Wednesday, June 2, 2010

"It's the Debt, Stupid"


(h/t Greyfox for title inspiration)

Why is global recapitalization impossible through fiat, yet inevitable through gold?

The answer is quite revealing.

It's the debt. Not the currency itself. The government could easily decree its money to be 50 times more valuable. It could announce that your taxes are cut to just 2% of what they used to be (in nominal terms), increasing the value of the currency already in circulation 50-fold. But the problem is all the private debt that's denominated in that currency!

For it to be a system-wide recapitalization, every debtor would have to pay (in real terms) 50x more than he signed up for. Salaries would be cut by 98% yet your debt would remain the same. If your monthly mortgage is $1,000 and your monthly income is $4,000, under a 50x fiat revaluation/recapitalization your mortgage would stay at $1,000/mo. and your income would drop to $80 per month. Can you see how this is impossible?

But gold is different. The (100%) holders of physical gold can become 50x wealthier and no debtor has to lift a pinky. (Someone holding 2% in physical gold would retain the same purchasing power.)

I know what some of you are thinking, and you're right. There is SOME debt denominated in gold. And that debt is in the paper gold contract market. Gold contracts are often denominated in gold. But this is where Another and FOA come in. They revealed that when the dollar-denominated paper gold market shifts into cash-only settlement mode (perhaps this month?), that Eurosystem $-paper gold contracts will be converted into euro denomination to save the banks. Think about this in relation to the present state of the euro, the Eurozone banking system, and the ECB's recent actions.

Here are a few extracts from Gold Trail Four:

FOA: At some point, our dollar denominated paper gold system will crack and plunge in value as its credibility to be converted into real gold is destroyed. In the process taking down most of the gold industry. An industry who's stock equity value is daily marked to, and closely follows, said dollar gold system. In time, we will all understand the currency supporting function and the industry killing nature of a Free Gold price. As its surging value more than compensates the dollar's lost value in the hands of foreign CBs.

This particular line of perception is being driven home in recent ECB commentary as their President, Mr. D., has discussed the very mechanism to delineate foreign held Euro money assets. (see Randy's recent ECB news) Assets that, per my above to Randy, will explode in numbers as our busted paper dollar gold market drives these institutions into Euro financing arrangements. These new, increasing, non-expansive assets will be balanced by their system's surging gold price and exported bullion from other nations. A process that in part allows the US to adjust its gold ownership just to stay in the game.

The world is changing and the Physical Gold Advocates will be the ones keeping score!

FOA (6/9/01; 16:36:42MT - usagold.com msg#75)
A letter from Another to me.

All were present at the meeting. I think contractual conversion became topic of some urgency. This BIS must now consider the values these forms will hold in ours and their new futures. Values that will no longer be dictated in dollars, rather realigned in conversion and gold market failure. Truly, this failure of current gold will be reflected as anguish in these western goldbugs, both bankers and investors. All done as the saving wealth for your gold advocates and new reserve bankers finds its new mark in our time. Your work, good man, has been as trying to reconcile the religions of this world. Telling both they are just while only one can be right in the end. So it is in this day of gold.

Some knew what was coming from the beginning. With the Hague Conference of Heads of State in 1969 sprang Copenhagen Report of 23rd July 1973. We pointed and all continued to turn away to follow where power was, not where it was going. With the Solemn Declaration in Stuttgart (1983) closely followed by the Single European Act (1987) even the BIS then understood the final goal. Margaret (Thatcher) soon expressed that signing that proposition (the Solemn Act) was her greatest mistake in office. While I do agree with her on a strategic political basis, such reflections by British leader only exposes the ignored, nearing failure of their shared singular currency dominance (both USA and England). Little is expressed of the wealth lost of our peoples and that of most Western economies as these governments' efforts to preserve this failing
$-system drains real wealth from our world.

Now these leaders' full attention must focus on this money transition itself as Blair's next initiative (the Euro) will lead to a realignment of contract values of all kinds. Before the fact! The Maastricht Treaty allows that by Jan. 2002, all contracts will be converted into euros and new contracts must be denominated in euros. Because Blair has overseen the signing of both Amsterdam and Nice Treaties, his closest people understand the full impact Britons intentions will have on this world's paper gold market. As it be contractually expressed in dollars. The credibility of these to not only represent gold but to maintain loan collateral on books will lead to several high level agreements to address this loss. Indeed, how does one transition a metal contract without moving the metal once again?

Some of your American gold must come into play during this game of kings. It must, as the BIS will sanction a complete disposal of contract liabilities from metal into Euros unless some real US gold is given up.

FOA: In the event of a large enough default, the entire world of paper gold trading will be forced into full cash settlement. The question will be presented: "if there isn't enough gold around to settle these commitments, then there isn't any point in letting the price rise further to effect still no metal settlement",,,,,,, "This was a contract trading market anyway, not a gold market"! Further, the international banking industry, in accords with their governments, will enforce a kind of "position limit" on the amount of gold liability they or their customers can carry. Both long and short. It will have nothing to do with the exchanges, rather it will be a bookkeeping problem being addressed by the banks. Still, it will impact the illusion price we use for gold,,,, downward. The net effect of this will be just the opposite of what paper gold players expect as positions are "force liquidated" prior to even a "cash settlement". This sudden dumping of major contract commitments onto the markets will drive the cash settlement price of gold,,,,, ?.

This is the reality of the political banking world we live in. Neither the EuroZone or DollarZone banking world is going to let the destruction of the Anglo/Dollar gold market shut down their financial system. Take some loses? Sure! But this portion of the pie is nothing compared to the troubles to be managed by the US (our Fed) as the dollar's role as reserve is removed. Granted, once the game is underway a true Free Gold market, trading noncollateral gold, will come about. It will be endorsed as governments settle a small portion of their political scores using physical gold reevaluated up into the "low oxygen zone". Mostly it will be US gold being moved.


Witness the recent long blowout of paper players on the comex? The so called "big traders" these guides thought were about to demand delivery. They were not the real "Big Traders" (I know) were they? If they were they would have demanded delivery even if the short side sold 500,000 contracts short. Even it they (sellers) drove the paper price down with empty sales! The reason these real gold advocates (Giants) buy physical gold is because they are waiting for this dollar casino of a gold currency market to shut down. This reality will end in a locked, no delivery market! Once again, Believe it!

Truly, this recent move was long "little traders" wanting to make currency profits without the real assets to back it up. Nothing more. We will see more of this as it all comes to its end. When the real gold run Another points to comes,,,,, no one will profit anything near the amounts physical gold advocates will.


Society has a way of changing the rules when the economic wealth that their savings are based on comes into risk. Our fiat banks will not be allowed to fail. Just as in 1971, when that real gold demand suddenly expands its boundaries to include ordinary gold investors, the supply rules will be changed again. [1] Fortunately for us Physical Gold Advocates, the next rule change will evolve from a reserve system that has no threat from a rising dollar gold price. Even if the contract markets crash and physical gold traded in Europe goes into the thousands, the Euro will find strength from such an occurrence. The ECB will embrace it and promote the same.

Dollar gold in the thousands,,,,,, USA inflation going hyper,,,,, The EuroZone dealing with the changes as the BIS settles all our gold dealings,,,,,,,,, And cheap Euro oil making sure Europe doesn't fail too.

Do I wish for this? Only a fool would comment to ask such a question. Am I preparing for this transition? Another would be happy to see that I am! (smile)


Gold, from times past was a wealth asset more so than it was in the form of money. Granted, it became the fastest moving form of wealth, but as it traveled on the road it was still simply seen as a tradable wealth. It has been American and Western ideals that made gold a lend able money and forced its competition against failed currency systems. We set currencies in fixed gold amounts and then inflated the currency. No wonder gold competed against currencies. The ECB will allow gold to go to the moon and everyone will love them for it. People will use the Euro whether gold is at 1 Euro or a trillion.

Arguments against this new logic (by failing Gold Bugs) are little more than a throw back to their outmoded Western money logic. ET (a USAGOLD poster) even thinks that by freeing gold to rise to whatever level it wants,,,,, we are somehow governing it??? That direction of thinking is caused by "promoted investing". The logic is to somehow invest in gold (the industry or its paper leverage) more so than owning the metal. Leaving the agenda of physical gold storage to be something the official governments or private enterprise should do for us. They base their concepts on a return of gold recognition as a somewhat official government money after price inflation discredits the local currency (Dollars).

Such logic suggests we buy into the various SEC-sanctioned (government) paper gold substitutes while governments somewhat allow a devaluation of their money against gold. Say to $800? In this way the dollar is saved a little while the gold exchanges continue life as before. This, my friend, was a failure in the past and the future will provide a very different rendering.


Two questions that seem to come up a lot are 1) how do you see the world after the Freegold phase transition, and 2) what if things don't fall the way you foretell? In this section I will attempt to address both of these questions with the assistance of links to two of my older posts.

One mistake I see a lot of people make is when they realize we are at a tipping point, "living on a knife's edge", and that things could go either way. The mistake is that they see the US/$IMFS/NWO on one side and Europe/euro/Freegold on the other. Or any number of other combinations that I'm not going to list here.

We are at a tipping point alright, but those and the others are not the two sides of the fence. The two sides are Freegold with international trade and economic continuity on one side, and Freegold with trade interruptions and economic chaos on the other.

Who are the productive engines of the world? In a very general sense they are the Middle East for oil and Germany and China for manufacturing. And to a lesser extent the BRICS. These are the surplus areas. The rest of us are running trade deficits. Who needs whom?

Next look at gold versus debt, particularly US Treasury debt, the "paper-producing engine" of the financial and monetary world today. Treasury debt (new or past issued) has a ceiling in its price, unlike gold. It cannot go any higher than its ceiling and it is there now. The ceiling is the 0% yield. The only thing that can happen beyond that is compression into the ceiling, as yields farther and farther out on the yield curve are pushed toward the 0% boundary. This is happening now.

US debt is the biggest bubble of all. Peter Schiff wrote this in Crash Proof back in 2006. He was absolutely correct, even if a few years too early.

Literally, Treasuries have only one way they can go from here... down. Compression can continue a while longer, but prices can't go any higher than the ceiling, the 0% ceiling. And the greater the compression, the more explosive the downward move will be when it finally happens.

This is a 30 year trend that has just hit its ceiling during this crisis. It cannot be continued indefinitely. You cannot offer yields below zero, and you cannot stay pinned to the ceiling.

This is connected to everything in today's crisis. Once the Treasury bubble pops, everything else will collapse too. Conversely, any number of unknown things, "Black Swans", could pop this Treasury bubble. It is the US Achilles' heel right now.

Of course Ben is just going to keep printing and loaning "discount" 0% Benny-Bucks to the primary dealers who then carry the Treasury debt on the down-low until the market finally calls him (and them) on it. But how long do you really think this "pushing on the ceiling" can last? The USG has an appetite of a few trillion a year now WITHOUT any inflation and without any black swans. And a good deal of that is structural.

So when will this bubble pop? What will it mean to everything else? And what will the world look like once everything settles down again?

Well I cannot answer the first question other than to say "sooner rather than later." But as this debt collapse happens, gold can and will recapitalize our world with its broken balance sheet built on debt. Gold will, simply because it is impossible for fiat to do it.

It is important to understand that "holding fiat" means not only holding currency, but also anything denominated in it, debt, long term contracts, bonds. Stocks are a little different because they are equity positions. But they too will suffer because a lot of the companies that issue stock have also issued debt into the debt markets. And these debt markets are senior to the stock markets, meaning that if/when a company is liquidated, the stock holders get nothing and the debt holders get a haircut.

So it is all very complicated and confusing, how collapse will play out.

Someone suggested that I should summarize Freegold in one post. My response was that the more you simplify a complex, paradigm-shifting topic like Freegold, the more the doubters swarm. Each Freegold element left only as a summary or a bullet point seems so foreign to the modern, Western mindset, that it just begs for the seemingly easy rebuttal.

So this is why I write long posts on various elements of Freegold as viewed from different angles and perspectives. As I recently wrote, this strategy allows me to not only share my understanding of a difficult subject, but also to test it out. And so far I have not seen a single argument that debunks it.

I read all the arguments all of you post in the comments, and I respond to a few. But most of them are on topics I have covered at length in the past. So, by all means, keep them coming. But please pay attention when other readers direct you to older posts. You might find them helpful. Some here know my blog better than I do! It's true!

But in the spirit of sportsmanship, here is a sorry attempt at a Freegold summary in as few words as possible:

Freegold Summary:
Debt into Equity
Separation of the monetary functions:
Store of value --> Gold
Medium of Exchange --> Fiat
Unit of account --> Split between Fiat and Gold depending on time preference
All (or most all) debt paper will burn
Gold will be repriced once, enough to make your nose bleed, not as a commodity or money, but as a real wealth asset, kind of like the Mona Lisa, only better




(From: Gold is Money - Part 1, Part 2 & Part 3)

The debt part is the most important. I am not overly religious, but there is a good reason that all the world's major religions prohibited usury hundreds and thousands of years ago. [2] But man evolved these rules over time to fit his desires. For example, in Islam interpretive differentiation emerged between lending for consumption and lending for commercial investment. And also between the lending to fellow Muslims versus non-believers. And in Christianity, the New International Version of the Bible written in the 1970's and 80's changed the word usury to "bank interest" putting a positive spin on it.

I have had discussions about the core "cause" of the GFC with some of the commenters here. I argue that the most fundamental cause of today's GFC is the evolution of usury to its present, climactic form. Some say it is energy (ie. oil). And others say it is the evolution of unbacked paper money. But I'll stick with usury (nominal debt, as I define it).

I believe I can reduce all the other "causes" down to man's innate desire to borrow and spend other people's money so as not to risk his own. [3] This underlies even the emergence of fiat money. And it is an evolution that has reached its climax today. The biggest debtor in the world's debt has now hit the ceiling and is presently compressing.

This explanation also works fractally, on all scales. From the individual homeowner who is struggling from a broken balance sheet to the sub-prime housing crisis that was the initial spark of the GFC, to the explosive potential of the paper gold market. These are all caused by the failure of debt. One man holds as his wealth the future productivity (or promise) from another man. Both of these men are in trouble today. Gold is the recapitalizing savior, in its physical form only, because it removes one half of the debt equation, the debtor. Gold in your possession is wealth without counterparty!

And as this concept gradually (or not so gradually) permeates the collective mind, we will move from a debt-based system into an equity-based system. A system where even the poorest of the poor hold positive equity. It can be very small equity, like 1%, but not the big negative limitless hole that is debt.

Remember that debt is infinite. It potentially runs from negative infinity on the deficit end of the spectrum to positive infinity on the surplus end. Equity, on the other hand, ranges only from 0% to 100%. (Please read Metamorphosis for more on this)


You may wonder, how could things like first-time home buying work in an equity world?

It would work something like this. Say you want to buy a house that is $200,000. You have $50,000 to put down and the bank "invests" the other $150,000 in you and the house.

You now own 25% of the house and the bank owns 75%. As you pay down your loan over time, your percent increases and the bank's share decreases until you finally own 100% of your home.


But the big difference is that your equity (and the bank's equity) is always calculated as a percentage. So you and the bank are BOTH exposed to the house value going up or down.

In today's debt world, the buyer has all the benefit of house price appreciation. This contributed to the false idea that homes were an investment, and also to the housing bubble and the GFC.

And the other side is that the home buyer is also the only one exposed to the downside today. If the value drops more than his down payment, he is underwater. And he can then (in the US at least) just walk away so that BOTH sides of the debt coin lose. The bottom line is that a debt-based system must always keep expanding... to infinity! Because it cannot handle a severe contraction without collapsing.

But in an equity world, if the value of the house drops to $100,000, then the buyer still owns 25% and the bank still owns 75%. Likewise, if the value rises to $800,000, the bank can claim a nominal (paper) $450,000 income (increase) while the homeowner only has claim to 25% of the rise.

This is how an equity-based system will work, generally. And our global financial system will switch to something like this because as debt collapses, both sides get screwed. The homeowners are all negative and the banks are all insolvent. The debt-based system simply cannot stand a severe contraction without undergoing a drastic change.

So how will this equity world work on the national scale? How will governments operate?

They will issue equity shares in themselves, just like corporations do today. No more debt, no more bond markets. Those will be completely discredited as they collapse the system and all the debt-paper burns. And it will become obvious, even to the blind, that they ultimately caused the very contraction that wiped out everyone's pension plans and wealth. So bond markets, after the collapse of the Treasury bubble, will not be viewed kindly, to say the least.

Fiat currencies will be the equity shares of nation-states and stocks will be the equity share of corporations. Both nation-states and corporations will only have two choices for income. Produce or dilute. National fiats will be judged by their ability to buy gold. National Treasuries will once again have an incentive to encourage the flow of gold back into their regions. If a government issues too many shares (fiat) it will quickly pass the point of diminishing returns and its "shares" will be able to buy less and less gold no matter how many more are created. Classic hyperinflation.

This brings us full circle back to Freegold. Please read Bondage or Freegold? for more on this.

Present Flow

Freegold Flow

Sincerely,
FOFOA

[1] This video offers a great twist on FOA's statement, "Just as in 1971, when that real gold demand suddenly expanded its boundaries to include ordinary gold investors."
[2] History of Usury Prohibition
[3] Please see: Say Goodbye to Wallstreet

88 comments:

Tyrone said...

Debt Bad, FOFOA Good!!

Cheers!

capt goodvibes said...

Debt bad, equity good.

FOFOA said...

Thanks Tyrone. And here I was just getting ready to reveal myself

Martijn said...

I have seen a picture of FOFOA somewhere on his blog...

Jimmy said...


A blog of Michael C. Ruppert...
(author of the movie: Collapse)


And of course, I promoted FOFOA's blog on his site... :-)

Martijn said...

Swiss meeting to debate global reform

Swiss SNB, IMF Host Conference; Monetary System Reforms Sought

Interesting, no?

Martijn said...

IMF, Swiss National Bank Announce High-Level Conference on International Monetary System

Martijn said...

I don't quite get the SNB. Is it with the $IMF?

I would guess not. Are they moderating the transition?

Martijn said...

All Roads Lead to Inflation - Bank for International Settlements

Interesting read.

Jimmy said...

@martijn: related to IMF on 11 may:

Concluding Remarks by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, at the High-Level Conference on the International Monetary System
Zurich, May 11, 2010


Finally, in principle, a new global currency issued by a global central bank, with robust governance and institutional features, could provide a nominal anchor and risk-free asset for the system independent of national currencies. This global central bank could also serve as a lender of last resort. But any such step requires considerably more debate on its merits, including on the need for a safety valve for the system given errors that might inevitably occur, as well as of its feasibility, given the very substantial multilateral effort required. I fear we are still very far from that level of global collaboration.

GG said...

BUY. GOLD. NOW.

mortymer said...

Wiki (Rubicon): "The point of no return is the point beyond which someone, or some group of people, must continue on their current course of action, either because turning back is physically impossible, or because to do so would be prohibitively expensive or dangerous. It is also used when the distance or effort required to get back would be greater than the remainder of the journey or task as yet undertaken."
Observation: The state of Debt.
...the IMF action to establish something "new" (call it global currency, sdr or whatever) from top which is is just a dressing debt rehersal for accounting so saver states/entities will not be losing their position (and do bank run), their action does not at any sence bring a NEW stabilizing item into the system. Just tries to postpone. I sence also they try to break Europe system as their major competitor and to live from carsas for some time. I see no incentive which would motivate savers to use their new sdr system. It has to be imposed with power over savers but US/IMF does not have that anymore. There is no way that this new system will be able to export inflation from US, home of military base. Russia buys gold, India did already, China most likely also silently, I bet their unofficial reserves are something like double. MiddleEast? Perhaps. Gold is on free it is just not realized. Iran realized/materialized it officially yesterday when it announced that they dump euros for gold. Is it better for them to keep Euros which have fraction of gold or go straight for the kill? The very best move straight forward. They dumped dollars already long time ago so no big surprise. If China did not do it, if EU did not do it (perhaps such option is forbiden to them otherwise it already happened) why not Iran? Its independent enough and had its army to defend such decision. US has to now either capitulate or invade. What about next IMF announced 15t? How does this correlate with Comex/LBMA problems? There are more and more news everyday...
Anyway, even this new IMF/SNB/EU/... initiatives - all seem to be bullish for gold. Nobody is saying that debt must be paid and in what term, it is not payable. This is now recognized fully with implications on bond market. Even if it will not grow, shrinking will cause more debt through interest rates changing so it is really trap and there is only 2 options left. I agree with you FOFOA on that and thanks for clearing the BIS-IMF against straight freegold versus freegold with bumps on road dilema.
One observation, more and more people are awake. Question for long term readers, have you realized that you see here new people who have very minimal knowledge searching for answers?

JR said...

Some misdirection and zig-zags as ETF talk is interspersed amongst comments on the importance of developing markets for gold trade in the Yuan?

Gold a ‘Good Choice’ for Boosting Global Use of Yuan

Pricing commodities in the currency “helps China’s goal to internationalize the yuan,” Wang Zhenying, deputy director- general of the Department of Financial Management at the Shanghai office of the People’s Bank of China, said today. “Gold is a good choice to have yuan trading.”
...

“We agree that yuan-denominated gold trading will help enhance the yuan’s global status,” Chen Shiyong, general manager of financial markets at Industrial Bank Co., said in interview today. “We also would like to be part of the efforts to increase gold investment products available to the public.”
...

“Although the gold market only accounts for about 1/400- 1/500 of China’s financial markets, the meaning of it is going to be significant,” Wang said. “A currency’s international status depends on its being accepted in trade and settlement and having certain financial products priced in that currency.” He said his views were his own and did not represent central bank policy.
...

“We have more than 30 trillion yuan worth of savings in deposits and the lack of investment products have contributed to Chinese investors going into mungbeans and garlic lately,” the central bank’s Wang said. “We can develop more gold products to attract investor demand.”
...

“China should develop its exchange-traded market instead of the over-the-counter market,” Wang said. “The financial crisis showed us the advantages of the exchange trading in terms of market concentration, timely release of information, efficiency and liquidity.”

Gold is traded in yuan on the Shanghai Futures Exchange and the Shanghai Gold Exchange.

samix said...

Have FOA and ANOTHER stopped posting stuff to the internet ?

All their archives seem to end around 2000-2001

FOFOA do you have any ideas ?

Martijn said...

lol @Samix

mortymer said...

:o)

Martijn said...

samix,

In this post FOFOA explains why he started this blog.

If A/FOA were still posting he could simply write them an email.

M

capt goodvibes said...

@ mortymer

Nov 2008, referring to Iran:

"...the country's money reserves were changed into gold so that we wouldn't be faced with many problems in the future," presidential adviser Mojtaba Samareh-Hashemi was quoted as saying by business daily Poul.

He gave no figures or other details."


Gold's 'illusion price' was US$735/oz at the time.

Reuters Article click here

samix said...

ha ha , Martijn thats what I was wondering some lobby or powerful interests cornered their posts ?

costata said...

GG,

"BUY. GOLD. NOW."

Your wordiness obscures your message. Halt the hyperbole. Cut the cocatenation. Omit the obscanturism. Excise the extrapolation. Delete the dribble. Void the verbosity. We-zist the wordiness (with apologies to Elmer Fudd).

Michael H said...

FOFOA,

In your "homebuyer" example, I believe there is a piece missing.

Currently, the bank's contribution to the home purchase is newly-created money in exchange for the promise to repay from the homebuyer.

In your 'equity' example, the bank will not be able to simply create new wealth to invest in the house. The bank's investment will have to be more 'real' than fiat currency creation -- perhaps the bank will have to commit the savings of its depositors, thus limiting access to depositors' accounts.

This dynamic would be very different from what we have today. Financial instruments -- stocks, bonds, real estate -- would have their worth defined in real wealth, and would not be inflated as they are today.

I think it would end up re-defining the very concept of saving and investing, relative to what we have today.

Greyfox "It's the Debt, Stupid" said...

@ FOFOA
"Thanks Tyrone. And here I was just getting ready to reveal myself"

From the expression on the face of the female reporter, guess we can't all have mega-intelligence and a "9 jack-up rig" for oil drilling.

@ mortymer
"I bet their unofficial reserves are something like double."

My best guess would be a factor of 4 or greater. The Chinese are Not short-term oriented.

miked said...

Time will tell how women react to only owning 25% of their properties :)

I can tell you where I live that property is valued way above the fair value based on rental income. The reason? I have no doubt it's the women's desire to really OWN their home.

In your example FOFOA the bank doesn't lend 75%. It seems to be buying 75% of the property on its own account, and selling it in tranches to the tenant, whilst charging the tenant rent on the 75% he doesn't own. I would love to see how the home makers view that one :)

Martijn said...

@Michael H

perhaps the bank will have to commit the savings of its depositors

Exactly how would that differ from the current situation?

mila said...

Thanks for the link to Another & FOA's posts/archives on usagold.

Although I came a little later in the game (gold @ $780), I'm fortunate to have to have stumbled across blogs such as this over the last 2 years.

Looks like I have much reading to catch up on!

FA in CA

Wendy said...

Good day to all,

I am hoping that some might offer insight regarding the thoughts/remarks made by Another/FOA and how the relate to what's happening in real time particularly in Europe.

5/22/98
Another
:If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will horde all gold and buy any offered if this new European currency does not work" and "debt currencies fail". If this does comes, no paper asset of world economic system will survive, nothing! Not a good thought, no?Thank You"

and:

3/9/98
Another
"....The potential exists for the return of gold as the "only" reserve currency. This may result from a failure of the Euro, due to a massive upheaval. Oil States, they have the ability to force this outcome. During this result, all paper will burn and the world economy will start over....."
(Oil states...Angela Merkel in Saudi ysterday??)

also:

11/2/01
FOA
"Gold must vise in value many many times just to regain it's wealth barter asset value. Perhaps $10,000 to start. Then, it will run with any and all dollar inflation,,,,, even Euro inflation that ECB people openly admit must be a part of a dollar to Euro transition. "

Could it be that this transition resulting in inflation in the Euro is what is being experienced now at $1200 gold?

and finally:

Sun Nov 23, 1997
Another:
" ....When the change in direction of gold starts, it will be hyper fast! A good many will run to the US$ first, making that currency rise with gold and misleading much people......"

Although maybe not "hyper fast" we have recently seen the USD:$GOLD chart becoome relatively flat.

I apologize for the length of this post. I thought it best to quote directly rather than para phrase.

And please know that I'm not asking for anyone to take the time to repeat what might of been discussed in past posts ... if this has been covered please say so, and I'll eventually discover it as I read the old posts.

Regards,
Wendy

Michael H said...

@ Martijn
"Exactly how would that differ from the current situation?"

Currently, if you have $100,000 in the bank, and the bank loans me $100,000 to buy a home, the bank doesn't actually give me your $100,000. Your 100k stays in the bank and the bank just creates another 100k to give to me. Even after I take out my loan, you can still go to the bank and take your 100k out.

If the banking system were to reorganize so that there was no debt, then the banks would not be able to create money this way. So, instead, they may have to fully commit their deposits to squiring this equity stake, making those deposits illiquid. In the equity case, in other words, once the bank buys 75% of my house, you would not be able to withdraw the portion of your deposit that backs the equity stake.

Here's a 45-minute video describing the creation of money in our debt system:
http://video.google.com/videoplay?docid=-2550156453790090544#

Martijn said...

Currently, if you have $100,000 in the bank, and the bank loans me $100,000 to buy a home, the bank doesn't actually give me your $100,000. Your 100k stays in the bank and the bank just creates another 100k to give to me. Even after I take out my loan, you can still go to the bank and take your 100k out.

Really? So deposited money remains safe regardless. I can't believe they fooled me into thinking banks could collapse...

Michael H said...

"Really? So deposited money remains safe regardless. I can't believe they fooled me into thinking banks could collapse..."

Right: banks collapse -- IF everyone tries to pull their money out at the same time. As long as everyone is happy with the illusion, fractional reserve banking continues to create money out of thin air.

My point is that, under an equity system, fractional reserve banking is not workable. Savings must equal investment, and so savings may not be liquid.

KROSS said...

Wendy,

I can address your very last point about when gold goes hyper fast. Indeed, the recent run into the safe have of the dollar is last threshold before gold goes parabolic. We certainly know we are not in the hyper phase yet.

How will it feel? Look at the year and a half before gold peaked in 1980. In 12 months it went from $195 to $300 (doubled). Then in the final 6-month flurry it went from $300 to $850 (nearly triple).

So in a year and a half it went up 335%. Now consider all the fundamentals of the financial system are far worse today than then.

As has been said before: it will obvious to everyone.

For those of us who have anticipated a historic rise for gold, it will be truly a strange thing to actually behold. We're so used to talking about it, it will be an unusual sensation to actually watch it unfold.

Wendy said...

Thank you very much for your response KROSS

miked said...

Wendy

"5/22/98
Another
:If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will horde all gold and buy any offered if this new European currency does not work" and "debt currencies fail". If this does comes, no paper asset of world economic system will survive, nothing! Not a good thought, no?Thank You"

The point here is that without oil we are all toast, and the Arabs have always thought of Oil in gold terms. Hence the OPEC crisis after the US suspended convertibility of the dollar into gold in 1971. should the Arabs choose to take delivery of physical gold only in exchange for their oil then gold will be worth its weight in, well.... gold :)

Martijn said...

Michael H

Right: banks collapse -- IF everyone tries to pull their money out at the same time. As long as everyone is happy with the illusion, fractional reserve banking continues to create money out of thin air.

How is that possible when all the deposits are still there as you said? (You just told me that banks only loan out new money they create from thin air.)

Perhaps the movie is not clear, or perhaps you've misinterpreted it.

The table in wikipedia might help you understand.

The thing is that most of the deposits are lend out again, while only a fraction is being held at the bank as reserve (hence the term 'fractional reserve'). However, depositors still believe they have money, while the bank has turned most of it into a debt by lending it out.

That's one of the issues of our current financial system: we cannot distinguish between money and debts.

miked said...

Banks have never existed without the ability to expand the money supply to my knowledge. That would be a first.

How would they differ from today's moneylender who is unable to take deposits in Michael H's scenario? Without the ability to multiply money most banks would be unable to exist. Not that that is a bad thing, especially these days with the internet where intermediation is possible without banks.

Michael H said...

Martijn,


"The thing is that most of the deposits are lend out again, while only a fraction is being held at the bank as reserve (hence the term 'fractional reserve'). However, depositors still believe they have money, while the bank has turned most of it into a debt by lending it out."

Yes and no. What is being reserved? 1's and 0's? And if the 'deposits' are indeed lent out, then why do the accounts still show the full balance as available? Banks cannot create money to infinity, since there are reserve and capital requirements ... or can they? As we saw in 2008, the Federal Reserve will create enough new money to keep the financial system going, and to prevent a modern 'bank run'.

I agree with you, that the problem with the current system is that money and debts are the same and indistinguishable. All I am trying to say is that an equity system would have to separate debt from money and so would have to work differently than our current system, especially with respect to banking.

Devils Avocado said...

Evening from Strasbourg :)

Excellent post FwhocannotbenamedFOA.

I quite like the equity model for home purchases (not like you Miked you unbridled speculator!) :). It would push people to put their money to work in productive (hopefully!) enterprise.

I read the quote below:

'At some point, our dollar denominated paper gold system will crack and plunge in value as its credibility to be converted into real gold is destroyed. In the process taking down most of the gold industry.'


Now I read about the 'frantic' covering of paper silver shorts by JPM upon any weakness...which actually seems to fly in the face of a collapse in paper price. Which is true? or perhaps we can see both outcomes over a longer time frame?

Is it better to then wait for the paper market price to fall, or am I thick as two short planks and missed something?

R

answer2me said...

One thing i have not seen discussed is the relationship between the "earth" and free gold. During the early phase, when gold goes parabolic, the earth will be torn apart by every individual in search of it. For example, look at the dios de madre region of Peru. The deforestation is now visible from space. I am not condoning environmentalism, im simple trying to make an observation. There will be a gold rush that will make the san fransico 49ers look like the steelers! It will be on in a way that would make this oil spill in the golf look like a joke. In certain parts of California, a weeks worth of dredging produces 1oz of gold. Im i missing something, has this been discussed?????????


Also,i think COSTATA, had a very good argument for gold dropping in the short term before its revaluation. Anyone's thoughts on this would be much appreciated, As FOFOA's blog grows, so do the number of hours it takes for me to research.

Freegold Summary:
Debt into Equity
Separation of the monetary functions:
Store of value --> Gold
Medium of Exchange --> Fiat
Unit of account --> Split between Fiat and Gold depending on time preference
All (or most all) debt paper will burn
Gold will be repriced once, enough to make your nose bleed, not as a commodity or money, but as a real wealth asset, kind of like the Mona Lisa, only better. Ill keep that one tucked away, good article!

Martijn said...

Without the ability to multiply money most banks would be unable to exist.
Perhaps it's better said that banks transfer money. They take it from depositors, turn deposit into debts (from the bank to the depositor) and lend most of those deposits again. Roughly speaking they multiply money, but technically they do not really.

What is being reserved? 1's and 0's?Fractional reserve banking works the same with digital money and gold, so that's not too much of an issue here, I believe.

And if the 'deposits' are indeed lent out, then why do the accounts still show the full balance as available?
That is where sometimes the trouble occur indeed, as is shown in bank runs.

Banks cannot create money to infinity, since there are reserve and capital requirements ... or can they? As we saw in 2008, the Federal Reserve will create enough new money to keep the financial system going, and to prevent a modern 'bank run'.
Banks are not allowed to, but as you say the Fed will indeed.

All I am trying to say is that an equity system would have to separate debt from money and so would have to work differently than our current system, especially with respect to banking.
On that we agree, although I doubt that we'll ever live without debt.

Andy said...

FOFOA: You may wonder, how could things like first-time home buying work in an equity world?

Andy: Why would a bank help me purchase a home? Why would a bank, as you say, "invest" in me unless there was a return on their investment? So, they'd charge me a fee for their "equity services"...i.e. I'd have a loan; I'd be in debt. If I am allowed to use someone else's capital, I'm in debt (unless we're talking venture capital, but we're not).

Jeff said...

The Saudis will become masters of the world in this scenario. Their wealth will buy the planet. What incentive will there be to pump as much oil as they do now? Why not slow the pumps and preserve the stream of income? Will the US military be used as a threat to keep the oil flowing at the same rate?

Also, after gold is revalued I assume the gold/oil deal will be off. Will they then require a much higher $ price of oil to compensate for their loss of the gold for oil trade?

Martijn said...

Will the US military be used as a threat to keep the oil flowing at the same rate?

Besides the oil-for-gold-deal A/FOA described it quite likely that the US struck a deal with the Saudi kingdom to enable them to remain in power, so the picture seems to hold at least some shades of gray for as far as Saudi is concerned.

FOFOA said...

Hello Andy,

You make some good points. It is true, I did not cover the totality of the new paradigm, which is why I used phrases like "something like this" and "generally". The deeper you dive into this new paradigm -- everything that is implied by a debt collapse -- the more alien things appear.

For one thing, banks will be little more than utilities, either public or privately owned. The profit-driven banking construct is a dying, discredited model. So banks will provide a few different services to the community, and some of them will be fiat-driven, but tightly regulated. Home purchase assistance will be one such service.

But as you can imagine, purchasing a home will never be as easy as it is today. It will be much closer to what it was like in the 1950's in terms of number of buyers and home owners.

There will still be rents to collect. And the bank will be able to collect rent on its portion of equity ownership, either from the owner or the occupant. In terms of the payment schedule, this will look very close to an amortization schedule of today, except for the relative exposure of each party to market fluctuations in home prices, which will naturally be much more stable.

So why will banks choose to be in the "proportional landlord business"? Because it will be in their charter to do so. Remember they will be "governed" utilities whether private or public, not unlike water, gas, power and trash removal.

As a citizen, you will have the choice to be a renter or a proportional owner. The minimum proportion allowed will likely be regulated based on the newfound need for bank stability. It could even be as high as 50%, but more likely around a third.

I don't fully agree with Michael H, that "honest money" is one of the inevitable implication of the debt collapse. I don't see central banks nor fiat money constructs disappearing anytime soon. Instead I see the separation of monetary functions, a concept that will be held in the collective mind for quite a while after the debt collapse.

What this implies for the home-purchase paradigm is that, depending on the minimum proportion allowable (minimum down payment), the balance may still be conjured on the bank's balance sheet the same way it is today, and backed ("guaranteed") by the printing power of the central bank. Under a reasonable ETV (equity-to-value; similar to today's loan-to-value) this paradigm could be fully sustainable for the long run.

And it may be deemed that it is in the currency zone's best interest to support proportional home ownership to some extent, backed by the central bank, in order to keep that zone appealing to the inflow of capital. This is one of the central tenets of Freegold.

Sincerely,
FOFOA

FOFOA said...

Here is a comment I wrote a year ago, June of '09. It is under the post The Triumvirate of Wealth. It describes Freegold pretty succinctly:

Martijn,

Fractional reserve in and of itself is not such a terrible thing. The problem is that it creates a moral hazard. This moral hazard is such that even regulation cannot fix it because ultimately the regulators become morally corrupted by the system.

The shift that is coming in the gold market, from paper to a physical market, is the ultimate conclusion to a fractional reserve system. It is the collapse of the system as confidence is ultimately lost that there is any reserve actually being held in your name.

If we only use fiat currency as a unit for trade, and not for store of value, but instead have a non-fractional wealth reserve riding shotgun, the system will once again become sustainable.

The currency will fluctuate per the actions of the printer, but if he prints too much, more value will flow into the wealth reserve. If the printer is responsible, people will gradually be willing to hold the fiat for longer and longer periods of time. Ultimately, if the printer remains responsible, some people may hold the fiat as a store of value. But then this will tempt the printer to print more and value will flow back into gold.

This is where evolution is taking us. It is not taking us back, it is taking us forward. We are evolving to a place where governments print the money we use for trade, but not for savings. They will have to earn our trust again before we will save in their currency.

FOFOA

Segestan said...

History tells use that usury causes an asset transfer from the poor to the rich, that the Jews are often quoted as the biggest supporters of usury, being as they are often found holding high positions of banking and politics; but I wonder is usury really more a wealth distribution system, one that allows capital to reach the poor where they would not have gold. In a Gold or non usury system their would, by default, through the finite limited supply of Gold, be an upper elitist wealthy class one who would see it advantageous to resort to conquest rather than banking, since it is not mans nature to co exist.
Gold is Money... and that is the bottom line with gold and or is money with or without the fractional banking social order ploy of usury. I have to wonder why usury is so often throughout history been retried over and over when the wealthy already have to power.could usury really just be a social tool for law and order? Maybe the Bankers no not what they do? Could it be that usury is the method of the poor and not the rich?

costata said...

Hi FOFOA and All,

Some really interesting thoughts and questions raised in this discussion. It's great to see so many people contributing.

I'd like to weigh in on a few issues. Apologies in advance for a long post.

1. Fractional reserve banking

D.E.A.D for about 10 - 20 years in most of the OECD countries. Solvency is determined by a metric called "capital adequacy". At least 6 OECD countries have no formal reserve requirements. Under the current regime banks create deposits by raising loans on their books. The Bundesbank calls this "bank money".

I am trying to find the link to a paper the Bundesbank issued a few months ago where they acknowledged that the banking system creates money, far more than the issuer of the currency. This does not mean that Governments can't increase the money supply if they wish to.

If you are scandalised by this notion consider that the banking systems have, for centuries in some cases, accepted "deposits" for safekeeping without telling their customers that they treat this money as a loan, an unsecured loan at that.

Some people refer to this as a fictional reserve system. In other words X per cent of your deposit money isn't sitting in the bank's vault. The amount is virtually zero.

2. The inflation vs deflation debate

If you can absorb the above it may help you to understand the deflation versus inflation argument that has been raging and continues to be debated. As the velocity of money slows (think rate and number of transactions) you can have many of the features of a typical deflation eg. falling prices and a de facto increase in purchasing power of the currency.

Banks refusing to loan, building up reserves with the Central Bank and borrowers refusing to borrow reduces both the velocity of money and the total stock of money equivalents, such as bank loans, in circulation.

None of this precludes the possibility of rising prices in some things. For example "supply destruction" can achieve this. If sales are low and/or credit is not available some businesses will fail. If enough fail then supply can fall faster than demand allowing the surviving businesses to maintain or increase prices.

FWIW I have one foot in FOFOA's camp and one foot in Jim Sinclair's camp on the hyper-inflation issue. If the velocity of money accelerates to a huge rate even a relatively small stock of physical money can cause a hyper-inflation.

It can also be a currency event as Jim Sinclair and others have stated. Either way it is not just a severe form of inflation. It's a loss of confidence in the currency leading to a flight from that currency to tangibles and investments that can retain their value as the purchasing power of the currency falls.

3. Revaluation of Gold under a Freegold regime

You may need to explore FOFOA's archive to fully understand why the transition to Freegold stands apart from most of the processes described above. The key is the absolute level of debt in the system. In order to recapitalise the system either gold or something else (from outer space?) is needed but fiat currency issued as debt or dropped from a helicopter isn't a solution that most people could survive without becoming destitute.

The hyper-inflation in Zimbabwe petered out around 3-4 months after they stopped issuing currency and the Zim dollar ceased to be legal tender. This wiped out all debts and all ASSETS denominated in Zim dollars.

Obviously the preferred asset reserve hereabouts is gold as it sits on the top of the store of value hierarchy. As far as I know there is no-one here claiming that there aren't alternatives, merely that the alternatives will prove to be vastly inferior at some point.

Wendy said...

Thank you for your response miked.

I have read and do understand the oil for gold deal an that ultimately gold will be worth it's weight in gold. I personally don't have the imagination to construct a "value", but I bet it beats a one ounce/suit and shoes, by light years.

I expect the transition from the USD to any other "global researve" will be chaotic.

I'm trying to understand the difference in relative chaos that might be expected in a USD >> free gold vs. USD >>>>>euro/gold

Regards,
Wendy

Devils Avocado said...

What is interesting is that in the UK the savings rate is low...so I can't see the velocity of money growing very quickly. It has only grown quickly in the past due to the loose lending on the banks via housing speculation. In which case we can get the opposite?

In France many families own gold and silver. I doubt many of them have parted these items. Perhaps at 1000euro/oz some feel it justified to visit the comptoir de l'or to make that 'discrete' transaction :)

I guess the velocity of money within an economy could really pick up in France if everyone were able to trade their gold for a large amount of cash.

In Germany there is a high savings rate. So one can well believe the recent stories of gold buying en masse. The Germans don't believe in property per se and so are investing in something even more solid.

It is quite interesting to look at the situation from a local standpoint. Its a bit like football, other countries can score a few goals but in the end Germany wins :)))

R

dojufitz said...

FOFOA,

i think you should start a youtube channel.

Devils Avocado said...

Lets refrain from insults now! :))

''dojufitz said...

FOFOA,

i think you should start a youtube channel.''

costata said...

FOFOA,

Re: GLD and Comex

What, if anything, do you make of this co-incidence?

From Harvey Organ and Zerohedge respectively.

"You can now bet the farm that this total of 2.465 million oz will be close to the final tally that will stand at the conclusion of June. The number of tonnes of gold is almost 80 tonnes. This is the highest number of tonnage of gold standing in the history of the CFTC"

http://www.zerohedge.com/article/gold-holdings-gld-surge-all-time-record

"The total gold tonnage making up the GLD NAV has just hit an all time high, at 1,289.8 tonnes, even as the actual fixing price of both gold and of the the GLD ETF have been relatively flat after hitting an all time high on May 12, incidentally a day when GLD had 80 less tonnes in holdings than it does today. In less than a month GLD alone has presumably acquired 80 tonnes of gold backing up its intrinsic value."

miked said...

Costata

I had a look at that Harvey Organ story. Interesting nobody else is posting an opinion on it. All I could find were conspiracy sites posting the Harvey Organ data.

Guava said...

Your views on this topic are really interesting and give a clear cut view. Thanks for sharing the knowledge

Jimmy said...

Why a 'new euro' could be the saviour of the European dream...

Jeff said...

Doesn't paper gold have to collapse for freegold to emerge? Paper gold is near all time highs again.

capt goodvibes said...

@Devils Avocado, 10.49pm

As Fofoa relates in the post above, it will be the realization that fiat paper is backed by nothing, and not a store of wealth at all, that creates the inverse waterfall that will be 'the event'.

As such, after 'the event', gold will only be exchanged for fiat for short term expenses, if one's weekly income will not cover them (personal deficit). Wise people will be exchanging any weekly excess income (personal surplus) for gold, to preserve buying power (store of wealth).

On a larger scale, the same philosophy will be employed by sovereign nations.

Velocity of 'money', in this case fiat, will increase to ridiculously high levels during 'the event', as people try desperately to get out of paper. This will actually be 'the event'.

What exactly will be the trigger for 'the event', causing people's perspective to change, and revealing the precarious position the world's currency system is in, is the only real question.
In retrospect, it will undoubtably be referred to as a 'Black Swan'.

If only we could ask Charles Ponzi, designer of the system, and the man with the most experience in it's demise....

raptor said...

>>>>
I agree with you, that the problem with the current system is that money and debts are the same and indistinguishable. All I am trying to say is that an equity system would have to separate debt from money and so would have to work differently than our current system, especially with respect to banking.
<<<

FOFOA, how would money-concept (money-triangle/square) look with Debt included i.e. system which needs Debt to function.
Because that is what we have now !
Debt currently partially is mixed in both as store-of-wealth and medium-of-exchange , right ?

Does banks get loans with collateral ty's ? What other pure examples are debt based solely on debt ?
As a store of value all bond based investments (in 401k & IRA's) are such, right ? (not purely the same for stocks cause they are equity, even if the companies had taken loans)

your comments are welcome..

carpenter said...

Spot on topic

Jim Willie latest from Gold Eagle editorials
http://www.gold-eagle.com/editorials_08/willie060310.html

Enjoy

raptor said...

We know that velocity of money and money supply are interchangeable, so I had the following thought ..

"Can increase in food and energy price generate inflation not so much because the money supply grows, but more because the circulation of money speeds up ?"

What I have in mind :

Everybody have to eat and fill gas, so as those prices increase, the bigger amounts of money start to circulate ... Ex. price of gas jumps from 2$ to 4$ ... ppl spend less in a sense less gallons, but money start to circulate faster, because you spend more as amount on every transaction.. i.e. larger amounts start to change hands..

raptor said...

ZH:>
Total US debt today was $13.06 trillion. Total debt on March 6, 2009 was $10.95 trillion..


16% increase ... => 47T in 5 years (close to ~today world GDP)
~85% debt/gdp ratio, still sustainable if the whole world only saves&produces and USA spends ;), welcome to Wonderland ...

Mark_BC said...

Dear FOFOA and others,

I have finished writing up my thermodynamic analysis of the world's economic system, which you may find insightful since I come at it from a different perspective, from the "bottom up". I come from an ecology and engineering background and I am learning more about economics through blogs like this and others, and through my old economics textbooks. It is interesting that I come to the same conclusions as do most people on this site, but from a different place. I haven't delved too much into the monetary aspects because I don't understand them well enough to expand beyond what FOFOA, Chris Martenson, or the Youtube "Debt as Money" do. But I think I manage to tie it all together with thermodynamics.

Please excuse my jabs at economists, they are directed towards the mainstream Keynesians in control right now, not forward thinking economists such as those frequenting these blogs.

http://markbc.wordpress.com/thermodynamics-for-economists/

Jimmy said...

@Marc_BC:

Very clever article. I agree...

Sincerly

Jimmy

samix said...

FOFOA said:
"For example, in Islam interpretive differentiation emerged between lending for consumption and lending for commercial investment. And also between the lending to fellow Muslims versus non-believers"

Actually Islam expressly forbids all kinds of usury and makes no difference between lending to a Muslim or not , and also no difference between commercial or personal lending.

In effect Islam stands against all that wall street stands for, like forbidding shorts, naked shorts, speculation etc

But I wont argue that there are some people who will twist the rules to make a quick buck....

samix said...

By the way, here is some interesting read...

"Modern history

As a consequence of the currency crisis in Asia, in the first part of 1997, then Prime Minister of Malaysia Mahathir bin Mohamad proposed introduction of Islamic gold dinar as currency for international trade in the Muslim world.[citation needed] It was intended to replace the United States dollar and, as a gold-based currency, provide a medium of exchange more stable than the dollar. Mahathir announced that Malaysia was to start using the dinar in mid-2003, but when in 2003 Abdullah Ahmad Badawi replaced him as Prime Minister of Malaysia, this idea was halted."

http://en.wikipedia.org/wiki/Islamic_gold_dinar

And here is the blueprint

http://www.lariba.com/knowledge-center/articles/pdf/Mahathir%20-%20Gold%20Dinar%20Speech%20PM.pdf

mortymer said...

Rising interest rates - I would say ... that US cant sell anymore treasuries. Deleveraging will be fun. I bet BoJ will keep zirp and live again from spread. This time all parties in the game. Dollar will have interesting ride. So US still in death trap no matter where they turn to. Like liliputans in the story who used tiny ropes :o) ... Down the rabbit hole, just a little bit faster.

mortymer said...

H.Organ´s numbers made me think:
-> It would be nice to compare how much gold France (as the story goes) wanted to exchange and what was the treshold when US said "..enough, like this we go puff" ..and we got BW2 in 1971.

Ishkabibble said...

As the Euro continues with movement towards USD@par, Europe forces China's hand towards revaluation. The increased European exports mean a weaker China... but only while the USD RMB rate remains pegged. The obvious counter is for China to adjust the peg, the implications for which are even more significant than they seem.

At this time, US produced currency is freely convertable into Chinese goods at set rates. That's how US currency maintained relative strength following the failure of gold conversion. Standard dynamics... the US can sell it's currency abroad because producers have been buyers of said currency. The peg basically turned China into the breadbasket of the US... where dollars are redeemed for actual value. Other producers have lent the US their strength as well. We all know this, but its important to put it out because of the implications.

China's export strength is derived from its relationship with the US and willingness to exchange USD for goods at a low pegged rate. As the USD gains strength relative to other nations, US exports fall... and so do China's. Pegging to the USD subjects China to punishment that can be adjusted with a mere stroke of a pen. Forced to react, what will China choose?

1. Drop the peg, leaving the US as a currency producer without productive capacity to redeem that currency.
2. Revalue the peg, putting additional stress on the Euronations which would be facing lower living standards and unemployment due to the lower currency value, all with a much less significant uptick in exports.
3. Stop collecting USD and US instruments because they aren't redeemable in US product anyway.
4. Repeg to another standard, leaving the US currency to its hyperinflationary end.
5. Leverage the current creditor position to create and deploy a new global standard (including but not limited to hard currency).

This Eurozone devaluation will force China's hand. At minimum, directly challenging the free convertibility of USD to product. It has the potential to destroy the USD entirely. Note that every action from China is bullish for gold.

Still wondering if the Euro can hold it together? I don't see that it matters.

bucephalus said...

FOFOA,

you will enjoy this interview of
Greyerz, and this imf research piece that James Rickards discussed...... (dated April 2010) released on imf website June 4, 2010.....discusses world currency within context of Keynes 'bancor'

http://goldswitzerland.com/index.php/egon-von-greyerz-predicts-gold-5000-1000/

http://www.imf.org/external/np/pp/eng/2010/041310a.pdf

Bucephalis

S said...

@Ishkabibble

to your point, watching the back and forth between China and the US over the South Korea sinking. The Atimes has an interesting read on the escalating tensions as evidenced in the Gates snub and the recent Sen. Webb comments re China not living up to its role as a responsible stakeholder. China countering that nations shouldn;t be escalating tensions for their own personal gains.

The bigger break over the weekeend whereby the Trichet and Germans embrace austerity and rebuff Geithner seems an even bigger threat to Geithner and Bernanke plan. Perhaps that is driving the closed door session and harkens back to that Summers clip of "we have a problem with the Germans"

Petis has been out front as has Dylan G of Socgen suggesting yuan devalue...




For what it is worth, Martin Armstrong has another piece out and it is well a jumble of ideas which seems to hit the mark on some points and miss on others.

mortymer said...

So US basically is being defeated by its creditors - China says No to intervention/issue with N.Korea. Germany says No to more bail outs. Saudies are ok for now when dollar is strong?

mortymer said...

BTW: Heads up -> A.Fekete has next article.
More puzzles go into together. & I am looking forward to the race between increasing interest rates and increasing price of the yellow metal :o) Isnt this one of the bigger cards which will fail anyway?

dojufitz said...

What does A. Fekete think of Freegold?

golden tube said...

Quote " There is an alternative group that is in possession of astronomical quantities of gold and will pay off US and UK debt with gold but they will not accept payment in Fed fiat dollars. This group wants to use their gold to kick-start an entirely new financial system that is actually controlled by the people of the planet and not a secret, in-bred cabal"

"...In 1994 I was part of a gold transfer. The largest that had ever taken place in the history of the world. Our group transferred 1500 metric tonnes of gold from the Philippines to Austria. There was an agreement that we could continue transferring up to 500,000 metric tonnes.

And this wasn't even a fraction of the gold that is stored in the Philippines...."!!!!

http://www.rumormillnews.com/cgi-bin/archive.cgi/read/144609

http://www.rumormillnews.com/cgi-bin/forum.cgi?read=174993

http://www.rumormillnews.com/cgi-bin/archive.cgi/read/8115

You can read about our gold transfer in David Guyatt's book, The Secret Gold Treaty.(next link)

http://www.bibliotecapleyades.net/sociopolitica/secretgoldtreaty/secret_treaty_part%202.1.htm


if this is true then there is a lot more gold than the "official" 160,000 tonnes in existence!

so gold is not as rare as people think?

therefore if freegold is to happen, does it happen BEFORE this other gold is released or after? or, does this other gold never get released? ...which is against "their" quoted aim.

FOFOA said...

Hey Golden tube,

You can't just drop a bombshell like that on us without giving us the full story. People might think you're just a troll. You left out the best part! The part about the 12 million aliens coming to Earth, the alien "King of the World" that has all that gold and is presently at the Bilderberg conference, and the "cloning arboretum" run by the CIA and the US Airforce. It's all right in the same article you quoted:

...According to my late husband, Gunther Russbach v. Esterhaszy, his family bloodline is descended from Sirius. Esterhaszy means descended from The Star... and the Star is Sirius.

The Sirians first arrived and set up underground bases on the Canary Islands. The underground bases in the Canaries were connected with underground bases in North West Africa and in the Catalon region of Spain.

It is my belief that I was taken to the Catalon region in 1990 for my meeting with the King of the World.

Is the King of the World the same mysterious man who is attending this year's Bildeberg meeting?

The Day I Met The King of The World"
By Rayelan Russbacher

"Why are we here?" I asked

"The King of the World wants to meet you," The Admiral replied sarcastically.

We entered a room that looked like a museum. The glass cases where the treasures were kept were incredibly low. I am only 5 feet tall, but the cases were so low that I had to stoop over to see what was in them.

Most of what was there had the Templar cross on it somewhere. At the time, I can remember thinking, "so this is where all the missing treasures are." The only thing I can really remember seeing and recognizing is the Crown of St. Stephen.

A door at the end of the room opened, and a man, about 5 feet eight inches tall entered. He had white hair and was wearing glasses with thick black rims. He was wearing a light blue shirt with an emblem on it. It was the compass from the CIA logo, stitched in dark blue.

He dismissed the Admiral as if the Admiral were a busboy. He then put his arm around me and led me out the door from which he had come. To the right of me I saw a mess hall filled with hundreds of people. To the left, I saw a long hall. The King of the World had his arm around my shoulders as we walked down the long hall. He was talking to me the entire time. I cannot remember what he said...

...It was about six months after I had been on Offutt Air Force Base with Gunther that I went through my purse and discovered the cryptic notes I had written to myself in the ladies bathroom.. Each one jogged my memory. I am sure there are still things I have forgotten, but I am also sure that I remember a lot that I am not supposed to remember. One of my vignettes will be about the UFO's that landed in the Persian gulf shortly before Kuwait was invaded. Another will be about the 12 million aliens that are coming to earth. These are conversations that I overheard from Gunther's cousin Larry Pauley, A.K.A. Robert Steigler, and another cousin Garret Henderson. A man I later found out was Richard Brenneke's half brother. Gunther told me that these two men were killed in Cambodia in 1994 on a mission to rescue the last of the POW's that came out of SE Asia before Ron Brown normalized relations with Viet Nam. All the rest of our boys who were left behind, were killed.

P.S. I do remember more about what was at the end of the hall, but this story is already so incredible, I thought I would save the story of "the cloning arboretum" until another time!

golden tube said...

No troll here. just posting what i find/research. Thanks to Another & yourself i'm all in long in physical Gold and have been for over 16 months. i'm just posting what i find if i think it is of use/info.

however i do think this. Is it possible that the Japs in WW11 looted Gold/Silver/Treasures etc as they found them as they swept across Asia? , i think Yes it is possible. Is it possible that Communist China, Russia ( as was) etc have unreported Gold, Yes it think thats possible as well. Did the Nazi's Loot gold in WW11? yes i think the probably did as well.

I didnt see/read the bit about the "Aliens" so i am not interested in that as far as this is concerned! only Gold!, 'cos this is a Gold Blog after all. So, if there is 500,000 tonnes of Gold or anywhere near that amount, that would change the "game" would it not?

Also of note is that you did not actually refute what was quoted. you just diverted attention to different subject? why?

finally
i read this in its entirety

http://www.bibliotecapleyades.net/sociopolitica/secretgoldtreaty/secret_treaty_part%202.1.htm

page after page ( pressing "next page" at the bottom of each page, ( i think there is about 8 pages in total)

it either is a) basically true or b) it is not. either way, do we ALL have the full Gold story?

golden tube said...

I thought this was of interest as well. from a Euro/Backed by gold point

Quote "...... At the time we were working on this transfer, I was told that the gold would be used to put Europe on a gold backed standard.

The reason that the enemy is depressing the gold price is to drive down the price of the metal trusts that the good guys are using to leverage the market... in other words if gold is worth 200 dollars an ounce versus four hundred and ounce, that cuts the power of the NWO's enemy in half.

When you have more information, suddenly the whole picture changes.

The Euro is not gold backed at the moment. when it becomes gold backed it --- or its successor, will become the currency of the business world.

The only way the dollar will be able to compete is to go on the gold standard also.

At least this was the plan in 1994... I have been out of that loop since early 1997... I do not know what has gone on since.

End Quote

taken from here (it was written in 2001 )

http://www.rumormillnews.com/cgi-bin/archive.cgi/read/8115

Jeff said...

Golden tube, the cheese seems to have slid off your sources' cracker. Funny stuff.

More interesting, we briefly hit a new gold price high today. Shades of futures past?

bene said...

@ golden tube:
http://www.roadtoroota.com/public/181.cfm

Please read also the included excerpt of the
September 11 Commission Report!

Bene

golden tube said...

@bene

any particular section of the sept 11 commission report i should be reading?


@jeff

new gold price high today = currency getting weaker

bene said...

@golden tube
This September 11 Commission Report gives an excellent insiders view of what goes on in the gold conspiracy world. Pay special attention to Chapters 7 & 8 starting on page 151.

CONTENT:
6. DESTRUCTION OF THE WORLD TRADE CENTER 129
6.1 The Link between the WTC, Illegal Gold and Money-Laundering 139

7. GOLD TRADING AND MONEY LAUNDERING
INVESTIGATIONS CANCELLED BY
DESTRUCTION OF THE WTC 151
7.1 Tonnes of Illegal Gold 153
7.2 Gold Laundering 161
7.3 Burying the Truth 176

8. GOLD BACKED BONDS, CANTOR
FITZGERALD AND THE OFFICE OF NAVAL
INTELLIGENCE 179

mortymer said...

Fofoa, after reading the last your comment which now on Capt Goodvibes page as well (thanks) and thinking about what Fekete wrote it gave me next great argument/understanding why freegold will emerge the way you describe.
- Hint: The best way is it when you find out yourself when one just tries to imagine how could (not) freegold go into gold standard or other way round.
-> So it will be lovely if you could be so nice and enlighten us with your thoughts about possibility of gold standard. (I hope I did not missed it in your readings) Your point of view or starting point is often debt but if you go from the other end, the future and return to today it could perhaps also bring some new points of interest.

raptor said...

FOFOA,

that is very profound graph, thanx :

http://2.bp.blogspot.com/_cvdgPlEKW9k/SsAQXJJPDGI/AAAAAAAAAwA/-1ngZyZNZFs/s1600-h/price092409.gif

I always thought the inflation will be externally generated event, not caused by Fed fiddling with the US bank reserves and such.
Now I know for sure... the tsunami is getting bigger by the day.

raptor said...

Hugo Salinas Price

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/6/5_Hugo_Salinas_Price.html

Speaks of the change of mindset...paper vs gld ..etc..

KnallGold said...

I have to make a few comments on the resignation of Köhler in Germany (you asked for connecting dots under "Stress Relief").

First, my own judgment on Horst Köhler is that he always made the impression of being clumsy, just "not up to the task", not being taken too serious, like a clown, crying for no reason (again on his resignation, "for being critisised" what a pussy! and he even had to read THAT text from script) etc. He was apparently some kind of "apparatschik". Boy, what guys do they take at the IMF? ;-)

Frankly, while suspicious at the beginning, later I didn't even give him credit for continuing the IMF agenda as the german president , but that resignation has raised some eye-brows and it can't be that he is that stupid. Particularly the TIMING is worth noting, look, theres a full-fledged currency attack running on the euro and they pull out all cards in this! As a sidenote, in case you didn't notice, even here on this FOFOA blog they've planted imposters, of course they're camouflaged quite intelligently but you'll find them out if you look closer!

One of the tactics is to destabilize the core (Germany). If you follow politics there, its getting pretty obvious, and Köhler fullfilled his duty as a sleeper at the right time. The "reason" for his resignation was brought up timely by the notorious-useful- idiots of the anglosaxion elite, the german Greens (for more information, read Hartmut Bachmanns "Die Lüge Der Klimakatastrophe", Another insider wich has links to the Rothschilds).

It surely stinks to heaven what goes on in Germany right now. Oh, and while at it, Bernanke was quoted just yesterday, saying, that to save th euro, "the ECB has to bring up more money". Like a copy of the BIS' printing-to-death, now applied to Europe. Oh this focus on the economic stimulus! Like Fitch, when it downgraded Spain with a reasoning that it will hurt the economic recovery! Since when do credit ratings have anything to do with "better stimulated" economies? Stability, anyone?

Yeah they will trot out all the stimulus trolls now. And the "end of the euro within years if not months" articles are popping up like funghi...

To end on a positive note, the german opposition has brought up a canditate as successor of Köhler which can only be named an act of genius, Joachim Gauck. I'm putting aside all political party tactics, but this man is brillant, a proven freedom fighter and a wonderfully couraged speaker of the truth, I'm only wondering why Angela didn't come to it herself, it would put an unbreakable rock on top of Germany. Well Gauck is in politics a bit like FreeGold in finance...

Now though it would spell trouble for the current coalition which has the typical party candidate in the race, either way it would weaken further the country, right what the attackers want. There must be a way, though, its like FreeGold, the point of attraction is organic evolution and this is setting aside all top down incompetent politic crap which we are all so tired of.

And a second positive note, did anyone notice the hardworking european parliaments (including GB), cutting spending on all fronts? I know some DO notice this, in stark contrast to Amerika! About time, and exactly whats necessary in this time (I'm Swiss btw, we did this a few years back and it really pays off, we closed with a surplus last year, who woulda have thought!) .

Its only a matter of time until the focus is back on Amerika's spending habits! I smell good bye T Bills...

miked said...

>>As a sidenote, in case you didn't notice, even here on this FOFOA blog they've planted imposters, of course they're camouflaged quite intelligently but you'll find them out if you look closer!

Serious? come on :)

SatyaPranava said...

so knallgold, if the US were to cut our deficit, would that bring us out of the hole in any of our lifetimes? :)

i think we're in deep. but cutting budgets is a good place to start.

miked said...

Just default already and get it over with.

I am no fan of the Bible but the ancients had it right.

KnallGold said...

Satya, no it wouldn't bring out anyone from the hole, its just a way better place to start a FreeGold debt-resolve. Just going along with the same spending habits will bring back again the debt bergs faster than you think, FreeGold might solve much of the past debt problems, it is in no way a miracle cure for all things going forward. There's always hard work to do for miracles to work ;-)

raptor said...

Gold mining cost Q1 2010 :
from $372 to $818 per oz

Gold mine cash costs rise in Q1

http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=105722&sn=Detail

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