Monday, April 4, 2011

Big Gap in Understanding Weakens Deflationist Argument


Last night Rick Ackerman published a piece called Big Gap in Logic Weakens Hyperinflation Argument:

"My argument is simple, and I will not yield ground to any hyperinflationist who fails to explain, if the system collapses, where the money will come from to bid tangible assets skyward."

Several of Rick's readers directed him to one of my posts to which he replied:

"Well, I tried. The thoughtful but logic-challenged article you’ve linked, as well as every “pro-inflation” comment in this forum, has contrived to ignore the main point of my essay — namely, that all of that printing press money would have to find its way into the economic system to become hyperinflationary. Please tell me how this would occur. And while you’re at it, explain how hyperinflation would occur if the financial system were to collapse this very evening. Please don’t try to argue that this is impossible."

Logic-challenged as I may be, it appears that Mr. Ackerman has thrown down the gauntlet here on a very specific question. It is a question that was clearly addressed in my most recent hyperinflation posts, but I will try again to clarify it here. Rick asks:

"Where will the money come from to bid tangible assets skyward?"

I will try to answer this question with the simplest possible answer (Occam's preference). I will avoid complicating elements like internal versus external dollars and international controls and flows. I'll just stick to fundamentals, as well addressing his additional challenge:

"And while you’re at it, explain how hyperinflation would occur if the financial system were to collapse this very evening."

First, the question. "Where will the money come from?" is a question of supply. Yet the answer to hyperinflation lies on the demand side of the equation. This is Rick Ackerman's big gap in understanding. Let me explain.

The value of money, like everything else in life, derives from supply and demand. There are two distinct entities that each control one side of the equation, kind of like a tug-of-war. The printer controls supply and the marketplace controls demand. A tug-of-war is actually an apt analogy. When demand for a currency spikes its price, the printer just eases his grip on the rope, releases more rope and the whole demand side just falls on its butt.

We saw this with the yen after the earthquake and with the dollar a little over a year ago. With a fiat currency, this is the way it works. No matter how hard demand pulls, if the printer doesn't want the price of the currency to spike all he has to do is release more rope. It's his ace in the hole. He can always send the marketplace to its butt. The printer is firmly in control of the supply side.

But in the same way that the marketplace has no control over the supply side, the printer is powerless on the demand side. ANOTHER alluded to this years ago when he wrote:

Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!

So it is the receiver of currency—not the giver—that determines its value. That's the power of demand. And what do you think happens to the printer when the demand side drops the rope? If he was pulling he falls on his butt. If he was releasing, he's now pushing on a limp string. And this is part of what confounds deflationists. They can only imagine hyperinflation happening while demand is pulling and the printer is releasing. They imagine "inflation-on-steroids," but that's not how hyper works.

The measure of any money's store of value is a continuum of time. It is directly linked to demand and velocity. Even the worst money (say, Zimbabwe dollars during the hyperinflation) works as a very temporary store of value. Perhaps you read stories about workers in Zimbabwe getting paid twice a day and then running out to spend it before coming back to finish the shift. This is an example of the briefest time period in which currency stores value.

The point is, this is the way collapsing money demand plays out in reality. It plays out as the collapsing of the store of value time continuum scale. And as the time in which a currency stores value becomes shorter and shorter, the currency circulates faster and faster.

So a falling demand = a rising velocity. Likewise, a rising demand = a falling velocity and a longer store of value. And that's how money demand works. Now let's look at how the two sides of the supply and demand equation (tug-of-war) can affect the value of a currency.

During stable times money is always in demand, more or less, which gives the supply side (the printer) control over the value of a fiat currency. He can loosen or tighten at will, because the demand side is always, to some extent, pulling on the rope. So during stable and predictable times, it is fair to say that the value of money is primarily a factor of quantity, or supply. Demand for money (or its velocity) is relatively stable during these times delivering (almost) full control of value to the printer—the supply controller.

But during unstable times something changes. The demand side of the equations suddenly takes value-control away from the printer. This is where we are today, and where we have been since 2008.

When the economy is struggling, unemployment high, home prices falling, people are afraid to spend their money. This drives up the demand for money, slows the velocity of money, raises the value of money and lowers the prices of things and assets. Likewise, when the financial markets are crashing, the demand for cash skyrockets while plunging assets bid frantically for dollars. Both of these demand-driven events act just like a large deflation in the money supply as they drive up the value of money and lower the prices of other things.

When this happens, the money printer tries to counter demand by increasing supply. But today, clearly, demand is in the driver's seat, not supply. That's because in 2008 we moved from the stable and predictable into the unstable and uncertain.

Now I want you to think about this for a moment. Because everything I've been describing so far sounds like deflation. And I have hardly mentioned prices, or the difference between credit money and physical cash, or the difference between luxury items and necessities, or any of the other myriad things that confuse and complicate the issue. And that's because I'm trying to focus your attention on this one concept. That the printer is no longer in control of the value of currency through the supply side. Instead, the marketplace is now controlling it from the demand side. And so far that has meant mild deflation.

You see, monetary supply and demand can act as exact substitutes for each other. A 50% rise in demand has the same effect as the 50% decline in supply. Or said another way, it takes a 100% increase in supply to counteract a 100% rise in demand. And that's exactly what we see happening today. A spiking demand for currency because of instability in some markets and the economy, as well as earthquakes and unrest in the Middle East, jacks up the price on the currency exchange and drops the price of other assets which is instantly met with quantitative printing (supply increases) to ease the pain, raise the price of assets, and recklessly counter that which is actually in the driver's seat today, demand.

Once again, during stable times, supply gently drives demand. During unstable times, demand drives (forces the hand of the printer who controls only the) supply. Did you figure it out yet? During stable times greed allows the printer of the currency to drive its value through supply controls. During unstable (or uncertain) times fear takes the wheel, leaving the printer at its mercy in the back seat.

So what are you afraid of? And what is everyone else afraid of? Could other people's fears ever affect (or change) yours? What are you more afraid of, running out of dollars or dollars becoming worthless? This is the problem with fear; it can turn on a dime without ANY notice.

Here is part of a comment I wrote on March 15th, following the initial response of the markets to the Japanese earthquake:

Fear is the main emotional motivator in any currency collapse, just like it is in financial market meltdowns. And as we saw even just last night, the herd can stop on a dime and reverse course 180 degrees overnight, from greed to fear, based on a single news item.

The initiating spark of hyperinflation (currency collapse) is the loss of confidence in a currency. This drives the fear of loss of purchasing power which drives people to quickly exchange currency for any economic good they can get their hands on. This drives the prices of economic goods up and empties store shelves, which causes more panic and fear in a vicious feedback loop.

The printing of wheelbarrows full of cash is the government's response to price hyperinflation (currency collapse), not its cause. This uncontrollable (knee-jerk) government response happens in some cases, but not all. Let me repeat: The massive printing that first comes to mind when anyone mentions hyperinflation is not the cause, it is an effect, in the common understanding of hyperinflation which is the collapse of a currency.


Deflationists like to view the economy as a machine. They think "this money here must reach this quantity and then flow there and only then that will happen." But the economy isn't a machine. Machines don't have emotions like greed and fear, but the economy does.

I can't say what will trigger the shift from fear of running out of dollars to fear of dollars becoming worthless. It could be anything. It could very likely be Rick Ackerman's inevitable "catastrophic collapse that could conceivably run its course in a week, if not mere hours"! All I can say for certain is that it will happen fast and unexpectedly at some point. And when it does, the demand side will release its grip on the currency "tug-of-war rope" and run over to the "real stuff rope" and start tugging on that one.

Rick writes (in a comment): "And while you’re at it, explain how hyperinflation would occur if the financial system were to collapse this very evening."

Okay Rick. If the financial system collapsed tonight and wiped out everyone's assets, their 401Ks and IRAs, their pension and trust funds, the US dollar would spike on the currency exchange like never before. I could imagine it rising well above 100 on the USDX, maybe even to 150, as all that financial sludge frantically unwinds. As you say, many will simply be wiped out as much lower valuations are imputed onto their 401Ks. They will never see it coming; never get the chance to withdraw that retirement money and use it to bid up real goods. So what? Do you really believe this will cause the dollar's purchasing power to rise?

What do you think will be the Fed's response? I'll tell you. It will make sure that the supply of dollars matches the demand. It will do another emergency $500 billion swap with foreign CBs to calm the foreign exchange market. It will expand its balance sheet once again to make sure there is plenty of liquidity here at home. And it will start buying whatever crap the primary dealers bring to its window. It will flood the markets with fresh Fed liabilities (obligations to print more cash) in a futile attempt to quell demand as the dollar goes to 100, 110, 120… up, up and away.

But no matter what quantity of financial assets are wiped out, the cash in the system will remain. And the obligations for more cash printing will remain. And that's all the cash it will take to spark the most amazing hyperinflation the world has ever seen, as the fear turns from 'running out of dollars' to 'running out of food' in the wake of a devastating financial collapse.

In parts two and three of my September hyperinflation posts I explained how the US government MUST respond to a currency collapse by printing more currency in order to keep its stooges doing its bidding. I explained the mechanism by which the hyperinflation will become a physical cash hyperinflation, not an electronic credit money hyperinflation because bank credit money will devalue faster than the cash. And I explained the mechanism by which million dollar Federal Reserve Notes will find their way into the hands of hungry, impoverished and unemployed people on food stamps. Hint: It's not through credit expansion or rising wages! LOL

Here's the thing. Hyperinflation is a currency event only. The price of three eggs may well rise to $100 billion as seen in this photo:


But those same eggs will still only cost one apple. This is an important enough concept that you should spend some time thinking about it. There will be shortages. Supply lines will be disrupted. And the relative value of stuff will change. But it won't change anywhere near the extent to which currency values will change. And if there's one thing the US has after 30 years of deficit spending, it's lots of real stuff! Tonnes of it!

I remember when my neighbor had his house foreclosed. He still had four cars, lots of very nice furniture and a quad-runner in the garage. Two of the cars were subsequently repossessed and when I saw him a few months later he was driving a much older car. But the point is, he was not only broke, he was in a negative net-worth hole of several hundred thousand dollars yet he still had all this stuff!

I have another friend who is equally broke yet he has all of the latest gadgets. He has the best digital camera, a nice iPhone, three computers, at least two iPads (he has to get the new one whenever it comes out) and much much more. There is lots of "stuff" here in the States. Lots and lots of it! And much of that stuff will become a secondary currency of sorts when the hunger sets in. That's how an impoverished, unemployed American will get his hand on the new US$1 billion note. He'll sell his iPad to a government stooge for a billion so he can buy a loaf of bread!

Think about it. That's all I ask.

And once again, here are the links to my three "logic-challenged" hyperinflation posts. They are recommended reading by economics professor Dr. Krassimir Petrov. Professor Petrov also recommends one of my older hyperinflation posts from two years ago, a recommendation that I second.

Just Another Hyperinflation Post - Part 1
Just Another Hyperinflation Post - Part 2
Just Another Hyperinflation Post - Part 3

Lastly, I would like to draw your attention to a couple of excellent comments posted today by my readers in response to Rick's Picks. Aaron posted here. And Lookma posted here.

Hopefully I answered Rick's question with a little dose of fresh understanding.

Rick: "Where will the money come from?"

FOFOA: "It's already here. You need only understand how hyperinflation actually unfolds to see it."

Sincerely,
FOFOA


(If you can't see the video, click here.)

102 comments:

John said...

First to the comments?!

My simplistic understanding - if NOBODY wants dollars, then the dollar denominated price of assets will SKYROCKET. Loss of faith in currency = true hyperinflation as opposed to 'lots of "normal" inflation.'

John said...

Many discussions about hyperinflation are rendered pointless by differences in definitions of terms (e.g. with Mish in the past). At least Mish makes clear his definition of hyperinflation (an increase in the supply of currency, I think?), but he doesn't really follow this through to a proper consideration of the other arguments (imho).

costata said...

FOFOA,

Home run. Outta the park. Great post.

Cheers

John,

The word "assets" trips up a lot of people when they try to discuss this issue. Some "assets" will be on their asses during a hyper-inflation, others wont. As FOFOA suggests in this post someone with a mechanistic view of the economy may find it obscures their vision and clouds their judgement.

For example: I note the argument from the articles linked to Rick's piece that the PTB would never "allow" a hyper-inflation to clear J6P's mortgage for cents on the dollar. This argument might stack up if the PTB had no avenues to take the extra cash right out of J6P's pocket again.

BUY. EASILY. HIDDEN. WEALTH. NOW.

nirvs said...

Awesome post FOFOA! Even I understood the deflation/inflation argument!

Fear is getting more prevalent.

If the reach of this article which was sent out by Gata yesterday reached the common man, the EVENT would happen sooner than we think:

http://paul.house.gov/index.php?option=com_content&view=article&id=1845:the-fed-undermines-foreign-policy&catid=62:texas-straight-talk&Itemid=69

Dave Harrison said...

Indeed, these concepts are consistent with my "overnight reset switch" thesis. However, I do have one key disagreement in regard to fear-based scarcity. It too is a deception which will be propogated when in reality there is sufficient tangible goods (food, clothing, shelter & even employment) for everyone to prosper. Nonetheless a willingness to accept the scarcity deception is all that is necessary for it to prosper as a weapon formed against those who submit to it.

Dave Harrison
www.tradewithdave.com

Wejn said...
This comment has been removed by the author.
Jonathan said...
This comment has been removed by the author.
Aaron said...

Hi Dave Harrison-

"However, I do have one key disagreement in regard to fear-based scarcity. It too is a deception which will be propogated when in reality there is sufficient tangible goods (food, clothing, shelter & even employment) for everyone to prosper."

While this may or may not be true on a grander scale, when you begin to think more locally you'll see shortages are more than mere deception. Take toilet paper for instance. If I head over to Hannafords super market and look at the shelf, I'm going to find some 40 cases of toilet paper (a case being 12 rolls packaged together). During hyperinflation it's only going to take a few arms sweeps by a couple of customers to wipe out the supply. At that point the store it out until the next shipment comes in. If I head over to Shaw's super market across the street, same deal. Down at the corner store? They'd be lucky to have more than 40 rolls in stock. So you can see that during hyperinflation, the stores in my neighborhood don't stand a chance of keeping toilet paper in stock. Now, forget the toilet paper and expand this idea to all of the items you need on regular basis -- many of which you'd prefer not to live without -- like toilet paper. Now think about the fact that Hannaford's and Shaw's suppliers are also going to want at least partial payment if not the entire payment in cash. How long is it going to take to complete that transaction to get the next delivery truck rolling?

So you see, the coming shortages are VERY real and will affect many people. Scroll back up and take a look at the link FOFOA posted to empties store shelves. (<- or click right here)

--Aaron

nirvs said...

I just started reading the UPDATED edition of Adam Fergusson's "When Money Dies"...the story about how Hyperinflation got started in Wiemar.

At the end of the "Note to the 2010 Edition" Fergusson states:

"People's trust in their currency is here a central theme. As it evaporates, they SPEND FASTER, the velocity of circulation increases, a little money does the work of much, prices take off, and more money is needed." ...confirms FOFOA latest...

Matt said...
This comment has been removed by the author.
Jeff said...

SINGAPORE, April 1 (Reuters) - The world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust , posted in the first three months of 2011 its biggest quarterly drop since inception as the prospect of interest rate hikes and gains in other commodities drove investors to sell.

The SPDR Trust, which issues securities backed by physical stocks of precious metal, said its holdings stood at 1,211.229 tonnes by March 31, down 5.4 percent from 1,280.722 tonnes in the quarter to December 2010. That represents the holdings' biggest quarterly drop since the trust was created in 2004.

Jeff said...

snip

"If gold behaved like copper, you would expect the price to come off when you see a buy strike, but it seems there are people who are willing to fill that gap in terms of physical market flows when the ETF buying dries up," said Hayden Atkins, a London-based analyst at Macquarie Bank.

"There is lots of physical retail buying outside of the ETFs, through Asia in particular."

Redhill said...

Thank you FOFOA

Indenture said...

Thank You FOFOA.
Just a reminder for everyone, please plan to skip one meal in the next ten days for the 'Fasting With FOFOA National Tax Day Netathon' where on April 15th we can support our Nation (I'm not dead yet) and our Guide with a small donation.

ebikeguru said...

This post will go a long way. Just what I needed to cross a few more trail posts on the path to understanding the view from a far.

Cheers FOFOA

fredquimby

DP said...

this.altName = "It's the velocity, stupid!";

Robert said...

EXCELLENT post again, FOFOA. Every time you're up at bat, you bang it out of the park.

lagedargent said...

Thank you for wielding Occam's razor so delicately, FOFOA.
At Zero Hedge, Gonzalo Lira is slicing up Rick's fishy propositions with his fine knife of logic, but your cuts deal with the more substantial parts, to my liking.

DP said...

"Where will the money come from to bid tangible assets skyward?"

Perhaps the initial sparks, the seed capital, comes from the Supreme Court of Judgement for the value of the dollar, and from there perpetual motion (of dollars) takes over.

Ore em' said...

Here is the link to the Gonzalo Lira article (sorry, don't know how to embed):


http://www.zerohedge.com/article/gonzalo-lira-vs-rick-ackerman-slicing-logic-behind-no-hyperinflation-argument

Aaron said...

Hi Lagedargent/Ore'em-

Gonzalo Lira doesn't seem to understand hyperinflation very well either.

GL states:

"And this fleeing from the currency is not the cause of hyperinflation—it’s merely an effect, when the population as a whole has realized that the jig is up, with regards the currency."

The onset of hyperinflation is precisely the result of people fleeing a currency. It is this event which sends prices skyward. GL seems to think the onset of hyperinflation is from "Spiralling prices that cannot be reigned in with traditional monetary policies of interest rate hikes" and those spiraling prices are a result of -- something other than fleeing the currency? I didn't catch that part.

He goes on to mention velocity in hyperinflation as "how hot the cash becomes", but seems to lose this concept when he mentions, "hyperinflation is a pricing issue."

Anyway, I stopped reading after that.

--Aaron

Pete said...

I find it strange that no-one has mentioned the repatriation of US dollars as a force for hyperinflation.

In my view this is one of the most compelling parts of the hyperinflation argument - particularly as it seems to counter the "USD is the reserve currency, we can do what we like" argument.

JR said...

Hi Pete,

I find it strange that no-one has mentioned the repatriation of US dollars as a force for hyperinflation.

FOFOA from above on the collapse of the store of value being key:

The point is, this is the way collapsing money demand plays out in reality. It plays out as the collapsing of the store of value time continuum scale. And as the time in which a currency stores value becomes shorter and shorter, the currency circulates faster and faster.

Likewise, when the financial markets are crashing, the demand for cash skyrockets while plunging assets bid frantically for dollars.

When this happens, the money printer tries to counter demand by increasing supply.

A spiking demand for currency because of instability in some markets and the economy, as well as earthquakes and unrest in the Middle East, jacks up the price on the currency exchange and drops the price of other assets which is instantly met with quantitative printing (supply increases) to ease the pain, raise the price of assets, and recklessly counter that which is actually in the driver's seat today, demand.

The initiating spark of hyperinflation (currency collapse) is the loss of confidence in a currency. This drives the fear of loss of purchasing power which drives people to quickly exchange currency for any economic good they can get their hands on. This drives the prices of economic goods up and empties store shelves which causes more panic and fear in a vicious feedback loop.

The printing of wheelbarrows full of cash is the government's response to price hyperinflation (currency collapse), not its cause. This uncontrollable (knee-jerk) government response happens in some cases, but not all. Let me repeat: The massive printing that first comes to mind when anyone mentions hyperinflation is not the cause, it is an effect, in the common understanding of hyperinflation which is the collapse of a currency.


Cheers, J.R.

JR said...

FOFOA’s FOA on Hyperinflation

Mr. Traveler: conversely: the "real" inflation I point to is largely a cash phenomenon, where all the past massively over-created credit instruments are bought up by the money making authorities and paid for with printed cash or allocations to the owners digital cash accounts.

As I stated above, the credit hyperinflation has already occurred. It's there, in place as we speak.

Truly, the vast bulk of overall debt assets standing against US credit extending institutions dwarfs our ability to service with real goods. Even at vastly diminished prices. These debt structures are held for further fiat accumulation only. Truly a Western Thought concerning wealth. Once an economy begins to get into trouble, everyone flees these very instruments


Cheers, J.R.

JR said...

FOFOA’s Credibility Inflation

In late 1982, realizing that this charade could not be continued, The U.S. Treasury eliminated the "difference" between the "temporary" and the "permanent" debt ceiling.

The way was cleared for the subsequent explosion in U.S. debt. With the U.S. being the world's "reserve currency," the way was in fact cleared for a debt explosion right around the world. It was also cleared for five of the biggest bull markets in history.

The global stock market boom of 1982-87
The Japanese stock market/real estate boom of 1988-90
The Dow (and then Nasdaq) led boom - late 1994 to March/April 2000
The great global real estate boom of 2002-06
The global stock market revival of 2006-07 [1]

Periods of high credibility inflation are generally not followed by smooth cycles of credibility DEflation. Instead, they tend to SNAP BACK into sudden real price inflation when confidence abates. What happens in the most extreme cases is real price HYPERinflation.

This is one of the main concepts deflationists and mainstream economists completely miss; the SNAP-BACK of credibility inflation that can instantly take down their precious fiat currency.

Rising prices come and go, but money inflation continues to affect us without fail. So why do people feel better when price increases slow or stop, even as money inflation runs ever upward? The good feelings usually evolve from the effects that money inflation (increases in the money supply) has on financial instruments. These assets take on the very same characteristic that the rising prices of goods once exhibited. They run up in currency price.

During these periods of "less goods inflation" another sinister form of mindset lurks in the shadows. Credibility inflation! Yes, it has been here many times before as every fiat currency alternates its effects upon the feelings of the populace.

what sets the stage for hyperinflation is a period of high credibility inflation followed by the loss of credibility. During our period of high credibility inflation the dollar was invisibly hyperinflated in a near-monetary sense. This has already happened. We are already there.

When I say the dollar has already hyperinflated in a near-monetary sense, I am talking about the number of dollars people, entities and even foreign nations think they have in reserve. Not in a shoebox, but in contractual promises of dollars to be delivered more or less on demand by somebody else. Claims denominated in dollars. This is how the vast majority of "dollars" are held; as promises to deliver more dollars. And this is why they are held this way. Because of the more in "more dollars." "Let me spend your dollars today and I will give you more dollars tomorrow!"The Credibility Waterfall

I think it is fair to say that we have finished our 30-year run of high credibility inflation and we are now in the early stages of credibility deflation. The real question now is, can the credibility of the financial system deflate without tripping a breaker, without causing a credibility waterfall in the currency in which it is denominated?

The difference between today and a few years ago is that a few years ago credibility inflation was being fed by private credit (debt) expansion. Asset values, like homes, were being sustained and driven higher with the arrival of new marks. But today the Ponzi cycle of credibility inflation has peaked, there are no more new marks, and its decline is being managed centrally with the government expansion of new base money to conceal the failures one at a time.



Cheers, J.R.

Pete said...

Thanks JR. I have read those articles before. My point was that the repatriation argument was not used, which surprises me.

I guess that repatriation would be a symptom of the onset of hyperinflation. A bit like hyperinflation being a spark that starts a campfire. I expect that the repatriation of USD would be similar to throwing a bucket of petrol on it.

matt said...

@ Aron

Yes Gonzalo seems to get a a few things wrong but he is an interesting guy.

I think he is the second best hyperinflation writer out there. He lived through a hyperinflation so he has some good takes.

He is one of the only hyperinflationsists that points out that some assets fall even nominally during hyperinflation.

His simple explanation "bank run on treasuries" is also a good take. Thats all it amounts to anyway..Treasuries are the worlds bank and there will be a bank run on treasuries.

matt said...

@ Pete

Americans are so out of it that it is easily possible that the run on the dollar starts overseas rather then the US.

julian said...

Excellent comments so far!

Cause and Effect. Observe correctly and you shall view with accuracy what truly is. Observe mistakenly and you shall interpret the image falsely.

FOFOA your observations are so sharp. Your works on Reference/Focal Point Gold and on Hyperinflation are worthy at least of honourary Doctor of Philosophy on Human Action, which is the central focus of Economics, in my view.


Plus, on a related note to hyperinflation and this whole monetary mess in general, if you "consume" Gold you Save at the same time. It's like 'going green' for the Economy!!

It dawned on me in one of the images of the closing video, where the human was holding a significant stack of red and other coloured "dollars" in the right hand, and a single 10 "dollars" FRN in the other hand. It caused me to imagine the right hand being full of FRN "dollars" instead, with the left hand holding 1/10 Au. The quantity is arbitrary. It's the principle of it that struck me. Value!!

Things made a lot of sense just watching that montage, keeping FOFOA's observations in mind.

(I don't mean to unwarrantedly attribute any observations to FOFOA which weren't conceived by him, or which are already commonly considered. I just attribute these to him because I haven't heard it from anybody else. I figure A/FOA and all the other "Great Thinkers" who shared hikes on the trail have a hand in it.)

Kindly,

Julian

costata said...

Pete,

Did you see this article?

"At the White House on Dec. 15, business executives asked President Obama for a tax holiday that would help them tap more than $1 trillion of offshore earnings, much of it sitting in island tax havens."

http://www.bloomberg.com/news/2010-12-29/dodging-repatriation-tax-lets-u-s-companies-bring-home-cash.html

Some estimates put the amount as high as $2 trillion.

There is also a strong argument that repatriation wont play a role in what is coming. If China, Japan etc tried to liquidate a significant portion of their US dollar paper holdings it would crash the market as A/FOA described. I suspect that they will be forced to eat the losses while the favoured few (above) can repatriate.

There is also the question of what China would be permitted to buy if they were able to liquidate. Perhaps a few nukes, with free delivery thrown in to seal the deal.

Yet, the hyper-inflation could be triggered outside the USA. Perhaps by the street vendors in some tourist hotspot saying: "No dollar". Or a Bureau de change that hangs a sign in its window saying: "No dollar".

Hugh said...

Great post.

One thing I see often forgotten in this recurring discussion, is that hyperinflation if/when it comes knocking in the US, will be a uniquely US domestic phenomenon.

If revulsion of the USD occurs, international markets will blow up other currencies as the markets swap out of it in search of a value store + liquidity. I think the dislocation of trade will ultimately cause deflation in many of the US's trade partners...

Weimar and Zimbabwe, Argentina etc. are not really comparable, as the bulk of their currency was held at home, at the time of revulsion. Where as much of the circulating USDs or equivalents, are held by foreigners.

I hope I'm on holidays if it happens... somewhere remote and without internet..

costata said...

Hugh,

FWIW agree 100%

I think the dislocation of trade will ultimately cause deflation in many of the US's trade partners...

And not just direct trade partners. The US$ interposes itself in most (all?) bi-lateral trade.

Will suppliers be prepared to export to the USA if they cannot be certain of the exchange value of the US$ on settlement?

They could demand guarrantees, refuse supply, demand payment in their own currency, demand payment in a third currency and so on.

Lots of potential for asymmetrical outcomes.

mtt04 said...

Mogul rider

In every debate there are those that scurry to have the right answer. They hold on to that answer to the grave.

But could it be that there is a 3rd answer?

You and Rick will die on the sword it seems of either inflation or deflation.

That is your failure. It will be both IMHO.

As you all scurry to spend your cash for fear of hyperI you buy assets that get crushed by Deflation.

In the end, you all lose because you fail to understand one thing.

There is no safety. You can manage your investments and hope that 50% of them survive.

That is history and that my friends after taking away everyone's ego is the true answer.

Buy and hold and you die.

sean said...

Very good point Hugh.
Just a thought, but I wonder what the effect of the loss of USD credibility would have to the credibility of other currencies. ie: could "credibility contagion" spark hyperinflation in other currencies too?

julian said...

mtt04 said:

You and Rick will die on the sword it seems of either inflation or deflation.

That is your failure. It will be both IMHO.

As you all scurry to spend your cash for fear of hyperI you buy assets that get crushed by Deflation.


my thoughts,

keeping in mind that hyperinflation is neither inflation nor deflation, per se...

if there is both inflation and deflation, some things will inflate in price(/value?) and other things will deflate in price (/value?)

therefore some things will go up, some things will go down, AGAINST some point of reference

what will this point of reference be? and will it remain the point of reference throughout, or will the reference point shift during such a punctuation?

If "safety" assets will be crushed by deflation, then what is it against which they will deflate? By what measure will they deflate?

Will 1 median sized home still cost 400,000 apples?

What will these safety assets deflate against? A currency? If so, this is the safety. If it is against some other point of reference, then this point of reference would be the safety whose value would then be increasing against these other assets.

Either way, based on my (mildly learned) understanding, if "store of value/ decent value holding" assets are deflating, they are deflating against some thing.

Perhaps all things will deflate against fresh foods? Clothing? What else is there of value?

I think many here already imagine what that thing will inevitably be.

In due time, we might be given the opportunity to see for real.

Let me know if my thinking is flawed on this.


Cheers,

Julian

sean said...

by the way, Rick Ackerman has posted a riposte G.Lira on his blog, but it's getting embarrassing reading his poorly constructed arguments. For a start he completely fails to defend himself against the point that he's only presenting arguments against hyperinflation, and not actually presenting any for deflation.
He also seems rather smug about the fact that the debtors will lose out (in his scenario), which seems unwarranted in light of this

JR said...

Hi Pete,

Perhaps the argument is one of repatriation. FOFOA from my above post:

I am talking about the number of dollars people, entities and even foreign nations think they have in reserve. Not in a shoebox, but in contractual promises of dollars to be delivered more or less on demand by somebody else. Claims denominated in dollars. This is how the vast majority of "dollars" are held; as promises to deliver more dollars.

***

One has to see that the number of dollars held in dollar denominated debt dwarfs actual physical dollars, at least as long as credibility is maintained in these instruments as a store of value. The tale of Another is really just an economic exposition into why 1) the $IMFS is a structurally flawed system whose store of value component (debt, aka contractual promises of more dollars in the future) will fail and 2) the form of the monetary system likely to emerge from this collapse.

***

As FOFOA has explained in Dilemma:

the dollar is the national currency of a single nation-state, yet it is also held globally as a reserve currency to serve all of its global uses, which in turn give it value even today through the global network effect. So how is this a flaw? Well, it leads to a conflict of interests between the issuing nation-state's internal and external obligations as manager of the currency. This is called the Triffin Dilemma.


From Wikipedia: The Triffin dilemma (less commonly the Triffin paradox) is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with ,enough of its currency to fulfill world demand for foreign exchange reserves.

The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.

The Triffin dilemma is usually used to articulate the problems with the US dollar's role as the reserve currency under the Bretton Woods system, or more generally of using a national currency as an international reserve currency.


***

JR said...

This inherent conflict in international trade, the Triffin Dilemma, is why FOFOA discusses the balance of international trade so much, like he most recently did in A winner takes the gold:

Before 1971 the trade deficit was settled by exporting gold (via the gold window) to those running a trade surplus with the US. The problem with this system was that gold was fixed at a dollar price. So the US reserves were quickly run down by maybe 65% in 20 years. This was a problem because it was clearly unsustainable.

After 1971 the trade deficit was settled by exporting US Treasury debt bonds. And as we can see, this system is also clearly unsustainable. It cannot be reversed without collapsing the system. Joseph Stiglitz alludes to this in that FT piece:

"These deficits are necessary, for creating sufficient global liquidity, but they also generate excessive indebtedness, both external and internal. So if the US were to shrink its deficit too quickly, a deficiency of supply of the global reserve currency could result."

Simply stated, the modern monetary system creates a debt monster that must be perpetually fed.


***

Remember FOFOA’s follow up to his Dilemma post? It was called Homeless Dollars :

So in keeping with the theme of Monday's post, "the network effect," I thought it would be interesting to explore what might happen to all those "homeless dollars" if "the effect's" feedback loop were to turn sharply negative.

JR said...

Sorry,

My above above is a continuation of the below post, which got lost in Blogger:

Hi Pete,

IMO the argument is one of repatriation.

I am talking about the number of dollars people, entities and even foreign nations think they have in reserve. Not in a shoebox, but in contractual promises of dollars to be delivered more or less on demand by somebody else. Claims denominated in dollars. This is how the vast majority of "dollars" are held; as promises to deliver more dollars.

***

One just have to see that the number of dollars held in dollar denominated debt dwarfs actual physical dollars, at least as long as credibility is maintained in these instruments as a store of value. The tale of Another is really just an economic exposition into why 1) the $IMFS is a structurally flawed system whose store of value component will fail and 2) the form of the monetary system likely to merge form this collapse.

***

As FOFOA has explained in Dilemma:

the dollar is the national currency of a single nation-state, yet it is also held globally as a reserve currency to serve all of its global uses, which in turn give it value even today through the global network effect. So how is this a flaw? Well, it leads to a conflict of interests between the issuing nation-state's internal and external obligations as manager of the currency. This is called the Triffin Dilemma.


From Wikipedia: The Triffin dilemma (less commonly the Triffin paradox) is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with, enough of its currency to fulfill world demand for foreign exchange reserves.

The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.

The Triffin dilemma is usually used to articulate the problems with the US dollar's role as the reserve currency under the Bretton Woods system, or more generally of using a national currency as an international reserve currency.


Cheers, J.R.

mortymer said...

1/2
“The Role of Gold in the unified GCC Currency”
first published January 2005 in Dubai, United Arab Emirates, by the Gulf Research Center, as part of the GRC Gulf Papers Series.
http://tinyurl.com/436whaq

* Introduction
- The Unsustainable Paper Dollar Standard
- The Euro And Other Paper Currencies As Questionable Alternatives
- The “Barbarous Relic” And Critical Silences Of Mainstream Economics
- The “Barbarous Relic” And Critical Silences Of Mainstream Economics
- A Tricky Gold Market, A Failed Gold Dinar And Unprepared GCC Central Banks
* The Demise Of The Bretton Woods System
* An Alternative To The Paper Dollar Standard? Exploring The Gold Standard
* Asset Protection, Manoeuvrability Of Central Banks And The Role Of Gold
* The GCC Currency Systems And A Trade Weighted Currency Peg
* The Manipulation Of The Gold Market Since the 1990s
* Shrewd Women And Unprepared Central Banks: Private And Official Gold Holdings In The GCC Countries

[Mrt: I like this sentence: "...But the actual physical gold itself has long left the vaults and now hangs around the necks of the women of the world. These women are the “ultimate longs” in the market while the banking system stays out in the rain with a
gigantic derivative short position of up to 16,000 t...."

"...The paper dollar standard is a dead man walking. Its debt, accumulated over the recent decades, is too high to be effectively repaid. It will either default or be inflated to such an extent that it will not hurt to “pay” it back. Therefore, the accrued imbalances in global finance and the inherent weakness of worldwide growth models that rely on a continuance of US deficit spending are likely to usher in a serious crisis of currency systems during the course of the coming years. As the dollar is not only the currency of the US but the most important reserve, trade and debt currency on which all the other nations rely, it will not be a regionally confined currency crisis as happened in Mexico, Asia or Russia in the nineties; but will affect all other currencies and economies as well. That is also true for the Euro. Although it is less weak than the dollar, it will be affected and eventually engage in competitive devaluations with other currencies rather than emerge as a new world currency.
Gold will be a suitable means of asset protection and ultimate payment in such a scenario...."

mortymer said...

2/2
"...While individuals in the GCC countries highly value gold as a means of asset protection, GCC central banks are particularly ill prepared for such a crisis scenario. With currencies pegged to the dollar, oil factored in dollars and most of its currency reserves and investments in dollars, they are highly affected by the woes of the paper dollar standard. At the same time, they only have tiny gold reserves or none at all. In contrast to other central banks that have cautiously started to anticipate a post paper dollar standard environment (e.g. Euroland, Russia, China), the GCC monetary authorities indulge in official oaths of allegiance. During the recent GCC monetary union conference in Bahrain, the IMF asked the GCC countries to peg their common currency in 2010 to the dollar. The justification given rested solely on the successful maintenance of the paper dollar standard. As stated: “Since most exports and external assets have been dollar-denominated, the peg assured external stability. It also provided a credible nominal anchor for monetary policy, ensuring price stability.”53 Yet while may be true for the past, once the paper dollar standard is tumbling the whole argument takes the opposite direction - to instability of external trade, prices and monetary policy. Thus, apart from further diversification of their economies and gradual diversification into “second worst”-currencies like the Euro, GCC countries would need to reclaim their leased out gold and build up a substantial gold reserve, as long there is still the time to buy it. Once the crisis scenario unfolds and the attempts of central and commercial banks at gold price suppression fail, the gold price will more than rise – it will explode to the upside...."

mortymer said...

IMF
Common Currency
Ugo Fasano and Zubair Iqbal
December 2002, Volume 39, Number 4

GCC countries face fundamental choices as they head for monetary union.

http://www.imf.org/external/pubs/ft/fandd/2002/12/fasano.htm

"Regional integration efforts among the member countries of the Cooperation Council of the Arab States of the Gulf (GCC—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) have recently gained momentum. During a summit meeting at the end of 2001, the heads of the GCC countries decided to establish by January 1, 2010, a MONETARY UNION with a single currency PEGGED to the U.S. dollar. Under the proposed strategy, member countries have decided to officially peg their currencies to the U.S. dollar by the end of 2002, and adopt economic performance criteria by no later than 2005 for the policy convergence needed to support the monetary union.

Since the GCC was created in the early 1980s, its members have taken significant steps toward economic integration, including the convergence of rules governing the mobility of capital and labor and plans for a single common external tariff by January 2003. The establishment of an economic and monetary union will create an important regional entity that in 2001 had an estimated combined GDP of about $335 billion, average weighted per capita income in nominal terms of $12,708, and 45 and 17 percent, respectively, of the world's oil and natural gas reserves (see table below). "

Aaron said...

Geithner's letter to Sen. Reid on April 4, 2011 was commented on over at USAGOLD.

A few excerpts from that letter:

"I am writing to update you on the Treasury Department’s projections regarding when the statutory debt limit will be reached and to inform you about the limits of the available measures at our disposal to delay that date temporarily."

...

"The Treasury Department now projects that the debt limit will be reached no later than May 16, 2011."

...

"f the debt limit is not increased by May 16, the Treasury Department has authority to take certain extraordinary measures, described in detail in the appendix, to temporarily postpone the date that the United States would otherwise default on its obligations."

...

"If Congress does not act by May 16, I will take all measures available to me to give Congress additional time to act and to protect the creditworthiness of the country."

...

"Treasury has been asked whether it would be possible for the Treasury to sell financial assets as a way to avoid or delay congressional action to raise the debt limit. This is not a viable option. To attempt a “fire sale” of financial assets in an effort to buy time for Congress to act would be damaging to financial markets and the economy and would undermine confidence in the United States."

"Selling the Nation’s gold, for example, would undercut confidence in the United States both here and abroad."

mortymer said...

International Monetary and Financial Committee
Twenty-Second Meeting; October 9, 2010
Statement by Obaid Humaid Al Tayer Minister of State for Financial Affairs, Ministry of Finance, United Arab Emirates

"... The Fund’s Future Financing Role--Crisis Prevention and Response

11. The Fund’s crisis prevention instruments have been enhanced through refinements to the Flexible Credit Line and a new Precautionary Credit Line. Given the potentially large size of commitments, well-articulated eligibility requirements, improved procedures, and conditionality where appropriate, can help to ensure evenhandedness and safeguarding Fund resources. These reforms render the Fund’s toolkit adequate to permit simultaneous response to multiple member requests, should the need arise from a future systemic event. We support coordinating action with regional arrangements, such as the European Stabilization Fund, to enhance the global safety net and look forward to the outcome of the high-level seminar on the subject during the Annual Meetings.

12. There may be scope for a Global Stabilization Mechanism (GSM) to deal with potentially systemic events on the basis of existing facilities. We are skeptical about the proposal for the Fund to offer liquidity lines unilaterally to members. The International Monetary System

13. We support improvements in the monitoring of capital flows. The volatility of these flows has increased the need for reserves, especially in emerging market economies. Further analysis is needed on initiatives to lower the need for precautionary reserves. We remain open to further consideration of proposals to diversify the supply of reserve assets and a possible greater role for synthetic reserves assets such as the SDR..."

[Mrt: I would add IMF to all: "pick all reserve assets but not gold"]

JR said...

So to flush out an idea more, the idea of repatriation is that there are a bunch of dollars held overseas, mostly in the form of debt, as the dollar is the reserve asset in the $IMFS.

This credit money (aka debt) has been hyperinflated all over the globe. People hold this credit money (aka debt) as a store of value. But this view of savings is the very flaw that is collapsing the $IMFS. Savings are held WITHIN the monetary system as the flipside of someone's currency debt, be it the debt of an underwater homeowner or the debt of the nation's printing press. Real wealth can't produce enough savings to feed the credit system's necessary growth. And that's where the FED steps in to keep the credit system going by supplying liquidity.

What part does the foreign repudiation of this debt (the decline of the credibility inflation) play in the $IMFS collapse and hyperinflation?

Lets look at it form the perspective of the holders of this debt
courtesy of miner49er via FOFOA's "Dillemma 2 - Homeless Dollars"

Regarding your musings re: dollar repatriation, it can be a tough one to answer. The obvious take is of course as you express, that without use for dollars, they would simply find their way back to US shores, and help drive (hyper-)inflationary pressure. Yet, if you will permit me also to think out loud for a moment ;->,
...
So, do these orphaned dollars eventually come home to roost in the US domestic markets? We will be told that.
...
But anecdote amounts to chump change, in a purely financial evaluation.

The really big holders of dollars are the central banks. What they do with their reserves will make or break. Their influence over other banks and financial institutions will also largely dictate the destiny of these dollars. In the gold standard, the currency acted as something of a title deed for a specific good at a specific price. Central Banks could and did take these "receipts" and claim gold from each other. In this day, there is nothing for CBs to "claim," as these dollars are no longer "title deeds." Rather, they are like non-expiring calls for things on demand, at the variable and going price. CBs are likely to neither a) dump them on the forex markets, as this would simply devastate the currency, and risk dreaded instability globally -- something banks are NOT prone to do; or b) race to our markets to try and buy things (like gold), as this would also be fruitless, since a market revaluation for this action would instantly make gold unpriceable, and it would not even be offered.
...

This decline in dollar holdings is desired to take place concurrently with a rise in the price of gold to offset this. Spoonfeeding dollars into the system won't crash it, as well a slow commensurate rise in gold. The discipline that they have thus far maintained is indicative of the tectonic movement of the geopolitical strata. Ideally there will be no rash or even discernible activity. The perfect result is to simply keep shifting these plates until we wake up one day and the world has been remapped. Reality of course is that there are points of friction that cause tremors of unpredictable frequency and proportion all along the way. At some point critical mass will be reached, and the dollar contract markets for gold will no longer be able to contain its price as market perception on a large enough scale discounts paper parity with the real metal accordingly. It is at this juncture that the gold reserves of the CBs will provide immense expansionary leeway, as they are for a season revalued constantly upward.


Cheers, J.R.

pipe said...

Very enjoyable reading. Great points were made.

I read the entire article, and skimmed all the comments, and didn't see much mention of the behavior of the USA federal govt. Although the USA economy is currently growing, I wonder what will happen in the likely event that the growth slows, then stops and reverses into recession.
a. Government spending stops growing, and states and local governments lay off workers in 2011.
b. Govt. (all levels) borrowing costs rise, enlarging the deficit.
c. To try to cap interest rates, Bernanke continues QE-X.
d. A weak USA economy means less imports, means less foreign demand for treasury, leading to more QE-X
e. Ivestors start chasing silver (read the gold sites, only a few giants are buying silver, and everyone else is baffled why silver is rising.
f. The central banks are loathe to sell gold, but try every paper gold trick in the book to cap gold
g. The gold:silver ratio collapses to 10:1 and silver giants start swapping silver for gold
h. Free Gold arrives

Michael H said...

(OT)
from kitco,
http://www.kitco.com/reports/KitcoNews20110406AS_1099.html

"Legislation Repealing Controversial Form 1099 Rules Passed By Senate, Headed To White House"

a quote:

"I appreciate that my colleagues have seen the wisdom of avoiding further delays and getting this costly, looming paperwork burden off the backs of our job creators,” Johanns said. “We now need only a simple signature from the president and this bill will become law, saving jobs and much needed capital for our small businesses."

I can picture this exact paragraph being uttered when the taxes on gold are eliminated in the US.

GG said...

I know I haven't been here in while FOFOA, and I kinda diagree with you on the Euro thing, but hats off to you man. This is one of the most brilliant analysis I have read in a while.

JR said...

Pete,

On repatriation, so we have this swell of dollar debt held around the world as a result of the $ being the reserve asset in the $IMFS.

Lets looks at it from the foreign debt holders perspective, courtesy of Miner49er via FOFOA’s Dilemma 2: Homeless Dollars

Regarding your musings re: dollar repatriation, it can be a tough one to answer. The obvious take is of course as you express, that without use for dollars, they would simply find their way back to US shores, and help drive (hyper-)inflationary pressure. Yet, if you will permit me also to think out loud for a moment ;-> , perhaps we can take a look at this currency as the derivative instrument it effectively is, and then try to figure out its ultimate fate.


While many holders of a currency intend to "exercise" the currency for real things, especially those in the currency's principal use domain, most of these currency units are likewise exchanged among speculators and hedgers (including all those private individuals, who own dollar denominated savings and investment accounts overseas), who are only trying to profit (speculate) from the currency's movement, or preserve (hedge) their own currency's seemingly endless trek of depreciation vis-a-vis this US dollar. Most of these have no intention whatsoever of "taking delivery" of things with these currency instruments.

So, what happens to the dollars they sell? For these average citizen types, the banks that held their accounts buy them. They then either sell them to another institution or may enter the foreign exchange markets themselves (depending on how they are regulated). They also may hold some back, depending on how they wish to balance their own portfolio. So, now these dollars that have not ended up remaining in reserves at these banks have entered the foreign exchange markets putting upward pressure on the currency of the seller, and downward pressure on the dollar.

Historically, the paradigm was to do as little of this as was necessary in order to keep the seller's currency "competitively" weak (among other reasons). As the influence of export to the US wanes (tapped out US consumer + growing size and sophistication of other markets), the need to keep one's currency weak vs. the USD, so as to compete for this market also wanes. Instead the stabilizing and strengthening of one's currency becomes more important (thereby encouraging borrowing in the local capital markets), and allowing local workers to enjoy a bit more the fruit of their labors, instead of always helplessly watching the value of their labors get sucked into the vortex of a dollar-dominant currency paradigm.

So, do these orphaned dollars eventually come home to roost in the US domestic markets? We will be told that.
...

JR said...

...
The really big holders of dollars are the central banks. What they do with their reserves will make or break. Their influence over other banks and financial institutions will also largely dictate the destiny of these dollars. In the gold standard, the currency acted as something of a title deed for a specific good at a specific price. Central Banks could and did take these "receipts" and claim gold from each other. In this day, there is nothing for CBs to "claim," as these dollars are no longer "title deeds." Rather, they are like non-expiring calls for things on demand, at the variable and going price. CBs are likely to neither a) dump them on the forex markets, as this would simply devastate the currency, and risk dreaded instability globally -- something banks are NOT prone to do; or b) race to our markets to try and buy things (like gold), as this would also be fruitless, since a market revaluation for this action would instantly make gold unpriceable, and it would not even be offered. Again, why engender the instability?
...
This decline in dollar holdings is desired to take place concurrently with a rise in the price of gold to offset this. Spoonfeeding dollars into the system won't crash it, as well a slow commensurate rise in gold. The discipline that they have thus far maintained is indicative of the tectonic movement of the geopolitical strata. Ideally there will be no rash or even discernible activity. The perfect result is to simply keep shifting these plates until we wake up one day and the world has been remapped. Reality of course is that there are points of friction that cause tremors of unpredictable frequency and proportion all along the way. At some point critical mass will be reached, and the dollar contract markets for gold will no longer be able to contain its price as market perception on a large enough scale discounts paper parity with the real metal accordingly.


To briefly paraphrase the idea, foreign debt holders don't repudiate and repatriate per se in a huge capitulation event, they accumulate the next reserve asset (gold) until that reserve asset (gold) stops bidding for dollars (aka the dollar price discovery in the physical gold market fails) and the new reserve asset emerges.

Cheers, J.R.

JR said...

So Blogger hates me and eats the first comment when I try to post consecutive comments.

Here is the first part to the above:

Pete,

On repatriation, so we have this swell of dollar debt held around the world as a result of the $ being the reserve asset in the $IMFS.

Lets looks at it from the foreign debt holders perspective, courtesy of Miner49er via FOFOA’s Dilemma 2: Homeless Dollars

Regarding your musings re: dollar repatriation, it can be a tough one to answer. The obvious take is of course as you express, that without use for dollars, they would simply find their way back to US shores, and help drive (hyper-)inflationary pressure. Yet, if you will permit me also to think out loud for a moment ;->, perhaps we can take a look at this currency as the derivative instrument it effectively is, and then try to figure out its ultimate fate.


While many holders of a currency intend to "exercise" the currency for real things, especially those in the currency's principal use domain, most of these currency units are likewise exchanged among speculators and hedgers (including all those private individuals, who own dollar denominated savings and investment accounts overseas), who are only trying to profit (speculate) from the currency's movement, or preserve (hedge) their own currency's seemingly endless trek of depreciation vis-a-vis this US dollar. Most of these have no intention whatsoever of "taking delivery" of things with these currency instruments.

So, what happens to the dollars they sell? For these average citizen types, the banks that held their accounts buy them. They then either sell them to another institution or may enter the foreign exchange markets themselves (depending on how they are regulated). They also may hold some back, depending on how they wish to balance their own portfolio. So, now these dollars that have not ended up remaining in reserves at these banks have entered the foreign exchange markets putting upward pressure on the currency of the seller, and downward pressure on the dollar.

Historically, the paradigm was to do as little of this as was necessary in order to keep the seller's currency "competitively" weak (among other reasons). As the influence of export to the US wanes (tapped out US consumer + growing size and sophistication of other markets), the need to keep one's currency weak vs. the USD, so as to compete for this market also wanes. Instead the stabilizing and strengthening of one's currency becomes more important (thereby encouraging borrowing in the local capital markets), and allowing local workers to enjoy a bit more the fruit of their labors, instead of always helplessly watching the value of their labors get sucked into the vortex of a dollar-dominant currency paradigm.

So, do these orphaned dollars eventually come home to roost in the US domestic markets? We will be told that.
...

Edwardo said...

Regarding the following:

g. The gold:silver ratio collapses to 10:1 and silver giants start swapping silver for gold


Should this ratio come to pass, how likely do you think it will be that A.) silver giants will have the foresight and fortitude to sell, and
B.) that subsequently they'll find the necessary quantity of gold to swap into should they find the strength to tear themselves away from the mother of all silver bull markets?

Edwardo said...

BTW, JR. Thanks, especially, for posting the most recent "critical mass" paragraph as it is both elegant and compelling.

pipe said...

Edwardo--To answer 'A', some will sell, should 10:1 present itself, and some won't. There is a gold:silver ratio that will entice enough silver holders to buy gold to set gold 'free', pun intended.

The answer to 'B' is basically the same as the answer to 'A'. They will NOT find the necessary amount of gold to swap into. Their attempt to swap into gold is what will break the central banks and bring about Free Gold.

Once the central banks realize that cannot stop gold, and stop trying, the gold:silver ratio will stop dropping, and will seek and find a level where the two metals are in relative balance. Some suggest that this will correspond to their relative presence in the Earth's crust. I believe there is roughly 9 times as much silver as gold in the crust.

S said...

FOFOA,

Well said. I read the Akerman piece and was equally disgusted by the utter lack of understanding. One thing that escaped me in the entire analysis was a total lack of understanding of the definitions of money. Moreover, the utter lack of discussion of the dollar/commodity nexus (see comments below on GCC)and its role in being the final hair keeping the global clearing mechanism operating. The US will continue to press its hand until such time as this nexus is broken definitively. Who will do the breaking?

I can't comprehend what he is saying about dollars being scarce ergo massive deflation? If the assets in his model collapse, he never follows up the argument with what happens next - as you lay out perfectly. Indeed an asset collapse would mean a banking collapse and almost certainly a confiscatory devaluation (whatever form it takes, fed printing or other). Why is it that none of these deflationists comprehend that filling a malinvestment hole without letting the market clear is in fact inflation.

But the even bigger and far more important issue is the prospective analysis. Confidence in the dollar if judged by its alternatives is running very low. Thus with US credibility running lower and lower - note Libya, Afghan, Iraq etc - such a move would be a nail in the coffin of the old order. It isn't a logical leap to say that any new system is dollar negative (or bancor or whatever). As the funding tributaries open up it only exacerbates the destruction of the "assets" that malinvestment bought even if it is disguised as devalution via purchase power (inflation again). Furthermore, while any such revaluation could wipe away debt, there is a very thin chance the US could go back to running an ex anti leverage model as the new currency simply wouldn't afford that luxury.

Which dovetails to what mortymer said re GCC...

It was reported this morning that Gates has now made 3 visits to Saudi in past 3 months. Meanwhile, the ATIMES reported that UN diplomats confirmed a US and Saudi deal over rolling tanks into Bahrain in exchange for Libya bombing (recall the break over Egypt). Now go back to the GCC currency union and recall it was a dispute over the central bank being in Saudi that was the reported sticking point for launching the integration. or was it? Back in 2007/8 Rice and Rummy were in the region a lot with much speculation around them breaking the pegs.

Point being that the US will preserve the crude/metals link at all costs as it is the last and only thing keeping the dollar relevant outside of the carriers.


What isn't clear is what strategy China is pursuing with comments like a reserve currency is a "burden" with short term benefits and long term negative. At the same time the Chinese are saying they encourage a more stable reserve asset in response to the Giethner comments on migrating to Yuan participation in the SDR - code for floating the Yuan. The US has already launched the inflation bomb and the Chinese response has been measured with bilateral deals etc. The rumor floating around that there was a weapons plant under reactor 3 in Japan says a lot about the old saying watch what they do not what they say.

Neverfox said...

@FOFOA

Both you and Fekete are in complete agreement about how money demand works through velocity and fear. However, Fekete points out that fear can also cause hyperdeflation, i.e. instead of people buying "anything they can lay their hands on because they expect prices to rise further," they instead "postone buying indefinitely because they expect prices to fall further." Both reactions are products of fear and therefore don't contradict your(or Fekete's) understanding of the dynamics of monetary value. So what I don't quite understand from you is why we should expect the former over the latter, even while we agree that the demand-side is in control. Fekete reminds us that simply pointing to rising food and energy prices (being necessities) don't preclude hyperdeflation and may actually reinforce it. He also reminds us that the U.S. isn't Weimar Germany (a comparison I know you also don't like, but perhaps for different reasons):

By contrast, the United States in 2010 has an army, navy and air force that can be put on high alert in a matter of minutes. Its military bases pockmark the face of the globe. The over-riding fact is that the whole world is still anxious to sell its wares on the American market, and is happy to lend back to it the proceeds of the sale in order to finance future U.S. purchases. Furthermore, it is a fact that the bond market trading U.S. Treasury debt is still the largest and most liquid in the world. Significantly, it still has room to go up ― thus offering speculators juicy profits at a time when the bloom is off the stock and the real estate markets. How can you compare the circumstances of a beggar with those of the emperor — prodigal and bankrupt as though the latter may be?

So why would we expect a massive shift to the fear of "dollars becoming worthless"? Here was what appears to be your explanation:

What do you think will be the Fed's response? I'll tell you. It will make sure that the supply of dollars matches the demand. It will do another emergency $500 billion swap with foreign CBs to calm the foreign exchange market. It will expand its balance sheet once again to make sure there is plenty of liquidity here at home. And it will start buying whatever crap the primary dealers bring to its window. It will flood the markets with fresh Fed liabilities (obligations to print more cash) in a futile attempt to quell demand as the dollar goes to 100, 110, 120… up, up and away. But no matter what quantity of financial assets are wiped out, the cash in the system will remain. And the obligations for more cash printing will remain. And that's all the cash it will take to spark the most amazing hyperinflation the world has ever seen, as the fear turns from 'running out of dollars' to 'running out of food' in the wake of a devastating financial collapse.

But Fekete seems to have this to say: While they clearly have the power to put unlimited amounts of irredeemable currency into circulation, central banks have no power to make it flow in the “approved” direction. Money, like water, refuses to flow uphill. In a deflation it will not flow to the commodity and real estate markets to bid up prices there, as central bankers have hoped. Rather, it will flow downhill, to the bond market, where the fun is, bidding up bond prices. As the central bank has made bond speculation risk free, the bond market will act as a gigantic vacuum cleaner sucking up dollars from every nook and cranny of the economy. The sense of scarcity of money becomes pervasive.

In other words, fear of running out of dollars, not fear of the dollar becoming worthless. I promise to go back and read your hyperinflation series for answers but, in the meantime, can you help me understand if you and Fekete have diverging views and why, or if they're more compatible than I'm giving them credit for?

Edwardo said...

Pipe, the whole issue of how much silver and gold exists in the earth's crust is, in my view, almost entirely irrelevant to the "value" and pricing of the two precious metals.

And not that you are espousing such a metric, but it is, at best, deeply simplistic, or so it seems to me. After all, do you suppose that if Pine exists at, for example, a ten to one ratio to Mahogany, that pine lumber should then be priced at one tenth Mahogany lumber. Silver and gold, while similar in some respects, aren't like for like, and so neat and tidy approaches such as the aforesaid "earth's crust metric" make little sense.

As for CBs, I defer to the host of this blog on this (and other) matters, but, given that most, if not all of them, hold physical as a chief asset, do they really want to "stop gold" or, rather, simply have its evolution occur in a way that causes as little upheaval as possible?

matt said...

FOFOA FOFOA FOFOA

Antal Fekete is asserting in his latest piece that this charade has years to go before hyperinflation.

Timing has become an issue.

-entrench deflation through entrenching the trend of falling interest rates.-Fekete

-Ultimately the market for Treasury bonds will collapse in a hyper-inflationary scenario, but this may be years down the road.-Fekete

-In the meantime we have to face the music that keeps the game of musical chairs going: the serial halving of interest rates to enable bond speculators to earn risk-free profits. This stokes the fires of deflation, not the fires of inflation.-Feket

pipe said...

Edwardo--The last 150 years are an anomaly. the 500 plus years before that had a gold:silver ratio of around 15:1. And that was with a lot of above ground silver, that is no longer around.

Regarding Fekete, he's been one of the most accurate over the last many years. However, the supply of treasuries is now so huge I think his model is breaking down. This is why silver is indicating hyperinflation is at hand. If a government could run fiscal deficits of 10% of gdp for many years, they would have figured that out a long time ago.

Warren said...

@matt, re: timing - you suggest things have to reach tipping point before they will hit the switch. My view is they will make the necessary announcements with a timing which catches everyone off-guard, and also leave it to the last minute so the banks can milk their exorbitant privileges.

If my memory serves me correctly, Costata once drew up a 'list' of financial-world pressures acting to encourage the Freegold transition or discourage it - it would be cool if he dug that out again with an update (can't remember the keywords to dig it out of the millions of words here).

FOFOA, great post! You're truly in the zone.

Warren said...

Sorry, just to clarify - I realised that what I described is in fact a tipping point - basically when it's suddenly in their best interest to do the Freegold transition.

My point is that we should be looking for the tipping point as seen by the people who run this show, not necessary the tipping point we see. For example it is safe to assume some disparity between how we view the markets and how Ben Bernanke views the markets.

Nick said...

Excellent point Warren. The simple fact that what we know and TPTB know are more than likely vastly different, is but another reason why time is impossible to predict, and in my opinion, regarding the gold/silver ratio discussed above, is just another reason to swap silver for gold now, even if it ends up not being at the best ratio. as we all know, hindsight is 20/20.

Pete said...

@ Costata
Thank's for your comment, thoughtful and to-the-point as always.

@JR
Thanks for digging up those comments from FOFOA. I found them quite enlightening.

I do not entirely agree that rapid repatriation is not really an issue, as I think there are more holders of USDs than just central banks (regular banks and forex markets for example), but I do agree that, as the major USD holders, central banks would not have an 'economic' interest in sending their USDs back to the US.

costata said...

Warren,

I will try to dig out that list and update it. That thought experiment had two columns headed Encourages Complacency and Discourages Complacency. My thinking at the time was that as the composition of each list changed we might be able to foresee timing and outcomes a little better.

Neverfox,

I understand Fekete's arguments. I view Fekete and FOFOA's positions on this issue as simply two sides of the same coin. They are compatible in a linear way but obviously they cannot co-exist at the same time. Either heads or tails must face upward at any given time.

As FOFOA said:
I can't say what will trigger the shift from fear of running out of dollars to fear of dollars becoming worthless. It could be anything.

"Fear of running out of dollars" could also be expressed as the "desire to hoard dollars" or to "demand dollars". The fear of dollars becoming worthless is the inverse of these statements. No conflict here that I can see.

enough said...

Total Gold in Trust: FALLING FAST

April 5.2011 GLD

Tonnes: 1,212.75
Ounces:38,990,976.30
Value US$:
55,869,916,371.25


GLD: April 6.2011:


Total Gold in Trust
Tonnes: 1,205.47
Ounces:38,756,954.58
Value US$:
56,619,016,726.38

Paul said...

Rick Ackerman is very muddled. There was an interesting comment left on his blog:

"Deflation/Inflation are the tolerance limits set by producer/rentier contributors to a scaling population & economy.

If we don’t stay within tolerance limits, there will be a pushing match and a slow series of negotiated settlements between these vocal segments, each backed by supporters recruited from the general populace."

My reply was that this negotation is continous, and is normally apparent in various yields, most notably govt bond yields. What happens in a hyperinflation, is that the tolerance has been pushed so far already, that the “language” of the negotiation changes. In Weimar, the language changed fairly slowly, from Marks to Dollars/Gold.

In the breakdown Rick foresees, the language changes abruptly. Rick is confusing a fast language change with a fast negotation.

Indenture said...

We should watch for signals from the Giants?

From Harvey Organ
Today in Gold:

"Withdrawals from Dealers Inventory = zero
Withdrawals from Customer Inventory = zero
Deposits to the Dealer Inventory = zero
Deposits to the Customer Inventory = zero

Let us start with gold. This has to be the most astonishing spectacle that I have ever seen.
Again we had no withdrawals by either the dealer nor the customer. We also had no deposits by either party."

Edwardo said...

I just read that myself from Mr. Organ. Can we trust Comex data? In the meantime, in another arena, the ten year is beginning to look ominous again. Bill Gross was said to have sold his bonds just a little while ago, yes?

matt said...

Warren, Nick

You have to wonder though, one of these two big names is wrong on timing. Antal Fekete thinks this will go on for years yet one of the biggest players in the game, Bill Gross, just sold all of his treasuries.

Neverfox said...

@costata

Thanks for the reply. I didn't mean to imply that FOFOA and Fekete had a conflict of theory. As I started out saying, I think they both share an understanding of the mechanics of both "hypers." But what I see is a conflict of expectations. FOFOA seems to lean towards hyperinflation and Fekete towards hyperdeflation, but neither rule out the opposite due to unforeseen events. I'm more curious if I'm correctly reading a difference of expectation, why it exists and what it would mean for Freegold if Fekete's expectation was more on target than FOFOA's.

Indenture said...

Edwardo: Bill Gross at PIMCO dumped all of his U.S. treasury holdings in PIMCO Total Return Fund

S said...

perhaps the Saudi Q is being addressed: Drudge running a story that the Saudis are reaching out to the Russians and Chinese as disgusted with White House )Bandar was in China a few weks ago per reports....

Warren said...

@matt, I wonder about timing all the time - my wife ensures this.

I guess your questions (articulated) are: 'who is on the losing side of the trade, given that both have advanced reasoning for their actions?'.

I uh, don't know much about treasuries, but I wouldn't be shorting them - and if someone else did I would be looking for some other reason why they were doing so (am skeptical of most news items these days as they seem to be purely a mechanic to move the market in whatever direction is desired at the time).

It's my understanding (someone correct me if wrong) that a Freegold environment ultimately defends US Treasury Bonds, assuming the USG has managed to get their hands on enough unencumbered gold. Also don't forget FOFOA's inverse pyramid - Treasury Bills are close to the bottom which means these should swell temporarily (in value) as the value passes through them.

Mentioned to a friend recently, the many opinions out there are like the blind men describing the elephant - they each describe the aspect close to them and they can all validate what they claim. So far, FOFOA is the only one I've seen who has stated it's an elephant. The elephant is Freegold. Soon it will come lumbering through and there will be nothing anyone can say about it.

http://fofoa.blogspot.com/2009/03/all-paper-is-still-short-position-on.html
http://en.wikipedia.org/wiki/Blind_men_and_an_elephant

costata said...

Neverfox,

I guessed that you did not see any significant conflict of theory. I'm conscious of other readers so I saw it as an opportunity to highlight the common ground.

I was going to post a link to this excellent piece by John Rubino any way. As it happens it illustrates some of my reservations about Professor Fekete's bond market and deflation theories. IMO Rubino's piece also presents a challenge to the deflationists to name any official policy that has favoured the savers over the debtors during this crisis.

http://dollarcollapse.com/inflation/how-inflation-violates-retiree-civil-rights/

As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That’s one-tenth the level of late 2007 and the lowest on records dating back to 1959. Such depressed rates don’t come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February.

There's no arguing with Professor Fekete's math on US bonds. Over the past 30 years, as "interest" rates on bonds declined, it created nominal capital gains for bondholders. Theoretically, if the "interest" on bonds continues to shrink, those capital gains can continue indefinately.

Professor Fekete's math also shows him deflation ocurring now, so the yield on the bonds is positive. He also (correctly IMO) sees the bond traders making guarranteed profits front running the Fed.

Continued/

costata said...

/Continued
Assuming no change to ZIRP, the threat to the bonds comes from two directions inflation and the US$ itself. I think Professor Fekete would agree if the world tries to retreat from US bonds or the US$ then this house of cards will collapse.

When I look at the same economy Antal Fekete is looking at I see real interest rates that are persistently negative. By some measures they have been for years. The value of those bonds are eroding.

Prices are deflating in certain asset classes including housing. At the same time I see price inflation in food and FMCG through product shrinkage, price increases and supply destruction due to the GFC. I see persistent price increases in the average person's shopping cart and daily expenses. That is inflation to J6P. The demand side that FOFOA is talking about.

I also see an orderly exit by holders of the US$ internationally. The Fed's actions show that they want to devalue the dollar against other currencies. At some point I anticipate this orderly exit to become disorderly.

Using Professor Fekete's logic about bonds, every decline in the US$ vs "real stuff" represents a capital loss for the US$ holder. If people become aware that this decline is structural and permanent, rather than temporary, the scene is set for the kind of sudden mood swing that FOFOA speaks of in this post.

FOFOA said...

"All this vast chapter in financial folly is sometimes referred to as if it resulted from the direct action of men utterly unskilled in finance. This is a grave error. That wild schemers and dreamers took a leading part in setting the fiat money system going is true; that speculation and interested financiers made it worse is also true; but the men who had charge of French finance during the Reign of Terror and who made these experiments, which seem to us so monstrous, in order to rescue themselves and their country from the flow which was sweeping everything to financial ruin, were universally recognized as among the most skillful and honest financiers in Europe. Cambon, especially, ranked then and ranks now as among the most expert in any period. The disastrous results of all his courage and ability in the attempt to stand against the deluge of paper money show how powerless are the most skillful masters of finance to stem the tide of fiat money calamity when it is fairly under headway; and how useless are all enactments which they can devise against the underlying laws of nature."

From the book "Fiat Money Inflation in France" about the French hyperinflation in 1789, by Andrew White (published 1912). http://mises.org/books/inflationinfrance.pdf

Greed, yes. Control, no.

Snippets from FOA on Hyperinflation:

"…in the real hyperinflation that's coming… it's not the borrowing class that's liquefied, it's the lending class! Remember, out there in our vast dollar world, for every dollar a consumer has borrowed, some entity holds the other side of the credit instrument. Our classic deflation begins when these holders are no longer being paid, resulting in the write-down of their assets. Across the land, banks, credit unions, citizens with lend able funds and every other form of lender no longer own a credit instrument that's sellable at par. Hyperinflation begins when pushing on the string no longer is an option."

"I doubt the creditor class as a group is seeking to remove the financial inequalities that separate people through this coming process of hyperinflation. Far from it. As I stated above, the credit hyperinflation has already occurred. It's there, in place as we speak.

"What is now faced by this non egalitarian lending crowd is the choice of: having their debt instruments defaulted on and losing everything,,,,, or playing 'let the fastest runner win the game!'

"My friend this is the choice you get when the currency your assets are denominated in hits the end of its "timeline".

"Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets."

"…My above explained why a deflation cannot be in the cards."

"When the world begins to abandon a currency at the end of its reserve timeline, deflationary gains on debt instruments are an illusion of bookkeeping. There would be no 175% real purchasing power gains allowed."

"Again, hyperinflation in our economy will (as I demonstrated in the beginning) begin with our government buying the debt from creditors and changing the terms of its payment for over-leveraged citizens and businesses."

"This is exactly what many people see and are preparing for!"


Sincerely,
FOFOA

mortymer said...

Speaking of which,... next A.Fekete article alert:

IMPEACH BERNANKE!

http://www.professorfekete.com/articles%5CAEFImpeachBernanke.pdf

"There are serious questions about the legality of Quantitative Easing..."

"Another thing the Fed is not allowed to do legally is to purchase Treasury paper from the U.S. Treasury directly. It must be purchased indirectly through open market operations. If you don’t put the Treasury paper through the test of the open market before the Fed is allowed to buy it, the presumption is that the market would reject it as worthless, or would take it only at a deep discount..."

"F.R. credit (F.R. notes and F.R. deposits) is legally created if it has been issued in accordance with the law. The law says that F.R. credit must be backed by collateral security at the time of issuance, usually in the form of an equivalent amount of U.S. Treasury paper..."

"...The point is that the process of posting collateral first, and augmenting F.R. credit afterwards must under no circumstances be reversed..."

mortymer said...

IMF Develops Framework to Manage Capital Inflows

http://www.imf.org/external/pubs/ft/survey/so/2011/NEW040511B.htm

"e IMF is developing a framework to help countries manage large capital inflows as part of its ongoing work to assess the risks facing economies as they recover from the global crisis..."

Indenture said...
This comment has been removed by the author.
Jeff said...

From Dec. to April the GLD trust is down 75 tons of gold. That's a lot, and no one has said where it has gone. Someone is going to need a bigger vault.

DP said...

@Indenture: Perha;s you meant to link to this?

Very interesting -- thanks. ;-)

DP said...

Jeff: From Dec. to April the GLD trust is down 75 tons of gold. That's a lot, and no one has said where it has gone. Someone is going to need a bigger vault.

If it is being taken out and split up from the current bulk palletfuls of bars, then yes it'll take up more space. If it's just going to move from one unallocated pool to another, or if it were all allocated to one party as a single block, it probably wouldn't need to move an inch and a ledger adjustment would deal with it.

Now... which bank is it I'm recalling stories recently they were building a new vault..? [taps index finger at side of mouth while looking up and to the left...]

Michael H said...

costata, thank you for posting Charles Hugh Smith's essay "The Mechanics of Hyperinflation: Bankers vs. Politicos" (January 11, 2011).

He makes an eloquent and reasoned argument for deflation, but I disagree with his premisis, in particular, the statement that "A hyper-inflationary wipeout certainly wouldn't benefit the Financial Power Elites who hold the vast majority of the financial wealth. Yet it is this very Elite which wields the preponderance of political power. "

In short, it seems to be CHS's view that the bankers and the elite are one and the same, and that their power stems from their financial assets, and that their goal is to increase their financial assets.

First, I would say that the bankers are NOT the same as the elite, merely the elite's leading servants. The bankers are like the knights during medieval times, while the elites are the aristocracy. Should the elites find it expedient to jettison their knights / bankers, they will do so.

Second, what the elite desire is not 'wealth' per se (and especially not financial wealth), but power and control. Ownership is secondary. Why pay to own and maintain the forest, when you can log for a small fee on state-owned land?

There is something the elite fear worse than the wipeout of their financial wealth, and that is the wipeout of their positions of power. When the people revolt, the stature of the elites may be diminished by about 10 inches. At that point, the elites would rather keep the people as fed and docile as possible under the circumstances, and to hell with financial assets -- as long as the elites maintain control over major industries and governments.

Rick said...

A great essay that deserves a thoughtful response. I apologize for having taken so long to do so, but I was occupied with Lira, and too caught up in the discussion at my own web site, to have time for yet another debate. I will get back to you shortly, but let me say that I appreciate your raising the level of discussion above the smug, self-absorbed posturing of Lira's uncivil attack.

Michael H said...

Two relevant tidbits (at least through my freegold-tinted glasses) from Bruce Krasting:

http://brucekrasting.blogspot.com/2011/04/on-fx.html

"The weak dollar conclusion is based on my perception that outside of the US there is increasing distrust of the dollar. Nearly every day there is another story in the papers that supports that view. America is financially out of control. Add in ZIRP as a policy that pays dollar holders nothing and it is easy to get bearish on the buck in general. Given that the Yen is not a place to go when shorting the US the Euro has to be the beneficiary."

MH: think of the counter-factual. What would be happening in FX right now if there was no Euro?

http://brucekrasting.blogspot.com/2011/04/lunacy-dc-style.html

"Way way back around 1970 I connived/snuck my way into a presentation by the then head of OPEC, Sheik Yamani.
...
He first told the audience what it wanted to hear. That OPEC understood that it had the power to crush the Western economies. But that it would be foolhardy for OPEC to do that as it ultimately leads to less petroleum demand and that ends up hurting the exporting countries.
...
But he was also clear on what this “peace” would cost over time.
...
"OPEC and the industrial world can achieve a lasting stability that creates prosperity in all nations. But there is a price that must be paid and understood by all. From this point on and for the next hundred years, the wealth of the West must flow to the East."
(end quote)

Indenture said...

Bullion Bank Trading -- A Closely Guarded Secret By Adrian Douglas

"If investors think they own large amounts of bullion in “unallocated” accounts they should take a very close look at what has been presented here and try to work out where exactly the underlying assets that back their investment might be hidden. The inescapable conclusion is that the unallocated accounts are unbacked or backed with no more than 2% of the bullion required."

Edwardo said...

I call this one, "Biderman gets a clue."

http://www.zerohedge.com/article/surprising-observations-trimtabs-are-central-bankers-loading-gold?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29

pipe said...

Costata-"The value of those bonds are eroding."

In the case of China, the return on their bond purchases has been the receipt of unfettered (except for empty jawboning) access to our markets. And therefore, the ability to grow their economy by 10% / yr. Pretty good return.

The bottom line, regarding the question as to when greed turns to fear, as presented by the author, is that the 'powers that be' have a vested interest in delaying the moment of fear conversion (hyperinflation) for obvious reasons, but mainly to hold on to power.

To do this they understate price inflation(cpi), give communist regimes access to our markets in return for bond purchases, fight wars to secure cheap oil, manipulate competing currencies (gold), cut taxes and run huge deficits, what ever it takes to put off the day of reckoning.

But more than anything, to maintain deflation and prevent hyperinflation they need the 10 yr. treasury bond to have a falling yield, as A. Fekete has pointed out. 10-yr treasuries have now been rising for six months. It will be interesting to see what kind of game of 'chicken' develops at the end of June, assuming that other events haven't already forced them to pre-announce QE-3.

Indenture said...

I like this fro Harvey Organ today, "Either the GLD folk have an army of people moving gold around or this has got to be the biggest fraud perpetrated on investors. Today the GLD added 11.74 tonnes of gold. Yesterday over 7 tonnes were removed. You can bet the farm that the removal was real gold (the problem of course, is that belongs to the Bank of England) and the addition of gold was not physical but paper gold additions. And our regulators sit idly bye."

costata said...

pipe,

I agree it will be very interesting to see how they deal with the 10 yr. IMO it is, as you hint, the "canary in the coal mine".

You wrote:
"In the case of China, the return on their bond purchases has been the receipt of unfettered (except for empty jawboning) access to our markets. And therefore, the ability to grow their economy by 10% / yr. Pretty good return."

During the 9 years that China was buying USG paper in ever increasing volume Foreign Direct Investment (FDI) in China rose at roughly the same rate and both peaked at the same time and were roughly balanced. This may be a co-incidence.

This FDI may simply be malinvestment as some claim. China may have the level of industrial over capacity that some observers claim but only around 50% of the FDI applications were allowed to proceed during this period. To me, that looks like "cherry picking" of technology, industrial sectors and so on.

China only commenced to buy USG paper in volume around the end of 2001 early 2002 (despite having had a trade surplus with the USA since the late 1980s). Prior to 2001 China held an average of around $50 billion worth of US debt securities in total. This total had been stable for years. Right around the time that China began to buy this USG paper in size the USG allowed China to obtain full World Trade Organisation (WTO) membership despite their failure to meet key elements of membership criteria.

WTO membership allowed China to dramatically accelerate their industrialisation. It gave them "unfettered access" to all WTO member markets, not just the USA. FDI helped them to forge ahead in many areas of technology and industry (for example becoming the No. 1 gold producer during this period).

All of this may be nothing more than co-incidence, of course. However to this simpleton, it suggests a plan.

Pete said...

A big W T F to FOFOA's last article now disappearing. Conspiracy?

Or are you just editing it FOFOA?

:)

FOFOA said...

Yeah, editing. Sorry. Back up in a sec.

Pete said...

Scared me for a second. I started thinking about black helicopters.

Michael H said...

I look forward to Rick's response.

In the meantime, Rick has updated his response to Lira with a 'foreword':

http://www.rickackerman.com/2011/04/heres-why-hyperinflationist-lira-is-wrong/

Rick says,
"At this point, I'll concede that it could be either that brings us to economic ruin. But I will nonetheless argue in a forthcoming essay that the dollar could collapse without triggering a hyperinflation. Under this scenario, it would not be a question of paying $1,000 for a barrel of oil, or $100 for a carton of eggs; rather, those in a position to supply such basic necessities would simply stop taking dollars. This clearly implies that we would move rapidly to barter, abandoning a currency system that might conceivably have become useless overnight. "

Of course, the next logical step is that if people stop accepting the currency, the government will print ever more of it to try to keep the military running, and the food stamps and SS payments going.

Michael H said...

Here's another post on hyperinflation, by Edward Harrison, posted at Naked Capitalism:

"What are the preconditions for Hyperinflation?"

punchline: "In short, there will be no hyperinflation in the U.S. any time soon."

http://www.nakedcapitalism.com/2011/04/what-are-the-preconditions-for-hyperinflation.html

Mr. Harrison begins by equating hyperinflationists with gold-standard backers, and arguing against a gold standard. I believe that contact with the ideas of A / FOA / FOFOA would show Mr. Harrison that there is a different path.

On Weimar:
"So, with a huge portion of tax revenue going to pay reparations in foreign currency, the German government turned to the printing presses to make good on its DOMESTIC obligations." (emphasis mine)

But he concludes that, since the US has no foreign-currency-denominated debt, it is unlikely to go down the Weimar path.

I would say that the US has enough domestic obligations to warrant a hyperinflation, should US treasuries be shunned in the market.

On Zimbabwe:
"The (land) redistribution process was a disaster, ... Many whites fled as violence escalated. The result was an enormous decline in Zimbabwe’s agricultural production. With agricultural production having plummeted, Zimbabwe was forced to pay to import food in hard currency.

Meanwhile, the government turned to the printing presses to fulfil its domestic obligations. as in Germany, the foreign currency obligations, the loss of productive capacity and the money printing was a toxic brew which ended in hyperinflation."

The current US analogy would be having to pay to import oil.

"the loss of the ability to tax is central in hyperinflation."
very nice insight!

"So, hyperinflation has very specific preconditions that are not apparent in the U.S..

1. No foreign currency liability (MH: do ongoing oil purchases from abroad count as a foreign currency liability? I suppose not as long as oil is priced in dollars ...)
2. Price pressures are still anchored
3. Currency revulsion has not set in"

Edwardo said...

Regarding Edward Harrison's argument,

I made the point that the very wealthy have moved into gold, and while that may not represent enormous sums, as yet, that is a removal of taxable wealth. The more pertinent point might be that loss of the ability to tax is, in effect, about the inability to raise revenue, and that is something that could happen very quickly.

A case in point might be the pending government shutdown.
Imagine what will happen to tax receipts going forward if all these Federal employees are furloughed
for any length of time?

As for reserve currency status, that is eroding as I write, and is set to accelerate in my estimation.

costata said...

Michael H,

Of course, the next logical step is that if people stop accepting the currency, the government will print ever more of it to try to keep the military running, and the food stamps and SS payments going.

A rose by any other name is still a rose.

Meanwhile, the government turned to the printing presses to fulfil its domestic obligations.

costata said...

Wendy,

I found this while trawling for something else in the FOA archives. It appears that Saddam Hussein's demand for Euro settlement was used as we discussed.

Make no mistake, the world has seen the very last of cheap dollar oil. The next dynamic of that process in the transition of oil settlement support into Euro denominations. Notwithstanding Iraq's move as a convenient trial balloon, the mass of this transition will not begin until the US has clearly embarked on a slowdown. And that slowdown, energy induced as it is, will, this time, force the fed to fight it with a super inflationary buyout of anything and everything that defaults. Right down to your shoe laces. This, my friends is the inflation dynamic unleashed once a currency is removed from reserve status.

Gold Trail 3
FOA (02/09/01; 14:24:03MT - usagold.com msg#59)
Current background

Redhill said...

@costata

Thank you for sharing and besides Wendy, I have benefited too!

This line caught my eye:

"And that slowdown, energy induced as it is, will, this time, force the fed to fight it with a super inflationary buyout of anything and everything that defaults."

We are now living through this. FreeGold in due time.

costata said...

Redhill,

My pleasure.

Cheers

Michael H said...

Charles Hugh Smith has another post out, 'Here's the Setup for the Con of the Decade':

http://www.oftwominds.com/blogapril11/setup-con-of-decade4-11.html

I would be interested in reading other's opinions of this piece.

My view is that his scenario is simply not possible. The US cannot service debt at high-single digit real interest rates based on the current productive capacity of the economy.

I do think there is a 'con of the decade', but it is not the one that CHS thinks. The con is happening now, while the elites steal what real value they can in the present time. The hyperinflations will, in fact, be 'the getaway'.

I read a comment (on ZH maybe?) that said: a hyperinflation is like the old joke of out-running a bear. The banks don't have to outrun the inflation, they just have to outrun YOU!

Wendy said...

Thank you for that costata, I'm trying to catch up on my reading. Normally I only work about half time, which is fine.

These days it's full on, full time. I've taken tomorrow off, so hopefully i'll catch up.

Frankly, I'd rather the time off then the money.

Post a Comment