Monday, September 13, 2010

Just Another Hyperinflation Post - Part 3


Let's try this one more time. Let's look at it from a purely conceptual angle. Most of the following discussion will not be a proof of the inevitability of hyperinflation, but merely the proper way to view the flow of capital in a panic while analyzing the probability that it will be called "hyperinflation" in hindsight, after the fact. This is what seems to be most lacking in the descriptions I read from those who cannot accept that fiat currencies always end the same way, and that the dollar has reached the end of its timeline.

To get there, I will walk you through several visualized metaphors in an attempt to build a workable mental image of hyperinflation. Hopefully you will be able to use this mental imagery when analyzing the deflationists' claims that it simply cannot happen to the US dollar.

So first, I would like you to imagine two flat, parallel planes. Those that know M theory can envision two membranes, very close to each other but only touching at a single point:


The top plane we'll call "the monetary plane" and the bottom one will be "the physical plane." And just so that we don't get confused with "the flat Earth society," those of you with advanced visualization skills can picture this same scheme as a globe with a membrane (or a Matrix of sorts) wrapped around it but not actually touching:


Now, for the purpose of this visualization exercise, I am going to challenge your definition of the word "money." In all likelihood you think of money as that which is substituted in the middle of a barter exchange. Something like this:


There is no right or wrong definition of the word "money," there are only poorly defined uses and clearly defined uses of the word. In the context of any single discussion, it is better to use a clear definition than to simply rely on everyone's common understanding.

In this discussion I will be talking about "the monetary plane," and in this context the word "money" refers to BOTH the medium of exchange and all forms of wealth reserves that exist in this "monetary plane." That is, "money" in this discussion is the medium of exchange PLUS any store of value that is not found in "the physical plane" of existence. Hopefully this is clear enough so that I don't have to add another three pages of descriptions.

In antiquity, the monetary plane didn't even exist. All wealth was held in the physical plane. In fact, even the medium of exchange was in the physical plane back then. So in that way, it was actually a barter exchange of one physical item for another, even if the other physical item was a chunk of gold. That chunk of gold existed in the physical plane. And for the purpose of this particular discussion, I hope this distinction is clear.

In today's monetary plane, enormous amounts of wealth are held as "someone else's thoughts of value" not value itself. And as ANOTHER once said, "time moves the minds of people to change, and with this, the thoughts of value also change. In this day, as not in the past, the loss of paper value as a concept will destroy the very foundation of wealth that this economic system is built on. This drama has started and is well underway!"

Credibility Inflation

Referring to my post, during times of credibility inflation the monetary plane swells large along with its credibility. One way to picture this is an hourglass, as I did in Gold is Wealth:


The top of the hourglass is the monetary plane and the bottom is the physical plane. And during times of credibility inflation, sand accumulates in great quantities in the top. Here are my pyramids representing the two planes from that same post, stacked on top of each other in a visual similar to the hourglass:


As I said in my Credibility Inflation post, the latest period of credibility inflation ran from 1980 until 2007. Since then, the credibility of the monetary plane has been deflating against the protestations of the Fed and CNBC. That doesn't necessarily mean the sand has gone down the hourglass yet, but its desire to cross the "bottleneck" is growing as the credibility of the top part deflates.

The stage for this was already set when the top swelled too large for the bottom to handle over the past 30 years:


Gravity alone would have brought it down gradually but for the managed perception of credibility that was holding it up, even as pressure built. But with credibility now deflating (that's the REAL deflation) it's anybody's guess when the pressure of over-inflation will bring it exploding downward with a force much greater than gravity alone. It's overdue at this point, kinda like The Big One in LA.

Some of you may have already figured out that hyperinflation, in my visualization, will be the great flood under pressure from the monetary plane back down to the physical plane of existence. And you may have noticed that this great flood must pass through a "bottleneck" of sorts to get where it's going. And perhaps you surmised that, if under enough pressure, this hyper-flow could actually BREAK the fragile neck in the middle of the hourglass.

In my pyramid above, taken from my Gold is Wealth post, I have that "neck" represented by gold. That's because that particular post was more about my #1 topic, Freegold, while this post is about my #2 (of 2) topic, hyperinflation. So for the purpose of this post, I will change that "bridge" between the monetary plane and the physical plane to dollars. For the bottom I'll use physical dollars, since they do actually exist in the physical plane. And I'll change the second layer on the top to "broad money," representing "balance sheet money," M1, M2, M3, MZM, TMS etc…


Now when I say we have already hyperinflated the $IMFS (the Dollar International Monetary and Financial System) over the last 30 years, I am referring to this whole top pyramid:


When deflationists see monetary deflation, they are looking at this part, and they see the value of the dollar in this circle rising:


When they see price deflation, they are looking primarily at this part, and they see the value of real estate and other things in there falling:


But they are missing the significance of the bigger picture; that the credibility of the entire top of the pyramid is deflating. And it was this credibility that was holding all that sand up there in the first place. With the value of the top red circle falling and the value of the bottom red circle rising, the deflationists see "deflation."


But what I see is the beginning of a capital flow, in one particular (and significant) direction:


Legal tender laws mandate the medium of exchange, but they do not and cannot name the store of value. For that they rely on credibility management by institutions like the Fed and CNBC. Jim Sinclair calls this MOPE. And it is the monetary store of value that is on the move, not the medium of exchange. But thanks to legal tender laws the monetary store of value must pass through (and be priced in) the medium of exchange, dollars, whenever it is on the move.

Thanks to our legal tender laws, in order for all that "wealth" at the top of the upper pyramid to escape to the bottom pyramid it must pass through the dollar. But as this occurs, the dollar swells in value. It becomes "more expensive." It'll cost you more derivatives to buy a dollar in order to pass through the neck of the hourglass. The dollar becomes a little bit harder to get, and this starts to look like deflation to the deflationists.

Now I'm really not trying to gross you out in this next little bit. But in order to pass through my next explanation I am going to have to carefully and delicately shift metaphors... without visual aids this time. ;)

As escape pressure builds in the upper regions of the upper pyramid, the legal tender dollar constricts its escape route like a clinching sphincter muscle as its (the dollar's) price rises. And then all that value that escaped the upper region starts collecting and compacting in the large intestine of Treasury Bonds, held in place only by the swollen sphincter that is the swelling dollar.

Not that I hope you can relate to this metaphor – I'm sure some of you can – but what do you think happens when that "flow restrictor" lets go, just a tad? Do you think "just a tad" escapes? Perhaps… at first. But with the Fed shoveling Ex-Lax (QE) into the system like there's no tomorrow, what do you think the end result will be? Will it be a journey back up into the stomach?

I know I haven't proven anything in this post. But I warned you at the beginning that was not the goal. The goal here, as I stated at the top of this post, was to give you the proper way to view the flow of capital during a panic when analyzing the probability that it will be called "hyperinflation" after the fact.

Notice that there is nothing in this view about the addition of new dollars. There is nothing about printing wheelbarrows full of money. All that stuff is secondary to the initial blast that explosively exits through a very small opening.

The lesson I hope you'll take from this story is simple. The next time a deflationist tells you there is no possible mechanism for hyperinflation in the dollar, just show him your sphincter and say, "oh yeah?" ;)

This metaphor even holds for the Weimar hyperinflation. If we think about our 30 years of credibility inflation as "packing the musket" for hyperinflation, then we can view the first year and a half of the Weimar three-year experience in the same light: "packing the musket." From Wikipedia:
It is sometimes argued that Germany had to inflate its currency to pay the war reparations required under the Treaty of Versailles, but this is misleading, because the treaty did not allow payment in German currency. The German currency was relatively stable at about 60 Marks per US Dollar during the first half of 1921.[1]

But the "London ultimatum" in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) goldmarks plus 26 percent of the value of Germany's exports. The first payment was paid when due in August 1921.[2] That was the beginning of an increasingly rapid devaluation of the Mark which fell to less than one third of a cent by November 1921 (approx. 330 Marks per US Dollar).

The total reparations demanded was 132,000,000,000 (132 billion) goldmarks which was far more than the total German gold or foreign exchange. An attempt was made by Germany to buy foreign exchange with Marks backed by treasury bills and commercial debts, but that only increased the speed of devaluation. The monetary policy at this time was highly influenced by the Chartalism, and was notably criticized at the time from economists ranging from John Maynard Keynes to Ludwig von Mises.[3]

Yes, this is the same quote Mish used. Sounds pretty bad when you read that from August to November, in 1921, the Mark fell to less than one third of a cent! But it sounds less bad when you realize that it fell from only one and two thirds of a cent. That's like saying he fell to the bottom of the Grand Canyon without mentioning he was standing on an applebox at the bottom of the Grand Canyon. To restate: during this period the German Mark fell from 1.67 cents to .33 cents. Only an 80% fall. This was Germany's "packing the musket" phase, similar to our 30 years of credibility inflation.

At this point the Mark looked the same, and it actually stabilized for the next 6 months! But the musket was already packed, just waiting for the collapse of confidence. And the collapse of confidence is what brought hyperinflation to Germany. It came halfway through 1922 after a conference with U.S. investment banker J. P. Morgan Jr. produced no workable solution to Germany's problems. Here's the next part of the Wikipedia article that Mish didn't include:
During the first half of 1922 the Mark stabilized at about 320 Marks per Dollar accompanied by international reparations conferences including one in June 1922 organized by U.S. investment banker J. P. Morgan, Jr.[4] When these meetings produced no workable solution, the inflation changed to hyperinflation and the Mark fell to 8000 Marks per Dollar by December 1922.

This came later, as a reflex to the collapse of confidence

Hyperinflation was the result of the collapse of confidence after the conferences failed. The wheelbarrows that soon followed were the effect of this collapse of confidence, not the cause. The initial printing in 1921 "packed the musket." The loss of confidence in mid-1922 fired the musket. And then the real printing began out of necessity! By November of 1923 wheelbarrows were no longer big enough. The banks were counting their money by the ton.


An Afterthought

I realize that some of you are going to complain about "physical commodities" being on the top pyramid of my visuals. They are there as a class of speculative investments with its value anchored in the industrial use of those commodities which fluctuates along with the health of the economy. This industrial use value will disappear, at least temporarily, during a hyperinflation. And the actual commodities will retain an appropriate value through the hyperinflation out to the other side. But if they are bid up by speculation prior to the hyperinflationary event, their final value on the other side may actually be lower in real terms, even if it is much higher in nominal terms.

A monetary commodity, on the other hand, like gold, will rise because its value is anchored in the MONETARY use of the metal, as seen on the ECB balance sheet. So as you are deciding on a metal in which to ride this thing out, ask yourself in which function, monetary or industrial, is its value anchored. And you might just want to follow in the footsteps of the Giants, because they are clear and large, and easy to follow.

Sincerely,
FOFOA

For more on the gold angle in the above discussion, please read:

All Paper is STILL a short position on gold 3/23/09
Gold is Wealth 11/21/09
and Gold: The Ultimate Wealth Reserve 12/29/09

312 comments:

1 – 200 of 312   Newer›   Newest»
samix said...

FOFOA: Good write! Thank you!

samix said...

Does anyone know of a well written book that I can gift to one of my relatives who is a lawyer so that he understand's money creation, fractional banking etc etc, which also covers the absence of the gold in our modern economic system ?

costata said...

FOFOA,

A truly appalling metaphor. Other then that a good explanation of the process.

LOL

intuitivereason said...

:)

And you gotta know that anything coming out at that time is going to be shredded.

And since a large portion of the stuff trying to get out is toxic, you can think of it as hot chilli on the way through...

Mike said...

I liked the flat earth society bit. I generally like Mish but there was no need for that tirade of his.

samix said...

FOFOA, LOL at the earth diagram!

Martijn said...

When confidence in a paper currency erodes it will loose its value as people increasingly start exchanging the currency for things the deem more valuable (such as food).

At this point commodities are both up and down the diabolo (hour-glass). The real tangible ownership is in the lower section, while their paper representation by means of delivery contracts (e.g. the COMEX) is in the upper part. The same holds for gold, hence the advice of moving to the lower part of the diabolo by taking physical delivery of your gold.

Martijn said...

I generally like Mish but there was no need for that tirade of his.

It wasn't really a tirade, but rather a very shallow post where he left out everything that didn't suit him.

Now that is no way of reasoning, but rather of trying to defend some idea by whatever means necessiry.

I prefer the toughful posts and deep logic of FOFOA any time.

Desperado said...

Bravo, Fofoa. Mish's arrogance is truly a sight to behold. I think Mish focused on Gonzalo Lira more because Lira's posts are more founded on his direct experiences and he made the mistake of saying when he thought the hyperinflation would occur. Your arguments are more esoteric and thought provoking.

When you were talking about the sphincter I was reminded of one of my favorite jokes as a child (forgive the vulgarity).

Once there was a circus owner who was looking for some way to make some money from a pig, and he got the idea to stick a cork in his anus. This worked wonders, and everywhere he went people would pay a to see the giant pig who kept growing bigger and bigger and bigger. Finally, the pig got so big that something had to be done. None of the circus owner's hired hands was willing to pull the cork out, so finally they decided to train one of the monkeys.

Afterwards, a news broadcaster was interviewing bystanders to find out what had happened. The first one said "miles and miles of shit". The second one said "miles and miles of shit". The third one said "all I remember was that poor monkey trying to stick the cork back in".


Well lets just hope that Mish is the one that has to try to uncork the flow restrictor when the panic hits.

Tuco said...

People like Mish are the flow restrictor.
Temporarily, at least.
So I guess he will wind up...



... like the monkey.

Ruben said...

Reminds me very much of this diagram (Exters Pyramid).

All forces are to reset the balance, and evaluate everything in power money. That means that everything will be expressed in power money, forcing the value of power money up, and the value of non-power money down.

Diagram of Exters Pyramid

More on John Exter on wikipedia

samix said...

Gold just hit a new high!

David Wozney said...

If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2010 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.

The September 13th metal value of these nickels is “$0.0574114” or 114.82% of face value, according to the “United States Circulating Coinage Intrinsic Value Table” available at Coinflation.com.

snerfling said...

FOFOA, another great post.

I would suggest that perhaps a better definition might possibly help clear some of the confusion that permeates the entire topic of hyper-inflation.

Mish, and many others, apparently seem to think of a hyper-inflationary event as some kind of vast monetary expansion ("super-inflation") chasing increasingly limited numbers of goods.

However, as you observe, the proper condition is actually the reverse: first goods disappear, then money is printed to chase them.

In actuality, it's all centered around default risk and the fear of exchanging something of real value (food, oil, etc) for something of little or no value (MBS, $USD, etc).

Hence, possible alternative terms could be something like 'hoarding', 'trade refusal', 'default scarcity', etc. I sort of like 'trade refusal' myself.

Anyway, I don't see much improvement in the dialogue until the term 'hyper-inflation' is either properly defined or understood by all that it has nothing to do with an (initial) expansion in monetary supply, but actually an abandonment of goods for sale/exchange.

JR said...

Hi Ruben,

FOFOA's archives are a treasure but you may enjoy this one in particular - http://fofoa.blogspot.com/2009/03/all-paper-is-still-short-position-on.html

Cheers

Nic T.R.G. Salad said...

FOFOA,

After reading Mish's piece, I was hoping you would respond and must say, I was not disappointed. IMO, your best piece to date.

My only disagreement is in the area of other precious metals- namely silver- and its role in what is unfolding. Throughout history, silver has often played a significant role as money/a store of value and I have to believe it will continue to do so, especially as gold returns to its rightful place and paper wealth is scrambling for cover. Add to the 5000 years of use as money, a host of industrial uses, historically low above ground reserves and that gold may be 10X its current price in the not too distant future and I don't think it is a stretch to say that poor man's gold should do as well as if not better than gold. What am I missing?

I would appreciate your thoughts. Again, excellent work.

David

blots said...

Your writings are very enlightening, yet I have difficulty in how to apply to the average Joe, in term of allocation of limited resources. For example, setting aside for the time, the necessity of having food/water/shelter/protection in place first, what is a person to do in a situation similar to this:
Monthly Exp: $2,000
Cash on hand: $10,000
PM: $10,000
UNsecured debt: $20,000
Mortgage $200,000

So does Average Joe pay off all unsecured debt, use $8,000 cash to buy more PM, or ???

I'm very interested to hear the varying opinions on this and how "best" to prepare for a hyperinflationary collapse - in a strictly monetary sense (i.e., not the weary old "beans and bullets" response).

Texan said...

Got it. I just happen to think the Fed will not print physical dollars to meet demand. Holders of financial instruments will be told to get stuffed. Maybe ration books or some sort of basic barter currency will be issued for daily necessities etc.

But they will not allow a flood of physical dollars, for exactly the reason you, and Mish, mention - it would be game over.

Why do you think the Fed must print to meet demand?

FOFOA said...

Hi Texan,

"Why do you think the Fed must print to meet demand?"

Because it's game over for the Fed even quicker (sudden death) if they don't print! Gideon Gono is very proud of his 2007 and 2008 printing in this 2009 interview...

Gideon Gono: "The stockbrokers were creating a money supply that wasn't there. I printed Z$1.5 quadrillion, but the [stock] exchange was operating with Z$100 sextillion. So I said, "Who is doing my job?" Unless there is more discipline and honor, the exchange will stay closed. I can't be bothered. I don't know when it'll open. It's a free market, a business which must be allowed to succeed or fail."

"I've been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks. Then the IMF asked the U.S. to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me."

"I don't want anyone to put unnecessary pressure on Obama and hold him to supernatural powers. He's coming into a situation that is untenable already."

"There are certain things, policies with the benefit of hindsight, where we could've managed our affairs better. I don't want to leave you with an impression that Gono or Mugabe are direct descendants of St. John or St. Paul. We are human."

"...economics is not an exact science..."

"It's got to be a good year. What keeps me bright and looking forward to every day is that it can't be any worse. And those who have studied the history of economies know that we are down, but that the only thing that can happen is we will move up. That is a certainty."

"I have been in the trenches during every moment of survival for my country. Any central bank governor is of necessity. When things go bad, we governors are the fall guys. No other governor in the world has had to deal with the kind of inflation levels that I deal with, no other governor has to come up with the gymnastics and strategy for the survival of his country. But let me say that in my bank resides the cutting edge of the country. I'm privileged to be the leader of that team."


Sincerely,
FOFOA

JR said...

Texan,

The FED printing is merely a response to the deflationary collapse in asset (aka debt) prices and the related collapse in confidence in the system.

It would already be game over if they hadn't already flooded dollars numerous times in the past.

If you think they will change their stripes so be it, but all that means is the system collapses quicker because they don't engage in the quioxotic quest of printing enough to try to keep it going just a bit more.

An example of this line of thinking-

"In a nutshell, the problem with the dollar is that it's brittle. It's hard to imagine a Volcker-style, contractionary defense of the dollar today. When Volcker did his thing, the US was a net creditor nation with a balance-of-payments surplus. Its financial system was relatively small and stable. And it had much more control over the economic policies of its trading partners - the political relationship between the US and China is very different from the old US/Japanese tension.

Fed policy since the crash of 1987 has been to insure against risk by stabilizing crises with liquidity injections - that is, hefty dollops of new money. It's no secret that the financial industry has responded by taking on more and more risk. This vicious cycle of "moral hazard" is a policy that's hard to change. For today's Fed, short-term rates of 5% are dangerously high. 25% is not a serious option.
"
http://fofoa.blogspot.com/2010/08/credibility-inflation.html?showComment=1282803169532#c4383227352629551580

caveman said...

Since gold hit an all time high in relative $ amount today, some (zero hedge) say it is in response to QE2 that is TBA in NOV/10, but is expected by Chase and Goldman (two firms known for their honesty) leading to an increase in gold spot price, following this line of "logic" if QE2 doesn't occur (and may be in conjunction w/ Central banks dumping gold/paper gold) then gold price should fall dramatically.

Anyone feel this could be a ploy to create a "mini bubble" in gold so it can be popped as to "prove" that gold is in an actual "bubble?" Sort of making a straw man out of gold? I say this because of how straw men have become ubiquitous in the media.

Or is this the actual loss of confidence FOFOA described?

oldinvestor said...

Blots,

You did not state what your monthly income was, but if you foresee a hyperinflation coming, theoretically one would pay your monthly expenses, your minimum debt service, and put everything else into PM’s every month. In the event of a hyperinflation, theoretically your increased monthly income would easily wipe out your debt, letting you pay it off with vastly devalued dollars.

That of course is assuming that your job will still exist.

FOFOA said...

Texan,

Continuing from my last comment...

Imagine confidence in the dollar has collapsed. Prices are hyperinflating with what's already out there. We are in July 1922 of the Weimar experience. The government will need inflation-adjusted funding to keep governing, as frequently as inflation is adjusted, which is quite frequent in hyperinflation.

What do you think Congress will do if the Fed refuses to monetize Congress' $10 Trillion debt issuance just to keep G functioning? Do you think they'll just give up, shut down the federal government, go home and say "to hell with it"? Or do you think Congress might vote the power of money creation back to the Treasury instead of shutting down the federal government? This is the sudden death suicide the Fed will face if it doesn't print for the federal government. And if it doesn't, the Treasury will anyway, so better the Fed do it, Bernanke will think.

And then, to quell his dissonance on the matter, Bernanke may consider how Gideon Gono's career survived hyperinflation and that he is still Zimbabwe's CB governor today. Perhaps, he might think, Bernanke and the dollar can survive a monumental devaluation! After all, it's only a transactional currency and specific value doesn't even matter in a transactional currency!

It's certainly a better course of action than the sudden death suicide act of refusing to fund Congress with $10T for another month of stooge payroll, he'll think. And then he may look in the mirror, pound his chest, and say out loud to himself, "they don't call me Helicopter Ben for nothing!"

And then imagine that! All of a sudden, all the debt accumulated in 200 years of governing is reduced to one month's stooge payroll. Quite a sight it will be to behold. I wonder what all those creditors holding 200 years worth of US debt will do once it is only worth one month of governing. I bet they won't be buying any new US debt! Only the Fed will be buying US debt at that point!

And to Caveman, when confidence is gone the price of gold will fall. And all the deflationists will scream "I told you so!" for a couple months! That's because the only price of gold we have right now is the price of paper gold. Look for it to fall like a rock right when this system is expiring. But don't expect to get any of the good stuff at the falling price! You gotta get that right now at the high price if you want any! Because its price will be through the stratosphere (though not reported anywhere) when confidence leaves the system once and for all.

Sincerely,
FOFOA

Nick said...

Samix,

"The Creature from Jekyll Island" by G. Edward Griffin touches on all of the points you listed. A good, interesting that includes a lot of history to tie it all together.

Texan said...

FOFOA,

No, it's not game over for the FED if they don't print. It actually makes the dollar incredibly valuable. Of course it will be devastating, for those that don't have dollars.

Anyway, I don't disagree much, just with that.

Texan said...

Sorry our posts were crossing. Let me think about that. I still don't agree but I will write something longer on why a bit later.

Nick said...

FOFOA,

In regards to your comment at Caveman, do you mean it will fall in price relative to current (or future) dollar terms? If you could expand on that a little I would appreciate it.

Texan said...

I will grant you that if confidence in the dollar collapses inside the US, then yes, hyperinflation (or worse), is very possible in the US.

I don't think the FED will let that happen, inside the US. I would not want, however, to be a holder of US dollars outside the US.

Physical dollars will become very scarce, accounts will be gated, securities will be "restructured" ( extended), food stamp program using debit cards will be broadened. In short, the US may experience a "jump depreciation" as described by Hussman, and the gvt will most likely respond by assuming control over the economy.

The US has ample food, and ample energy if the economy effectively shuts down. Maybe this will cause a loss of confidence in the dollar in the US, but I doubt it. Overseas of course, the dollar will be done as a reserve currency, ie as a store of value. Everyone will want gold.

So maybe I end this with the following: you see fire, I see ice, and it really doesn't matter, since all roads lead to Rome.

Thank you for all your posts, they very much clarified my thinking on some matters.

FOFOA said...

Hi Nick,

Where do you find the price of gold today? Kitco.com? CNBC? Goldprice.org? In all those places the price of gold will eventually fall. To what? I don't know. Maybe $500. Maybe $200. There are reasons why I think trading may be halted at around $500, simply to make sure that certain contractual gold deliveries are completed to certain privileged parties in the near future. But those will have nothing to do with you. For you, the price of gold that you find everywhere will be $500, but you won't be able to take delivery of any physical. Kitco will probably still sell you $500 shares of its pooled account. But they won't let you take possession. You'll still be able to buy and sell GLD for $50, but no physical. This is why I tell people to only buy physical gold and take possession of it! Today! Don't wait for the price to fall!

This is what will happen to the paper gold market (the only gold price discovery market there is today) when its futures all go into permanent backwardation at the same time. When infinite demand meets zero physical supply. When all COMEX registered physical is withdrawn from delivery. When all the holders of physical gold -->IN SIZE<-- stop bidding for dollars with their physical gold. This will be concurrent with the loss of confidence in the dollar, because it's gold bidding for dollars that matters, not dollars bidding for gold, although causation between the concurrent collapses may be unclear at the time.

Another and FOA wrote about this. They called it "physical gold going into hiding for a while." They also said that the BIS would soon after fill the "gold price discovery void" with a new physical-only gold market for the Giants, because the euro needs an accurate gold price each quarter to mark its reserves by. And they will not use that $500 price if no physical can be had at that price. And like a rising tide lifts all boats, so will this Giant physical-only gold market lift the value of the coins in your sock drawer!

So, try to picture a future gold price chart that looks -- very roughly -- like this. And remember you saw it here first!

Sincerely,
FOFOA

caveman said...

FOFOA let me re-start by saying, I've been enjoying reading and learning from your writing lately. I hope you continue to produce quality articles.

I get that money with intrinsic value cannot (and should) not be bought with any amount of fiat, and a time will come when this becomes true.

But I can't quite wrap my mind around this disconnect between physical and paper gold that people say will happen because the paper market is continuously suppressed with paper and the price on physical gold would sky rocket.

How could an investor (at least a small one) not see the shenanigan when the price of physical is at say $2000 (from a place like APMEX) while the price of paper gold is say at $1800? Wouldn't it be clear that there is a supply squeeze, and simply unload paper and buy physical.

Which would in essence collapse the paper market. So in order to keep the dollar going, there cannot be a large/noticeable/un-spinable differences between paper and physical, until the manipulators are in a position to capitalize the most from a sky rocketing gold price.

Unless, this has gotten out of the control of the manipulators, which I doubt because these guys are very smart people.

Nick said...

FOFOA,

Thanks for the clarification. I'm in the midst of re-reading through your old posts, so hadn't come across that thought yet.

But it makes sense, and I was making sure that you meant physical wouldn't be attainable by us non-giants.

But it is at the moment!

Thanks for your continually enlightening posts.

- Nick

Robert said...

The Giants have shown us the path, even to us little hoarders. Buy physical gold. ASAP.

Those of you NOT in financial distress ought to consider buying physical gold right now! Silver is second best IMO for wealth preservation, but might be best if we have TEOTWAWKI... I have no problem diversifying some $ to silver...

I buy gold, automatically, as money comes in to me. I look at the price of gold, but I buy anyway, price makes no difference. As our Grandmaster FOFOA said: "It's all about the ounces!

Yours,

FOGARB (Friend of Gold and Rolling Bearings)

DoChenRollingBearing (at zerohedge.com)

Michael Shedlock said...

I explicitly said hyperinflation is a political event.

"The commonality between Zimbabwe and Weimar is they are both political events. In Zimbabwe a political event triggered capital flight, in Weimar a political event started massive printing, triggering hyperinflation."

By the way a drop of 60 marks per dollar in the first half of 1921 to 330 was started by the demand for reparations - a political event. It progressed on another political event when meetings broke down.

The amazing thing is I was agreeing with you, not contradicting you and you challenge it!

Another irony in this is your defense of Lira who has a "jiggle" in commodity prices triggering hyperinflation when the idea is blatantly silly, progressing from one amazing fantasy to another with a ridiculous assumption that asset manager had to sell treasuries.

"asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell."

That is one of the dumbest things I have ever heard.

Mish

samix said...

@caveman I thought so, the mini bubble thing, but it does not hold water for a very important reason , which is that It could quickly get out of hand and beyond the cartels control.

The smart people with big money who are aware of the suppression scheme can hold the cartel with a gun to their head in such a case, when the cartel will be forced to cover their shorts.

Also if they let the price run loose too many dollars will start to bid for gold and that's not a healthy thing from the cartels point of view.

samix said...

@Nick, thank you I will check that book out

FOFOA said...

Hello Caveman,

I really hate answering these kinds of questions in the comments. Because without writing a 30 page treatise, my explanation will most definitely be incomplete. And if you can't see it on your own, then you will probably not see it after my incomplete explanation. That said, here goes nothing...

Over the past decade much gold has changed hands. Both paper gold and physical gold. If you can conceptually visualize these as two separate markets you are on the right track. The next step is to think in terms of strong hands versus weak hands. Weak hands will sell gold with any volatility in the price. They will sell when it drops for fear of losing more money and they will sell when it rises to "book the profits." These are traders (not traitors, even though it sounds the same). They focus on "technicals" which leads them to sell whenever the price moves. Most of these guys deal in paper gold because it is much easier to move in and out of.

Strong hands tend to focus more on fundamentals than technical signals. The reason WHY they own gold is different than the traders. And they don't sell just because the price moves. They see fundamental value in gold and for this reason they learn and understand the reasons to own physical gold.

Over the past decade the paper gold trade has been mostly between weak hands. Weak hand to weak hand trades. Over and over again, round and round, with profits booked for some and losses taken by others. The physical gold market, on the other hand, has been a steady move from weak hands into strong hands. Most of the "profit taking" sales of physical gold in coin form happened between $500 and $950. Coin sales at $1,250 tend to be from people that bought more than they could afford and have had to sell some for spending money on life's necessities, like debt service.

On October 10, 2008, my local gold dealer was selling gold eagles for $1,259 while the spot price on Comex was $887.40. And he was BUYING them from the public for $1,180! Strangely, no one was lining up to sell their gold eagles. Instead, there was a line to BUY them at $1,259. That's $371.60 over spot!

Not only that, but the Comex price had been $910 the day before, Oct. 9. And on that day, he was selling the same gold eagles for only $1,116. So in one day, Comex had DROPPED $22.60 at the same time as the physical premium ROCKETED up $143.

I must also explain how gold dealer's "discover" their price. Most people think that if my dealer only paid $900 for the gold he sold me for $1,259 that he made a $359 profit. This is incorrect. The price difference "profit" between a gold dealer's very first inventory purchase and his very last sale is spread out and diluted throughout the length of his career. And my gold dealer has been in the business over 50 years. All that matters to a gold dealer is his cost to restock the gold that he sold you.

So he calls another bigger dealer that he buys stock from, while you are standing there in some cases, and gets a quote, and later locks in an order once you complete your purchase. And on October 10, 2008, my dealer was receiving quotes of $1,210 from his supplier to lock in an order.

So in an "efficient market" sense, which force was in the driver's seat that day? Was it the Comex price? Or was it the actual supply of physical gold?

More later if I can find the energy. It takes a lot of energy to answer these questions that seem so obvious to me. But I try anyway.

For now, I see that I have had a celebrity visit. And I must apply an unfair amount of energy to his post. Because I see that his profile has had 240,000 views!!! And yours has only had 38. So he must be a much more important human being! ;)

Sincerely,
FOFOA

FOFOA said...

Hello Mish,

Welcome to the FOFOA-zone! I never thought I'd have a visit from a celebrity such as you! So please feel free to stick around and comment all you want. Many of my fans are your fans too. I'm sure they are thrilled to see you here!

About the Weimar thing. Your point was that the printing to pay the "London ultimatum" caused the hyperinflation. In fact, it did cause a quick and relatively massive depreciation in the Mark, but it didn't quite ignite hyperinflation. Loss of confidence did... later. And following that came the REAL printing that we all picture in our minds when we imagine hyperinflation; wheelbarrows, burning cash for warmth in the wood-burning stove because the cash is cheaper than cutting logs, kids building "money forts," etc...

This stereotypical view is the EFFECT, not the CAUSE, your "political event" notwithstanding.

Hyperinflation is from the loss of confidence that starts prices rising rapidly. This happens WHILE credit is contracting. This happens WHILE asset prices are collapsing. This happens WHILE everything looks like deflation. Even housing prices collapse in real terms during hyperinflation!

The big money printing is THE RESPONSE to the rapidly rising prices. All you deflationist guys say it can't happen because the big money printing won't happen. You are looking at it the wrong way. IT HAS ALREADY HAPPENED!

The "political event" you described was the to prime to the system. Our system was primed a little differently; through 30 years of credibility inflation -- that is, the credibility of debtor's debt as a viable wealth reserve.

So we have this 30-year explosion in credit/debt and all that perceived money is sitting there like an anvil hung over our heads. Germany had its own threat hanging over its head. And it SHOWED its willingness to debase its own currency as a "solution" to the war reparations problem. Similar to us, in that way.

The money that's already out there (without any more printing) can hyperinflate prices through velocity. Velocity can have the same exact effect as printing. Would you agree with this statement? Fear is the spark that ignites it. And then the government will need to fund itself in this hyperinflationary environment. This will entail THE massive printing that always follows immediately after hyperinflation starts. ***THIS IS THE POLITICAL EVENT THAT I AM TALKING ABOUT*** Not the priming beforehand. That's already done. We are already in the summer of 1922.

You say you were agreeing with me but you were only pointing to the priming event. You were actually trying to discredit me! You said that I weakened my own argument!

You said, "In Weimar Germany, printing for war reparations kicked off hyperinflation." I say, the printing that required wheelbarrows came AFTER the collapse of confidence that was only primed (set up) by the German govt. DEMONSTRATING that it would debase its people's currency to ease its own pain.

Continued...

FOFOA said...

Continuing...

I imagine a deflationist like you back in 1921 would have probably said, "sure, the mark dropped 80% when they did that, but they'll never let it get so out of control that they'll be printing trillion mark notes!"

It is this LATER political event that is 100% guaranteed. That our government will debase its currency TO ANY DEGREE to ease its own fiscal pain. And as for the cause, the prime, it's already there. Has been for at least 10 or 12 years now. Just a matter of time until fear-induced price inflation (not economic, not credit-driven inflation) lights the fuse.

As for Gonzalo Lira, I hadn't even read his two hyperinflation pieces until AFTER I wrote Part 1. I figured I should give them a read before I posted it. I don't know him. In fact, I was a little surprised that he distanced himself from me yesterday on ZH...

"He also quotes other people—whom I am not affiliated with and don't even know—and allows his readers to infer that I fully agree with them, and that I am part of some conspiracist, gold-bug cabal."

I must echo Gonzo's sentiments myself in this case. I am not affiliated with and don't even know him. I am not a conspiracist. I am not affiliated with any gold-bug cabal. I am not even a gold-bug. And I am happy to explain to you why that is the truth.

I think some of the other big gold organizations, in fact, diminish their credibility on this front. I don't wear a tin foil hat. Ask me about your favorite conspiracy theory... ask me if I believe it. I will tell you right now there is a 99% I will say no, I think it is utter bullcrap.

So I assume Mr. Lira has a few misconceptions about me, as I'm sure you do too.

And I certainly wasn't intentionally defending his positions! I haven't even read his "Termite riddled house" post yet. So please don't combine the two of us (as he accused you of doing) to knock us down easier.

I have been blogging about Freegold and Hyperinflation since Aug. 2008. Gonzo started his blog in 2010. I am not here for self-aggrandizement. This should be obvious by now. I don't foist my articles on anyone. Anywhere they appear other than my blog is because someone else wanted to share them, not me. I have never submitted an article anywhere. And I have no plans to do so.

I do not care about the selling of Treasuries like Gonzo does. It does not matter. Yes, he is correct that it could be the spark, but it doesn't need to be, and it probably won't be. There are an infinite number of other possibilities. And THAT'S the key. The really low probability right now is that we keep dodging this inevitable monetary event. It gets lower as each day passes.

The rising dollar is not a force that is making hyperinflation less likely, quite the opposite.

Sincerely,
FOFOA

J said...

LMAO

With the insults that Mish has thrown your way I wouldn't even waste the energy responding to him.

J said...

Looks like I'm a few minutes too late.

Jimmy said...

@Mish:


Now, I'm very curious on your reply to FOFOA's last post. I agree with his vision and I'm also not a hardcore goldbug or freaky conspiracist.

Sincerly,

Jimmy

Desperado said...

@Mish,

Well since you are showing up here, I guess you must have a bit of a guilty conscience for smearing so many talented and concerned bloggers with your "flat earth society" quip. What I find amazing is that you are so certain that there a hyperinflation is impossible that you would do this.

So my question to you is: Why do you even recommend holding gold in a portfolio if you are so certain there won't be a hyperinflation?

My guess is that you have at least the seeds of doubt in your mind, and are concerned how you will look if a hyperinflation comes and all those who trusted you are ruined. And this is why your smearing of Fofoa and Lira is so hypocritical and unconscienable. And I will also add that your continued smearing of Lira in this thread with statements like "fantasy", "ridiculous" and "dumbest" is very unbecoming and downright arrogant, especially when you won't even make the effort to try to refute what he says.

And one final comment. I have been banned 4 times now from your blog without any explanation or statement from you. Just pang, I am gone, in a fashion that also illustrates your arrogance. At least Fofoa has the courtesy of explaining to participants in his blog why he bans the most obnoxious trolls.

samix said...

FOFOA: On the other hand does it matter to me or the average Joe if we will have a hyperinflation or a deflation ?

I think this discussion is more academic in nature.

I respect you because you have cared enough to warn us little people about the coming impending crisis and directed us to the ultimate store of value, the wealth of generations.. gold.

hats off to FO/FO/A!

Casper said...

Hi FOFOA!

I have been reading your posts for the past year and went through all the material you posted links to (Another, FOA, Aristotel, Gold Trail, ......). I understand the basic message you're trying to bring to your readers with your excellent writing and/but have one big question to ask you (or maybe some more enlightened reader than i am can answer instead) if you permit.

BIS. From your writings I got a feeling that you're describing them as a administrative institution fascilitating gold sales/purchases between Central banks. You've never described them (as far as i know) as the major holders (owners) of gold itself. We know that you can't make the rules without gold :-) so, what's the secret of their power?

And thanks for you blog and thoughts, which I find extremely intelectually challanging.

RobertM said...

You'll have to count me as one of those people who think the Weimar hyperinflation was an intentional act of financial terrorism. I believe it was in Magic Of Money that Schacht admits the crisis was caused by speculation i.e. financial warfare. It was the German government that finally stopped the Reichsbank's private interests.

On another note about freegold "[...]Only gold can go in an asset column and not be in the liability column of another bank.", there is another way- sovereign money.

costata said...

Casper,

Forgive me for jumping in here...

"BIS...so, what's the secret of their power?"

The ability to move the pieces around the Chess board. In other words, control of gold.

IMO that's the true message of the recent 300+ tonnes BIS gold swap. A swap of gold for (BIS) dollars.

Casper said...

Hi Costata!

Thank you for your answer. I too understand that they're apparently able to "move" large amounts of gold but what gives them the power to do that. As we know, their "governing body" appears to be an assembly from various (ex)central bankers among them g.Bernanke if I am not mistaken. I am still trying to figure it out.

Mike said...

Casper

i too am curious to know that answer but my first thought is that of who does the BIS represent?

China, Saudi's, Swiss, europe, old money etc...

Who don't they represent?
the Western Governments. Canada, US, UK etc..

so i think what gives them their power is the self interest of the those savers and producing countries. who needs who in this world. i think they have all come in agreement and gold is the best way to destroy the dollar and benefits all those citizens in those countries which we believe is one of the 2 motives of the BIS. 1st one was to bankrupt Russia and take their gold which they already accomplished.

when i think of this i see it as the BIS vs IMF.

What gives the IMF power? the ability to spend and consume? since the dollar is exactly that and that is the system they represent i think that's what it is.

i could be wrong on all this but it was my first though. interested to know what some of the seniors in this blog have to say.

Michael H said...

@ blots, oldinvestor
(way back up in the thread!)
Regarding what the average Joe should do,

What one must watch out for in the coming hyperinflation is the early stages. It won't just be 'poof', wake up one day, and all your debts are gone and your money has extra zeroes in it.

Rather, prices will double, triple, but your income will remain the same, at first. This will put tremendous pressure on your finances. At the same time, you may likely not be able to sell your PMs for a good price, as FOFOA describes, since paper gold price will drop and the true price will be unknown.

This will mean that, for a few months at least perhaps, you will be living from savings, and your expenses will have doubled.

It is this interim period of uncertainty that you must guard against. The worst that can happen is to have to sell you PMs at fire-sale prices, be foreclosed out of your home, tap out your savings, and be left with nothing.

I'd say the current asset / liability mix you describe is appropriate. Pay only the minimum debt service. Reduce monthly expenses in any way possible, and put any extra savings into both PMs and cash-on-hand. The mix between the last two is for you to decide, but remember that if you have too few PMs you will only kick yourself later as your investment skyrockets, but if you have too many PMs and not enough cash, you may end up out on the street!

Jeff said...

Mish is a waste of time. He is so publicly tied to 'deflation' that even when he realizes his error, he can never admit it. His credibility will go up in smoke with the dollar.

samix said...

@Nick thanks for the suggestion, the book is what I was looking for.

I am amazed and dumbfounded, what is happening in America now is not new all these banking gimmicks and crashes have happened in the past too, its just that the players and the people have changed.

What keeps the American public from not learning from history ?

snerfling said...

FOFOA, you're wasting your time attempting to debate critical issues with Mish. You should understand his modus operandi and the factors that initially made him successful in the blogosphere.

First of all, he is an analyst. What does that mean? Well, it means he's an excellent counter-puncher. Give him a framework for proposed IT development, or, in the current environment, give him some obviously skewed 'official' data, and he will perform an excellent job in disassembling the various lies and assumptions.

However, you should realize that Mish is basically uneducated - ignorant, if you will. This isn't an ad hominem attack. Rather it's merely an straight forward observation that he has limited exposure to a broad range of traditional topics such as geography, political science, history, philosophy, et al.

In other words, what he 'knows' is limited to his immediate cultural influences - family, friends, work, etc. And what are those? Why mid-western values, which to many are a basic article of faith. And what is the primary tenet? The primacy of the USA.

So, ultimately, the person with whom you are attempting to debate with is simply an analyst manqué. Once you begin to tread in the area of faith, you're just one step away from religion and arguing about angels on a pinhead.

Mish had his time - when people where searching for basic truth amongst the lies. But to extrapolate and project future outcomes - especially as it relates to the USA? LOL - that's why you're now getting responses like "That is one of the dumbest things I have ever heard."

ShockonT said...

To All:

Go easy on Mish. Name calling will not further the debate. Mish himself describes the process that FOA and Another described over 10 years ago in a recent post (PA Gov Attempts Foolish Bailout of Bankrupt Harrisburg):

"Mayor Linda Thompson is a fool as is Governor Ed Rendell.

Harrisburg is bankrupt. Period. Wasting 10's of millions of dollars will not change that simple fact. Harrisburg would be much further ahead had it skipped bond payments years ago. Now that is money down the drain.

Harrisburg cannot afford a $500,000 loan from the state to pay bills it should not pay. It has no means of making the next bond payment. While cutting city services may be a good thing to do, cutting city services to pay bondholders, when city residents get nothing out of it but higher taxes is point blank stupid.

There is no deal to work out with the bondholders other than default and bankruptcy court.

Governor Ed Rendell is acting in the interests of the bondholders not in the interests of Harrisburg. The move is so foolish I have to wonder what the governor's connection to the bondholders is. The city council should reject this offer."

Here Mish describes the monetization of debt in lieu of the [dollar] deflationary alternative. Debt ultimately gets transferred to the public books, where it will be defaulted on with dollar debasement. Do you think the bond-holders are buying CDs?

The statement that the Fed would not deliberately let hyperinflation happen is somewhat obvious. The Harrisburg situation is an excellent illustration that this is a process of stacking straws on the camel's back. The bailouts will continue until there is a currency event.

If Mish has his way and the bailouts stop, then the dollar will become scarce, tax revenues will plummet and the government will have to print money to service the existing debt, which will create a currency event.

So Mish may be very correct that the dollar will strengthen, but for how long? Arguing the path of the dollar is a fool's errand, as it's ultimate fate is of the most importance.


I am not a trader, nor am I a debtor, nor am I a borrower. I hold assets. Paper is for writing, not for saving. There is no dollar-based chart that can prepare the traders for what we are experiencing. The reference frame itself ($IMFS) is transitioning.

snerfling said...

@Jeff said "Mish is so publicly tied to 'deflation' that even when he realizes his error, he can never admit it. His credibility will go up in smoke with the dollar.

Jeff, Mish's position is golden (yes, pun intended). As long as the USA survives as a political entity, he will be proven right regarding his deflation thesis.

When confidence is finally lost in the dollar and Treasuries and hyper-inflation ensues, there will be so much political turmoil that no one will be wasting their time discussing such niceties as who was right/wrong about deflation, hyper-inflation, etc.

In fact, operational markets might not even exist, so who cares what the hell anyone previously said or did? (Unless some start looking for revenge.) It will all be immediately ancient history as we the living attempt to deal with the here and now in our brave new world.

Jimmy said...

@Mish:

And you know, I went to Argentina, Uruguay and Mexico to ask the bankers (went to private banks, museums of monetary history, local people,...) about hyperinflation and the similarities between the future of the dollar and their hyperinflated currency.

They see many similarities between the dying dollar and their killed currency. All of them recommended me to buy PHYSICAL gold, silver or landproperties (not houses, but meadows, farms or others (to generate cashflow, or better said gold/silverflow)). No one recommended me to buy treasuries, shares, ETF's or other shit (excuse for my language, but they said it exactly what I'm writing here).

They've practical experience (they've said me they were also misguided to deflation, like your opinion, they went to cash + treasuries and at the end, they burned their fingers), you have only theoretical experience and your believes...

Next year, I'll go to Thailand and Japan to check the reality and their recommendations what to do... I'm very curious to hear it... Maybe also they recommend to buy PHYSICAL gold, silver or landproperties...


So I'm curious if you're clever than Buffet, Benetton, Rogers or other great investors: They're buying land like fools...


Sincerly

Jimmy

Jimmy said...

@Mish:

And you know, I went to Argentina, Uruguay and Mexico to ask bankers (private bankers, museums of monetary history, local people...) about the similarities between the dying dollar and their hyperinflated local currency. All of them recommended me to buy PHYSICAL gold, silver and landproperties (not houses, but meadows, farms, or others to generate cashflow (better said: gold/silverflow)). No one recommended me to buy treasuries, shares or other shit (excuse me for the language, but I'l exactly writing what they've said to me). They were also misguided to deflation, like you, and at the end, they went to cash and burned their fingers... Practical experience, not theoretical...

Next year, I'll go to Thailand and Japan to ask their thoughts and I'm very curious if they would also recommend to buy PHYSICAL gold, silver and landproperties...

And why are great investors like Benetton, Rogers, Buffet,... buying lanproperties like fools...

Again, I'm very curious to your reaction to FOFOA's last reply...


Sincerly,

Jimmy

caveman said...

@FOFOA
So what you are saying is that ~240,000 views is a big number? Big number = more important = more authority, hmmm, can’t see any flaw in that logic. So I agree, he must be more important, devote not thoughts to serfs in the presence of a prince, one who wears such a beautiful robe that is so obvious to the enlightened.

For serious though, I appreciate your thoughtful reply, very detailed. I only recently graduated and found out the intrinsic value of my fiat money, and new graduates don’t get paid much. So for me gold is out of my price range, in addition to the ridiculous Au:Ag, and I focus a little more on silver. From what I have read so far you don’t place silver in the same category as gold, which you may have explain why previously and I just haven’t gotten to it.

Back on point, I think what you said about the dealer v. paper price in Oct/2008 support (unless I am missing something) my view that there cannot be a large/noticeable/un-spinable disconnect between dealer and paper price until the end game. Though the difference was large and noticeable, it can be spun as a “temporary spike in demand.” The big difference $300 quickly closed between dealer and paper to show this indeed was an anomaly, just move it along nothing to see here.

And today the premium at APMEX for gold is only ~$40/oz. I remember in 2008 I was thinking, at the time of this big disconnect, that the dollar was collapsing against gold.


@samix
Americans are program to think history is borrrrrrrrrrrrrrrrring, dry, dusty, and un-cool by the media. A relic of the past, fit only for the spectacle wearing tweed jacketed professor whose office is cluttered with piles of dust covered ancient academic papers. Who needs to think for themselves when we have dogmatic experts of all sorts to think for us and for us to parrot? Duh?!

blots said...

@ oldinvestor, Michael H

Thanks for the input! With not having a net worth in the millions, it is difficult to know what an appropriate mix should be.

oldinvestor - for net monthly income, assume $2,500 - roughly $500 over expenses.

If I understood you both correctly, you are suggesting NOT paying off debts, rather continuing to pay the minimum. This is the route I was leaning toward, even though most everyone seems to scream "get out of debt before TEOTWAWKI"!

Bottom line, it's better to have some debt and cash, than none of either.

Now if I could just find that Rich Uncle to pay off the mortgage . . . :-)

Thank you again for taking your time to respond.

Mike said...

caveman
if gold goes to $500 on the paper price, sells for $1000 in the street for a short period because of supposed increase in demand and then goes back to $500 on the street that gold would be out so fast that this example can't even happen. is this a supply or a demand issue. i see it as a supply with infinite paper demand from dollars as fofoa says.

dollars need bids from gold and those bids are drying up as the true gold advocates are long physical and wont let go of it.
they also don't fall into the silver trap.

do you feel that you have more value because you have 2oz of silver or 1gr of gold?

FOFOA said...

Hi Caveman,

The story about the dealer is important because of the way the dealer prices his inventory. He prices it based on his restocking cost, that is, restocking in physical. He's not turning to CNBC to get the spot price and then selling to me and buying a futures contract on COMEX. He's calling another dealer whom he trusts, and who trusts him. And that other dealer is working in a similar way.

Some people think that this network of gold dealers will be the price discovery market for us shrimps in the Freegold future. The mechanism for the price discovery of various coins and sizes. And some people believe these gold dealer networks will be very important some day. This is why I described that one little incident.

Now imagine my dealer picked up the phone that day and his supplier couldn't quote him a restocking price because he wasn't getting quoted a price himself from his trusted supplier. The stock was simply not flowing.

If this happened, my dealer would not sell the gold he had in hand, because he couldn't be guaranteed a timely replacement of that stock. He'd wait until he could quote a valid price. And it is also important to understand that there are two ways a dealer gets new stock. One is from his supplier and the other is from the public.

So taking the network of dealers as a whole system, there will either be a net inflow of gold (public selling) or a net outflow (public buying more than it is selling.) And if there is a net outflow, then either the price must rise to slow the outflow in weight-denominated terms (not dollar-denominated terms though) or else the dealers network must receive an inflow from the Giants.

I have predicted that the most likely and direct collapse trigger will be when gold **IN SIZE** stops bidding for dollars. That is, when the Giants withhold from the marketplace the gold they already have. Not when they use all their dollar reserves to bid for a little more gold, but when they withhold what they already have. When infinite demand meets zero supply **IN SIZE**.

Now if you think about my "dealer network" you'll see that it is still full of gold when everything freezes up. But this gold will not move because it cannot be restocked from one of its two sources (either the public or the Giants.) It's like a water hose that's full of water yet none comes out because one end is capped and there is no flow, with a hundred thirsty mouths gaping and waiting at the other end.

Continued...

FOFOA said...

Gold will go into hiding, because there will be no known price to coax physical to restock the dealer network out of either the strong hands like you and me, or the Giants who stopped bidding for dollars with their gold.

So as I hope you can see, there is not going to simply be a smooth widening of the spread between paper and physical. At some point it will snap (break) and physical will stop moving altogether. The paper price will fall at this point because it will have failed to deliver. And while you correctly imagine that this visible widening could possibly be concurrent with the onset of systemic collapse, I think you fail in assuming the direction of causality.

You seem to be assuming that the difference between the prices will be the cause of the event, but it is only a visible effect, not the cause. The cause is the collapse of faith in the dollar's ability to deliver, and the withdrawal of bids for dollars from the physical gold giants. You seem to be assuming that if this effect, this symptom, can be suppressed (spun) then the disease will not kill. And in this sense, your thinking is very similar to the Fed.

A favorite exercise of the doubters is to point out that the system did not collapse in October of 2008 and to draw the conclusion that predictions of collapse were/are simply wrong. I look at it a different way. Oct. 2008 presented a very real symptom of a very deadly disease. A system-killer! The symptom was suppressed but nothing was done to cure the disease. It's still there. And next time this (or some other) symptom presents may be the last.

Sincerely,
FOFOA

Texan said...

Excellent comments. A few things I noticed today. First, demand for physical coins plunged in August. Check out the US Mint's monthly gold sales report. I have also heard anecdotally that dealer markups are now nil. Second, Anglogold having to supposedly de-hedge their book(paying for it with share issuance). Third, argentine inflation expectations by the public are at 25%. Apparently they are all out buying durables like mad, such as TVs, cars, washing machines, etc. So I think we may get to witness Argentina go hyper again soon, and what their gvt does about it.

seeweed said...

Why should I worry about paying off unsecured debt when supposedly the system may be leaning towards extreme unstability? More importantly, why should I cash in bullion to pay off unsecured debt? I rather just carry it and wait. Perhaps patience will pay off?

Edwardo said...

FOFA wrote:

"I have predicted that the most likely and direct collapse trigger will be when gold **IN SIZE** stops bidding for dollars."

Some of the material I am receiving asserts that this process has already begun in that large stockpiles of gold have been, in very tumultuous fashion, removed from vaults in London.

Michael Shedlock said...

With the insults that Mish has thrown your way I wouldn't even waste the energy responding to him.

Pray tell what Insults are that?

I agree with FOFOA about what starts hyperinflation. I wish I would have made that perfectly clear in my post.

I disagree with him in regards to whether or not "politics" or as FOFOA calls it (loss of faith) makes the US more vulnerable.

It was a very gentle disagreement.

The US has a hell of a lot going for it. I will expound upon that idea in another post.

I never insulted FOFOA but I clearly insulted Lira after he sent me a bunch of nonsensical emails daring me to take him on.

Now, I freely admit I started it when I was asked out of the blue, unexpectedly in a podcast about Lira's post.

I commented honestly actually, but admittedly harshly. I wish I used less harsh words. However, very few people played that podcast until of course Lira made an issue of it.

If someone attacked me, and many have, I typically do not respond. There is no point in engaging in a mudfight especially when you have made a horribly weak argument.

I only responded to Lira in a blog post when ZeroHedge misquoted me and Lira egged me on calling me a "pussy" and a whole bunch of other names in emails.

I made a careful reply designed to make Lira look like an idiot. And it did.

If FOFOA would read that Lira post, I am willing to lay odds that he will say the logic Lira used to make his case is laughably preposterous.

Mish

Michael Shedlock said...

In other words, what he 'knows' is limited to his immediate cultural influences - family, friends, work, etc. And what are those? Why mid-western values, which to many are a basic article of faith. And what is the primary tenet? The primacy of the USA.

That is absolutely hilarious.

I am a Ron Paul libertarian, free market fan, extremely critical of both the Obama and Bush administrations, a proponent of free choice on abortion, hugely anti-war, hugely anti-union, I have no love affair with the US, I advise people to hold gold and have ever since I started blogging over 5 years ago. My deflationist views are hardly mainstream to say the least.

Pray tell which of those are "mid-western values".

I am amazed at the absurd characterizations and perceptions people have about me.

Mish

Wendy said...

Thanks again for Thoughts FOFOA. I just wanted to interupt boys night long enough to throw in a couple of cents.

Mike you mentioned in the last post:

"some provinces in canada still tax gold maples. so much for freegold in canada."

As far as I've learned there are no taxes or duties on pure bullion (gold and silver), but if you buy older coins that may be 92% pure, they are taxed.

Caveman:

I hear you when you say you can't afford gold.

I used to think that way myself until I heard someone say "are you saing you can't afford $20,000 (or whatever) in a savings account?"

That remark hit me like a bolt of lightning ................

So for my purposes digital currency/money in the bank is for household disasters, cash in the house is for banking disasters, silver is for barter, and gold is for saving. I don't live in a major center, if I did my digital currency would be far less than it is.


Wendy

costata said...

Wendy,

".... and gold is for saving."

+1000

Cheers

Desperado said...

@Mish,

You clearly labeled Fofoa, Tyler Durden at ZeroHedge, and Gonzalo Lira as "the flat earth society". Don't try to weasel out of it. Whether it was an insult is up to them to decide, I personally think it reflects poorly on you. It confirms exactly what snerfling was saying in his comment about how "what he 'knows' is limited to his immediate cultural influences". You see, it is not wrong to have invalid opinions, but it is entirely wrong to disallow or denigrate other people who have their own invalid opinions. This should be perfectly clear to a libertarian. But then you go and call a very well and widely respected minority of fellow economic specialists "flat earthers". And the joke is that economics is far less a science than a study of human nature, and then you go and use the worst possible scientific analogy to try brand these guys as neanderthals. This is also arrogant, because you obviously think that your knowledge of "economic science" is far superior. Snerfling is right, you understand American values and observe the entire worlds human nature through that lens and then ban any conflicting opinion from discussion and from your blog. It is even worse than the entire global warming debate where one group of government and university paid scientists refuses to honestly debate any scientists with opposing views.

I can well understand why Gonzalo Lira could have ended up writing something offensive when dealing with someone as closed minded as you, and until I have seen the entire email exchange, I would give the benefit of the doubt to Gonzalo, because you have used the superior power of your blog to your advantage to try to diminish him. Again, Mish, this is a poor reflection on your character.

Desperado said...

From the Zerhohedge thread "Mish vs. Gonzolo" I found this comment interesting:

by SWRichmond
on Sun, 09/12/2010 - 02:01
#576176

"Mish destroys his own case starting at about 21:00 when he starts listing all the measures the Fed has undertaken, and all the giant fiscal U.S. deficits, which haven't had any impact on credit growth. Then he says hyperinflationists "aren't even talking about that". Yes we are. In fact, all of the things you list are exactly why there will be a currency collapse: everything they have done is for naught, the economy continues to sag, and along with it, tax revenues. Constantly sagging tax revenues create increased demand for social (deficit) spending while decreasing the Treasury's tax take, and the deficits continue to balloon as interest payments rise steadily. When the credit markets realize the U.S. situation is untenable, the Fed (as Mish also points out) continues to balloon its balance sheet, destroying once and for all the value of the currency, which is backed by the toxic holdings of the central bank. Poof.

Mish kicked me off his blog years ago for insistently asking him how the U.S. would continue to make debt payments in the event of a persistent deflation. That is the one thing HE never addresses. Ever."


"Mish's Global Economic Trend Analysis", my ass. Mish, you should call it "The Myopic Tyrant's Economic Analysis".

ShockonT said...

A recent post by Ben Davies supports the statement that traders (and the general public) are not prepared for the [$IMFS] frame of reference transition:

"We are at an inflection point for world markets as the issuance of sovereign debt and the consequential proliferation of currency has left gold as the only viable store of value."

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/9/15_Ben_Davies_-_Gold_Will_Outperform_Many_Fold.html

The Prechterites trumpet the horns of deflation citing their Elliotwave analysis. Their thesis states that the dollar will be crowned the ultimate king, so stash $100 bills under your mattress (Prechter does believe that at some point hyperinflation may be the ultimate outcome).

I believe we have had our bout with deflation in the post-Lehman asset collapse. I find it highly unlikely that global governments in deficit spending hyper-drive will suddenly put on the brakes, reverse direction, cancel public debt obligations and dramatically downsize....ain't gonna happen!

When the FDIC, Fannie and Freddie close operations, I'll jump in the Prechter camp. But as long as the GSE debt monetization machines are humming along, you can bet that Another and FOA will go down in history as the "Ultimate Golden Canaries".

snerfling said...

@Mish said "I am a Ron Paul libertarian, free market fan, extremely critical of both the Obama and Bush administrations, a proponent of free choice on abortion, hugely anti-war, hugely anti-union. Pray tell which of those are "mid-western values".

A strong sense of right and wrong is a crowning hallmark of mid-Western values. In this context, faith holders typically exhibit a profound ignorance of how the world really operates.

You yourself just unwittingly itemized a long laundry list of self-congratulatory nouns, including fan, critic and proponent, as if these characteristics were actually advantages.

On the contrary, to be a truly effective analyst requires one to be completely agnostic as to underlying assumptions and emotional drivers.

Your off-hand reactions to others who have presented rational and logical alternative hypothoses regarding potential outcomes given real-world facts is typical of one who is wed to a certain position.

This style of 'analysis' served you well during a period when the populace at large was just awakening to the concept of a lying ruling class. Kudos for you taking on Krugman et al.

Yet unless you begin to recognize your own limitations and shed those vestiges of your past, you will be unable to accurately surmise what is going to play out on the global stage.

caveman said...

@Mike
So true the price of physical gold would always be higher than paper, just a matter of how long the price can stay disconnected. Just as the case in Oct/2008, the price of physical did not go to $900, the price of paper when to ~$1200 to meet or reconnect with the price of physical. So the demand for physical drives the separation between paper and physical, however, paper has to reconnect, except when the time comes for the dollar to visibly collapses.

As to do I feel better holding on to 2 oz of silver vs. 1 g of gold? It depends on your fiat holdings. If you are among the super rich ($1+ billion) and wanted to preserve your accumulations through the collapse, you would clearly go for gold, because $1B buys a lot of gold, but since gold is about twice the density of silver it takes up half the space. Hypothetically speaking, if you could buy $1B worth of physical at $2000/oz you would get 500,000 oz of gold.

Using a Au:Ag of 50 for the same money you could have bought 2.5E7 oz of silver. If you believed that the gold/silver ratio of 50 far above the historical normal of 10-20 then you would conclude that at a future ratio of 1:20 your 2.5E7 oz of silver could trade for 1,250,000 oz of gold. So you should from a purely mathematical point of view trade your $1B to silver. However, you would still get the gold because of storage, transport, and let’s face it, if you had 500,000 oz of gold you’d be dirty filthy rich no matter what.

From the opposite perspective of the poor man, who only has $4000 to invest before the collapse, does it matter to him if he also believes the 1:50 ratio is unrealistic. Should he buy 2 oz of gold and know that eventually he can trade that 2 oz for 20 oz of silver. Or would it be better for him to buy 100oz of silver today, and know that he get likely get 8 to 20 oz of gold later.

So me as a poor man, who sees the collapse coming in the next 2-5 years, couldn't accumulate a vast amount of wealth and the "bulky" silver serves well to preserve my minuscule wealth, far better then anyone with $1million today and earning 2.5% from bonds.

To finally answer your questions, yes I feel 2 oz of silver is a better investment than 1 g of gold.


@FOFOA,
Thanks again for the detailed reply. Allow me to clarify, I don't think the disconnect between physical and paper will lead to the collapse of the dollar. The dollar in my estimate collapsed a long time a go, "peak America" was when Thomas Jefferson defeated the central banks. So either 1913, or the collapse of Bretton Woods in 1971 would to me be the collapse of the dollar. Everything since 1913 is the slow burn building up to the fire to come.

What you say about gold bidding for the dollar is actually perceptive and a new perspective for me. Are you suggesting whether or not the dollar collapses is actually in the hands of Giants? And that at anytime suitable to the Giants the dollar would collapse? And that for as long as it suits the Giants the dollar will limp along?

As to my thinking like the Fed, I am not sure if it is a compliment or insult. As a formal poker player, I look at the show of weakness by the Fed/bankers/Giants (composed of some very smart people) as a clear sign of strength, they hold all the cards and have a mountain of chips, yet have fooled all the players at the table to think they are stupid.

caveman said...

@Mike
So true the price of physical gold would always be higher than paper, just a matter of how long the price can stay disconnected. Just as the case in Oct/2008, the price of physical did not go to $900, the price of paper when to ~$1200 to meet or reconnect with the price of physical. So the demand for physical drives the separation between paper and physical, however, paper has to reconnect, except when the time comes for the dollar to visibly collapses.

As to do I feel better holding on to 2 oz of silver vs. 1 g of gold? It depends on your fiat holdings. If you are among the super rich ($1+ billion) and wanted to preserve your accumulations through the collapse, you would clearly go for gold, because $1B buys a lot of gold, but since gold is about twice the density of silver it takes up half the space. Hypothetically speaking, if you could buy $1B worth of physical at $2000/oz you would get 500,000 oz of gold.

Using a Au:Ag of 50 for the same money you could have bought 2.5E7 oz of silver. If you believed that the gold/silver ratio of 50 far above the historical normal of 10-20 then you would conclude that at a future ratio of 1:20 your 2.5E7 oz of silver could trade for 1,250,000 oz of gold. So you should from a purely mathematical point of view trade your $1B to silver. However, you would still get the gold because of storage, transport, and let’s face it, if you had 500,000 oz of gold you’d be dirty filthy rich no matter what.

From the opposite perspective of the poor man, who only has $4000 to invest before the collapse, does it matter to him if he also believes the 1:50 ratio is unrealistic. Should he buy 2 oz of gold and know that eventually he can trade that 2 oz for 20 oz of silver. Or would it be better for him to buy 100oz of silver today, and know that he get likely get 8 to 20 oz of gold later.

So me as a poor man, who sees the collapse coming in the next 2-5 years, couldn't accumulate a vast amount of wealth and the "bulky" silver serves well to preserve my minuscule wealth, far better then anyone with $1million today and earning 2.5% from bonds.

To finally answer your questions, yes I feel 2 oz of silver is a better investment than 1 g of gold.


@FOFOA,
Thanks again for the detailed reply. Allow me to clarify, I don't think the disconnect between physical and paper will lead to the collapse of the dollar. The dollar in my estimate collapsed a long time a go, "peak America" was when Thomas Jefferson defeated the central banks. So either 1913, or the collapse of Bretton Woods in 1971 would to me be the collapse of the dollar. Everything since 1913 is the slow burn building up to the fire to come.

What you say about gold bidding for the dollar is actually perceptive and a new perspective for me. Are you suggesting whether or not the dollar collapses is actually in the hands of Giants? And that at anytime suitable to the Giants the dollar would collapse? And that for as long as it suits the Giants the dollar will limp along?

As to my thinking like the Fed, I am not sure if it is a compliment or insult. As a formal poker player, I look at the show of weakness by the Fed/bankers/Giants (composed of some very smart people) as a clear sign of strength, they hold all the cards and have a mountain of chips, yet have fooled all the players at the table to think they are stupid.

caveman said...

@Mike
So true the price of physical gold would always be higher than paper, just a matter of how long the price can stay disconnected. Just as the case in Oct/2008, the price of physical did not go to $900, the price of paper when to ~$1200 to meet or reconnect with the price of physical. So the demand for physical drives the separation between paper and physical, however, paper has to reconnect, except when the time comes for the dollar to visibly collapses.

As to do I feel better holding on to 2 oz of silver vs. 1 g of gold? It depends on your fiat holdings. If you are among the super rich ($1+ billion) and wanted to preserve your accumulations through the collapse, you would clearly go for gold, because $1B buys a lot of gold, but since gold is about twice the density of silver it takes up half the space. Hypothetically speaking, if you could buy $1B worth of physical at $2000/oz you would get 500,000 oz of gold.

Using a Au:Ag of 50 for the same money you could have bought 2.5E7 oz of silver. If you believed that the gold/silver ratio of 50 far above the historical normal of 10-20 then you would conclude that at a future ratio of 1:20 your 2.5E7 oz of silver could trade for 1,250,000 oz of gold. So you should from a purely mathematical point of view trade your $1B to silver. However, you would still get the gold because of storage, transport, and let’s face it, if you had 500,000 oz of gold you’d be dirty filthy rich no matter what.

From the opposite perspective of the poor man, who only has $4000 to invest before the collapse, does it matter to him if he also believes the 1:50 ratio is unrealistic. Should he buy 2 oz of gold and know that eventually he can trade that 2 oz for 20 oz of silver. Or would it be better for him to buy 100oz of silver today, and know that he get likely get 8 to 20 oz of gold later.

So me as a poor man, who sees the collapse coming in the next 2-5 years, couldn't accumulate a vast amount of wealth and the "bulky" silver serves well to preserve my minuscule wealth, far better then anyone with $1million today and earning 2.5% from bonds.

To finally answer your questions, yes I feel 2 oz of silver is a better investment than 1 g of gold.

caveman said...

@FOFOA,
Thanks again for the detailed reply. Allow me to clarify, I don't think the disconnect between physical and paper will lead to the collapse of the dollar. The dollar in my estimate collapsed a long time a go, "peak America" was when Thomas Jefferson defeated the central banks. So either 1913, or the collapse of Bretton Woods in 1971 would to me be the collapse of the dollar. Everything since 1913 is the slow burn building up to the fire to come.

Why you say about gold bidding for the dollar is actually perceptive and a new perspective for me. Are you suggesting whether or not the dollar collapses is actually in the hands of Giants? And that at anytime suitable to the Giants the dollar would collapse? And that for as long as it suits the Giants the dollar will limp along?

As to my thinking like the Fed, I am not sure if it is a compliment or insult. As a formal poker player, I look at the show of weakness by the Fed/bankers/Giants (composed of some very smart people) as a clear sign of strength, they hold all the cards and have a mountain of chips, yet have fooled all the players at the table to think they are stupid.

@Wendy,
Personally, I don't have even $2k, we are thankful to have paid down most of our debt. So whatever silver we can accumulate is a blessing, and at this moment we still have time to practice the lost art of farming, animal husbandry, crafting, canning, hunting, solar/hydro/wind power generation, methane isolation, water gathering/purification, etc with no real consequence if we failed. However, failure during hyperinflation puts us in a bad spot.

Anything that can preserve wealth and store value is money. Silver and gold is ideal for this purpose. However, a person who has only gold must trade it for food, shelter, clothing, etc. In a free market situation, two people holding gold bidding for a farmer's egg could drive the price up dramatically, 1 oz/dozen? 1 oz/egg? Literally a golden egg, this ideal makes me giggle.

A person who can grow his food, cotton, chickens, sheep, horses, and have his own energy source don't have real immediate need for gold or silver. But to me a balance between 18th century skills with a modern twist (ie electricity/computers/motors) plus a small amount of wealth is best suited for hyperinflation.

I weep for the children of the ipod generation, they are so screwed.

moe said...

Reccomendations of a book: Ralph Foster's - "Paper Money"

FOFOA said...

Book:

I haven't read this book yet, but the author asked for permission to quote me in it. I don't know Doug personally, but he is sending me a copy of his newly published book.

http://buygoldandsilversafely.com/the-book/

Fauvi said...

“Fiat money has no place to go but gold,” the former Fed chairman said at the Council"....
He discusses gold on several pages of his memoir, “The Age of Turulence,” reminding that he once told a Congressional committee that “monetary policy should make even a fiat money economy behave ‘as though anchored by gold.’” He wrote that he had “always harbored a nostalgia for the gold standard’s inherent price stability.” But he confesses that he’s “long since acquiesced in the fact that the gold standard does not readily accommodate the widely accepted current view of the appropriate functions of government — in particular the need for government to provide a social safety net.”

http://www.nysun.com/editorials/greenspans-warning-on-gold/87080/

Veeeery interesting! Looks like Freegold or what?

Robert said...

FOFOA, your account of buying gold in late 2008 was very revealing (how you would have had to pay $300 over spot). I was in Europe during September that year, and when I came back I was nearly paralyzed by what happened in October.

Big spreads when the coin shops find it hard to get gold... Seems like we were very close to Game Over. Maybe the next time the coin shops have it happen again, maybe, that will be the sign that the end is near.

*** That might be a good column idea FOFOA! Looking back through time to track down other times that physical gold diverged from paper gold. Also, Fekete-style backwardation. ***

meechai said...

Caveman said..........
However, a person who has only gold must trade it for food, shelter, clothing, etc.
=====================================

This is not how I see it and of course I could be wrong.

But gold is for those with excess cash above & beyond the needs you mention you have stock piled.

Once the basics are taken care of yes gold is the preferred preservation of wealth.

But folks who would need to trade gold for food etc should not have had gold as they did not have what they needed first.

Gold is for after the dust settles.
Silver is for during the dust storm along with all the supplies you should have already had.

Just my 2 cents

Wendy said...

Caveman,

Silver's great to own, and you'll find that many people here started accumulating silver first.

I couldn't agree more that any effort that leads to greater self reliance is worth persuing. Personally I've just set up a small aquaponics system. Although not well known in North America, the concept is a huge success in Australia.

My neighbors have been warned of the real possibility of chickens in the future.

Regards,

Wendy

Paul said...

Hey FOFOA

You've just started registering on Google Trends.

http://www.google.com/trends?q=fofoa

Maybe there's room for one more celebrity in blog land!

FOFOA said...

This, I think, really encapsulates the present debate.

Listen to 22 seconds of this interview. I have set it to start at 16:20 if you just click on the link. This is Max Keiser interviewing Nicole Foss who writes as Stoneleigh on The Automatic Earth blog. She is a very articulate deflationist.

You'll notice she sounds a lot like me in these posts. She describes the same things I describe. And if you'll recall, in Part 1 I wrote: "I tend to agree with 99% of what the deflationists write... But they all miss the hyperinflation that is coming. And they miss it because they don't understand how perfectly it fits with a deflationary collapse."

Here's the link. I am referring to 22 seconds from 16:20 – 16:42.

Here's the last thing she said:

"Deflation is the messy and chaotic extinguishing of excess claims to underlying real wealth."

Now compare this with FOA's famous quote written 10 years ago, referring to deflationists in general, including some he met in the 70's:

"As debt defaults, fiat is destroyed. This is where all these deflationists get their direction…"

Does this sound similar to what Nicole said? Here's the rest of FOA:

"…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! (bigger smile)"

What is dangerous about the deflationists' perspective is that it leads them to the conclusion that cash and Treasuries are the preferred savings vessel. Even while the Fed and the US govt are proving over and over their absolute willingness to buy debt outright with printed cash and dump it on the people's front lawn.

And if you realize that currency collapse tends to come in a "waterfall event," then that can be dangerous advice to savers that follow it. Let's listen to 38 more seconds of the interview. This link starts at 15:00 and I am referring to 15:00 – 15:38.

Link

Continued...

FOFOA said...

So here she says that the dollar and Treasuries could do well for a year or two and then after that, "all bets are off." If you let the link above play a little longer you'll hear her say that monetarists like Larry Summers suffer a deficit because they view the market as a mechanical machine. But as I wrote in my posts, the deflationists suffer this same deficit when it comes to their failure to see the organic, inevitable responses. A) The reaction of the monetarists to the public pain of collapsing debt, and B) the reaction of capital flows to the reaction of the monetarists that results in more collapsing debt. An unstable positive feedback loop that must accelerate into collapse. A Gordian Knot that cannot be untangled, and must be cut. As my friend Mantis said, "The collapse will be swift."

Here is how I see it:

Yes, we will see the long shakeout of malinvestment in the global economy that deflationists see as a certainty. We, primarily in the West, will see the long reduction in life style as this malinvestment is cleansed. But what we won't see is the long pain of debtors, states, etc… struggling to service their mountain of dollar-denominated debt in a strong dollar environment, while savers, pension funds, etc… lose their wealth as large swaths of debtors default from exhaustion in a crumbling economy.

From a monetary perspective, the pain will end swiftly. Currency collapse and hyperinflation tend to be short-lived and then some other system takes their place. Yes, this wipes out the debt. It cleanses that part only of the malinvested system. And it cannot be stopped by the currency issuer. The judgement of value rests with the "externals," for lack of a better word.

But in real terms, yes, we will have a grand deflation in all the ways she describes; standard of living, energy consumption, sad-looking black and white pictures, etc... Just not in nominal dollar terms.

"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!"

As ANOTHER said, "This drama has started and is well underway!"

Sincerely,
FOFOA

Greenie said...

I am a daily reader of both Mish's and FOFOA's blog, and find both of them enjoyable. It is really unfortunate that people commenting here find Mish as their primary enemy, while the banking cartel has been looting this country dry.

caveman said...

I apologize if anyone was swamped by my accidental multi-post emails. Mike I hope you got my response.

meechai,
I agree w/ everything you said. I hope people don't rely too much on their gold and not enough with their hands. Unlike previous hyperinflation chaos, I think this one may last 10-30 yrs.

Wendy,
I loved my chickens from 2 days to 4 weeks, then I hated them from 4 weeks to 4 months, then they started laying and I love them again.

Desperado said...

@Greenie, the biggest problem with Mish's "global economic analysis blog" is that participants who wander too far from the opinions of Mish and his favored enforcers are simply banned without comment or explanation. This leads to precisely the same myopic view on our current situation that you have just expounded: "while the banking cartel has been looting this country dry.".

The majority of what one reads in Mish's comments is ranting about "banksters" without the slightest inkling into how one can change the situation. Try to argue some other perspective and you are likely to be banned. Try vigorously supporting the teaparty there and see what happens. All I can say is please don't bring that same narrow-mindedness here, the problem is far larger than the "banking cartel".

Desperado said...

Gary North has another great piece: The European Banking Crisis: Next Phase

"The moral collapse is only marginally related to the willingness of voters to look out for their own interests. The moral collapse came when voters trusted governments to tell them the truth. Voters trusted government promises to fund the majority in old age at the expense of the rich. This is a widespread moral collapse."

I would add that just as FOFOA says, hyperinflation is guaranteed simply because of the human nature, and because we are already bankrupt. As all the boats are going under, every central bank across the west is monetizing sovereign debt to keep the lights on and to try to stay afloat as long as possible in the hope that some mystery rescue ship will appear. The ECB too.

Michael Shedlock said...

Well since you are showing up here, I guess you must have a bit of a guilty conscience for smearing so many talented and concerned bloggers with your "flat earth society" quip. What I find amazing is that you are so certain that there a hyperinflation is impossible that you would do this.

So my question to you is: Why do you even recommend holding gold in a portfolio if you are so certain there won't be a hyperinflation?


1. Guilty conscious - hardly - I followed a link here - saw silly comments posted about what I thought - and responded
2. My comment about flat earth society was obviously directed at one particular person who posted a preposterous scenario- if others took offense - well I can't help it
3. I have explained my position on gold at least 100 times - gold goes up in deflation in the senior currency - gold is a piss poor hedge against ordinary inflation, gold falling from 850 to 250 over 20 years is proof - Gold also does well in times of credit stress (we are in both deflation and credit stress) - gold does well in hyperinflation (not my concern right now)
4. Hyperinflation is possible and I never said otherwise. However it is extremely unlikely. In the meantime we ARE IN DEFLATION now - as predicted - and gold is doing well as predicted
5. I have no idea if I banned you - I do not even know who you are - But if you posted comments calling me an idiot or something like that - yes, I banned you. I also ban people who make racial comments - make disparaging comments about Jews -etc. Finally there is one more possibility - No one can see comments unless I approve someone - I do not read every comment - If I do not approve someone the comment will go away unseen - I am sure lots of people signed up and vanished - Finally, I will ban someone if they keep repeating the same stupid thing often enough, though in that case they get a warning - There are lots of possibilities here and I do not know which applies

Finally, I have no way of contacting anyone. I do not have email addresses - If I ban someone they are simply gone

Mish

#77 said...

FOFOA, regarding your citation of gold AE's selling for $300+ over spot in October 2008: I was an active buyer at that time and was able to buy as many Kilo Bars as I could handle at spot +$10 (Tulving). I think your example is more an illustration of how there was a shortage of gold Eagles than the physical metal (at least for moderate buyers such as myself and most on this board).

This past Spring I traded each k-bar for 31 gold Eagles to give myself better liquidity. I ended-up with many more eagles than I would have had I just bought them at those crazy premiums.

When premiums skyrocket for product you really want, I always recommend buying another bullion product (Mexican 50 Peso's always seem to be out of favour, but are quite liquid). You can always trade-up later when premiums come back into line.

g. said...

Hi Fofoa, and everyone else.

I'm new to this forum, but in addition to other free-market sites I consult, this forum is certainly worthwhile.

Your freegold-theory got me thinking. Up till now I was under the impression that (if you believe that freegold is inevitable, to which I concurr) by buying gold and silver I would become rich ;-)

However, using the Roman-toga analogy, If today I can buy a nice suit for an ounce, after freegold has happened, I will still be able to buy a nice suit for one ounce, right? So have I become richer then?

You could say that I have become richer, because there will be fewer people than today that can spend an ounce on a nice suit, because in my mind, a nice suit should cost 50.000$$ today.

So If I buy 20 nice suits now and sell them for an ounce a piece after freegold, haven't I preserved my wealth as well?

Jenn said...

Oh my. I had to really laugh out loud last night when I read this post. My other half in the kitchen must have said, "What are you laughing about?" a few times.

Thank you FOFOA for another brilliant post. Your explanation in this one solidified my understanding of both deflation and hyperinflation -- we pass through one to get to the other.

MISH! Good to see you over here. You should visit more often -- I think you might appreciate much of what FOFOA has to offer if you hang around a while.

Michael H said...

@g,

Part of FOFOA's freegold story is that the price of gold will reach ~$50,000 in real, current value terms. No telling what the nominal price of gold will be, because dividing by zero (i.e. the future value of the dollar) gives a nonsensical answer :)


FOFOA,

Do you have a FOFOA primer? I'm sure you get tired of answering the same questions about freegold, about silver, etc.

A few months ago you made a list of your previous post for freegold background. But I've noticed that a lot of FAQ get answered in the comments section, too.

Michael H said...

One more word about the 'one ounce gold = one nice suit':

Wealth can be exchanged for goods and services. Since roman times, the amount of above-ground gold has grown much slower than the human population (I believe, though I don't have actual data). Thus, the gold:services ratio is different now than it was then.

Also, we now have the use of fossil fuels, to further leverage labor into the making of goods. So the ratio of gold:goods is different now as well.

Desperado said...

@Mish, see my comments in your replies below:

1. Guilty conscious - hardly - I followed a link here - saw silly comments posted about what I thought - and responded

Sorry, I just don't believe this statement, since you had already labeled Fofoa a flat earther and referenced one of his posts in your thread before you showed up here. Obviously you knew about Fofoa's work before "following a link".

"2. My comment about flat earth society was obviously directed at one particular person who posted a preposterous scenario- if others took offense - well I can't help it"

In your thread Debating the Flat Earth Society about Hyperinflation you said:

"Some of the arguments that people have recently presented for hyperinflation are so silly they are not worth discussing."

and then went on to discuss posts by ZH, Fofoa and Lira. Sure, you focused on Lira, but the thread clearly was about the hyperinflationists and their "silly arguments" and the "flat earth society". Fofoa evidently also thought it was directed at him and that is why he responded to that charge in this thread of his own. And how can you expect any debate when you frame the debate before it even starts as "silly" without presenting any evidence to support your smear?

"3. I have explained my position on gold at least 100 times - gold goes up in deflation in the senior currency - gold is a piss poor hedge against ordinary inflation, gold falling from 850 to 250 over 20 years is proof - Gold also does well in times of credit stress (we are in both deflation and credit stress) - gold does well in hyperinflation (not my concern right now)"

Firstly, there is no way you have "explained your position" 100 times, at least not on your blog in the last couple of years.

Secondly, what is a "senior currency" and what do you mean by "gold goes up in deflation in the senior currency"?

Thirdly, earlier this year I had to ask you in several threads why you had neglected to discuss gold when it kept rising when finally you threatened me with banning, and, as here, you made some vague statement about gold having a place in peoples portfolios. I would call it "damning it with faint praise".

continued...

Desperado said...

continued...

"4. Hyperinflation is possible and I never said otherwise. However it is extremely unlikely. In the meantime we ARE IN DEFLATION now - as predicted - and gold is doing well as predicted"

I would request that you provide links for at least a few threads in the last year where you have come out with strong statements that "gold will do well" and recommended it. I can think of maybe one, and that was more of a passing mention.

"5. I have no idea if I banned you - I do not even know who you are - But if you posted comments calling me an idiot or something like that - yes, I banned you. I also ban people who make racial comments - make disparaging comments about Jews -etc. Finally there is one more possibility - No one can see comments unless I approve someone - I do not read every comment - If I do not approve someone the comment will go away unseen - I am sure lots of people signed up and vanished - Finally, I will ban someone if they keep repeating the same stupid thing often enough, though in that case they get a warning - There are lots of possibilities here and I do not know which applies. "

As has become overly clear from the current Presidency, accusations of "racism" are a tool used by the left to stifle discussion and intimidate the opposition. On your blog I have been banned for discussing whether the term "wetback" is racist, whether there was really torture at Guantanamo, and most recently for saying "they used to call California the land of fruits and nuts". As far as banning people for "if they keep repeating the same stupid thing often enough" this is exactly the issue. If someone consistently presents arguments for hyperinflation, or repeatedly asks you how the US will pay the interest on the treasuries in a deflation, or continually presents evidence that Palin is a tea-partier and not a stupid bimbo, then they are likely to be banned for "stupidity". I find that way of carrying on a debate very arrogant, unfair, and myopic.

Also, Black Swan and Fedwatcher both have the power to ban on your blog, and I am pretty sure that I have been by each of them. This makes debating on your blog even more tetchy because you never know who has the power to ban and what make them pull the trigger. You, Swan and Fedwatcher are like a bunch of demi-gods banning those that debate too vigorously, and I have seen numerous posters be "dissappeared" in the middle of a heated debate. And it is one of the reason why your comments section is overly left wing because all the dedicated hyperinflationists, conservatives, or even anarchists end up being banned by the demi-gods.

And just so you know, I have been at different times been KennyB, ConfederateH, Desperado, until recently poor house, and currently Captain Trips on your blog. You can email me at rajah.incognito@gmail.com.

samix said...

“The higher gold goes, the more it’s going to hurt when the rubber band snaps back,” Klopfenstein said. “I wouldn’t blindly enter the market at these prices. Investors need to have some risk management when they buy at these levels.”


I love these guys! comic relief at it's best!

g. said...

@ Michael H

Even with freegold, people will make malinvestmets. Maybe a suit is one of them then? ;-)

Mike said...

i guess a lot of people still haven't read this blog. i hope silver does well over paper but the giants won't waste their wealth on it.

http://www.zerohedge.com/article/weekly-peak-silver-next-gold

Biju said...

@#77

I had similar issue around Sep 2008.
I had Kitco Gold Pools then(now no more) and I tried to convert to physical Gold but alas there was not a single Gold item for sale then. I was aghast and thought I was fooled. But luckily they came back. Learned a lesson. Moral of the story - "Always take physical", never paper, not even miners if they get nationalized or taxed to death.

samix said...

Mish here is some food for thought.

"Following the crash of 1929, the supply of paper money was limited because it was backed by silver, and the amount of silver was itself limited.

Those who had money were able to buy the assets of people who did not. Since prices were falling, the longer they held on to their dollars, the more they could buy.
Now things are exactly the opposite. There is nothing to back the money supply except politics, there is no limit to the amount of currency that can be created.

It is just a question of
printing and delivering it, and prices are riding. Those who have the money are spending it as soon as possible to prevent further loss of purchasing power, in the 30's everyone wanted
dollars, now everyone want to get rid of them"

- Creature from Jekyll Island: A second look at the federal reserve system.

Mike said...

Biju

thats correct, as FOFOA says the BIS will use the physical market once the paper price discovery fails to find the real value of gold. your paper then wouldn't be worth anything ie ETF's, futures contracts, mining shares.

allen said...

Snerfling,

Some r still missing the point on hypo inflationo. based on your post...

Anyway, I don't see much improvement in the dialogue until the term 'hyper-inflation' is either properly defined or understood by all that it has nothing to do with an (initial) expansion in monetary supply, but actually an abandonment of goods for sale/exchange.


As FOFOA states, it is related to the expansion in money supply, but what he states is that first step has already happened. The pump has been sufficiently primed! Now, the money could leak back out if IF... one more time IF, congress/FED let banks failure and destroy credit, but as FOFOA predicts, they won't. So they will replace the HUGE amount of credit expansion with base money (cash) and this will cause the hyper inflation trigger.

FOFOA said...

Hello #77,

You said, "$300+ over spot in October 2008" and you were a "buyer at that time."

That sounds like you bought gold for a normal premium in October. So did I. The spike that I witnessed only lasted those two days from what I know. And it was not as severe on the 9th as it was on the 10th. So we're talking about one specific day in October, not October in general, that something happened in the dealer network.

In fact, on the 9th and 10th, gold AE's were the only gold item my local dealer had. And he had a lot of them. The mint was shipping like crazy earlier that week, but apparently no Maples or other foreign coins were circulating. So I wouldn't say it was an Eagle premium that was driving it. It was that the US mint was the only inflow of gold to restock the dealer network on the days leading up to those couple days. And perhaps that Mint flow stopped on the 9th? As I said, the first effect when this happens is a run up in the price to slow the outflow measured in weight (not currency). That's just my guess now, in hindsight.

Also, my dealer had lots of silver on those two days. He was even offering a discounted premium on his silver to steer buyers from gold into silver. He had an assistant in on the 10th who would announce the "silver special" to anyone that walked in. If you came in to buy 3 ounces of gold, then the deal was 100 ounces of silver and one ounce of gold for a deep discount on the silver portion of the premium.

And there is one other very subtle difference. When gold is finally withheld from the dealer network you may find that online gold sellers will keep selling at least some of their products, even at reasonable premiums. This is because there is a delay between your commitment to buy and the moment they must ship the product. This delay can also be stretched if they need to stretch it. And they know this. They also know that orders can be canceled and refunds issued if necessary, without causing a big problem like it would at the LBMA. In a face to face direct cash exchange, there is zero delay and the sale is final. Some online dealers even sell product before they have it in hand. And I'm certainly not saying Tulving does this.

But when it finally comes, the lesson here is that face to face cash transactions will get the very last of the physical gold before it goes into hiding. Phone and online orders operate their own mini futures market in which delivery can be canceled in an emergency, which does keep the price a little lower.

Sincerely,
FOFOA

FOFOA said...

Desperado,

I feel your pain. All of your attempts to post did go through, and I received the many email notifications. They just didn't post for whatever reason. Blondie can attest to this because the same thing happened to him recently. And Costata in the past also had a comment that never posted. Mish's last comment never went up either. I really don't know what to say.

It has even happened to me a few times. But lately it seems like all of my comments go up. So I will repost your comment and if you had changed your mind and don't want it up, just let me know and I'll take it down.

Sincerely,
FOFOA

FOFOA said...

Snerfling and Allen,

How is this for a definition?

Hyperinflation is initiated when the physical plane stops bidding on the monetary plane with physical goods. Not when the monetary plane bids up the physical plane with lots of paper. The latter is the necessary reaction to the former.

Further, gold is the proxy-par-excellence for the physical plane and thus carries additional gravity in this process.


Sincerely,
FOFOA

Sigo Plapal said...

Desperado, that is a lucid, intelligent, well thought out objection....

http://www.youtube.com/watch?v=UjEjjnw2BQY

snerfling said...

@FOFOA says "Hyperinflation is initiated when the physical plane stops bidding on the monetary plane with physical goods. Not when the monetary plane bids up the physical plane with lots of paper. The latter is the necessary reaction to the former.

Further, gold is the proxy-par-excellence for the physical plane and thus carries additional gravity in this process."


***

Works for me; to try and simplify:

"Hyperinflation is when physical goods & services stop bidding on (fiat) money."

Btw, what is your opinion of government pulling some kind of force majeure? IOW, something along the lines that Zarlenga @ AMI advocates?

http://www.monetary.org/

To recap, he advocates that government (once again) take over issuance of exchange receipts/tokens by declaring money purely a legal construct by claiming this right within their purview.

They can make their 'money' tokens the official legal tender by only using it to pay contractors/employees and accepting only it for tax receipts.

Does this fit with your bifurcation of the means of exchange (fiat) & store of value (gold)?

If so, then it would seem logical that as the crisis deepens, we will begin to see significant gov't turnover as increasingly radical legislative bodies are seated, and they will be much more receptive to a complete make-over.

If we are going to have fiat, why should private bankers control issuance, leverage & regulations?

PS Someone who writes as well as you do would never spell judgment as judgement unless perhaps they were in the UK/Can? (Spelled judgement in UK/Can.)

FOFOA said...

Well I solved the mystery of the vanishing comments. Apparently Google installed an automatic spam filter on all blogs about a month ago. It hasn't captured a single spam yet on my blog, but it has caught 46 real comments by many of you. And from what I can tell, there's no way to turn it off. You have to teach it what spam is on your blog. So I'm going to have to unspam all these comments including many multiple tries by the likes of Desperado and Blondie to "teach" google that you guys are not dirty spammers. Just FYI as to what I'm doing.

If someone knows how to turn it off, please let me know.

costata said...

Mish,

This observation (below) from Trader Dan over at jsmineset.com hit me in the face like a bucket of ice water.

The reason it was so confronting was due to the fact that I read the following article yeserday concerning Forex trading.

http://online.wsj.com/article/SB10001424052748704421104575463901973510496.html

"The $4 trillion mark (Ed: PER DAY) represents a 20% gain from $3.3 trillion in 2007, the last time the global foreign-exchange markets were surveyed, according to the Bank for International Settlements.... it did reflect a slowdown in the market's growth from the prior survey, when trading volumes had soared 69% from $1.9 trillion in 2004." (My emphasis)

(Note: This is ALL currencies expressed, note expressed, in US dollars.)

The article above also states that the CFTC has capped the permissible leverage for currency trading at 50:1 (previously 100:1). The CFTC wanted 10:1. (So good luck to Ted Butler in his quest for sensible position limits on the PMs.)

Observation by Trader Dan:

"(Ed: Commodity)Prices have now recovered 3/4 or 75% of their losses since peaking in 2008. Keep in mind this is with the USDX sitting above the 80 level. Back in 2008, it was trading down near 71-72." (My emphasis)

(Note: There were food riots in Asia last time commodity prices soared.)

And this:
"The result is going to be felt by every single consumer of food across the entire planet – this is not hyperbole; it is a tragic fact. When you do realize what the hell is actually going on, send a thank you note to the idiots who have birthed this process with their QE and with the 30 to 1 leveraged trades now swamping our markets."

FWIW I think Trader Dan is being conservative with his 30:1 ratio based on the CFTC limits for Forex trading.

Continued/

costata said...

/continued

Regarding QE it is a huge oversight to focus solely on QE by the Fed/US Treasury. Most governments (who can do it) have been running their own "printing presses" hard as well.

What will ALL of this money and quasi-money compete for in the final stages of this process?

Once you answer this question I urge you to address this question:

Can you obtain a position in the things that this money/quasi money is bidding for if you wait until the last moment?

Mish, I realise that you (Steve Keen et al) observe "deflation" right now. I also realise that Steve Keen's math is sound. I assert to you that what we need is more than observation. We need extrapolation based on insightful analysis to allow us to plan ahead.

The "little guys and gals" CANNOT move fast enough to escape the tsunami at the last moment. We have to find the high ground as early as possible to avoid being swept away in the flood.

Mish, where is the "high ground", the "safe haven" for the future not just the present?

My 2 cents on this final question: A popular T-shirt from the Cold War era (circa 1960's) said this about the threat of nuclear war:

Mutate now, avoid the rush!

Greenie said...

Desperado, I do not understand why you are dying to post comments in Mish's blog. People with intelligent things to say open their own blogs and express their opinions. Why go through all the trouble, when you have this painless (and costless) way to do the same in a better way?

Desperado said...

@Greenie, I don' have my own blog because:
a) I am not that smart
b) I am too lazy
c) I make too many grammatical errors.
d) No one would come (see a+b+c)

My guess is that Fofoa and Mish invest enormous amounts of time running their blogs, and I am too lazy to do that and I don't want running a blog to restrict my freedom.

As far as "dying to post" goes, the words are well chosen. You see, I spent over a year building up my first "handle" on Mish's blog, revealing all kinds of personal details. I also built up a certain kind of "virtual relationship" with many of the posters there. Then someone murdered me, I think it was Black Swan. I have seen him do it to other posters like Reality and Centurion. It happens when he starts loosing a hot debate.
I have also seen him and Fedwatcher passing hints back and forth as to whether to ban someone (me). Why do you think those two and Mish are the only ones with a dark blue background?

The first time it happened, it took me a while to figure out what had happened. The last couple of times I have been banned within a couple of weeks of revealing my past identities. This last time, Black Swan threatened me about a day before he banned me in a hot discussion about California when I used the expression "fruits and nuts".

If you haven't figured it out yet, each of the times I have been "virtually murdered" I have felt that an injustice has occurred. For some strange reason, when in my life I am confronted with an injustice, I feel compelled to resist it. So I come back. I can be very persistent, as Fofoa can attest to by the number of times I attempted to get my post above to stick (thanks for putting it up and putting up with all the emails, Fofoa).

Desperado said...

And one more reason why I so persistently keep coming back to post on Mish's blog. I think it is the same reason Fofoa has this blog. It is because I am doing what I can to change things, and I am doing that by trying to promote awareness. And this an awareness of ideas and perspectives. Mish's has a great comment section because it is the only one I have found that straddles the left-right divide. If I were to go to, say Huffpo, and try to influence people with my ideas, it would be completely pointless because the people there have their blinders on. If I were to post on Belmont Club (my favorite blog by far, Wretchard is my guru), first of all many of my ideas come from there and second of all the posters there mostly have the same ideas and values anyway, so there is little to be gained. One difficulty I have here on this blog is trying to figure out where Fofoa is trying to take it. Does he want a very broad and diverse comment section like Mish? Up until now, my perception was that he would like to keep the blog and its comment section focused on Freegold. Lately, he has broadened the debate to hyperinflation, and I am loving it.

@Fofoa, I have noticed that you don't have any comment guidelines. Perhaps now would be a good time to formulate some...

Sigo Plapal said...

Has anyone noticed Jim Rickards again on CNBC? He doesn't say "if" the dollar collapses, he says "when".

Notice:

"Plan B"

"What we're seeing is the collapse of the dollar. We're actually starting to quote the dollar in terms of units of gold."

http://www.youtube.com/watch?v=xJgru_7JzkY

costata said...

Sigo,

Does this sound familiar? From Eric Janszen of iTulip fame:

"It is curiously framed as a left versus right issue, but the real battle is between creditors and borrowers, and between debtors and saver, and the interests that represent them." (My emphasis)

http://www.itulip.com/forums/showthread.php/16891-The-committee-to-destroy-t

As GG said:

BUY. PHYSICAL. GOLD. NOW.

Sigo Plapal said...

Hi Costata. Hmmm yes that does sound vaguely familiar. ;-)

Texan said...

FOFOA, I have thought all week about the "inevitability" of the Fed actually running the presses, and I still can't get there. If the banks have $100 credit asset that is going bust, the Fed pays par, the banks put the $100 on deposit with the Fed as reserves. Several trillion have happened this way already, I am not sure why another $10 trillion couldn't happen this way. It is actually incredibly deflationary because credit is contracting. I think this is the problem they are struggling with, frankly, is since credit is contracting what mechanism is there to get base money "out there". That's why both parties want tax cuts, and the Dems any kind of stimulus that involves quick direct payments of real cash.

Until I see massive tax rollbacks and/or people just being mailed checks, I don't see how the system goes hyper. You are right, they will support the system by buying bad debt. But the cash used to do that goes nowhere.

stibot said...

@Texan: When FED is buying debt, new printed money do not go nowhere. New printed money flow directly into economy. It is equivalent to throwing money from helicopters.

raptor said...

I wanted you guys to comment on the Texan, proposition.
What if the Fed does not print cash (I mean physical printing, not electronic money).
I can't see why this could not be feasible !!
The government can still be funded with electronic-dollars.
Could this extend the live of $$ ?
Would this cause a split it to two different currencies in a sense : electronic and physical.

Would $$ in general benefit from such a move.
Why not ?

..your comments

oldinvestor said...

Well, anyone can (currently) turn electronic dollars into paper dollars at any time, just drive by your local ATM machine. Perhaps they will have to put in more drive-through lines of ATM machines?

k said...

Don't do it seeweed! Keep your bullion. In January I cashed 400k of bullion to paydown some debt, now I wish I planked it with my gold broker (who sells me physical). Oh well, such is life. (Still have plen ty of bullion :)---)

FOFOA said...

Hi Moe,

Thanks for defending my honor, but your choice of insults crossed a line I don't really want this blog to cross. So I hope you won't mind that I deleted your comment.

Sincerely,
FOFOA

FOFOA said...

Hi Raptor,

Your questions:

Q. Could this extend the life of $$ ?
A. No

Q. Would this cause a split it to two different currencies in a sense : electronic and physical.
A. Perhaps

Q. Would $$ in general benefit from such a move.
A. No

Q. Why not ?
A. Because when you deny a currency its reserve, it falls in value. Look at '71. Cut off the reserves (gold) and the dollar tumbles. Today the reserve is physical dollars. Separate that reserve from the currency and the currency will tumble.

A purely digital currency without a trade surplus needs an ultimate backing. This is actually possible in Freegold but not today. So don't look for hyperinflation in digital units. Look for wheelbarrows of physical cash! The government will print that which commands goods and services from the physical plane. And because hyperinflation is driven by fear of money by the physical plane, not greed, that will be physical cash.

The way digital currency works is by tether. It is always tethered to a counterparty. Without that counterparty, there is no value in it. The value comes from the counterparty's obligation to supply SOMETHING to the entity you paid with your digital currency. Usually it ends up being just another transfer to a different counterparty that is supplied. But without that "SOMETHING", digital currency can't work. There is no way in today's technology to have an untethered digital currency, like a bearer bond or a dollar bill, that can circulate untethered. So the tether requires a counterparty, which requires something promised, which requires a "SOMETHING" other than the digital credit itself.

So it all comes down to the solvency and credibility of the counterparties. And most of the digital currency that circulates today is tethered to insolvent counterparties running trade deficits. We don't see this. We don't even realize it, and that's how we end up with fantasies like this "all digital currency" nonsense.

But when faith collapses, this "SOMETHING" will come to the forefront. And today, that "SOMETHING" is physical dollar bills. When the currency collapses, it is the sellers of physical goods that are in the driver's seat. They will not simply raise prices to get more digits unless there is "SOMETHING" limiting those digits. That "SOMETHING" is physical cash.

Remember this: in hyperinflation the physical plane FEARS the monetary plane because it is crashing. It is not GREED that drives the prices up, "give me more credits for this apple." It is FEAR of the credits, "get those credits away from my apple"... "but wait, sir, here I can double my offer, two wheelbarrows of cash for your apple."

I honestly feel like I'm talking to a pile of rocks here. NO ONE gets it. Hyperinflation today will look just like Weimar and Zimbabwe in this respect. WHEELBARROWS! Or their modern equivalent. A quick devaluation of the dollar like Argentina or Iceland will not be enough to change the fear of the physical plane back into greed. Instead it will begin the long fall of a currency that is too old and too large to do anything else but fall very, very far.

The only way to eliminate physical currency altogether is to have a central authority backing the digits with SOMETHING ELSE. And the only thing that can be is a FLOATING RESERVE like Freegold. It doesn't actually NEED to be gold, but it must be something. And in Freegold they truly could eliminate cash. Because all digits will ultimately be backed by the floating reserves of the central monetary authority. You can walk in anywhere and change them in for gold at gold's current floating price. The reserves NEVER RUN OUT because they float. It won't matter how many credits are issued, the reserves will just rise in price and never run out.

Continued...

FOFOA said...

Today the reserves are physical dollars. If you eliminate physical dollars you don't get hyperinflation, you get instant worthlessness. I suppose that COULD look like hyperinflation for a very brief time, but the idea is so ludicrous it simply won't be tried, NWO paranoids notwithstanding.

If a smaller country tried this experiment domestically there would have to be some central authority backing the digital credits with something OTHER THAN CREDITS. There would have to be. Even if the backing was simply euros or US dollars. It would have to be something harder than credits. That's what a reserve backing is. Something relatively "harder" than the circulating medium.

Ever heard of a black market? If the US government tried something like this with the dollar it would send everyone into black market mode almost immediately. Yes, gold and silver would THEN become transactional currency once again. As would cash and even foreign currency. This is one of the worst-case scenarios ANOTHER spoke of.

If you are really interested in understanding this the way it actually is, then you must think like a central banker, not like a NWO paranoid that thinks he knows how they are sticking it to the little guy.

In a currency, the little guy DOESN'T MATTER. What matters are the people who matter. The EXTERNALS. You can't have a domestic currency unless it provides "SOMETHING" to the externals.

That SOMETHING must be either a solid trade surplus (goods) or else a backing OTHER THAN THE DIGITS. And it must be something HARDER than the digits. Otherwise the digits won't be accepted by the externals because you are running a trade deficit.

When you run a trade deficit you ship out more digits than goods. So there must be SOMETHING to back those extra digits, other than more digits.

The dollar is still backed by gold through the paper gold market. The externals that matter most (oil) are still cashing it in for physical gold. It is also backed by oil supporting it through pricing because trade surplus nations like China can use some of their surplus credits for oil that doesn't come from the US. And then oil uses those credits for physical gold from the paper gold arena. But this backing is breaking down now. For others, the dollar is backed by physical cash and Treasuries which are promises to pay physical cash. If the dollar was only a digit, then those Treasuries would be worthless to the externals.

The paranoids think "well the sheeple bought this digital-everything scheme, so I'm sure the banksters will take it to the next level and REALLY screw us now." But if you think like a central banker, you'll realize that THE SHEEPLE DON'T MATTER in the big picture. Sure, they are the domestic backing for the currency, yes. But they are the backing as it is reflected EXTERNALLY. It does no good to you, the central banker, as a purely domestic medium. It must have MEANING (VALUE) in a broader context to do you any good.

Continued...

FOFOA said...

If you create a truly honest currency then the SHEEPLE will create a trade surplus and you will not need trickery through your currency to gain profit. If you create a deceitful currency, then the SHEEPLE will create a trade deficit and you will need a reserve that is AT LEAST a little harder than your currency. What a miracle the Fed has such a reserve that it can ALSO create, albeit with a little more effort!

When the circulating currency was dollar bills, the reserve was gold. When that reserve was cut loose, the dollar plunged. Today the currency is mostly digital (tethered) credits and the reserve is dollar bills. If you can't understand this principle, then you can't understand money.

Fooling the sheeple is the easy part. SATISFYING THE EXTERNALS IS THE HARD PART. And without some sort of backing, either a trade surplus or something HARDER than your currency, you don't have a prayer. The dollar bill is harder, and amazingly it is still accepted as harder. This is why they (physical dollar bills) will be printed in GREAT QUANTITIES when faith in the symbolic currency collapses.

When confidence in your currency collapses you must inflate it just to keep functioning yourself (i.e. the USG!) If you have a reserve, you will revert back to that reserve because THAT is what the EXTERNALS want and it will give you more purchasing power to inflate that reserve, if it is inflatable. This is why when faith in the dollar dies the Fed will print cash like crazy. Finally cashing in on the miracle scheme of the inflatable global reserve! Tethered credits will lose value much faster than cash and cash will be demanded by the physical plane. If the Fed doesn't print cash (which is a ludicrous notion) it will be retired and the Treasury will print cash. It's really not that difficult of a logical progression to follow. And no one has shown me another way it could play out. When I see one, I will let you know.

Sincerely,
FOFOA

moe said...

I understand Fofoa and Im sorry to have posted such truths. Its just that I despise brokers from bucket-shops like Mish. When I say I feel bad for his clients its because I truly do as he will send them to the poor-house one by one.

BTW, here is the book I mentioned; Ralph Foster's - Paper Money. (http://localbizblogs.com/fostercoinstamp) It is the best book on paper money and its history. In my opinion it is a must read if a portion of you networth is tied up in metals. Luckily my entire networth is tied up in metals (and some real estate unfortunately).

Lastly, what does Fofoa mean and who is "Another"?. Thanks for you blog and for the life saving insights.

FOFOA said...

Alright guys. Enough with the mudslinging at Mish. I think we know how some of you feel now. If you have a lucid, intelligent, well thought out objection, as Fred Gwynne said, let's have it. But let's please try to avoid the following words from the last two posts which I deleted: idiot, shithole, retards, and dumbasses. These posts reflect poorly on all of us here and especially on me if I leave them up. They are not representative of the respect that is normally shown here.

For my part, I am sorry for using the term "pile of rocks." I am sorry to any rocks that were offended. And I'm sorry to the rest of the pile which are clearly not all rocks. That was simply my frustration coming through. A rare show of emotion for which I am embarrassed.

And thank you for your apology, Moe. You will find the answers to your questions in the first few links to the right.

Sincerely,
FOFOA

costata said...

FOFOA,

I wasn't all that impressed with Gonzalo Lira's pieces but when Harry Schultz sees substance in them IMHO it would be wrong to dismiss his hyper-inflation scenario as lightly as Mish seems to be doing.

http://www.marketwatch.com/story/exit-harry-schultz-pursued-by-a-bear-2010-09-16

Perhaps Gonzalo Lira's choice of the "trigger" undermines his scenario. There are many possible triggers (internal and external) for hyper-inflation in the US$.

Even if Lira is right for the wrong reason the end result will be devastating for anyone on the wrong side of history.

Tyrone said...

Moe,
The answers to your questions are found throughout these articles, but...
A - Another - nobody knows who this is
FOA - Friend of Another - nobody knows who this is
FOFOA - Friend of a Friend of Another - and we all know who this is,... it's FOFOA!

For more history, follow The Gold Trail.
Cheers!

Texan said...

FOFOA, thank you for your recent comments. I think I understand you to be saying that EXTERNALS are suppliers to the US. As long as they accept digital dollars, all is well. If they start not accepting digital dollars, a run for physical dollars sets in and that's when some gvt entity MUST print.

If i have this correct, that is where you and I fundamentally differ. And maybe the difference is kind of meaningless, but I would appreciate your thoughts on this.


In my view, if confidence in the US dollar collapses, it's over. No one is going to want physical dollars. Or probably much of any currency other than their own home country transactional currency. I think it is precisely because of the end game nature of hyperinflation that we won't experience it. And perhaps also because as you say they just couldn't print it fast enough.

Ie, the USD is "binary". The full quantity of it can never ever possibly be spent, as you say, yet people continue to "have faith". I think what you will have with a jump depreciation will be a massive instantaneous singularity, in which Externals simply reject the USD. Then there is NOTHING after that. Prices aren't going to be raised, or currency printed, because there just isn't any time for that.

The gvt will realize this. They will freeze everything, and take control of essential food and energy distribution. Very little will transact. Dollars may or may not have much value, i happen to think they will, but it won't matter because there won't be a transactional currency because nothing will transact.
My point is simply that the notion of hyperinflation for the USD is, frankly, "quaint". This is not the argentine peso, or any other fiat currency. Not even close. The USD is so much more than a "currency", it is the most widely adhered to "religion" in the world, ever. IF people lose faith in it, it's over. And it will be "over"immediately. Within a month tops. Information, and money, simply moves too fast now. If there is a run for physical currency, within days or weeks its all over. There isn't going to be time for hyperinflation. It will just be one giant delivery default, just like if everyone asked for their gold at comex next week.

Only gold makes it through. No fiat will survive, not even the euro.

Desperado said...

@FOFOA, I understand what you are saying about digital currency being even more dependent on counterparty risk, and that it is tethered to a counterparty, usually a bank or broker (ie. Schwab, etc).

It is also clear that there would be strong preference (Gresham's law) for paper dollars over edollars.

But my problem is that unlike in Weimar, Zimbabwe and even 1929 America, where payday meant getting physical cash from the boss, the US now is very much a cashless society. There simply is no physical infrastructure for delivering new, higher denominated paper. There aren't enough local bank branches, and those branches don't have enough tellers. If, at the end of the month everybody in the US shows up at the ATM at 17:00 after work on Friday, and wants to get their paycheck in cash, who is going to keep the ATM's full? And how is Walmart going to handle all that increased volume of paper?

So I can see the FED/FDC would have to guarantee all the banks (or at least their politically favored ones anyway) in order to try to reduce the counter party risk to the same level as paper. But I just don't see how they could get the paper into the hands of the sheeple in order to keep the economy functioning. And I certainly don't think that China is going to want to be paid in physical paper for the interest due on the trillions in treasuries at the end of each month. I guess this is more evidence that the crash could come on faster and harder than even those of Weimar, Chile or Zimbabwe.

I also don't completely agree with this statement:

"If you create a truly honest currency then the SHEEPLE will create a trade surplus and you will not need trickery through your currency to gain profit. If you create a deceitful currency, then the SHEEPLE will create a trade deficit and you will need a reserve that is AT LEAST a little harder than your currency."

The deceitful currency is a symptom of a corrupt government, and that is the source of the deceit, not the currency. This also ties into nature of the Central Banks. You seem, and it appears Another and FOA as well, to have a lot more faith in CB's than I do. I always had my suspicion that Another had at some time worked for a CB, so I can understand this coming from him (it is one reason why I am more skeptical of his writing than you). When I look at the Fed I don't see an overarching banker conspiracy, but I do see a corrupt, power hungry and unaccountable government controlled institution that is run by the ruling class. And that is exactly what I see in Europe too.

It seems to me that you think that the ECB, due to the sounder footing of the Euro compared to the dollar, is somehow more pristine than the Fed and that this makes the Euro worth having. I would say that the EU is being run by their ruling class just like the US is by it's own, and that the EU ruling class, as opposed to the US ruling class, is smart enough to realize that a stable currency will lead to: "SHEEPLE will create a trade surplus". But when I look at the Med countries it appears that a non-deceitful currency does not compensate for a deceitful government and a selfish populace.

In both the US and the EU it is clear that the sheeple are being herded by a ruling class, and therefore the Euro is morally as weak as the dollar, and over the long term will lead to the Euro being as corrupt as the dollar. One could easily conclude that being sentenced to lifetime of sheepledom, one would be better off with a stable currency than an unstable one. This may be true, but it still is not the world I want my children and grand children to have to inhabit.

Pete said...

@Desperado

"But when I look at the Med countries it appears that a non-deceitful currency does not compensate for a deceitful government and a selfish populace."

Could it be that the Euro countries have been subjected to many loose US dollars being offered to them? Goldman Sachs, etc...

Pete said...

(Cotd.)

And maybe that the world's economies and currencies have been somewhat cursed by this US reserve currency phenomenon, making them very susceptible to US monetary policy, which has unforeseen effects on their own?

So hey, if the US is leveraging up and reaping benefits, you wouldn't want to be the head of a country that says "no no, let's not take any of that free flowing US currency here... lets be prudent, even though our neighbours will be reaping leveraged benefits". Except in hindsight.

Desperado said...

@Texan, I think you are right when you say: "The gvt will realize this. They will freeze everything, and take control of essential food and energy distribution."

The first sign will be lines at gas stations. As Lira says, everyone will want to use up dying dollars on anything tangible, and gasoline is obvious. Next would come food stuffs with a long shelf life. The time lapse between gas lines and empty food shelves could be very quick.

Under the current regime, I think they will use inflation protected food stamps as the means to keep the sheeple fed, and they will work with large grocery chains to get food delivered. Unfortunately, those who currently don't need food stamps and in the future will, will have the same problem as all those with edollar assets trying to get through the door at once. So the middleclass will rush to get into the same system that the poor already inhabit. It is a form of redistribution that I am sure our leader would be proud of.

But it gets worse. The ruling class inhabits the main population centers, mostly in the blue states on the coast. They will make sure that the sheeple are fed in those cities, otherwise rioting and looting is guaranteed. That means that even if you are already in the food stamp system and live outside these cities with the rest of the country class, your food and fuel deliveries will be lower priority. That is unless you live in an area of a military base which will also get priority deliveries to keep the soldiers families fed.

The entire system is so brittle due to years of constant increases of quantity of scale that made communities constantly more dependent on deliveries of goods and resources from ever further away. In this aspect I find Europe better prepared. Years of subsidies and support of small farmers means than all across Europe there are still family farms going back generations. In Austria, Germany,Switzerland and France these farm families have tended to be large and have stayed with the church. In America, IMO, the country class is going to be hit especially hard, depending on which city/state/region they are located in.

snerfling said...

@FOFOA said "If the Fed doesn't print cash (which is a ludicrous notion) it will be retired and the Treasury will print cash."

I agree with Texan, in that loss of faith in dollar digital credits spells doom, which begs the question of why anyone would then desire physical $USD.

FOFOA, I think you are hinting at (the highlighted text above) what appears inevitable at this point. The US and many other countries have a very long history of resorting to printing un-backed currency.

Unless someone can point out and explain to me what underlying fundamentals exist that will drive the resumption of organic economic growth and credit expansion, it just seems like it's really game over and we're just all waiting around to finally accept this reality.

Hopefully one last comment regarding Mish: Mike filled an important role at a time when the majority of people could not fathom that leadership was actively lying. He carved out an excellent niche that relied upon exposing the lies with grounded, well thought out research. His reasoned dismantling of Krugman over the years is an excellent case in point.

But that was 2007, and today is today ie the world has significantly changed. As anyone in any line of business knows, people once satisfied demand more. How many times can someone rant about the same topic and still draw readers? The evidence is in Mish's comments section - most are either fundamental queries or rants.

So, not only has Mish become a stale product, but he himself can't see that he has become stale (typified by his offhand, ignorant comments/replies on this thread and elsewhere - I mean, they are sort of embarrassing, yet he doesn't seem to be aware that they do him discredit), nor does he have the horsepower to change even if he did want to move up the power curve.

Compare that to this thread, and FOFOA's periodic updates/replies. Knowledgeable folks such as myself, Texan & others are being forced to go through some mental gymnastics to play out the top level scenarios being proposed by FOFOA.

You won't get this type of exercise any place else on the interwebs. My own private theory is that as this crisis deepens, guilt or just the desire to come clean with the truth is propelling some CB insiders to pen some missives under various pseudonyms.

I mean, doesn't Trichet or Ben ever itch to at least reveal some truth? Isn't this essentially what Greenspan is doing now? Doesn't human nature rule us all?

Desperado said...

@Pete: In 2002, when I still believed in Greenspan, I remember thinking that the ECB was not doing its share to help pull the world out of recession by lowering interest rates fast enough and low enough. So the Eurozone has always set its own policy, but it certainly has been impacted by the ebb of flow of Fed monetary policy. I don't think that a GS or Citi flush with leveraged fiat dollars had any influence on the Greek mindset in regards to government and taxes. Loose dollar policy is what has driven the Dollar down from 80 cents/Euro to $1.31 over the last several years, so the dollar bubble hurt America more than Europe.

Of course, one could also say that Greece would never even have gotten into the EMU if not for the help of GS, so yes, your point has some validity.

I think that the real reason all the CB's want a new SDR reserve currency is so that they can partake in the suzerainty when SDU's are created. The US has tried to compensate for this privilege by giving them dollars through the IMF, and who knows what other deals are made with the IMF gold. So the IMF bailout of Greece was probably largely due to the US compensating for this privilege of suzerainty. Again, yes, more culpability. But again, the predominate problem is the culture and corrupt government.

As Toqueville said:

"In a Democracy, the people get the government they deserve"

Tyrone said...

There simply is no physical infrastructure for delivering new, higher denominated paper.

Not related to your comment on the delivery system, years ago, I commented to friends that the Bureau of Engraving and Printing has become very, very skilled at making 'new currency'. Decades of no change turned into regular change. Protecting the "reserve" from counterfeiting? Sure; maybe. But they can probably respond much quicker now if they have to change anything on that paper.

Jamesneo said...

Hi Mr FOFOA and other posters, which country do you think will have hyperinflation first? Will it be US, UK, Japan , China and how will this affect the currencies and economy in a country in southeast Asia like Singapore or Malaysia( you can google for these countries if you do not know where they are)

I have a hard time figuring out how hyperinflation will directly affect these countries other than the huge increase in gold prices.
Will this countries be forced to hugely devalue their currecies or they will do it themselves to encourage their exports?

pruiz said...

FOFOA -

Thanks for your posts and insights.

There's one thing I can't wrap my head around. Who benefits from a dollar hyperinflation? It would be the death of the dollar, fed credibility and the fed itself. Is bringing the US to its knees part of a one world governance plan?

Also, I haven't read all your post but it seems you believe the Euro will survive even though it may get bruised when things hit the fan. Would you advocate getting out of the US if it was a real possibility? I've never seen any mention of such a thought by anyone.

Finally, what about the 1099 reporting coming our way in 2012. If the time comes and we must sell a few PM to survive, how can we escape the government from taxing our prudence away?

Wendy said...

I am very much enjoying the excellent dialogue in this post. Thanks to all the participants, and keep it going.

Tyrone said...

Jamesneo, based on the questions you're asking are you really Timothy Geithner?

Tyrone said...

Pruiz,
Some in congress recognized the insanity of that 1099 reporting. They are trying to repeal that POS.

The 1099 Insurrection
The Senate will vote on amendments to the White House small business bill that would rescind an ObamaCare mandate that companies track and submit to the IRS all business-to-business transactions over $600 annually. Democrats tucked the 1099 reporting footnote into the bill to raise an estimated $17.1 billion, part of the effort to claim that ObamaCare reduces the deficit by $100 billion or so.

It shall be abolished. Cheers!

Aleksandar said...

@jamesneo

Difficult questions, impossible to answer.

Look for the countries that have highest debts to be the most vulnerable. The net debtors in other words.

As fas as I know, people in Singapour and Malasyia are actually producing more than they consume (net savers!) so they should be fine as long it stays that way.

@pruiz

There is no plan. FOFOA describes a process governed by laws similar to the Natural Laws. Like gravity. Nobody plans anything, it just happens no matter what *they* do.

FOFOA has a rather romantic view on the euro and that is no surprise since he doesnt live here. I have a hard time sharing his optimism but then I also have strong political views that may cloud my judgements.

I have no idea what a 1099 is. The middle ages proper?

seeweed said...

For those contemplating leaving the US, check out "Getting Out - Your Guide to Leaving America" by Mark Ehrman.

oldinvestor said...

This probably would be a good time to repost my recent post on the potential dis-connect between actual paper money and money in electronic form.

Since that post, I have gone to the web sit of the Bureau of Engraving and Printing (that actually prints our Federal Reserve Notes) at http://moneyfactory.gov/uscurrency/annualproductionfigures.html

They show the numbers of notes printed per year. For FY2008 they printed 7.7 billion notes. For FY2009 they printed 6.2 billion notes.

However, at the bottom of that page came a most interesting figure.

“95% of the notes printed each year are used to replace notes already in, or taken out of circulation.”

So if this is true, then in FY 2009 there were actually only 312 million actual new notes printed into existence, everything else was to replace worn out currency.

Thus even if every single one of the 312 million new notes printed was a 100 dollar bill, they only would have the physical capacity to print 31.2 billion dollars worth of new currency.

If there is ever a run on the banks due to distrust of their solvency, and people started to hoard real paper money, it would disappear in a heartbeat.

Paul said...

"The way digital currency works is by tether. It is always tethered to a counterparty. Without that counterparty, there is no value in it."

It's imagery like this that really helps people understand the true nature of money. Certainly helped me. I think most people don't draw a distinction between digital currency and paper cash, yet. Once you start viewing digital as "tethered", it becomes clearer.

As soon as I read this, I imagined everyone walking around with a balloon of money floating above them. Sometimes they pull it down and take a bit into their pocket (cash from an ATM) but mostly it's up there floating.

The counterparty risk is the strength of the string. Maybe it's a bit frayed, maybe the knot has worked a bit loose? Once people start doubting their string, what's the first thing they'll do?

So we'll start to see more digital converted to cash well before we get total loss of faith in fiat, it's just the first stage of an inevitable pychological process.

And as the balloons start to lower one by one, the cash flowing out the ATMs will increase gradually at first, a bit more each day. What can the banks do? Shut the ATMs? No, at first they'll just make sure they're full of the hightest denominated notes. I think that's whats known as a slippery slope.

Sigo Plapal said...

Aleksander,
A 1099 is just a US Federal gov't tax reporting form. By January 1, 2012 coin dealers will be required to report all sales and purchases over $600. As Tyrone said above, people are working to get rid of that requirement.

If we have freegold, then there shouldn't be any tax on gold. I guess the key word there is "shouldn't".

Michael H said...

FOFOA,

Do you foresee the crisis of confidence in the dollar beginning within the US, or coming from abroad?

There are two possible foreign triggers: the 'externals' you mentioned (oil countries, China), and foreign holders of dollars, including physical cash.

Would a crisis that starts domestically be different in any meaningful way from one that starts due to foreign influence? Or, once crisis hits, will the effects spread fast enough that the actual trigger doesn't matter?

Michael H said...

@ oldinvestor:

Is there a chance that the presses aren't running full-tilt? Also, in the throes of hyperinflation, they might decide not to retire as many bills.

If, for example, the are only printing on one shift per day, they could potentially triple the printing capacity by running them around the clock.


@ Aleksandar, regarding the Euro and FOFOAs view on it:

FOFOA has a favorable view of the Euro because of the mark-to-market gold reserves the Euro holds. Regardless of any political mismanagement, the ECB maintains something 'real' that it can trade to the externals in exchange for, say, oil. Thus, even though the Euro is not an ideal currency, it is 'less bad' than all the others. And when confidence breaks down, it will make a whole lot of difference!

@ Texan, regarding the dollar "shut-down"

Your scenario is plausible except for one thing: a total dollar shut-down will also mean a shut-down of the US government, and of the US military. Oil will not flow to either.

So how will the government freeze everything and take control, when they have literally nothing? No weapons, no transportation, and no one to do their bidding since their is nothing to compensate workers and soldiers with.

FOFOA said...

Hello Michael H,

"Or, once crisis hits, will the effects spread fast enough that the actual trigger doesn't matter?"

That.

And as I said in an earlier comment, "I have predicted that the most likely and direct collapse trigger will be when gold **IN SIZE** stops bidding for dollars. That is, when the Giants withhold from the marketplace the gold they already have."

Earlier, we came up with a good definition: "Hyperinflation is when physical goods & services stop bidding on (fiat) money." And as I said, gold is the proxy-par-excellence for physical goods and services, and can therefore be the trigger-par-excellence for dollar collapse.

And for the rest of you, keep your scenario proposals coming. Like I said, "no one has shown me another way it could play out. When I see one, I will let you know."

Some of you are even describing things similar to what I see, but you aren't seeing the connection. Desperado, what's the difference between "inflation protected food stamps" and $10,000 FRN's if an apple costs $10,000? Alternate question: What do "inflation protected food stamps" and price controls have in common during a currency collapse?

Sincerely,
FOFOA

Mike said...

FOFOA sorry to bud in.....

What do "inflation protected food stamps" and price controls have in common during a currency collapse?

less food ?

FOFOA said...

Good Mike. You're getting close. Follow the trail. If there's less food, where did the rest of it go?

Desperado said...

Hey Fofoa,

Well I guess you are saying that the food would be exported in order to provide exchange to buy necessities like oil. I would expect a nominal export freeze like in Russia.

In a hyperinflation the major problem any responsible government would have would be to keep the population fed. The current regime would use this opportunity, like it has consistently since 2008, to punish their opposition and reward their supporters. They can't just have the banks spread hyperinflating edollars to each bank account. By using food stamps they would already have a list of all the "deserving" parties. And then they could politically control access to the food stamps and hence the food supply. The system is already in place, the computers are already humming away, and I would suggest that the middle class should be getting themselves into the system now, before the rush.

As far as diminished supplies go, that is a given. But if the US no longer has access to large quantities of cheap oil through fiat edollars, then there will be diminished supplies of everything, and I don't think there will be much time for the brittle system to adapt. I think a pseudo socialization of Walmart, Costco, Safeway, etc. is a given. Then the government will try to "guarantee" deliveries. Sure, some food production from some large suppliers would go overseas, but a starving population would demand an export freeze. Clearly, the edollar wealth of the middle class will be vaporized, many more will be unemployed and most of them will be dependent on e-food stamps.

There would obviously be an active underground economy, perhaps bigger than the socialized Walmart economy. So much will depend on the continued flow of reasonably priced oil, because with out that each region will be dependent on what it can produce with whatever oil it can scrape together.

If the breakdown continues, and I think it will, by default all these problems will fall back to the state governments, many of which will be unable to deal with them, so then the problem of a starving populace will fall back to the cities and communities. Again, some will deal with it far better than others. This is why I am almost as convinced that there will be a break up of the Union as I am that there will be a hyper inflation. The communities, cities and states will simply be as unable to make tax payments to the higher level of government as the unemployed citizens will be. I would also expect to see chattel slavery in certain areas. This is why I think the discussion of gold seizure is kind of moot, whatever local government exists may well be seizing whatever physical property that one has. Again, it will make a big difference if you live in Boise, Bozeman or Boston.

FOFOA said...

Hi Desperado,

"I guess you are saying that the food would be exported..."

Sorry, that's not what I was saying. :(

Pete said...

@Desperado

I came to the same conclusion as you did. But then I realised that it is in fact the opposite.

If you were a farmer, why would you even bother to farm if you couldn't make a profit in such a price controlled environment?

It's the old lessons from communism/central planning.

The answer is less food. The answer is starvation and distortion in the economy. Like when they put price controls in wartime Germany, and people found that it was more cost effective to produce shell casings than to farm. So they all produced shell casings, and very few farmed. A lot starved.

(note that last example is from something I was told once, it is unverified)

Gilligan said...

If there's less food, where did the rest of it go?

It stopped bidding for dollars, or rather, it was withdrawn from the market.

Desperado said...

@Fofoa,

I was never good at trick questions. How about this: It will drive the food out of the market. People will be accused of "hoarding" it.

But I think you are missing something here. I could well be wrong, and I am sure it isn't the same in every state, but when I look at farming in the west, it is mostly being performed by large corporate farms. Sure, many are owned by family corporations, but you can hardly call them family farms any more. These giant operations lease thousands of acres of land and farm it with gigantic tractors in specialized crops that are then processed by large distribution companies and marketed nation and even world wide.

These farms cannot load their produce into a wagon and sell it at the local farmers market, nor can they hoard it. Probably 95% of the US population gets their food at large supermarkets anyway. To a large degree this has the characteristics of the collectivization that the soviets strived for, and the entire food chain would be vulnerable for a statist take over, or take over attempt anyway.

So I can imagine giant potato farms in Idaho, tomato farms in California, or chicken farms in Tennessee delivering to semi-socialized food processors who deliver to semi-socialized retailers who get prioritized fuel deliveries. Again, these large farms simply cannot hoard their product or sell it all on local markets. The ruling class would make sure that there were food deliveries to the population centers they inhabit, small rural towns would be left to their own devices except when the military came foraging.

This is what I mean by the advantage Europe has with its smaller, heavily subsidized family farms. These humongous farms in the US are a lot more fragile than the family operations in Europe.

Fred said...

Infinite planes touching at one point. . . .

I think that when people talk about credit "derivatives" they miss the point that the first credit derivative is actually the mortgage signed between the real person and the ficticious person, the bank. The consideration of this contract is nothing but bank created credit, a fiction successfully challenged.

Where did the food go? Producers don't need food stamps even if they are good to settle taxes.

Paul said...

@Desperado

What you're describing is Russia circa 1990. Just before hyper-inflation hit.

Desperado said...

@Paul, I hadn't considered it, but you are right. And it is also interesting that the MIC (military industrial complex) in both countries forms the core of the remaining manufacturing.

Unless the Teapartyers take over a significant share of both houses, we can be certain that the knee-jerk solution of the current ruling elite to the looming dollar crisis will be ever bigger government solutions, continuing power grabs and more TBTF. I really don't see any hope for change in the right direction until our leader is thrown out of office. The entitlement mentality permeates so much of society, I think the majority don't care as long as someone promises to keep the entitlements coming.

The joke is that the deflationists keep saying that the US is Japan. In reality, the US is the USSR. Lets just hope that the apparatchiks don't end up owning all the wealth like they did in the USSR.

Gilligan said...

FOFOA,
is this what you mean, just..."undeclared"?

http://www.nytimes.com/2009/02/08/world/europe/08barter.html

http://www.reuters.com/article/idUSTRE5123PN20090203

http://www.richardccook.com/2010/01/10/in-time-of-crisis-barter-works-and-may-have-saved-russia-in-1998/

Jeff said...

FOFOA,

When I began reading your blog, the ideas of A/FOA were novel to me; I had found them nowhere else online. Today, I believe your (and their) ideas have gone 'viral'. I find other blogs and authors borrowing (to put it kindly) from you. Itulip, ZH, the Privateer, Jim Sinclair, Jim Rickards, and more seem to be evolving their view of the future from a gold/hard money standard to a floating standard, though none have gone so far as to call it Freegold.

I can only conclude that the likelihood of your scenario playing out is rising. Congratulations on being correct, and being influential.

oldinvestor said...

@ “The system is already in place, the computers are already humming away, and I would suggest that the middle class should be getting themselves into the system now, before the rush.”




I recently investigated the requirement for getting on food stamps. They require you to have no more than $3,000 in assets, excluding your house and one car.

So essentially they require you to almost bankrupt yourself before you qualify.

Desperado said...

@oldinvestor,

"They require you to have no more than $3,000 in assets, excluding your house and one car."

I googled it, and it is $2000 of "resources" per household without disabled family members, $3000 with. Resources are cash, checking account, stocks, bonds, etc. You point is valid, most of the current middle class is "over qualified". However, it does seem astounding that the households of 44 million Americans have less than $2000 in "resources".

Since PM's would be counted as resources, this would be one more good reason to buy your gold and silver anonymously for cash.

Although the Feds or State governments could implement some kind of soup kitchens, my guess is that they would first try to use food stamps because it gives them much more control, and because of the massive urban sprawl that is a trademark of the US lifestyle.

miked said...

33k pages out there with words to say about FOFOA now Jeff.

http://www.google.com/search?q=fofoa&ie=utf-8&oe=utf-8&lr=lang_en

Unfortunately not enough searches on FOFOA to register on the radar for Google Trends, however Alexa shows a big increase in traffic in the last few weeks :)

http://www.alexa.com/siteinfo/fofoa.blogspot.com#

Texan said...

FOFOA, locally produced goods are not going to be hoarded because physical dollars will be hoarded.

Think of it this way. Let's say you run things. There is a crisis, huge, unstoppable - China says "we are selling Treasuries", the run internationally commences.

What do you do? Print USD? NO. What you do is you basically take control of the choke point. You gate all accounts. Every account gets 400 in physical cash per week maximum, or whatever. And everyone gets food, gas, and electric allowance. Internal "elites" and "essentials" get larger allowances, naturally. Ie, if the physical dollar is the
"reserve", you make it "scarce". That is the only way to keep control, ergo it is what would happen.

Your scenario will only play out if INTERNALLY people don't want physical dollars, and I really believe the opposite is increasingly the case. We are literally "eBay nation", and people will take digital as readily as they will take physical. The digital part may change if the rest of the world dumps dollars, but I am pretty sure they will not allow a physical bank run in the US.

Already, in lots of most likely unintended ways, you can see how thoroughly gvt and gvt programs have become life
support for tens upon tens of millions of people. And major gravy trains for virtually every industry sector. They are doling out dollars NOW in drip fashion. The rate of change may go up or down depending on who is power, but they are not going to kill their golden goose.

Again, this does not change the outlook for me for gold- far from it. I like the idea of retaining purchasing power internationally. But I do not see what triggers Americans, 50% of whom pay no income tax, from withholding labor or goods in exchange for FRNs.

Because most Americans don't have any money, and unfortunately I think that suits a number of very powerful agendas just fine.

Paul said...

@Jeff, @miked

There does seem to be a change happening from discussion of "honest goldbacked money" to something more along the lines of Freegold.

Personally I'd like that discussion to start moving beyond the usual contrarian sites to some more mainstream media. To that end I've started talking up Freegold in the financial section of a very mainstream UK newspaper's website. (With links to to FOFOA's blog of course).

I hope that's OK with you FOFOA?

costata said...

Texan,

The USG isn't going to pay their debts, period. How do you get from the current unpayable debt position to debt free? Easy, debase the currency it is denominated in. There's no other path that is politically feasible or practical for that matter.

Provided the PTB can blame another actor for the currency collapse what do they have to lose? Why not pin it on the Fed? The banks who own that august institution wont be harmed by walking away from it. The wealth transfer is a fait accompli.

Debasement of the US$ is a "tax" on the productive output of US citizens AND the rest of the world. Can the USG continue to pull off a gradual debasement of the US$ and rake in this "tax" indefinately? I assert that we have ALL hit the limit of our capacity to pay this "tax", both within the USA and around the world.

IMHO the "gate" you keep talking about is likely to be as successful as the DEA "gate" has been in keeping drugs out of the USA. If the only place where the US$ can buy anything is the USA then US dollars outside the USA will try to repatriate. If they cannot enter NO ONE will exchange anything outside the USA for a US$.

Hyper-inflation allows the USG to disavow responsibility for the destruction of the US$. Not one American in a hundred would understand the real underlying causes for the hyper-inflation if they are presented with a "credible" scapegoat.

Desperado said...

@costada: "if they are presented with a "credible" scapegoat"

They are being presented with a scapegoat, and it is currently the tea party, who are being dragged through the mud almost as much as Monica Lewinsky before the "stain".

Here are some worrying trends:

Clinton says Says Republican Opposition Had "Shocked," "Disoriented" President

"When he got elected, the first thing he said was, 'I don't want any investigations into the Bush years; I want to go right ahead. We want to get this country moving again,'" Mr. Clinton told host Bob Schieffer. "He kept thinking that he would find some partners in the Republican Party. He didn't.

"It was clear that Mr. Boehner and Senator McConnell, they weren't going to vote for any meaningful health care bill. They weren't going to support any student loan reform that the banks didn't like. They were going to oppose the financial oversight bill (we got a couple of Republicans for that).

"I think he was shocked at the intensity of the Republican opposition,"


The Teaparty will be blamed for blocking reform.


Man Sentenced To Prison For Missing Taxes On Swiss Account

This guy gets fined $4.4M and a year in jail for setting up a trust in Panama to shelter his income on $8M from the federal government.

Math Isn't There To Give Tax Cuts To The Rich

at 30 secs He says: "on average millionaires will get a check for $100K". Disregard that extending the Bush tax cuts isn't a tax cut, it is a tax increase. Disregard Obama wanting to extend what the Democrats for years called "Bush tax cuts for the rich", to help the middle class. The key point here is that he is calling a decrease in an already monsterous tax burden "a check from the government". As far as these guys are concerned, the only wealth in the country is wealth that people are "allowed" to have.

72 Hour Notice to Fly in the US After Nov 1?

"As a result of the Transportation Security Administration (TSA) and Department of Homeland Security (DHS) mandate, beginning November 1, all passengers will be required to have Secure Flight Passenger Data (SFPD) in their reservation at least 72 hours prior to departure."

What is going on here? Uncle Sam is glaring at you and has his hands around your throat. You are his serf. If there is a hyperinflation, you can be sure that "hoarders" and owners of gold will be scapegoats, as will Teapartiers.

Texan said...

Costata, correct USD will repatriate. The US will have plenty to sell. I live here, and we are simply awash in goods. Inundated, up to our eyeballs in "stuff". People spend money every month to rent storage rooms to hold stuff they never use.

Also correct, no one will accept USD offshore. As for holders of Treasuries offshore, well, they can take the digital USD we pay into their gated US accounts, or not. Makes no difference to us, as it's not technically a default. There is no physical money other than
what the gvt chooses to allow to circulate. They set the rate, and they can sure determine who gets more of it.

Michael H said...

@ FOFOA,

I appreciate your answers, and I apologize for making you repeat yourself.

@ Texan,

I agree that the US government would love to implement the scenario you propose. However, I still do not see how it is possible.

The US as a nation is a net debtor. To fund continuing operations, it requires constant inputs of goods and resources from abroad. They can impose martial law domestically, but how can they appropriate foreign oil, and how can they appropriate foreign goods?

Without foreign oil, the US transportation system would shut down, agriculture would cease to function, and the military would be impotent. I just don't see what the US could offer the all-important 'externals' under that scenario to induce them to part with oil, and with gold.

Also, regarding the statement "FOFOA, locally produced goods are not going to be hoarded because physical dollars will be hoarded"

The point isn't that goods will be hoarded, is that they won't be produced. There will be no locally produced goods! Farmers will plow their crops under, and flush milk down the river, rather than put labor into a commodity that pays a negative return, even if said return is denominated in a wheelbarrow full of useless paper.

...
Regarding scapegoating minority groups in the USA, it looks to me like American Muslims are the next target.

Pete said...

@Texan

"The US will have plenty to sell. I live here, and we are simply awash in goods. Inundated, up to our eyeballs in "stuff". People spend money every month to rent storage rooms to hold stuff they never use."

Stuff bought from China? Don't think they will want it back just yet...

Gilligan said...

Texan,

Say they "gate" physical dollars, does that encourage confidence, or does it show weakness?

MystryBox said...

The following is an email exchange I had with Mish back in March 2008. It might be of interest here. I'll post in several chunks as it's large.
=========================

Mish,

I've really enjoyed your writings the last few years.
Thank you for your efforts.

I agree with your argument that we are in a deflation.
Clearly money/credit are contracting. However it
seems to me that we are also seeing extreme
inflation... not as an expansion of money/credit, but
as a loss in the value of money/credit itself (despite
the contraction!). If you look at the CRB, everything
from wheat to hogs to tin is up around 30% the last
few months. The credit markets are clearly deflating,
but what about the value of real things as priced in
that money/credit?

From what I understand (which isn't that much), Mises
says an eventual crack-up boom comes on the heels of a
credit event. (Quote from some website) "The boom can
last only as long as the credit expansion progresses
at an ever-accelerated pace. The boom comes to an end
as soon as additional quantities of fiduciary media
are no longer thrown upon the loan market. But it
could not last forever even if inflation and credit
expansion were to go on endlessly. It would then
encounter the barriers which prevent the boundless
expansion of circulation credit. It would lead to the
crack-up boom and the breakdown of the whole monetary
system."

So the credit crunch event that you would describe as
deflation, Mises describes as what leads into a
crack-up boom of hyperinflation. And hasn't most
modern hyperinflation events been kicked off by a
credit crisis?

So if the above is true, deflation is the BEST CASE
scenario. We should be cheering if all we get is
deflation. My $ savings will survive a deflation, but
they won't survive a crack-up boom. If credit events
can lead to both, the REAL danger is inflation. And
with the CRB shooting through the roof it seems to me
the crack-up boom theory needs serious consideration.

Can you please comment on this?

Thank you,
--David

==============================

Deflation It Is.
.21% interest rates and talk of hyperinflation is complete silliness.

Mish

MystryBox said...

Mish,

Did you even read my email? This is serious. If
inflation is "silly" then why does Mises suggest a
crack-up boom results from a credit expansion? What
do I care about 0.21% interest rates when every
commodity in the CRB is up 10% A MONTH! WHY is the
CRB shooting through the roof?

From your articles you say hyperinflation won't happen
because it would be the end-game and the Fed wouldn't
let that happen. But since when does the Fed get to
decide or control when people lose faith in a
currency? Isn't the fact that the Fed is cutting to
historic lows at the same time the CRB is going crazy
say anything about how little the Fed thinks of
keeping faith in the currency?

Could you please comment a bit more than a one-liner?
I really really don't see how inflation isn't the real
threat here. Thanks for your time.

Best Regards,
--David

===================================

I get 200-400 non-spam emails a day
I put out 2-3 columns a day
and I simply do not have time for personal debates when much of what you ask I have already commented on.

Finally have you looked at the CRB lately
Did it occur to you that maybe we already had the crack up boom?

What about peak oil?
How does that fit into your theory?
What about speculation?
What about the fact that CPI peaks after recession starts.

If I answered you question in detail I would be writing for an hour.
I do not have an hour.
I do not even have 15 minutes but I take them most often anyway.


I simply do not have time to discuss all this when most of it I have already covered.
Mish

======================================

I appreciate that you are busy and don't expect a
response. You can just count me as another reader who
isn't worried about expansion or contraction of
money/credit as much as I am of loss of faith in the
currency.

Your articles don't help the worry. If people follow
the logic in your articles and act rationally they
will advance a hyperinflation end result. I'm
surprised you don't see that.

Anyway keep up the good work. I hope you're right and
I'm worried about nothing.

Best Regards,
--David

==========================================

"If people follow the logic in your articles and act rationally they
will advance a hyperinflation end result. I'm surprised you don't see that."

That is patently untrue and I have explained why a dozen times. What you are telling me is you don't understand what I am saying. I cannot help that because my reasons are crystal clear. You simply cannot or will not see it even though deflation is staring you in the nose.

Deflation fully explains 1% interest rates. Inflationists are scratching their asses. And even though I like gold it would not surprise me one bit to see it at $500 again.
I also expect the dollar to rise.

Gold bugs could be in for a very nasty test of faith between now and August.
Mish

MystryBox said...

I understand and agree with you that deflation is
hitting hard and that we are not seeing inflation.
But HYPERINFLATION IS NOT INFLATION. Inflation is
expansion of credit/money, hyperinflation is when
faith is lost in the currency/economic system itself.
Faith is not something like interest rates or M1 that
the fed can control, it is an attitude all agents in
an economy hold about the system itself. Credit
contraction leads to deflation which can lead to loss
of faith and hyperinflation--they happen together.

Our deflation will not be like in Japan because we are
in much more debt to start with than they were. The
faith in the system itself is what is at risk here
(which is the risk of hyperinflation).

Consider the articles that you write and see if they
result in people gaining or losing faith in the system
and currency. If the latter than they push people to
act in a way that ends in hyperinflation. My problem
is hyperinflation is a much larger problem than
deflation and I don't see how you dismiss it as if it
couldn't happen.

Best Regards,
--David

===========================================

"Our deflation will not be like in Japan because we are
in much more debt to start with than they were. The
faith in the system itself is what is at risk here
(which is the risk of hyperinflation).

Consider the articles that you write and see if they
result in people gaining or losing faith in the system
and currency. If the latter than they push people to
act in a way that ends in hyperinflation. My problem
is hyperinflation is a much larger problem than
deflation and I don't see how you dismiss it as if it
couldn't happen."

Our deflation will be worse than Japan's because our personal debt is way higher and our savings rate headed in way lower.

Hyperinflation is possible, but if it comes it will be from acts of Congress not the Fed.

But to say it is a result of loss of faith, you never addressed what caused the loss of faith: printing.

Zimbabwe and Weimar are perfect examples

Given that every currency in the world is Fiat and they are all doing the same thing, and there are a dozen reasons why I have said the Fed will not destroy the system, odds of hyperinflation are EXTREMELY low. I have laid that case out a dozen times.

But yes, it is possible.
Mish

MystryBox said...

> But to say it is a result of loss of faith, you
> never addressed what caused
> the loss of faith: printing.

Yes, printing is the classic cause. However any
crisis that brings the stability of the system into
question can cause that lack of faith. Once
confidence in the minds of the agents in the economy
is damaged, by acting rationally to mitigate exposure
to a potential crisis they cause the crisis.

In other words the credit crisis itself coupled with
the US being badly positioned to deal with it (as you
point out) is the potential cause for a crisis of
confidence. And IT IS ALREADY HAPPENING on a smaller
scale.

Bear Sterns was exactly this crisis of confidence.
Supposedly Bear had high quality collateral, but the
rumor that they had liquidity problems made
counterparties less willing to enter into
collateralized funding arrangements with them. Bear
might have survived but the lack of confidence
cemented their failure, and very rapidly.

It is precisely this crisis of confidence extending
beyond the level of investment banks to the level of
the country/dollar that is the risk. It is not caused
by any single event, acts of congress, or even by
"printing". It is caused by a change in mindset of
agents that make up the economy. If people start to
think there is a risk, (due to the nature of the risk
itself) positioning against the risk causes the crisis
to become reality. It's not controllable by the Fed
or anyone else.

The underlying theme of your articles is the high risk
state the system is in and the inability of those in
control to do anything about it. How can a confidence
crisis (and the resulting hyperinflation) not be a
serious risk here? It might be a small risk, but if
there was any time to be wary of the risk it is right
now.

Best Regards,
--David
==================================

For Christs sake Bear Stears is deflationary action

A flight from things (assets) to the safety of cash (treasuries).
If you prefer a run from credit to treasuries or more liquid assets.

You are failing to show any grasp of what a flight from credit means.
Mish

MystryBox said...

> For Christs sake Bear Stears is deflationary action

Of course it's deflationary. I thought we were
already past the point where we agreed hyperinflation
is not about credit expansion or contraction but
rather about a loss of confidence in the system. I
was just giving Bear Sterns as an example of a crisis
of confidence on a smaller scale.

The point where we seem to differ is you think a
hyperinflation comes from extreme monetary expansion
(due to an act of congress or something) and the Fed
can act to prevent it. My position is a
hyperinflation stems from a crisis of confidence in
the monetary system itself regardless of credit
expansion or contraction.

I suppose what I need is evidence from past
hyperinflations for my position. Let me do some
research and get back to you.

Best Regards,
--David
=====================================
Fair enough
Mish

MystryBox said...

That was the end of the discussion at the time. Today I'd just point Mish toward FOFOA's blog... but it seems he's already aware of it and it doesn't appear to effect his thinking.

Mish just doesn't get it.

--David

Desperado said...

The Angry Rich

"...among the undeniably rich, a belligerent sense of entitlement has taken hold: it’s their money, and they have the right to keep it."

So says Krugman, economic guru of the current regime. They don't think that "rich" people are entitled to property. After freegold, anyone who got "rich" by "hoarding" gold will also be vilified.

Remember, one of the reasons Hitler and many Germans hated the Jews was because they had held gold and many Jews had profited during the Weimar hyperinflation.

Gilligan said...

After freegold, anyone who got "rich" by "hoarding" gold will also be vilified.

With all due respect, this is paranoia.

It's one thing to be wealthy, it's another thing entirely to be arrogant.

Subtlety is of importance.

SatyaPranava said...

mystrybox. excellent posts, or series thereof. I must admit that I didn't get that about hyperinflation back in early 2008. I was also under the impression that the printing had created it (just like all fires seem to have guys in suits and helmets with water hoses).

but then again, i was listening to mish from 2005-2008 or so, though there were many others who I thought had a bigger picture of what was going on than him, so I eventually got tired of his song. Sadly, he still seems to know only the same tune.

But we oenophiles (wine lovers) who've worked in the high end restaurant biz always like to say that White Zin is a garbage wine. However, it's probably the single reason that 95% of people who don't think they like wine, start drinking. And that's what Mish is; he's the white zin of economic analysis. he just likes his wine sweet and full of deflation. But he's always been a fan of gold, he even thinks it will do better than most other assets. he just disagrees about currencies, it seems. And we can agree to disagree.

I think FOFOA has stated it quite eloquently here, as have you.

SatyaPranava said...

For all the newbies on here, I don't envy your position coming to this site after a little over 2 years. but one of the reasons i've refrained from posting is that most of the discussions are regurgitated (no judgment) topics and questions from previous posts.

PLEASE, PLEASE, PLEASE, do yourself a favor and start reading from the very beginning of this blog, ESPECIALLY if you've only been in this a few months or years.

This is not a blog of casual reading. Agree or disagree with FO/FO/A's ideas, interpretation, predictions, or forecasting ability, there is a lot to chew on.

Best of luck to everyone!

MystryBox said...

Thanks SatyaPranava. Years ago Mish was ahead of the curve correctly seeing an upcoming deflation. But now the deflation is obvious and what we need is a view of the likely road ahead. It's FOFOA who has been ahead of the curve (correctly I think) seeing an upcoming currency "event" as a result of the deflation. And he does a great job of explaining it.

Mish's primary argument against hyperinflation is obviously wrong when you think about it historically. He claims those in control of the money supply won't allow hyperinflation because it would be the end of the game and thus against their interests. However the same would've obviously been true for any historical regime that suffered hyperinflation... pick any historical hyperinflation and you can make Mish's argument that it would be against the interests of those supposedly in control, yet hyperinflation happened anyway. So clearly those supposedly in charge of monetary matters do not have the sort of control over hyperinflation that Mish thinks they do.

Texan said...

Gilligan, they will gate digital dollars, not physical dollars. Physical dollars will be like gold internally in the US and will be disbursed on a favored elite status. No, it doesn't inspire confidence, but this AFTER the dollar has collapsed internationally.

The only thing the US imports in any meaningful, life-sustaining sense is oil. We export food. I am going off the top of my head here, but I think 20-30% of oil is domestically produced, with Mexico, Venezuela, and Canada sending us another 30% or so. They are going to get technology, food, medicine, whatever for their oil. And they will need it. The rest of our oil we get from the ME. We can surely survive with a40-50% cut in oil supplies. It will not be fun, but it won't be the end of the world either. I think it would actually fuel a massive switch to natgas cars, similar to sugar ethanol in Brazil. The US has almost limitless reserves of natgas, at least in the context we are discussing.

What will people abroad buy? Everything. Steel. Cars. Apple ipads. Manufacturing will move home, and excess stuff we have will find a new home. I recall reading a story back in 2008 when trucking crashed, the US was a major exporter of used diesel trucks, to Russia.

In short, what we are experiencing and living through is the answer to Triffin's Dilemna. The answer is that the US loses it's reserve currency status, and becomes a net exporter again ( I know, unthinkable right? Because it implies such a massive loss of living standards? Yep.).

If and when this plays out, the US will either respond as FOFOA posits, and print like mad to meet the "digital currency run", or it will gate the outflow of physical dollars, as I posit.

This is why I said way up in the thread - fire or ice. Take
your pick. Either way it's good for gold.

miked said...

MystryBox... one eternal truth is each generation thinks it is more clever than the last. This is why these things happen when all the old wise ones are dead.

Of course it's different this time ... :)

miked said...

Texan your rationalizations sound remarkably like the utterances of the lunatic policies undertaken by the fictional looting government in Atlas Shrugged by Ayn Rand.

The sort of central planning you hypothesize is exactly the kind of knee-jerk reaction that she predicted would lead to the downfall of the United States 50 years ago.

I hope God does bless America because if you are right, America will need that blessing

Edwardo said...

Texan, it seems to be there's at least one huge fly in your ointment labeled "The US becomes a net exporter again." The fly in the ointment is that the lack of access to sufficient fuel supplies will amount to a massive drag on the ability of the economy to function.

It's not even a question of a bumpy ride back to a condition where the U.S. again manufactures (what the world wants), but that the road to that place will be in such disrepair that the auto breaks down traveling to its destination.

Mexico, BTW, and FWIW, is very close to becoming a net importer of oil.

Edwardo said...

Texan, it seems to me..

Pete said...

@miked

Surely, regardless of the financial outcome (hyperinflation or deflation), there will be some political upheaval. Mugabe's military backed dictatorship of Zimbabwe survives because that is the lowest form of Government you can revert to, and it was already in that state (let's not pretend it is democracy). But democracy...surely that will degenerate to something else when TSHTF. Texan suggests in essence this is communism. How about fascism or a military dictatorship? Weimar needed saving, right? We all know who stepped up to the plate.

@Edwardo
+ 1 ... exactly the comment I was about to make.

Andrew said...

Uh huh... So let me get this straight; a heavily armed and angry middle class is going to starve whilst the current poor is going to reap the benefits because the current administration so wills it. Is that what I saw earlier? Rrrriiiggghhhttt... Sorry to be crude but that has about as much of a chance as a fart in a hurricane... I'm just sayin...

miked said...

Hello Pete

I just posted a reply to you but I will have to type it again as it didn't register.

Texan may well be right. Nobody can preclude the possibility that those in power make cash illegal.

Nobody knows what will happen, but the logical outcome of successively draconian knee-jerk interventions is that innovation will become stifled to the point where those with ability would rather sit idle than produce goods in exchange for the right to support every man except themselves. The result would be the downfall of the United States and probably much worse.

Yes Pete,which ever way the world goes there will be huge convulsions, but the perpetuation of mediocrity - the support of the needy at the expense of the able - will just result in bigger and worse disasters down the road. A socialist government would respond with more regulation further seeking to expropriate wealth from the producers and redistribute it to those in need. After all the productive are fewer than the needy and every man gets one vote, and the socialists know this.

The only answer which can possibly lead to a bright future is to reset debts to zero and dismantle the welfare state, whereby each man should take pride in exchanging the fruits of his production for the fruits of another man's production at an honest price. Self interest is beneficial to society only when there is no handout culture. Bailout after bailout and regulation after regulation are the enemy of free trade.

costata said...

MystryBox,

I exchanged e-mails with Mish in late 2007/early 2008. My question was in relation to Mises "crack up boom". At the time I thought that the necessary pre-conditions had been in place for some time.

He dismissed me saying that there could not be a crack up boom unless residential RE was rising in price. IMO that response betrayed a poor understanding of RE fundamentals (and Mises + Austrian economics for that matter).

Suffice to say I still read some of Mish's posts for topicality and info but not for analysis. As I asserted in an earlier comment, I think he is an observer not an analyst.

Pete said...

I'm definitely in agreement with you miked

Although for all those people who support gold here, you might want to think twice:

http://chainsawsuit.com/comics/20100922.png

;)

FOFOA said...

When a government tries to control an object (think: controlled substance) it sends it into a black market. It loses the control it was seeking. And when that object is the very engine of that government's power (think: physical dollars), it loses that control as well. At that point it must go to the black market to find what it needs. And it will have to pay that black market in the terms of its (the black market's) choosing. You can arrest a man, but you can't arrest a market.

Whether markets are free from government or not (a relativistic question), market forces are always present. Government domination cannot outlaw market forces.

I think you are all giving the US government far too much credit considering it is about to lose its golden goose. To me, you are all thinking like deflationists. You are describing the present situation of the federal government and projecting its present abilities into a future without the dollar. A ludicrous projection!

Soldiers don't fight without a paycheck that at least buys an apple. Even the stooges won't show up for work. And I'm talking about buying an apple at the market where apples are actually being sold. Not the government bread-lines for those with inflation protected food stamps, where you can "afford" all the food your family needs except that there's not enough to go around.

What you think of as the big domineering federal government is nothing without public confidence in its currency, the physical dollar. And confidence is one thing it CANNOT force. Confidence is the ONE thing that must be earned. The entire federal government operation from Pelosi to Private Benjamin will stop on a dime the minute it can't pay its stooges in inflation-adjusted terms.

Blocking (or "gating") electronic capital flight will be the least of its worries when the dollar goes. It'll be the outside world that'll be blocking the dollar at the exits, not the USG! How many zeros to add in the first batch of new bills will be the main question at that point. And the speed capability of the Fed's printing press will be the determining factor in answering that question.

Hyperinflation will be fast. Six months maybe. After that, Freegold. And trust me, most of you have no idea what I mean when I say Freegold. I can tell by the comments lately.

Paul said...

OK for what it's worth, this is what freegold means to me:

No more 50% of GDP wasted on a bullshit tail-chase called "Let's create wealth by creating wealth".
No more of our best and brightest, who should be focused on the NEVER ENDING list of crises coming down the pipe, being sucked into running a state sponsored ponzi scheme.
No more endless development of OFFICE SPACE. We don't need more OFFICE SPACE, we need to blow the offices the fuck up, and MAKE STUFF where we now FILE FUCKING ENDLESS PAPER.
No more soul destroying, black clad, "I'm in mourning for myself, and I don't even know it", zombie fucking commuters, mindlessly producing fuck-all, because paper wealth has fucked up all notions of need based investment.
No more $300,000,000 investments to build a minutely faster fibre optic link between Chicago and NY, so robot traders can get a 3 millisecond jump on the opposition, when our bridges are collapsing and our gas pipes are exploding for lack of investment.
No more FX trading ads

That feels better. Sorry about the swearing. Feel free to delete.

miked said...

FOFOA, do you have a link to a post where you discuss why the fact that the US gold is accounts for at 35$ an ounce will make a difference to the end game?

I don't see how the accounting matters once the system blows up. Surely what matters is the 9000 tons in Fort Knox and not how it's written into the balance sheet?

Mike said...

i believe the fed values gold at $42.22/oz not $35.

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