news is many people are ready for sound money, and more awake to it daily. The swell is growing.

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