Saturday, April 23, 2011

Deflation or Hyperinflation?


Chapter 84 – Bond salesmen's propaganda that "a dollar is a dollar" should be rewritten to say "a dollar is 3¢"

Since most ordinary people, bankers, and company presidents have never studied currency theory, they swallow it hook, line, and sinker when the bond salesmen tell them, "a dollar is a dollar." That piece of propaganda should be rewritten to say "a dollar is 3¢." The nominal dollar is officially worth no more than 14¢ of its 1940 value, unofficially only 3¢.

If computed in 1940 constant dollars, not more than $1,380 exists of the US $46,000 per capita gross public and private debt. More than $44,628 has been destroyed by inflation. But sadly, the owners of this debt do not want to hear about it. They do not wish to know that bonds are issued by governments with the sole purpose of debasement.

To my knowledge, no government in history has paid its debts in currency equal to the purchasing power of the currency lent to them. The people always lose their money on bonds.

It angers me. Bond salesmen should be thrown into the East River.


-The above was written in 1985 by Dr. Franz Pick, in the book "The Triumph of Gold" sent to me by one of my readers. The photos are from Time Magazine.


The whole point of the deflation versus hyperinflation debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end. The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY. People of modest net worth, like me, can of course participate in the debate. But then it can become confusing at times when we think about shortages or supply disruptions of necessities like food. Of course you need to look out for life's necessities first and foremost. But beyond that, there is real value to be gained by truly understanding this debate.

I want to apologize in advance for the length of this post, but I have to be thorough if I want to have any chance of winning Rick Ackerman over to the hyperinflation/Freegold side. And I think there is a chance. While deflation and inflation are practically polar opposites, deflation and hyperinflation look almost identical on the surface, with the main difference being the wheelbarrows of worthless cash. As I wrote in 2009 in The Waterfall Effect:

There is a quote I like that comes from Le Metropole Cafe. It goes, "we will have deflation in everything we own, and inflation in everything we use". This is partly true. It is true during the run up to the rubber band snapping. It is true until we hit the waterfall. At that point I have my own version of the quote. "We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars."

My latest post on this subject was called Big Gap in Understanding Weakens Deflationist Argument in response to Rick Ackerman's "Big Gap in Logic Weakens Hyperinflation Argument". Rick also received responses from Jim Willie and Gonzalo Lira. Last week, with regard to Lira and Willie, Rick reported to his readers in "Rick's Picks":

I’ve concluded there is little to gain arguing on the one hand with a guy who turns rabid whenever someone contradicts him, even in a friendly way; and on the other, with a preening narcissist who comes to argumentation in the same state of sexual arousal that Jeffrey Dahmer must have experienced hovering over the fresh corpses of teenage boys. These guys are bad news, as lacking in civility and manners as buzzards in a scrum, and you’d do well to avoid them both. You might try tuning instead to the hyperinflation arguments of Steve Saville, Peter Schiff and a few others who seem less concerned with trouncing, slicing and dicing opponents than with presenting facts that might better prepare you for the financial crisis ahead. The very best of them, in my opinion, is FOFOA blogspot, where the essays are erudite, the discussion elevated and the arguments as knowledgeable as any you will find on the web.

I would first like to thank Rick Ackerman, and to also acknowledge his perspicacity in this particular regard. And because he has demonstrated such a discerning acumen in his preference for hyperinflationists (among other things), I will try, once again, to help him see the way. As our own Blondie likes to say (and I paraphrase for clarity), "you don't own your baggage, it owns you." Here is Rick's baggage, in his own words:

My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.

Rick repeats what he calls "C.V. Myers' dictum" quite often in his deflation-oriented posts: “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” I'm going to go out on a limb here and say that this dictum is Rick's baggage, his foundational deflation premise, in a nutshell. And it leads him to his "bottom line" or his analytical conclusion:

Rick's Picks Commenter SD1: To my knowledge, no bank has ever made provisions in their lending criteria. So to anyone subscribing to the hyperinflation theory, all I can say is there is nothing I, and millions of other North Americans, would love more than to take $250,000 of worthless, hyperinflated money that we worked a few days to make, to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay.

Rick Ackerman:That’s the bottom line, as far as I’m concerned.


In this post I will explain the flaw in Myers' dictum. I will go into great detail as to why the missing component in the dictum is the essential (and inevitable) one. I will show how this one flaw in Rick's premise sends his otherwise excellent analysis careening 180 degrees in the wrong direction (with regard to the subject of this post). And I will explain the proper frame of reference from which to view what I am describing. How's that for a kick-off?

First Myers' dictum. “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Rick: "Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit." Me: Yes, someone will pay. But there is a third option that is missing from Myers' dictum. "The hit" can be socialized:

"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…"

"…hyperinflation is the process of saving debt at all costs, even buying it outright for cash… because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!"


(The quotes are from FOA on Hyperinflation and FOA on Currency Styling, Currency Management, Dollar Hyperinflation and End Game Scenarios respectively.)

As many of you know, I came to this debate, with no baggage and no hard opinion, in 2008. And in the "doom and gloom internet community" where I arrived there was definitely an equal helping of both deflation and inflation/hyperinflation talk. Most of it I found less than convincing (on both sides). The "deflation side" is actually bigger than you might think. Most of the peak this or peak that crowd, the majority of the survivalist community, and the Great American Collapse people are all expecting a sort of grand deflation, whether they understand the arguments or not.

If you want to think of a grand deflation as a deflating—or grand contraction—of economic activity that was previously "energized" by massive trade deficits, massive credit expansion, and the massive structural malinvestment that flows from those easy money expansions, well then I too am expecting a sort of grand deflation, in many of the same ways they are. But one thing I have learned from the writer that made the most sense to me, the writer that I found most convincing from within my "past baggage" vacuum, is that "deflationists" as a group still have a big gap in understanding.

Rick became a deflationist in the 1970s by his own account. And he certainly wasn't alone. I wasn't even aware of the existence of such a debate in the 1970s let alone 2007, so I can hardly add the wide perspective necessary in this debate from my own personal experience. What I can do, instead, is to share with you this excerpt from the one that spoke convincingly to me, the one that informed my developing view in 2008.

One point I hope you'll find curious in this excerpt is that deflationists have always fixated on residential real estate. This is one of Rick Ackerman's, almost obsessive, objections to the hyperinflation case, and it clearly has roots in his kind. This was written in 2001, just as the housing bubble was developing. My notes in [brackets]:

Somewhere in the 1970s era I was exposed to the thinking of several different deflationists. It seemed that all of their conclusions came to the same end: that dollar deflation would rule the day, no matter what. Mind you now,,,,,, most of them were split on the finer points of the issue, but for all of them; [de]flation would have its day even if prices would rise somewhat. Deflation was always the final outcome.

One of the central themes in these thoughts was concerning how this coming deflation would impact plain old residential real estate. You see, most of these guys advocated selling excess residential property because it was, sooner or later, going down for the count. Mostly because the mortgage markets would be destroyed in the deflation and nobody could buy [prices would collapse to the cash price].

-- Note: The reader has to understand that these discussions were directed towards people and investors that had plenty of net worth. And I do mean Plenty! The argument wasn't about how to survive; rather how to balance a truly conservative estate portfolio. --

As time has passed we can see several major flaws in their thinking. Flaws that cost them a bunch of credibility, if not personal money. [I want to jump in here with a quick quote from Gary North written in 2002:

"I remember in 1975 hearing C. V. Myers tell attendees at a gold conference, 'If you get this one wrong, you'll lose everything.' He was predicting deflation. He got it wrong. He didn't lose everything."

And now back to FOA] One point, that I have touched on here several times, was in understanding just how much ourselves and our economic structure would and did evolve into accepting fiat money use. Even though it was, "god forbid", separated from gold.

In one area alone, the bond markets, investors reacted far differently than deflationists thought they would. Twenty ++ years ago [again, this was written in 2001], it was expected that just gross increases in money printing alone would be enough to crash the bond markets. Not talking about price inflation here, but money inflation and that should have started a deflationary fall in our credit markets. It almost happened, several times, but never followed through. It seemed that the market function had evolved to accept fiat inflation as a prerequisite to modern economic function. In a like comparison to today's thinking; investors assumed that as long as we had an expanding economic stance [nominal GDP growth, credibility inflation and financial product appreciation], sourced by inflating fiat supply, price inflation would not impact long bond credibility. We saw confirmation of this over many years. We saw that our credit markets, especially long bonds, were used in spite of the price inflation threat. Indeed, there was a ready [highly liquid] market demand for bond purchases.

In hind sight, long term holders of bonds did do very well if their position was part of a balanced holding and they didn't need to sell at bad times. Even now, dollar bonds have gained as rates are pushed lower.

Back to the thought:

This whole IMF dollar system has always been based on an expanding fiat theory that swells [nominal] GDP over time. Investors that bet on deflation coming along, after each of our bouts of inflation, were badly burned as deflation was overcome. Economic function returned, essentially because price inflation could not rout the overall market for long credit.

The flaw in all of this was in the reserve structure of our Dollar IMF money system. The fact that the world had to walk, lock step, with our money policy meant that their goods production would almost always be cheaper than ours; keeping local US price inflation under control. In other words; local US-based price inflation could not get out of hand as long as the rest of the world was willing to use their economic production to control it by selling [products cheaper than we could produce them] into our expanding fiat system.

In this, the dollar [and its securities, and their derivatives] could be inflated without end while our credit markets functioned in a non-inflationary environment.

But there is an end.

A money system like this has a definite timeline and that point is reached when the world can move away from keeping price inflation low in the US. That point is reached when Another money system comes along to challenge the dollar and, in the process, offer these other goods-producing countries a chance to buy some "lifestyle" for themselves.

At first, the show is dull as investors keep right on buying into the dollar argument above: that an expanding fiat base builds non-inflationary [nominal] growth [in both GDP and securities]. This is one reason traders still buy US long credit, not to mention chasing rising dollar exchange rates; they expect more of the last several decades of economic theory to keep right on going. It won't.

The dollar faction saw its match early in the 90s as the Euro was taking shape. To counter this threat, as I have outlined here in several ways, they promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar / IMF system beyond its ability to serve as a real fiat money system, today. [See (my title): Is the Fed selling Hyperinflation Insurance Backed Only by Hyperinflation?]

I mean; that our whole dollar landscape has now become just a trading asset arena: it's now evolving away from any meaningful currency use to trade for real goods. It can head in no other direction because our local economic structure, the USA economic base, cannot possibly service even a tiny fraction of the buying power currently held in dollars worldwide.

So what does this have to do with Real estate?

Take a look at any broad section of the US; Northeast, SouthWest, etc.. If any of the deflationists were correct, their reasoning back in the late 70s and early 80s should have produced at least an average fall in Residential real estate. Can any of you find an "average" of property today, that is lower than early 80s prices?

Of course I'm not talking about the spikes in Hawaii, New York, Denver or San Francisco; those are just blips on an ever rising inflation scale. Even if they fall some from here, it isn't part of a deflationary act playing out. Average home prices will rise all across this country no matter what the future economy holds. A super inflationary stance by the Fed means that even unemployed workers can buy a house and pay for it! Watch how this all comes about. The Dow will not be much different when seen ten years from now; a drop to 5,000 then off again, is a real possibility! [Note: The Dow dropped from 11,000 in 2001 down to 7000 and back up to 12,000 in 2011. Again, FOA wrote this ten years ago in 2001]

The same is true for anything perceived as something real: "even silver" (grin).

The difference is in the drastic ups and downs derivatives will place on all asset markets. My point is that we are on an "end time run" in fiat dollar production that will soon produce a spike in real price inflation that crushes hedge vehicles. One item alone, physical gold, because it is the main wealth asset behind the next currency system [See: RPG #1], will outrun everything by a wide margin. No matter the derivative's hold on it!

As the Euro builds a base [which is happening right now in 2011 – see this, this, this, this, this and this], it will drive an inflationary recognition into our credit markets, then freezing up our derivative markets. That perception will fuel a complete failure of our bond markets and force the Fed to buy up any and all credit; paying in full. [Paying full price for deflating assets? Oh my, would the Fed ever do that? The deflationists never saw it coming!] If needed, Bush and congress will see to it that enough money is printed so we are paid in cash for everything! Don't laugh, this is where we are headed.

[I must insert here the rest of the famous FOA quote from above. I affectionately call it "the front-lawn dump" and it was coined by FOA a full 18 months before Bernanke's famous "Helicopter drop" speech:

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

Okay, now back to the original excerpt…] In the meantime, whether or not our economy is growing, stalling or failing, will have little or no impact on price inflation.

You see, living with real serious price inflation goes something like this:

---- "Honey, I talked to Fred again, he can't sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that's not so bad, we had to jump ours up three times before selling." ----

Inflation runs crazy when a money system is forced to "print out". We will "print out" our dollar, too. Getting there just takes time and an alternative system to cause it.


Now I do realize that it takes a certain talent to distill deep wisdom from a 10-year-old internet forum post. And I can almost hear some of you out there screaming, "but but but… house prices DID collapse… d… d… DEFLATION!" Wrong. Sorry. Residential real estate will ultimately crash to its non-leveraged cash price as credit disappears, just like the deflationists think. But that ultimate cash price, once reached, may actually be higher than today's leveraged prices and be outrunning the availability of cash needed to clear the market! And all the while real estate will keep crashing in real terms (gold).

There is always a shortage of cash during a full-bore, in-your-face hyperinflation, which is why the printer has to keep adding zeros. His press simply cannot keep up with prices at established denominations. It is also why the first to touch the new cash (the "elite") have a very valuable advantage. Hyperinflation is a grand competition for lifestyle retention in the face of forced austerity, just like a race! Here, look at this from the excerpt:

"Honey, I talked to Fred again, he can't sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that's not so bad, we had to jump ours up three times before selling."

I'll bet the deflationists were thinking in terms of deposit+loan=price, rather than cash. Wrong paradigm. Sorry. When the hyperinflation hits in a reference point purely-symbolic fiat currency paradigm, the market will try to clear for the rising symbolic cash price while the hard currency price (denominated in gold) continues to drop like a stone. Deflationists do have one thing right. Real estate is not a very good investment when preparing for what's coming. That doesn't mean home loan debt won't be hyperinflated away though. It most likely will be. And if you are lucky enough to catch the bottom in the reference point gold paradigm during the crisis, bless you. But it's still a poor investment choice right now, even at 5% down, compared to putting that same cash into physical gold. More on this in a moment.

The point of sharing this FOA excerpt was that deflationists, like other groups that have established encampments cluttered with old baggage, tend to miss what is actually unfolding. And for that, you might want to start with my post The Debtors and the Savers. Understanding the balance necessary to keep the peace between these two groups is fundamental to understanding the political will behind the inevitability of both Freegold and dollar hyperinflation.

Rick seems to have a number of hang-ups when it comes to both gold and hyperinflation. His biggest is obviously real estate and the modern home mortgage. He simply cannot seem to fathom how a system designed and managed by The Power Elites could ever deliver a "windfall" to overleveraged, underwater homeowners or shady, uncouth gold bugs. And, frankly, if you don't make the effort to understand what is actually unfolding, there's a good chance it won't.

To the deflationist, "a dollar is a dollar" just like it is to ordinary people, bankers, company presidents and bond salesmen in the quote at the top. And even though the dollar has already lost almost 99% of its original gold purchasing power, Rick believes The Power Elite will make sure it stays strong until you have worked off every last dollar you owe. Because someone has to pay! (He's right about that.) And it's not going to be "them". (He's mostly right about that too.)

The dollar has a long, storied past. To believe "a dollar is a dollar" is to simply ignore its history. Of course I'm not implying that deflationists are unaware of this chart:


But I am saying that they think the collapse of the dollar's financial system will strengthen the dollar itself and make prices fall in the end. This is a funny notion when you take the totality of the dollar's journey into consideration.

The dollar was once worth 1.555 grams of gold. Then it was reduced to .888 grams of gold. Today it is able to purchase .02 grams of gold, but only at the margin. Notice that I said "able to purchase" instead of "is worth," and I also added "at the margin." That's because the dollar is not worth .02 grams of gold today. Around 60 years into its 100-year life, not unlike the human retirement age, the dollar retired to become a purely symbolic, completely worthless token. And in the big scheme of things, this "retirement from value" is not such a bad thing. Someone emailed me a question the other day and this was my reply:

Hello Mark,

I don’t see much wrong with your grasp of the subject, other than those worthless tokens are actually a good thing. What sets us apart from those monkeys is our ability to divide labor in a way that resists the second law of thermodynamics and allows us to organize our environment.

This division of labor requires us to use a medium of exchange in order to avoid the double coincidence of wants.

The question then becomes, what is better as a medium of exchange? Should it be something of value? Or is it more beneficial to the anti-entropic process for it to be something purely symbolic and worthless?

If you answered “something of value” I would ask, Why? Is it because you want to hoard that thing in the case that you produce more than you consume? And what is the net effect on man’s battle against entropy if the circulation of that valuable medium slows due to hoarding? Conversely, with a worthless medium, why not just exchange it for that same valuable thing if, in fact, you do produce more than you consume? Seems simple enough to me.

Sincerely,
FOFOA


You see, this is where we are today. We are using, as a medium of exchange, a purely symbolic, completely worthless token. The logical action, then, is to exchange surplus worthless tokens for something of value. Yet still today, most everyone hoards up purely symbolic, completely worthless tokens in the form of the debt of more tokens to be worked off and paid by someone else. In fact, globally, this debt far exceeds the ability for it to ever be paid (worked off by future labor), at least not at today's dollar purchasing power of .02 grams of gold. And yet it will be paid by someone, just as the deflationists promise! So the question then becomes, how can an impossible debt be paid?

Answer: if it cannot be worked off by future labor, it will be worked off by past labor, the net surplus of which was erroneously stored in debt and dollars. The icing on the cake is that it is also the past labor of "someone else," if the profits can be capitalized and the losses socialized. Precisely the process we have witnessed over the past three years, for those with eyes to see.

Rick Ackerman's somewhat-myopic focus is on home mortgages as the lynch pin that will keep this worthless, symbolic token valuable while you toil on the chain-gang working off your debt of worthless tokens. So let's take a look at the larger picture to gauge the strength of this pin and the stress it must endure.

Total US mortgage debt is a little over $14 trillion. That number includes you and your neighbors. Of that $14 trillion, about $6 trillion sits on the balance sheets of banks and $9 trillion has been packaged and sold to savers like pension funds. Of that $9 trillion held by savers, about $5 trillion is guaranteed by the US government.

So here's Rick's lynchpin that's going to keep all of you indebted homeowners honest: $14 trillion - $5 trillion guaranteed = $9 trillion. And that $9 trillion lynchpin is so powerful because it is held by politically connected and powerful banksters and pension funds, or so they say. Now in a minute I'll tell you why these two groups would rather have all that debt printed and the cash handed to them than to watch even 20% of you default on your mortgages. But first, let's step back and take a wider look at what might be exerting shear stress on this supposed lynch pin.

Total worthless token debt in the US, both public and private, is around $55 trillion, four times as big as that backed by physical real estate. If we add in the government's unfunded liabilities (which definitely apply shear stress to the dollar's lynch pin), that number comes in around $168 trillion. And that is simply the promises to deliver worthless, purely symbolic tokens, at some time in the foreseeable future, emanating from within the United States. Meanwhile the US produces enough "goods and services" (loosely defined) every year to be purchased by 14 trillion of these purely symbolic tokens at their present level of purchasing power. And with a trade deficit of around $500 billion per year, it appears the US is consuming roughly 103.5% of what it produces every year, in real terms.

So in real terms, that is, in terms of the dollar's purchasing power as it stands today, it would take, let's see… $168T/($14T produced - $14.5T consumed)= x years… hmm… somehow it's going to take us negative 336 years to deliver those promised dollars at today's purchasing power. Remember I said this debt would be "worked off" in the past, without the use of a time machine I might add? Well here you go—past surplus labor foolishly stored in dollars and dollar financial instruments and their derivatives will be tendered. Of course the deflationists want you to know that we will be forced to reduce our consumption to below our production in order to pay those off. And once again, they are correct, though not in the way they think.

Reducing consumption means reducing your standard of living. Some call it austerity. But with forced austerity also comes the competition to avoid reducing your standard of living. And herein lies the inevitability of US dollar hyperinflation.

You see, those Power Elites that Rick thinks are going to support the dollar and its $169 trillion burden (excluding derivatives) simply to make sure you'll work off your $9 trillion dollar mortgage at today's purchasing power are the same ones that will resist personal austerity measures the most. And as all good deflationists know, you simply cannot resist the irresistible without breaking something. And what they will ultimately break in their competition to maintain lifestyle is the value of the dollar, which will actually break quite easily due to the mountainous (think: landslide) shear stress applied to it right now.

Now let's go back to those "banksters" that, along with the politically powerful pension funds, are part of the Power Elite that are going to keep the dollar strong enough so that your mortgage isn't hyperinflated away. Remember, this is roughly $6 trillion, or 3.5% of the dollar's debt problem, that is still sitting on the balance sheet of banks, yet gradually being absorbed and/or guaranteed by the Fed and/or the US government.

This is simple logic: Do you think they'd rather offload that debt onto the Fed's book in exchange for full cash value? Or would they prefer to hold onto those notes while you struggle to pay them off in symbolic tokens over the next 25 years? How about this: Is it better for the health of the bank to take possession of the houses (and then have to sell them) that roughly 20% of the troubled homeowners are walking away from? A 2009 jingle mail study showed that close to a fifth of troubled mortgages in the U.S. involved borrowers who were strategically defaulting. That represents roughly a 10% hit to the asset side of the banks' balance sheets. Yet the banks' liabilities (deposits created when the loans were originated) remain, fully insured by the FDIC which has no money.

Through the magic of commercial bank double-entry bookkeeping, the banks' balance sheets are actually not exposed to decreases in the purchasing power, or present value of purely symbolic, completely worthless token dollars. They are, however, exposed to decreases in the value of their assets and to the risk of default that flows from deflation. Deposits are nominal liabilities that remain when assets deflate. So supporting deflation would be, to a bank, like suffering a masochism fetish.

Rick thinks the banks will defend their assets by keeping the dollar strong. But that only keeps their liabilities that much harder to meet while the effects of deflation tend to shrink their assets making it even harder still. Ignoring the dollar for a moment, and the flaw in Myers' dictum, what happens to a bank's balance sheet if all of the loans are defaulted at the same time? Or if the asset value of all of their collateral collapsed at the same time? It would have precisely the same impact. So would a mixture of the two. The banks have and are experiencing precisely this type of squeeze. How has their "guardian angel" the Fed responded so far?

Rick Ackerman's view of the banks' incentive or preference to prevent (as if they had that control) hyperinflation is exactly bass ackward. A bank's balance sheet becomes severely damaged in deflation, yet it is made whole through hyperinflation.

As for the pension funds, they hold this debt not for its value to maturity, but for its appreciation in a falling interest-rate environment and its liquidity in trade. Pension funds get in trouble when they cannot perform nominally. They hold nominal assets and make nominal promises (like 8% returns) which simply cannot be met in a deflation. However, as disastrous as hyperinflation is for pensioners (the funds' clients), it is a Godsend for the politically-connected pension managers who were being crushed by deflation.

So once again, the incentive or preference of those who hold the note on your mortgage to prevent (as if they had that control) hyperinflation is simply not there. In fact, as I will show in a minute, there will be ample incentive for these politically connected Power Elite Giants to actually encourage the kind of printing that will take an Icelandic-style currency collapse into full-blown Zimbabwe-style wheelbarrow hyperinflation. More on this in a moment.


What you see is the result of the perspective you choose

A small-minded ant's only interaction with Giants may be getting stepped on or sprayed with deadly poison. So from the ant's limited perspective, this activity of killing ants is what Giants live for, what motivates them, and what they spend their time scheming and planning for. Don't limit yourself to the ant's perspective. If you want to find the tasty morsels left by Giants, you've got to start thinking like a Giant. You can read more about ants in my post Life in the Ant Farm.

In his latest of several posts on this subject, Rick Ackerman presented two responses that he found "of particular interest." The second one is so ldo that I won't spend much time on it. It is a comment that explains the old truism, "you can't eat your gold." That's right, gold is not at its highest and best use being spent (circulated) as a currency during a hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the very best way to shuttle your wealth THROUGH a crisis to the other side. If you are forced to deploy this wealth for food during a crisis, then you apparently planned poorly.

And with a little understanding of how a monetary collapse actually unfolds, flipping the switch on illusions and revealing reality, you'll find that the actual crisis itself will be relatively short-lived. My best guess is 6 months maximum—for the worst of it—beginning when the normal distribution of food abruptly stops. So transporting your wealth to the other side should be of great importance to those with significant savings. But if you are one of the ants that cannot distinguish between a monetary collapse and the myriad other problems with our civilization (i.e. you think that when the money collapses everything else goes to permanent sh-t as well—it doesn't by the way, look at history), then you probably think we'll be in a Mad Max wasteland for a generation or more after the dollar finally goes the way of the peso.

In that case, you should probably buy yourself a Texas ranch, a lot of guns, and a few friends to help you shoot those guns, like the Circle K Cowboys. The way I see it, the monetary collapse is going to reverse and ultimately correct many of those myriad other problems because reality will be uncovered and freed to exert its more balanced supply and demand dynamic.

But that's enough on the Texas Rancher's Thunderdome wasteland. The first of the two responses that Rick found "of particular interest" was an email he received from Charles Hugh Smith, the man "Of Two Minds" who is bothered by the "conviction" (or what he perceives as single-mindedness) of others, particularly hyperinflationists. He said as much in the email:

What bothers me is the widespread conviction that hyperinflation is “guaranteed.”

Smith is truly a man of two minds. He likes to stay uncommitted and agile, to trade against the crowd:

I certainly wouldn’t want to debate anyone because my arguments are those of a trader, basically, not an economist. Maybe we will get hyperinflation, I don’t claim to know… This smells like a one-sided trade to me, even if it is more of a meme than a trade.

I am up on a hill with a wide view of the valley. In this post I am attempting to share the framework in which you, too, can see what I see rolling in. It is a tsunami called currency collapse coming in, following a violent financial and economic earthquake, which in our case will end in probably the most devastating hyperinflation the world has ever seen. And the more people that come to see what I see rolling in; the more people that join me safely on higher ground with a view of the valley below, the more the man of two minds likes his contrarian position in the valley below. Did you see that newish video out of Japan? The one I have in mind?

In order to share my view with you, I am going to patiently work my way through Smith's email, correcting errors and explaining the flaws in his perspective as I go:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation?

I think we can safely define Charles Smith's "Elites" by his own words as the Financial (Wall Street) Elites, the politically powerful (including politically connected corporations and unions/union pension funds), the "banksters robbing us blind" and "CONgress" along with all the politicians running this country into the ground; basically everyone running the Dollar International Monetary and Financial System (the $IMFS). And he asks how do "they" benefit from hyperinflation? Well, they will benefit, in the same way that those closest to the printer benefit tremendously in all hyperinflations. But more importantly, Smith's core perspective on "the Elites" is wrong. He makes the same mistake Karl Marx made, which I explained in my post The Debtors and the Savers. [I know, this is the second time I've linked this post. It is intentional. I'll probably do it one more time as well.]

What I described in that post last July is the essential foundation to the framework for understanding why US dollar hyperinflation and Freegold are, simply, unavoidable, or to use Smith's word, "guaranteed." I have been accused of overconfidence in my views. But I specifically and actively limit the scope of this blog to only these two topics. I'm certainly not a know-it-all. I only describe the things that can be clearly seen, and how to ascend to that perspective.

Was the Japanese guy shooting that video up on a hill overconfident about his view of the tsunami rolling in while those still down in their houses had a more rational, balanced opinion? Perhaps they were of two minds; on the one hand, there had just been a Richter scale 9 earthquake and they lived in a tsunami warning zone. On the other hand, they were not exactly ocean-front properties and it would have to be a pretty big tsunami to bring the ocean over that levee. Surely they would hear it coming giving them plenty of time to escape. It's all about perspective. With the proper perspective you can see things more clearly.

In The Debtors and the Savers I wrote:

Today we have many fine, intelligent and exacting analysts all looking at the same economic data and coming up with vastly different analyses of the present global financial crisis. What sets them all apart from each other is not intelligence, or math skills, or even popularity. What sets them apart is the foundational premises on which they operate.

And a false premise can skew a brilliant analysis 180 degrees in the wrong direction. Few analysts fully disclose their premises. But Karl Marx did, and in this we can find the one, key flaw that sent his analysis off in a disastrous direction.

Marx writes, "The history of all hitherto existing society is the history of class struggle." He got this part right! What he got wrong was his delineation of the classes.

Marx's classes were:

1. Labour (the proletariat or workers) - anyone who earns their livelihood by selling their labor and being paid a wage for their labor time. They have little choice but to work for capital, since they typically have no independent way to survive.

2. Capital (the bourgeoisie or capitalists) - anyone who gets their income not from labor as much as from the surplus value they appropriate from the workers who create wealth. The income of the capitalists, therefore, is based on their exploitation of the workers.

Simply put, Marx says it's the rich versus the poor. According to Marx the rich exploit the poor to get themselves a "labor-free income", which spawns a class struggle.

This is an attractive perspective because it requires only a cursory, superficial judgment to place someone into one of the two camps, the rich or the poor. If someone is driving a Bentley we immediately know which group they are in, right?

[…]

As I said, Marx got one thing right. History does bear out the dramatic story of centuries of class struggle. But if we eliminate his one small flawed premise, we can see it all much more clearly.

The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. "The easy money camp" and "the hard money camp". History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.

1. Debtors - "The easy money camp" likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.

2. Savers - "The hard money camp" likes to live within their means and save any excess for the future. They prefer hard money (or in some cases "harder" money) because it protects their savings and forces the debtors to work off their debts.

1789, the French Revolution, "the hard money camp" had been in power since 1720 when John Law's easy money collapsed, and starting in 1789 "the easy money camp" killed "the hard money camp" and took back the power. This is the way "the easy money camp", the Debtors, usually take power... by revolting against the hard repayment of their spending habits…


Obviously I don't want to reprint the whole article here, which is why I linked it three times. So please go read it.

But here's the fatal flaw in this Marxian paradigm; many of we, the modern proletariat, are savers who would prefer hard money like gold to protect our savings. It is we, the savers, that are punished by the current easy money system. That's why I delineated the groups as the Debtors and the Savers, otherwise known as "the easy money camp" and "the hard money camp."

And with the proper view of who Smith's Elite CONspirators really represent—the easy money camp, the debtors, the hungry collective—the answer to his question begins to develop. It is the opposing camp, the savers, that will be most-punished by hyperinflation and it is Smith's Elite that will profit the most during the race to spend.

If you can start to think of the administrators of the $IMFS, the "banksters", politicians and Western Capitalists in charge of the system as being firmly entrenched in the Debtor camp, you are well on your way to a very rewarding enlightenment. I realize this is counterintuitive, and counter also to much of the baggage that accumulates while reading other "hard money" writers on the Internet, which is why I spend so much time on it. But once it clicks, you'll be like, "OMG! WTF was I thinking?" I have conversed via email with many extremely intelligent people that have had this momentous "click", so I am tempted to consider that I may be on to something.

So call me overconfident if that makes you feel better, but I'm not going to be wishy-washy about what I can see. I'm certainly not of two minds on this.

How will "the Elite" profit from hyperinflation? By being the first to spend the bills with new zeros added and thereby outrunning the rest of us in the race to spend and winning the competition to retain standard of living. Hyperinflation is the end result of the dollar-debt timeline, there is no other way it can end. Only the severity is a variable to be considered.

Rick Ackerman and other deflationists agree with me that the unsustainable, unstable mountain of debt must and will collapse. And they view "the Elite" as the capitalist creditors and the rest of us poor working saps as the proletariat debtors. Therefore they believe that when the debt mountain collapses, their version of "the Elite" will not print Zimbabwe-style because, even though they just took a tremendous haircut on their bonds, they want to be sure that the super-saps among us, the proletariat that are still working, will continue to service the remainder with dollars of today's purchasing power.

This is a bass-ackward view in my opinion. The hungry collective provides ample political backing and sufficient naiveté for "the [Western] Elite" to print the full face value of their bonds and dump that worthless paper on the public's front lawn. Furthermore, deflationists like Ackerman as well as practically all mainstream economists provide plenty of cover in the form of plausible deniability that hyperinflation would be the inevitable result.

But the story runs deeper still. The reason I have been putting "the Elite" in quotes or referring to them as "Smith's Elite" is because, not only does he have the delineation wrong, but he is myopically focused on only one quarter of the bigger picture.

Some of you, I know, like to think in terms of grand conspiratorial conflicts, a "Clash of the Titans" (Clash of the Elites if you will), or something like that. Well I can probably help you with that view in this "Debtors v. Savers" paradigm.

We have the West which is roughly only 25% of the world's population, and then we have the rest of the world. And oh yes, they have their own "Elite". You'd probably guess that "the West" represents "the debtors" in this paradigm. But you'd be wrong to assume that the rest of the world is taking "the hard money camp" stance.

It is true, we are at the end of one of the longest-running "easy money camp" regimes. And these things usually swing back to the other side. But history has taught the world that while easy money regimes end in financial collapse, hard money regimes usually end in bloodshed. And it's usually the blood of the hard money campers that is shed. (See: the French Revolution.)

So the rest of the world has taken a different stance this time. It has been "in the works" for several decades.

Q: **Who does BIS really represent?

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


Those are the words of ANOTHER from my post "The Gold Man" (not Goldman) at the BIS. The BIS truly represents "the rest of the world" from a monetary perspective. It is the "trade union" of their Central Banks. All is not as it seems on the surface.

So how do you view an "old world gold economy" through modern eyes? And how do you move there peacefully with the easy money camp? It's quite simple actually. You let nature take its course, you support that natural course however long it takes (rather than pathologically fighting nature like the dollar system does with its obsessive-compulsive drive to control), and you don't deprive the easy money camp of their precious fiat. It's Freegold. It is about allowing meritocracy to rise like a Phoenix from the ashes of the dollar's inevitable collapse. It's not about a transfer of wealth. It is about a re-born meritocracy. The transfer of wealth that will take place is what blinds most people from seeing its inevitable approach.

More from Charles Hugh Smith via Rick's Picks:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then [who] owns the $160T in financial wealth?

First of all, it is unclear exactly how much gold there is, but it's probably over $8T by now, and only about 18% of it is owned by central banks, not anywhere near half. That leaves $6.6T in private hands, at today's price.

Smith exposes his ant-like perspective in this paragraph when he implies the Giants that own the lion's share of $160T in financial products should have already crashed the value of those financial products and exploded gold in the stampede from one to the other, if a collapse of the dollar was really on the horizon. On the contrary, you have to think like a Giant to see the best way to move your Giant wealth from one system to the next. True Giants do not panic out like ants, nor like ants imagine that Giants would. True Giants know that if they panicked out, with the weight they carry, they would end up transferring much LESS wealth into the new system.

Viewed from the Giant's perspective, you can see that most all of that dollar value, that $160T will vanish in a flash. And when that happens, the market for paper promises of gold delivery will also collapse and vanish as physical gold gaps up (in my estimation) 40x. That's right, $160T vanishes, and $6.6T worth of gold—in private hands—gaps up to $264T.

Oooh. Now I'll bet I've got the deflationists screaming! "You can't turn $160T into $264T in a flash during a deflationary collapse!" Au contraire, mon frère. What you see is the result of the perspective you choose. Reader "Reven" recently asked this same question, to which I replied:

It is a fallacy to compare a snapshot of gold with a snapshot of "global asset values" because it ignores the time dimension in which gold flows. Even if you are correct about everything in the world (other than gold) being worth [$160T] in 2011 constant dollars, the value of all the gold can be multiples of that amount. It is theoretically unlimited, unlike paper wealth which is self-limiting by its own objective metrics and economic ties. Paper wealth is limited to the upside but unlimited to the downside. Gold is the inverse of paper, unlimited to the upside, limited to the downside. It's not the total stock of gold that matters, but the flow from those that already hold it.

Here are a few snippets from my post How Can We Possibly Calculate the Future Value of Gold?

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

[...]

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

[...]

Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough "stock" is reassigned to "flow" to meet demand.

[...]

Lastly, understand that currency flows through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that, as I said above, it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more "flow gold" is moved into "stock gold", not the other way around like commodities and paper.

This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have objective metrics for valuation or economically limiting forces. All except gold.

[...]

So, cutting to the chase once again, the biggest fallacy in your model is using "Total above ground gold" as your point of comparison. It's not the stock that matters, it's the flow.

Now, if you have a supercomputer you can try to run this unimaginably complex flow algorithm. But be careful with your assumptions. One wrong assumption can throw the whole thing off by orders of magnitude.


Back to Smith. Here's that same paragraph again. Let's see if we can answer his questions a little more concisely now that we have a new perspective:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then owns the $160T in financial wealth?

Yes, they've bought the gold and it's still priced at around $6.6T, at least that portion that is in private ownership. No, there will be no gold-backed currency because we aren't going back to "hard money" because "your Elites" wouldn't like that. No, they won't lose all their wealth; they will gain wealth. Here are the steps as viewed, not by ants, but by Gi-ants:

Step 1: Buy up as much physical gold as you can over a couple decades without running the price and without panicking out of your paper, while the Western investor is caught up in all manner of paper including paper gold.

Step 2: Wait patiently for the inevitable financial collapse. As Rick Ackerman himself wrote, "financial collapse is not just likely, but inevitable."

Step 3: When the collapse comes, sell that $XXXT in "financial wealth" to the printer for fresh cash at full face value in the name of "saving the system" and "survival of the country and the Western way of life."

Step 4: Spend the new cash.

Step 5: Adjust your balance sheet from the old paradigm where it used to read $160T paper/$6.6T gold to the new paradigm where it now reads $0 paper/$264T gold. A net gain of $97.4T.

Now I must explain here that I don't view this as a nefarious plan, plot or con. It is simply the way you deal with the inevitable collapse of the global reserve currency at the end of its financial timeline. And if you are a Gi-ant, it's the clearest way to transfer your wealth through the crisis and into the future. You don't do it with a high-yielding bond Con and a sustained deflation. LOL Gimme a break!

And if you think Congress will prevent the Fed from doing what it did in 2008… and 2009, 2010 and 2011… guess again. The USG will face a real, existential shut down this time. Nothing like the charade that happens every few years when it's time to renew the budget or raise the debt ceiling. This will be the real deal. Congress will DEMAND that the Fed print "for the good of the country" (and for their own paychecks).

Back to Smith:

This explanation — that the wealthy have already transferred their financial assets into gold and land and thus they don’t care if all money, bonds, mortgages, derivatives, insurance policies, etc. all go to zero and is wiped off the books as an asset—makes no sense because it doesn’t explain who is the bag holder to all this “fiat-based” wealth. If the wealthy don’t own all these financial assets, who does? Who did they sell it all to? Yet we know that the Financial Elites own all this financial wealth and thus it will not be in their self-interest to see it wiped out. Only debtors, i.e. Central States, want to see hyperinflation to wipe out their debt. But who considers all that sovereign debt an interest-paying asset? The Financial Elites, that’s who, along with politically powerful union pension funds, banks, etc.

Yes, I know I have already addressed everything in this paragraph. But I wanted to show you how silly it starts to read once you have a different perspective. Moving on:

Everyone seems to forget that debt is an asset to the guy on the other side of the trade. The debtor would love hyperinflation but the owner of the debt will resist hyperinflation with every fiber of his being — and that includes the Financial Elite who own the debt.

Okay, here Smith moves into the first of his two strongest complaints about hyperinflationists. Remember up at the beginning of this post I wrote that in 2008 I didn't find many of the arguments convincing on either side of the debate? That is, until I read FOA? Well, clearly Mr. Smith has not read much of my blog, not that I'd expect he had, because his two complaints are completely backward in their reasoning.

Those two complaints are that he views hyperinflationists as i) not considering that debt is an asset to someone else, and ii) that hyperinflationists don't understand that hyperinflation is a POLITICAL event and not a mechanical or "deterministic" event. Once again I had to LOL when I read this backward view.

I think it's time for me to post links to my three part series again, in which I DRIVE HOME these two topics… and how they inevitably end in hyperinflation, not deflation:

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

If you haven't yet read them, you should probably start with the post I made just prior to those, Credibility Inflation, in order to understand what is actually deflating in our hyperinflation.

Basically, regarding Smith's paragraph above, "the guy on the other side of the trade," if he is well-connected enough to be considered "the Financial Elite who own the debt" would prefer to be relieved of that "asset" at full face value as long as he's getting that cash first. Remember, hyperinflation is a race, not against the bear (you can't outrun the bear) but against your neighbor.

Next:

This is basically a “politics of experience” analysis, and very few are equipped to understand such an analysis, as it’s outside their econometric comfort zone. They prefer a deterministic financial analysis that there are “laws” of economics which lead to hyperinflation, etc. Meanwhile, for me, there are only political choices, a narrow band of which lead to hyperinflation and a bunch of others which do not. This kind of analysis doesn’t lend itself to refutation or confirmation by financial models of the sort being bandied about — it’s a behavioral analysis and a political one.

I have yet to see how banks and the Financial Elites would benefit from hyperinflation. Without getting too fancy, it’s obvious that holders of debt, those collecting interest on debt assets, would be wiped out by hyperinflation. Thus as a simple matter of self-interest, we can deduce they will not favor policies that lead to hyperinflation. If the owners of debt (Treasuries, mortgages, corporate debt, commercial paper, etc.) were politically powerless, then we could expect them to be steamrolled by those who would benefit from hyperinflation. But they are not politically powerless — it’s the debtors who are powerless, except for the Central State, and it’s beholden to the Financial Elites who have captured the political and regulatory classes that govern the State.


This is the introduction of Smith's "it's about politics, and hyperinflationists don't get that" argument, which he refined in his next post on his own blog titled "Con of the Decade" or something like that. (By the way, this came out after Smith's blog post, but if there's any truth to it, it pretty much demolishes Smith's con idea and ensures—or insures—hyperinflation.) In that post Charles Hugh Smith pretty much threw down the gauntlet on this issue in the opening paragraph:

I described The Con of the Decade last July (2010). The Con makes me a heretic in the cult religion of Hyperinflation. I consider myself an agnostic about the destruction of the U.S. dollar and hyperinflation (basically the same thing), but my idea that hyperinflation is fundamentally a political process makes me a heretic. I skimmed a few of the dozens of comments posted on Rick's Picks and Zero Hedge after they posted one of my expositions on this dynamic, and didn't see even one comment in favor of this perspective.

Now I'm not sure if this is technically a straw man fallacy if Smith has never read FOA or FOFOA. Perhaps not. In any case, here are a few quotes from my hyperinflation posts:

What is a deflationist? It is one who looks very closely at the present structure of everything, the laws, the rules, the regulations, what is supposed to happen, who should fail, etc… but ignores the political (collective) will that backs it all up. The same political will that always changes the rules to suit its needs as surely as the sun rises. And it is this political will that makes dollar hyperinflation a certainty this time around.

[…]

As FOA warned 12 years ago, these bailouts were always baked into the cake. They are a mandatory function of the political will that backs the entire system. This is the main element that all of the deflationists miss.

[…]

The political will (which is the same as the collective will in my lexicon) always does whatever will lessen the immediate pain, even if it will most certainly cause greater pain later. This is the part that is as reliable as the sun rising.

[…]

Because we have a purely symbolic currency, a dollar-denominated deflation is impossible... because of the political will I mentioned above!

[…]

But this is also where the political (collective) will comes into play. It will NOT let that savers' balloon deflate. The Fed is helpless against the debtors' balloon and the credit/debt feedback loop, but it is most certainly NOT helpless against the savers' balloon.

The Fed has the power to keep the savers' balloon 100% full if it wants to, and the political will to fully back that action.

[…]

This is an excellent description of what the deflationists see, and also why they don't see the rest of the big picture. They view the monetary world as a machine rather than a human ecology. They underestimate the will of the "politicians and bureaucrats who are playing God." And they also underestimate the power of fear and monetary velocity.


I think you get the picture. But if you really want to get to the heart of this subject and see where Smith and the deflationists (notice I'm not calling Smith a deflationist here) go wrong on cause and effect with regard to hyperinflation and political will, you should read noteworthy deflationist Mish Shedlock's comment under my "Part 3" where he defended his post saying:

"I explicitly said hyperinflation is a political event… The amazing thing is I was agreeing with you…"

And my responding comment where I wrote:

"…Velocity can have the same exact effect as printing. Would you agree with this statement? Fear is the spark that ignites it. And then the government will need to fund itself in this hyperinflationary environment. This will entail THE massive printing that always follows immediately after hyperinflation starts. ***THIS IS THE POLITICAL EVENT THAT I AM TALKING ABOUT*** Not the priming beforehand. That's already done. We are already in the summer of 1922…

…It is this LATER political event that is 100% guaranteed. That our government will debase its currency TO ANY DEGREE to ease its own fiscal pain. And as for the cause, the prime, it's already there. Has been for at least 10 or 12 years now…"


And then Mish's follow-up where he writes:

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

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

It was a very gentle disagreement."


I didn't call Smith a deflationist because I don't know if he is. I haven't read enough of his blog to know if he's ever categorized himself. Usually deflationists are happy to categorize themselves as such, as in the case of Mish and Ackerman. But Smith appears to be a simple skeptic, a man of two minds, as he wrote in closing of that email to Rick Ackerman:

Maybe we will experience hyperinflation after all. I am a skeptic, not a true believer, but I am certainly open to it as a possibility. I think all the financial arguments are somewhat akin to biblical debates about how many angels can dance on the head of a pin. They are fundamentally deterministic and apolitical, while the actual process of setting policies that lead to hyperinflation is entirely political.

I have no econometric arguments against hyperinflation, I only have political ones. But since politics sets policy, then hyperinflation is necessarily a political choice. So a political analysis will trump an econometric one in my view.

But I could be wrong. As a basically poor person, I don’t have much of a stake in either outcome.


If Charles Hugh Smith happens to be reading this post, and I hope he is, I would like to point out that my hyperinflation arguments cover the gamut. And thanks to Rick Ackerman, I now have kudos from both camps, deflation and (hyper)inflation:

Deflation camp: "The very best of them, in my opinion, is FOFOA blogspot, where the essays are erudite, the discussion elevated and the arguments as knowledgeable as any you will find on the web."

[Hyper]Inflation camp: "FOFOA is probably one of the very best analyst in the whole world. The more I read from him, the more I am convinced of his vast superiority over most experts and analysts, probably of the Schiff-Turk caliber… This is one of the very best contributions in the inflation-deflation debate. It is long and detailed, but the topic is extraordinarily complex."

I really despise self-promoting in this way and risking coming across as if I think too highly of myself. The truth is quite the opposite, and I only post these so that skeptics like Smith will at least consider my arguments rather than dismissing them outright. I know my posts are long, and I know that some people think I'm just a crazy gold bug, which I am not. So there has to be a good reason for a skeptic to make that commitment of time and energy. And if he's read this far in my longest post ever, then at least that's something!

Now before I wrap this treatise up, there was one thing I said I would come back to that I haven't yet. And that is, if hyperinflation is guaranteed, why aren't all these hyperinflationists snatching up real estate left and right on the leverage that's still available? I, for one, don't have a mortgage. I don't even have any debt because I don't have an income, other than donations from this blog, to cover the carrying cost. And back when I was following Peter Schiff he was a proud renter too. Perhaps he still is, I don't know. There are literally dozens of answers to this question, almost all of them extremely personal. But the bottom line is that real estate will continue to fall in real terms even more than having an LTV of 95% hyperinflated away would cover.

Even if you accept that hyperinflation is 100% certain, real estate is still a poor investment choice to carry your wealth through. Gold is so much better that real estate shouldn't even be considered an investment choice (choice, as in a new investment) beyond your primary residence. Even with 10x or even 20x presumed leverage in a near-term debt wipeout, unleveraged gold is still a much better choice. And in addition to it being the lesser choice, leveraged real estate also carries a non-zero political risk in hyperinflation. I'm giving this an extremely low probability in today's world, but under any kind of conservative and personal "one percent doctrine" it must be factored heavily into the equation that includes expected leverage and the carrying costs on an unknowable timetable. This is an excerpt from an email I received a while ago:

Today I read a short little book titled Fiat Money Inflation in France by Andrew White (published 1912). My general impression is that there is no law so insane that it can't be enacted during a hyperinflation. As you may know, they even passed a law such that debts increased along with the issuance of further currency, so that for every so many additional assignats printed, one's debts increased by 25%. Thus they took away the one silver lining of currency debasement for the middle class. What a nightmare. I liked this bit:

"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 one it is fairly under headway; and how useless are all enactments which they can devise against the underlying laws of nature."


Okay, last thought on the real estate home front, and then I'll let it go. I have a question for Rick and his commenter SD1 from the top of the post. Remember they wrote:

Rick's Picks Commenter SD1: To my knowledge, no bank has ever made provisions in their lending criteria. So to anyone subscribing to the hyperinflation theory, all I can say is there is nothing I, and millions of other North Americans, would love more than to take $250,000 of worthless, hyperinflated money that we worked a few days to make, to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay.

Rick Ackerman:That’s the bottom line, as far as I’m concerned.


How close to the business end of the printing press are these millions of North Americans? You guys seem to assume that, during hyperinflation, millions of American mortgage payers will have access to this river of cash early enough to benefit overall. By the time they get their hands on it they may be struggling to meet other skyrocketing expense like property taxes and, uh, food. Wages won't keep up. Most people simply won't be able to keep up. And most of those who do will find that their wealth relative to those closest to the printing press will be declining. Like I said this is about outrunning the next guy, not the bear.

This is why I wrote, "if you don't make the effort to understand what is actually unfolding, there's a good chance [hyperinflation] won't [deliver any windfall in your direction]." If you really want "to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay," then you'd be best equipped to do so by buying some physical gold right now!


Inevitability

Here is Rick's premise once again: “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” If the borrowers can't pay, at least not in full, and certainly not in real terms (today's purchasing power), and the politically connected lenders won't take the hit, that only leaves the third option which C.V. Myers missed and Rick can't seem to fathom.

How do I know hyperinflation is inevitable? I know that they will do the "front lawn dump" not only because they said they would do it, and then did it, and they continue doing it, but because it makes absolutely no logical sense, from their perspective, to NOT do it in the face of a crushing deflationary collapse like both Rick and I see as inevitable. It will be judged an infinitely better option than immediate total economic collapse. And besides, 75% of the world has been waiting patiently, for a long time, to get off the dollar standard. And it has prepared for this very, inevitable, eventuality. So it won't be fought from abroad.

This is very important: Once hyperinflation commences it is characterized by a running shortage of cash, even though it appears like the opposite to the outside observer. The currency collapses in value against economic goods because the debt and the credit collapsed. There is no credit, only cash, and there is a shortage of cash for everyone, including the Elite and the government. So they, the Elite/government, print and print for their own survival while saying it is for yours.

And for those of you that think they won't do it because they'll be afraid it will end the dollar, end the Fed, or end fiat currency altogether, guess again. Not a chance! After it's all said and done, Bernanke will say some sweet things like his cuddly Zimbabwe counterpart did in this 2009 interview:

Gideon Gono: "I've been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks…

"There are certain things, policies with the benefit of hindsight, where we could've managed our affairs better… We are [only] human…

"Only a fool does not change course when it is necessary. Because economics is not an exact science, you want to be able to be relevant. The only constant is change and adaptation…

"It's a free market, a business which must be allowed to succeed or fail…

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

"I am modestly credited with the survival strategy of my country. The issue is if you want to break Zimbabwe and want it to fall, just deal with one man. You deal with Gideon Gono…

"I'm a normal guy: I miss going to the supermarket. One would like more freedom…

"If you raise the interest rate you'll be friends of people who have access to money. If you lower the interest rate, you'll be the darling of borrowers, but pensioners will curse you to hell. It's never about popularity. At all times you are definitely hurting some people in the economy…

"It's impossible to be directing the course of an entire economy and divorce yourself from politics. Politics are important because the turnaround of the economy hinges on political stability, but I can't tell when that will happen…

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


Zimbabwe still has a Central Bank, and Dr. Gideon Gono still has a job as its governor. It will likely be no different for Bernanke and the Fed. Extreme times call for extreme measures. And that's how it will be spun. They will print for survival and they will say it was for the survival of America. The dollar will end this thing without reserve currency status, more like the peso. But at least we'll have Freegold!

In our time and for the first time in the modern US dollar history, the US will embark into a classic hyperinflation for the sake of retaining its own lessened dollar for trade use. As destructive as that might be to players in this financial house, it is better than immediate total economic failure. It will evolve in a form much like the course of any other third world country, if its currency too was suddenly deprived of world reserve status. We will, like people the world over, learn to live with it and live in it. Truly, our dollar and economy will not go away, but its function, use and value will change dramatically.

Thank you
FOA/ your Trail Guide


Happy Easter!

Sincerely,
FOFOA



Something filled up
My heart with nothing
Someone told me not to cry

But now that I'm older
My heart is colder
And I can see that it's a lie



Children, wake up
Hold your mistake up
Before they turn the summer into dust

If the children don't grow up
Our bodies get bigger but our hearts get torn up
We're just a million little gods causing rainstorms
Turning every good thing to rust

I guess we'll just have to adjust

With my lightning bolts a-glowin'
I can see where I am going to be
When the reaper, he reaches and touches my hand

With my lightning bolts a-glowin'
I can see where I am going
With my lightning bolts a-glowin'
I can see where I am go-going

You better look out below!

502 comments:

1 – 200 of 502   Newer›   Newest»
Wejn said...

As usual, thanks for the article, fofoa!

tina said...

Very good article.

This leaves the question to everyone living outside the $system how will this Hyperinflation affect me?
Especially what will be in the Euro Zone?

mortymer said...

A Secret Time Bomb Made of Gold ; SEPTEMBER 12, 2007

http://online.barrons.com/article/SB118954417476624138.html

"THE VOLATILITY SEEN THIS QUARTER IN the stock and credit markets may be new to younger investors. But there is something lurking out there that can make things really dicey.

A little-known fountain of free money called the "gold carry trade" is in danger of drying up. And if it does, then markets from gold to bonds and even stocks can be in for a wild ride..."

Joel said...

Hi FOFOA,

Great article, as usual. I still think it is the dollar centric viewpoint, versus a RPG viewpoint, that gets most folks hung up in the inflation/deflation debate. I could never see how we could have hyper inflation of the dollar and deflation of assets at the same time, and your RPG posts are what finally allowed me to grasp the concept. Until one makes the transition to gold as the reference point, it's hard to grasp.

One other comment. You mention that bank balance sheets are protected in the event of inflation, but that's not totally true. What about shareholder equity? Yes, it stays constant on the balance sheet, but it's purchasing power gets ravaged, so while the bank may still operate and remain within it's capital requirements, the shareholders are being hammered! A business other than a bank will typically have more debt than equity, so they will weather the storm well (can pay off debt in worthless dollars to offset loss of purchasing power of equity), and then simply start selling their widgets in the Euro or Amero or Freegold based new dollar. Banks, however, don't have leverage to speak of, so their equity will get pounded in terms of purchasing power, and will have no offsets. Sure, they will continue to operate, but their net worth will go from Mercedes and summer home multiples to peas and carrots multiples.

Lastly, I sincerely hope you are right about the short term transition and lack of civil unrest. I see a much greater potential for the latter during the period of transition than you do. Keep in mind, during the great depression, 80% of the populace lived on farms. They didn't have much, but they survived by growing their own food and raising goats,cattle,chickens, etc...to subsist. Today, 90% of the populace lives in urban areas, and "you can't grow no corn in concrete", as they say down here in the south. I believe the supply disruptions and crazy food prices will cause rioting by those that we have trained so well through entitlements to rely on the government for assistance. Hope I'm wrong.

Yannick said...

A quote from one of your other posts within a quote from another of your posts... Whoah!

Be careful at recursive quotes! :)

Radek said...

Hi FOFOA,

As usual a nice read.

I agree with you on most points. It is about savers vs debtors. It is about looking at things through the eyes of the giant and understanding that they in hidden way transfer their paper wealth into gold wealth.

I have some beef with you anyway. I would not be sure that there must be just FreeGold. If sufficient number of giants makes the decision it will be also FreeSilver. That is the only beef I have ;).

I would also add to this in my view superficial discussion deflation versus inflation. I do not care how the currency goes up in flames. I care only about carrying my wealth over to the other side, so I buy gold/silver and do not care.

If you choose your camp and make optimized investment (hiperinflationists say it should be highly leveraged cash positive assets, deflationists say it should be cash) you are exposing yourself to being completely empty handed if you happen to be wrong.

Also, on the cautionary note, if you decide to be a debtor by taking huge loans in RE, how can you be sure that power-that-be won't take advantage of you and denominate your debt in gold before hiperinflating currency? You were right, there is hiperinflation, but you were wrong thinking that you can game the system. The system is bound on taking advantage of the ants. The ones that think they are smart are easy to pick up too because the giants make the laws.

best,
Radek S.

Mickette said...

I read with great interest your article, FOFOA.
A hyperinflationary phase is definitely a psychological phase. The American system must be set on winning the crisis of loss of confidance in its currency. I am convinced that we will witness the fall of the eurosystem and its currency in these coming years of inflationary depression. This could generate a return of confidance in the dollar. The danger of hyperinflation would be rejected until the replacement of a new global currency (we could call it "the new dollar" in this case) would be implemented. Do not forget that the United States have the largest amount of gold and is a country enormously rich in raw materials. It could easily ensure the new created currency.

Charles Hugh Smith said...

Thank you very much for your careful analysis of my comments. This explained your reasoning and the basics in a way which I finally understand, and admittedly I am rather thickheaded not from being stubborn but just from being slow.

You are correct, I am basically a skeptic, trying to follow the dynamics of various models to various end-states. What you have done here is explain the process and the end-state very clearly.

I will link to this entry and suggest my readers read it.

One practical question, posed by a friend of mine: if all debt is doomed to eventual zero (and not in some far distant future, but probably within a few years), then wouldn't it make sense to borrow as much fiat currency as one could now at low rates and buy tangible assets/gold? This seems to follow logically.

charles

Ore em' said...

Mr. Smith,

Welcome to FOFOA. First post, and you're already expanding the quality of the discourse, as I too have wondered about leveraging oneself into the physical gold market via fiat debt.

My only fear, as mentioned in the article by FOFOA, is what happens when debt is expanded right alongside fiat (i.e. the 25% law that came into effect in France)?

FOFOA,

As always, a thing of great intellectual beauty. Although, perhaps if I spent less time reading you I'd actually be spending more time making money!

Joel said...

The case for debt is blown up unless gold stays under a two multiple of current prices. Your debt can go to zero, but that is still only a 100% gain. If one has assets that they cannot sell for whatever reason, then it makes sense, but is not without risk in the short run. Gotta make those interest payments!

Joel said...

Also your equity will probably go to zero.

costata said...

CHS,

"...not from being stubborn but just from being slow."

Slow like the tortoise or quick like the hare?

"... borrow as much fiat currency as one could now at low rates and buy tangible assets.... This seems to follow logically."

The Wall Street bankers seem to find that logic compelling.

All jokes aside, the crucial point is this: for this strategy to work you must be confident that you will be able to obtain the depreciated currency you need to service the debt.

In other words, you need to be close to "the business end of the printing press" as FOFOA put it in this post.

mortymer said...

http://en.wikipedia.org/wiki/Chas_Freeman#cite_note-Curtis-1

"...In 1991, while he was US Ambassador to Saudi Arabia, Freeman gave an interview listing ways that Saudi Arabia had been helpful to the US. It contributed $13.5 billion to the 1991 Gulf War effort and provided fuel, water, accommodations and transport for US forces on Saudi soil. Immediately after the war it rapidly increased its oil production, preventing the US recession "from becoming far worse." He also stated Saudi Arabia continued to insist that oil be in dollars "in part out of friendship with the United States." He warned that with the "emergence of other currencies and with strains in the relationship" Saudi Arabians might begin to question why they should do so..."

mortymer said...

When will we buy oil in euros?

When it comes to the global oil trade, the dollar reigns supreme. But it has a challenger, writes Faisal Islam

# The Observer, Sunday 23 February 2003

http://www.guardian.co.uk/business/2003/feb/23/oilandpetrol.theeuro

"...there is one enduring constant: the dollar sign...Recycling so-called petrodollars, the proceeds of these high oil prices, has helped the United States run its colossal trade deficits. But the past year has seen the quiet emergence of the 'petroeuro'...Some $3 trillion (£1,880 billion) are in circulation around the world helping the US to run virtually permanent trade deficits. Two-thirds of world trade is dollar-denominated. Two-thirds of central banks' official foreign exchange reserves are also dollar-denominated...The majority of countries that require oil imports require dollars to pay for their fuel. [Mrt: This is past now, not anymore.] Oil exporters similarly hold, as their currency reserve, billions in the currency in which they are paid. Investing these petrodollars straight back into the US economy is possible at zero currency risk...But now there is the euro. ..."

[Mrt: Note this has been written in Feb.2003!]

Charles Hugh Smith said...

Slow like a tortoise, to be sure. :-)

Good discussion on the expansion of debt issue--I am here to learn.

The entry on the Saudis is most interesting. How will the Chinese and Japanese react if the dollar goes into freefall?

mortymer said...

btw:
from old link: http://www.cbl-ly.com/
from bis: http://www.cbl.gov.ly/en/

mortymer said...

CHHS: There is much more of this if you like, follow the past posts :o)
---
"The US Air Force is currently in the process of certifying its entire fleet to run on a 50/50 blend of synthetic fuel derived from the Fischer-Tropsch process and JP-8 jet fuel." Mitigation of peak oil ~wiki

Larry said...

FOFOA,

Excellent post - and nicely painted landscape! I do hope new readers will take the time to read your referenced posts - especially Debtors and Savers and the recent Hyperinflation series. If they do, the "expansive" view cannot help but open up and give the opportunity of a lifetime(s) to avoid financial annihilation.

CHS - good to read your comments.

Best,
Larry

Brian D. Richards said...

Dear FOFOA,
Again, you have done an amazing job of explaining these two subjects: deflation and hyperinflation. I read this post carefully over a period of several hours, and it did help illuminate the dim concepts in my mind, although I have yet to reach the "ah ha" moment. Nonetheless, I had a question. Just what would you expect the "elites" to purchase with their freshly printed billion dollar notes that Ben so generously hands to them? And, why would an aware seller of any asset with intrinsic value (let's say, for example, oil wells or potash mines) EVEN exchange that asset for quickly depreciating dollars?
Thank you very much, really. Brian

costata said...

Charles,

FWIW I think the Chinese will accelerate their plan to make the Yuan fully convertible. Hence the surrency swaps etc.

It seems to me that this "kicking the can down the road" has been an effort to ensure that world trade can continue despite the problems with the US dollar. The US share of world GDP peaked at around 30% in the late 90s. If memory serves me it was estimated to be well under 20% in 2009.

Could the rest of the world live without the US as consumer-of-last-resort today? My gut feeling is that the answer is "Not yet".

Japan is an interesting case. As a US vassal they cannot move openly to attempt to quit their US dollar denominated "reserves". Anyway as A/FOA pointed out an attempt to do so would crash the market for those securities instantly.

The question that has been excercising my mind lately is: Does it matter if their FX reserves evaporate? Does it matter if any country's FX reserves disappear in a post-US$ reserve world?

I suspect the answer is "No" to the latter question if the oil producers will play ball. Japan has a trade surplus, so their capital account is not an issue they need worry about at the moment. Japan Inc would continue to function after a dollar collapse. (Bearing in mind that a dollar collapse does not = zero US GDP.)

I suspect Japan's fate is tied to the fate of their currency. Will the Yen hyper-inflate? How can it not if their unfunded liabilities are to be met? Their gold reserves could allow them to limp through a hyper-inflation of the Yen by keeping the oil flowing.

In saying the above I am conveniently ignoring the elephant in the room. How will the US react militarily if the oil producers move to a multi-currency regime. Insisting on selling oil for Euro exclusively worked out rather badly for Saddam Hussein so that doesn't look like an option IMO.

Is the US ready to accept Putin's vision of a "multi-polar" world? Once again, I think the answer is "Not yet".

Perhaps Churchill will be proved right after all:
"Americans can always be counted on to do the right thing...after they have exhausted all other possibilities."

http://www.quotedb.com/quotes/2313

Brian O'Flanagan said...

FOFOA: This post is a masterpiece. You have taken a very complex topic, broke it down piece by piece and presented a conclusion that cannot be refuted logically. Well done.

GoldSilverClub.ca said...

I am convinced to sell a lot of my silver and buy more gold. Thanks FOFOA.

One question remains... when?

cognitivefun said...

exceptional article, simply exceptional. Thank you.

conheart said...

Finding your site leaves me feeling as though I've won the lottery. I too took the time to carefully read through this and digest it as I went along. Your discourse is an absolute masterpiece. I have never felt more clear on this question than I do now.
We all owe you a great debt of gratitude for your thorough explanation. Many, many thanks.

Jonathan said...

"How close to the business end of the printing press are these millions of North Americans?" Good point. Only as close as barter will allow.

I have no problem with FOFOA being confident in his analysis. I just wonder if he has followed throw with his earlier post of swapping the metal he prefers to fondle for gold at (from memory) GSR 1:40?

g said...

FOFOA,

I am relatively new to this site so I ask you to forbear my exuberance. Your post (including all embedded links) is an intellectual tour de force. I have spent the better part of the day blissfully reading, contemplating, clicking back and forth between links referencing thoughts and generally revelling in the high level of discourse. Despite the density of material, your capacity for clarity is quite literally marvelous and what you impart is priceless to the keen reader. Thank you. Also, many thanks to posters in the comments section going back through time. The quality of the back and forth is useful as one allows such seminal ideas to soak in.

Texan said...

FOFOA,

Wow! I loved it. I am still not convinced that hyperinflation is the ONLY path, but this was the final piece I needed to convince me deflation is not in the cards. I think we could be in for many years of real inflation in high single digits. At that point who knows.

Anyway, thank you. Excellent writing.

Chaiwalla said...

Thank you FOFOA for addressing the option of buying real estate on leverage versus buying more gold. It's an issue I am dealing with right now, as my landlord wants to boot me out but has offered me the "opportunity" to purchase the place at a discount to the price of other units around here. The last thing I want to do is use my PMs as a down payment on overpriced real estate, but I was thinking "at least I'll get a free condo in a few years." I can see now that this is not necessarily true, as .gov could keep my real mortgage debt increasing a la Assignat-era France. I would be better off finding another rental, waiting for the cash-only market to take over and then buy the dream house for a few gold coins.

@GoldSilverClub.ca, I've just recently started swapping my silver for gold (sold about 5%), when I can get a good deal making even trades or paying a slight vig to the dealer. My feeling is that silver is going to spike a lot higher vis-a-vis gold, perhaps to a GSR of 16 or lower, but still I don't want to be left holding on to the silver bag without having done the swap. Basically, I plan to increase my silver sales significantly for every couple of points the GSR heads lower, up until I exchange 90% of my silver.

It looks like you are a dealer yourself - if you have an interest in acquiring my 10oz, 100oz and 1000oz silver bars and selling me cheap bullion in return, let me know. I'm in the Toronto area. As I said I'm doing even swaps or paying 0.5% to 1% and getting coins like Krugerrands, sovereigns, Can$100's etc. I'd love to get a couple hundred maples if I can get a great price on them for my silver.

- Chaiwalla

Dan said...

My brain hurts

Thanks for a great read

victorthecleaner said...

I have one more comment on the U Texas gold purchase in the Forum 1500 video:

Towards the end of the interview, he says that they did not want to roll the futures contract all the time and therefore took delivery. It was about $ 1bn or more than 6700 contracts (assuming $1400/oz) or more than 21 tonnes.

I wonder whether anyone has checked this against published COMEX data. As far as I remember, there has always been a position limit for people who go into the delivery period (1500 contracts??). So they would have needed four delivery months to get it. Is this credible?

The other thing that irritated me in that interview is that they said they initially paid $ 750 million for the gold. But if they initially owned the future, why did they put down more than the margin required to hold these contracts?

Could it be that the interview was disinformation, and that in reality they had GLD and took the physical out of GLD?

Does anyone remember how Einhord (Greenlight Capital) did it? Also via GLD?

Victor

victorthecleaner said...

Sorry, he is called Einhor[b]n[/b] of course.

Victor

victorthecleaner said...

DP and Jeff,

you asked why you cannot create synthetic supply using COMEX futures. Please see

http://victorthecleaner.wordpress.com/2011/04/23/synthetic-supply-of-gold/

for my reply.

Also, I think that COMEX is overrated in gold and silver-bug circles. The amount of gold and silver that go through COMEX is less than 2% of the annual production (mining plus recycling). I think only with the recent silver events, this has exceeded the 2%.

Victor

costata said...

victor,

You may find this interesting. David Galland of Casey Research had an interesting discussion with Dr. Andrew Bogan on the subject of short selling in ETFs. Apparently some of the stock ETFs have short selling levels up to 1,000% compared to IBM stock at around 1.4% short.

According to Bogan it is possible to heavily fractionalise the physical metal in GLD (and presumably SLV) through shorting the ETF shares.

http://www.zerohedge.com/article/are-etfs-really-safe-interview-andrew-bogan

The short position in GLD isn't nearly as large as it is for some equity funds – but we have looked at GLD, and it has the same structural issues, just to a lesser extent, at least for now. The short interest in GLD has fluctuated around 20 million shares. Now, GLD is a pretty big fund. With 20 million shares short, it is roughly 95% fractionally reserved……. But GLD does not have to stay at 95% fractionally reserved.

DG: Could they just say, "From here on, we're not issuing any more shares"? Would that stop the short-selling?

AB: Not necessarily, because, you know, the short-sellers are selling – in fact, it would probably exacerbate the short-selling. So as long as a fund is issuing shares, aggregate buying demand can be satisfied by expanding the fund. If they stop issuing shares, aggregate demand would get satisfied by short-sales of existing shares. So, if anything, closing the issue window should make the problem worse, not better.

..... The bigger challenge might be if there were an actual redemption wave. If that happened when GLD was already substantially fractionally reserved, then you're back to an 1800s gold bank problem. Fractionally reserved banks can be hit with a run ..... You know, one of the big risks, by the way, that no one has really discussed much, is if an ETF were to have a big redemption run in panicky market conditions and halted redemptions .....it's quite possible that if redemptions were halted for any length of time, the arbitragers wouldn't be keeping the share price in line with NAV. We already know from the Flash Crash that significant price departures from NAV are quite possible for ETFs.

info said...

This has to be your greatest piece. All the people up there who say, "thanx, nice piece" are understating. I think it is a masterpiece and it puts to rest the d/i debate once and for all. Just the fact that you got such high cudos from Ackermann (who I respect) says alot... Even though I respect you more. Warm Regards from Santorini

Brian O'Flanagan said...

@costata

yes, GLD is heavily shorted. Yes, if you own shares of GLD in street name and your broker lends them out, then you technically do not own them.

GLD holders would be wise to either hold their shares in a cash account or take possession of their share certificates. Only then can they be assured that they really own their shares and thus really own an interest in GLD's gold.

costata said...

Brian,

If I understood that piece correctly it may be even more dire than the downside you describe. If enough shorts on GLD are put on then the long GLD holders could still have only an "interest in GLD's gold" that is actually a disputed interest in a fractionally reserved gold pool which appears to be 100% allocated.

As Andrew Bogan pointed out it would appear that GLD is 95% reserved currently but it is, to my way of thinking, a tip off on the endgame for GLD ie. the bullion banks have a "legal" method of stripping that vehicle of the allocated gold and paying out paper.

pipe said...

FOFOA-I was very impressed with the manner in which you stated the 'hyperinflation' case. Especially, the 'debtor' vs. 'saver' part.

However, you should have stopped there, because your analysis of gold as a store of value is deeply flawed. For an individual, an institution, or even a vassal state the size of Canada, gold will probably work very well as a store of value. But once you reach a certain size, and the USA has greatly exceeded that 'certain size', your only hope for retaining value and wealth is to maintain a healthy, growing economy.

Gold, as a medium of exchange, could be a big part of the healthy economy maintenance, by preventing socialists from engineering serial bubble blowing, but it is incapable of storing the value of a country with the world position of the USA.

What good is gold as a store of value if there is no one to sell it (or barter it) to to get food, health care, housing, etc.? No good what so ever.

When you get to the level of super power, the only way to store the excess wealth of your country is to educate your youth, maintain your infrastructure, and keep your economy growing and innovating at about the same pace as population growth.

Take the case of your 'Focal Point' piece. Once the worker has all the gold and all the stuff on the 2-man island, what is the value of his gold? Zero, because there is nothing to exchange it for. He could make jewelry, but that is a non-monetary use. If the lazy bum starts working again, and eventually produces more than he consumes, the gold owner would have a tiny value in his gold, though, so it is not without hope of value, but it is slim, in your example.

An even worse case is the present situation of the USA, a 'baby boomer' syndrome. The baby boomers are near the end of their productive, wealth building years. What would have been the ideal way for them, collectively, to store their excess (over and above everyday expenses) wealth? They could have all bought gold, pushing its price to $100,000/oz, or higher. And then they all go to sell at once, with predictable results.

Once you have a baby boomer bulge of people moving through life, you are going to have failure. No matter where the 'boomers' attempt to store their excess wealth, there will not be enough people to sell it to, as in the 'Focal Point' example above.

It is true that those boomers that have gold and silver will probably be better off than those that don't, but that is only because so few have them have any.

Boomers are going to need food, health care, small, easy to maintain homes, etc. To the extent that they cannot provide those things for themselves, someone younger will have to do it. We can use the gold in Ft. Knox to pay those younger people to perform those services, or use something else. In either case, those younger people are going produce only a finite amount of wealth. Some of that wealth will be for their own maintenance, and some will go toward maintaining the boomers. The value of all the gold cannot exceed that volume of that wealth.

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

As always an excellent expose, thanks again for your time and efforts to qualify the hyperinflation/deflation debate. My personal plans since the late 70’s has been to prepare for inflation/hyperinflation even though at times I would have some doubts as to my plans and opinions on this subject. Thanks again for helping to cement my convictions and the knowledge that my preparations for all these years are correct. My appreciation will be forthcoming.

@ all others who appreciate and have thanked FOFOA for his efforts and also those who prefer to remain anonymous, please remember you can’t put appreciation/thanks in your pocket. It just won’t pay the bills. My belief is that there is Not a single reader of this blog that believes FOFOA’s time is better spent flipping burgers for McDonalds. Please entertain the thought to provide a decent wage for the party that has enlightened so many and has been such a gracious host to all. As has been stated previously, FOFOA’s solitary income is from the donations received through this blog. Above and beyond the previously stated, y’all need to donate/spend your Yankee dollars while they will still purchase something of value.

Don't hang up said...

The pieces keep coming together. After listening to Greenspan talk about the conundrum of low ten year yields and Ben talking how it would not be in the best interest of China to sell their bonds, I am starting to see the bigger picture. Ben's analysis was flawed on the timing aspect. The way I see Greenspan's problem is that countries such as China viewed things as "give a man enough rope and he will hang himself". They could feed a lot of debt as they knew the time to pull back was when the US was slowing down. That meant the policy makers have no choice but to fund their own debt.
I thought I had read a quote from another or foa that described things coming to a forefront on a US slowdown.
Does this seem like a scenario that is playing out or am I on the wrong path?

ShockonT said...

What the deflationists never consider is this:

If you attempt to preserve the dollar, interest rates must rise. If interest rates rise then debt will default outright. Defaulted debt is a 100% write-off for "the elites".

Buying debt outright for cash is THE ONLY WAY that the "elites" can cash out.

As FOFOA points out, the first one to the newly minted cash outruns the Bear.

Any dollar deflationist out there please try to explain how a contracting dollar supply won't lead to massive liquidation of debt. How does this benefit the banking elites? And while your at it, explain why QE will suddenly stop? Why would they have started QE in the first place?

THIS IS THE ONE REASON WHY CENTRAL BANKS HAVE GOLD ON THE BALANCE SHEET. IT IS A DEBT DEFLATOR/LIQUIDATOR....Use only in case of emergency (and only after numerous rounds of quantitative easing).

Pretty simple. Very political. Unstoppable.

A note to Charles Hugh Smith:

As anyone highly levered in 2008 found out, a temporary liquidity crunch will force liquidation of fungible assets and the most fungible asset is gold.

Ever wonder why Bear Stearns was folded into JP Morgan over a weekend and Lehman was left to fail?

Bear Stearns was a big player in precious metals derivatives. Lehman was a big player in CDOs. When Lehman defaulted the liquidity crises shifted physical gold from weak and levered hands to those with access to cash.

Bravo, FOFOA.

Edwardo said...

Costata, I think where Japan is concerned, the wildcard may simply be the viability of that nation to function in the wake of their, as yet, unresolved nuclear catastrophe.

With regard to FOFOA's thesis on the inevitability of the scenario he paints, it has much to recommend it, and I have touted it on no less than Rick's site. And yet, to bowdlerize old Don Rummy, there are "known knowns, known unknowns, and unknown unknowns." It sounds like gibberish, so, if you don't catch my drift, I'll try Shakespeare by way of the character, Hamlet, "There are more things on heaven and earth than are dreamt of in your imagination."

And there's the rub with respect to the prospects for certainy on this orb.

Joel said...

Mr. Smith,

In response to your question about their moves towards a depreciating dollar, here is a Zero Hedge article on impending Chinese currency diversification away from the dollar, a portended lead in to reduced bond purchases as well:

http://www.zerohedge.com/article/china-proposes-cut-two-thirds-its-3-trillion-usd-holdings

d2thdr said...

This is your best post FOFOA. It surpases the credibility inflation post which was the best until now.

IMO hyperinflation would be good for the mankind, would get rid of the bad stuff overall- Debt, political class, general deterioration of meritocracy, sincerity, the importance of hard work. I do not see this happen with deflation. So even if there is a chance of deflation, I want hyperinflation as it will benefit majority of mankind.

Please keep going.

/SleepingVillage/ said...

I just want to say that reading everyone's comments here has put a big ol' smile on my face today:) This new entry of FOFOA's is indeed a masterpiece! Many thanks to all of the new faces commenting as of late. You know who you are;) And of course, many thanks again to all of the regulars I've been learning from quietly in the past.

FOFOA; I don't know if it's just me finally being able to grasp the message more clearly of your last few pieces, or if you're honing your communication style, but I've really taken a step, nonetheless, in my overall "absorption" and understanding. Thank you.

Good day to all

DDT

SS said...

What about the Chinese announcement that they will cut 2/3rds of their dollar denominated holdings?
http://www.zerohedge.com/article/china-proposes-cut-two-thirds-its-3-trillion-usd-holdings

Charles Hugh Smith said...

Thank you to those who posted the link on ZH re: China dumping bonds. Unlike in the US, China appears to be experiencing a classic wage-price spiral of out-of-control inflation, triggered (IMO) by the Fed's dollar devaluation. The need to de-link the RMB from USD seems apparent. Dumping USD-denominated bonds would be a good step 1.

Charles Hugh Smith said...

I also just made a small contribution to FOFOA as per the excellent suggestion above.

FOFOA said...

Thank you Charles Hugh Smith, Greyfox and the others that donated as well!! Charles, it's very nice to have you here participating in the comments!

And welcome to the poker players. As my long time readers are aware, I enjoy a good game of poker now and then. We are getting a rush of hits right now from a popular poker author's Twitter account. He tweets:

"It took me 3 hours to read 'Deflation or Hyperinflation?' post twice & I'm still confused"

:)

costata said...

Joel and SS,

Thank you for that ZH link.

Edwardo,

I see your point about Japan. The impact of the nuclear disaster, earthquake and tsunami should not be underestimated. I still think that the Yen is their key vulnerability.

Time will tell.

I also agree that there is always the potential for a black swan. However, I also think that processes can be observed over time. And where huge forces concentrate momentum builds and some trends can become unstoppable. This is how I interpret FOFOA's use of the word "inevitable".

I also place a lot of emphasis on human nature in my attempts to understand civilisation scale events and trends. I doubt we will stray very far from sound conclusions if we attempt to understand how the PTB will attempt to "save their own skins" at the expense of anyone else they deem expendable. That they will attempt to do so seems to me a given.

Cam said...

Great article. A very long read though. I would have appreciated the condensed version in two thousand words or less. You know, the version where you just get to the point because not everyone has all day to sort through the complicated bits.

Pete said...

A great article.

@Cam

The article is in response to others, and as they have stated that the topic is complex and requires due diligence.

So I'd suggest you either find the time, or go comment on ZH instead.

victorthecleaner said...

Here is another article by John Hussman on monetary base, short term interest rates and price level:

Monetary Policy in 3-D

Victor

mortymer said...

@ Costata:
http://en.wikipedia.org/wiki/Endaka

radix46 said...

So, can someone help me to concretize the process in such an event....?

Bond market failure, due to some event (caused by blowing up of gold derivatives, due to physical buying)?

Followed by wholesale dumping of bonds, being bought by the FED for cash. How about in other countries with regard to their own bonds?

Then all of these hedge funds, banks, pension funds etc pile into whatever gold they can find. They then spend their cash first on whatever else (what?), driving hyperinflation, leaving everyone else in the doo doo.

Now, what we have is hyperinflation in cash terms, and hyperdeflation against gold. So, how does the hyperinflation get under control and what happens afterwards? Is peoples' purchasing power the same against all goods, other than gold, or how has the balance been effected?

Their pensions are now dependent on how good their fund manager was at getting out of bonds and (equities?), and into gold.

Would anyone like to have a stab at describing the functional reality of Joe-Six-Pack, as the dust is settling, the very next morning after Freegold?

samix said...

thank you FOFOA, I want you to know that I am still around taking a silent hike with you.

Rickack said...

Sheesh! Where to begin? It's difficult to give up a belief system that took root 30 years ago, but I find your arguments irresistible. I took notes as I read the essay, thinking to rebut you point-by-point; instead, halfway through it, I found myself overwhelmed by the clarity of your thoughts. The real power of this essay is that each step of the hyperinflationary endgame it foresees is entirely consistent with human nature, particularly where self-interest and self-preservation are fated to play out.

I will have to find a way to break this gently to my readers, perhaps starting with the joke about not having to outrun the bear. It goes a long way toward explaining how the Masters of the Universe will actually benefit from hyperinflation. You've also helped me understand how I could have been so bullish on gold over the years even though I considered myself a hard-core deflationist. It was a conflict between head and heart, really, but you’ve resolved it with the most persuasive argument I’ve seen in favor of gold. Even better, you’ve provided a sound basis for arguing that at $1500 per oz., gold has barely begun to discount the dollar’s final fall.

I especially appreciate the patience and humility you showed in walking readers through your argument one gentle step at a time. By not trying to overpower your opponents, you have produced a treatise that is certain to engage many minds. Thanks for engaging mine -- at a depth that had eluded me for three decades.

Matt said...

wow, this is an incredible piece FOFOA. thank you. it makes me want to explore the archives deeper and spread the link to as many as possible.

i'll certainly want to read it again, but that was time very well spent and your conclusions are spot on!

costata said...

mortymer,

The King of the link strikes again. Thank you.

I've never seen the Yen carry trade pinpointed as the proximate cause for the 2008 meltdown. As it happens I don't agree it was as important as this entry in Wikipedia suggests. I see it as one of several important factors. That said, it certainly makes one pause and reflect on the relative importance of the Yen carry trade in the GFC.

"Endaka occurred in 2008. The yen moved from the floating near 120 to floating near 90. This is thought to be the first time endaka contributed to a worldwide recession, instead of just a Japanese recession. While the proximate cause of the recession is widely thought to be an increase in credit defaults (largely outside Japan) causing a loss in confidence in the credit markets (a credit crisis), the yen was funding these investments through the carry trade over a period of years, where loans were made at low interest rates in yen to finance the purchase of non-yen debts which had higher interest rates. As the value of the yen increased, the trillions of dollars worth of carry trade buildup over years swiftly reversed in a matter of days, and there was pressure to sell these assets to cover the more expensive yen loans, thus decreasing the available credit and accelerating the crisis. By 2010, the yen had touched 81.1129 per USD.[1]

mortymer said...

@Costata: Check the discussion page on the same link. You are not the only one with same claim: ("**Agreed. Declaring that endaka is the cause of the world-wide recession is a huge claim that I've never heard before. This article needs to be fixed, clarified, cited, etc")
"King of the link" :o)

Endaka has its importance in the "Timeline" connected to another events :o) Check NNW message.

Blondie said...

Rick,

Your gracious concession displays more than a little integrity.

This is not the only essay FOFOA has posted that engages minds to this degree... the archives are rich with comparable insight.

Thank you both for enabling the debate to develop to this degree.

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

Rick,
Welcome aboard the “hyperinflation train” before it has left the station. Have read many articles written by yourself and am pleased to read your comments here.

Yes, please do as Blondie has suggested as there is a wealth of knowledge in the archives, found nowhere else on the net and explained in a manner in which all can understand. FOFOA has this wonderful ability to divide a subject into all the individual components and clarify each member. As concerning Blondie be advised that all of his comments are first class and well worth reading multiple times.

As for your readers, they should appreciate the humility/integrity of someone that has acquired free-thinking knowledge and is able to proceed in a manner that will benefit them. I know that this would be my estimation/evaluation as a long time reader.

Aaron said...

@Rickack--

Welcome! I hope we'll see more posts from you at FOFOA's blog in the future. Lots to talk about over here.

FOFOA, great work as always.

--Aaron

Jeff said...

I see FOFOA has increased his freegold price target. 60k?

On another point, what does one save in for spending purposes DURING the hyperinflation? Dollars will quickly be devalued and cash will be in short supply; we don't want to spend gold before we arrive at Freegold. How is one to meet needs for six months or so?

Michael H said...

FOFOA, this is your best post yet.

Welcome to Charles and Rick! And welcome to the poker players as well.

Patrick said...

@Rickack...

You should tellyour subscribers to get out of the paper scams in gold.. and buy the real stuff...

Trade everything else.. but not the gold...

If you fully understand the things written over here.. you'll stop trading.. and will be running to the coinshop.. that's what I did.. a long while ago

ShockonT said...

http://www.rickackerman.com/2011/04/hyperinflation-vs-deflation-i-concede/

Bravo, FOFOA, again.


It's like understanding gravity, conceptually difficult, but once you get it, you never cross back!

Brad Williams said...

Great post! The hard money camp versus soft money camp analysis just might be brilliant.

But it is an error to think of Mish as a "deflationist" in the sense of predicting that ultimately there will be a deflationary collapse in the US rather than hyperinflation. I've never seen him say that. Although his call is for bouts of deflation for the foreseeable future, an eventual currency collapse is consistent with that and I've never seen him deny that hyperinflation may come. Just probably not in the next few years, as many hyperinflationists like to say is possible or even probable.

Options Trading Investor said...

I can't recall ever reading through a longer economics post! Yeesh!

But well worth the read. Thanks for sharing your insights.

mortymer said...

The Monetary System and The Collective Subconscious
By Alar Tamming with Krassimir Petrov; 04/01/2011

Fofoa, there is a new challenge for you here:

http://www.petrovfinancial.com/?p=1460

"Today, there is a common belief that the Euro, which doesn’t have any physical backing, is an exception. In psychology, this belief falls under the category of “delusional thinking”. No doubt, drastic changes are coming for the Euro that will shake peoples’ worldview and attitude towards life."

...so it seems Krasimir Petrov and Alar Tamming have a different view on the foundations of Euro.

"Since the USA renounced the gold standard in 1971, the World Bank has identified and “officially” recognized 176 monetary crises and 96 banking crises."

[...or isn´t it just and only One continuous Crisis since the Smithsonian Agreement?]

Rookie said...

I'd like to thank Charles for linking to FOFOA. It takes courage to do that: lead people to a site critiquing your own. Very cool.

dave2004 said...

Thanks FOFOA for this extremely complex post, I will have to read it at least twice!

What's the perspective for the EUR and CHF zone? would they follow the USD?

Ore em' said...

FOFOA, out of curiosity, who was the Poker tweeter?

Ore em' said...

Upon further review, it appears as though it was Paul McGuire, aka TaoPauly or Dr. Pauly.

Ash said...

Question: If deflation leads to increased loan defaults, and loans are secured by hard assets, and/or can be modified by the government to secure additional hard assets (land, homes, cars, whatever) and wages, and it increases the value of the currency in which debts are denominated, and financial institutions can be bailed out (if their is still confidence in government-issued debt) and/or high-level execs can move from failed companies to other companies or the government, where they will be paid by the taxpayer, and they can easily travel across national borders (physically or virtually) and use electronic technology to record their wealth (and power)...

then why exactly are we saying they are opposed to deflation?

Perhaps I am also incorrectly assuming the existence of a trans-national global elite class that can influence monetary dynamics and outcomes... but perhaps not.

Roual said...

FOFOA

Here is my problem with hyperinflation : You say that hyperinflation is created in order to save debt. But your argument is that the holder of this newly created money would then take it and pay down debt.

So there is ultimately no debt outstanding in a hyperinflationary environment, with a ridiculous amount money bidding for a finite amount of goods and services.

But what if there is a short-circuit ? What if the holder of this freshly manufactured money decides not to pay down debt ?

Instead this holder decides to buy gold. And if enough of them do this, the POG rises. So more money is created to save debt, but this second column of holders doesn't pay back debt as well, but instead buys gold too. As does the third column, the fourth column, and even the fifth column. It doesn't stop.

So here in gold you have an asset class that can soak up an infinite amount of money, whose appreciation will ultimately extinguish all the holders' debts, while at the same time leaving a ridiculous amount of debt outstanding.

Because not everybody will have gold, but they will have debts ... one way or another ...

And that debt will be defaulted on, causing all the destruction of money and credit that is deflation. This while all the excess money is swarming like bugs around a neon light with gold lettering.

A rising POG is deflationary, not inflationary. Gold is the ultimate liquidity trap ( decipio liquidus magnus tyrannus )

matt said...

@ Pipe

""When you get to the level of super power, the only way to store the excess wealth of your country is to educate your youth, maintain your infrastructure, and keep your economy growing and innovating""

For all your trash of socialism, that is the biggest neo keynesian socialist rhetoric i have seen on this blog.

""We can use the gold in Ft. Knox to pay those younger people to perform those services, or use something else. In either case, those younger people are going produce only a finite amount of wealth.""

More socialist rhetoric. You do not understand freegold.

StefanX said...

From what I've read so far, this seems like it will be a landmark essay on the central economic puzzle of our times: deflation vs. (hyper)inflation.

+++

One quibble so far:

I was wondering: is there a math error (typo) in this part?
-----------------------------------
let's see… $168T/($14T produced - $14.5T consumed)= x years… hmm… somehow it's going to take us negative 34 years

Should be either of the following?
-----------------------------------
a) ... $68T/($14T produced - $14.5T consumed) = ... negative 34 years ...

b) ... $168T/($14T produced - $14.5T consumed) = ... negative 84 years ...


In the case of a), then also change $168T to $68T in the preceding paragraph.

Thanks.

Indenture said...

IMF bombshell: Age of America nears end
Don't Like a Weak Dollar? Might as Well Get Used to It

StefanX said...

Woops, I think my correction needs a correction.

The correct math is obviously:

168 / -0.5 = -336

which does round to -340...


But I still don't understand:
how do you get -34 years from -340?

Thanks.

(Instead of dividing 168 by negative a half, I was incorrectly multiplying 68 by negative a half trying to get negative 34!)

Sorry if double post.

JR said...

Hi Raoul,

Reading is your friend. You comment:

FOFOA

Here is my problem with hyperinflation....

A rising POG is deflationary, not inflationary. Gold is the ultimate liquidity trap ( decipio liquidus magnus tyrannus )


But who knew, in the *very post* you respond to, our humble host wrote:

"We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars."

Its probably too much to ask that you take the time to read the post your are responding too, so enjoy your voyage!

Cheers, J.R.

pipe said...

Matt-Please calm down. A desire for a healthy economy has nothing to do with one's love for, or in my case, disgust with, socialism.

The fact of the matter is that, on a macro level, it is almost impossible to store wealth. Rather than floating bizarre or unproven theories, why don't we just look at a real world example. How about the USA for the last 50 years?

The largest demographic group in the USA in the last century (or two) is the 'baby boomers'. Their most productive, wealth building years are ages 30 to 65, right? So the first of the boomers (born in 1946) are just now completing this stage of life, and should be at peak wealth, or near it, as a group. The remainder of the boomers are between 50% and 99% of the way through their most productive phase of life.

So where is all the wealth created by this unprecedented bulge of well educated, hard working population moving through life? Did we use their wealth to pay down debt, and that's why we can't see it? Obviously not. Did we use their wealth to acquire a bunch more gold? No.

Did we use their wealth to do anything? Yes, we must have, since we know they created a bunch of 'excess wealth'. I define 'excess wealth' to mean the wealth created by a person over and above that needed to support himself. So where did it all go? It was spent on the prior generation, those born before 1946. That prior generation has lived a standard of living above and beyond their productivity, and the boomers' wealth is gone.

Nothing can bring back that wealth. It has been consumed.

As the dollar fades to zero, all dollar debt will be distinguished, but so will dollar saved wealth. This will cause a huge contraction in the USA economy. If 11 million illegal immigrants are deported, that would contract the economy further. We will drag down the rest of the world.

America is a country blessed with natural resources, rich farm land, etc., so there is still a lot of wealth here. But most of the 'phoney wealth', such as govt. spending, will vanish. Also, it is very likely that gold will have many competitors for the job of 'store of wealth'.

I expect gold to increase in buying power, but this 'gold to Pluto' talk is a low probability event. Check your emotions at the door before making financial decisions, I say.

S said...

Excellent post. Gven the reserve status the political element is as much a vote of the reserves (or at least their inability or unwillingness to defect) as it is up to Congress/Fed. The political signals are flashing red whether it is the CHF, the JPY, POG or the various diplomatic moves from states like China and Saudi. The aggressive push (csh) in Libya and for that matter Syria are direct challenges to Chinese and Russian interests. The sometimes reliable Debka reported this morning that the the US and its allies are confronting Russian weapons and Chinese intelligence. While I agree that the decision is a political one, it doesn't mean that it is the purview of the Congress. The US is playing defense not offense. No question IMHO it will turn tables witha preemptive strike when it senses (sees) the defections accelerating. The question is will such an accomidation if it sufficiently entices the reserve defectors be enoguh to delay the pathway to RFG?

JR said...

Hi Pipe,

"If you cannot be bothered to read FOFOA's archive (BTW did I mention that this is his blog) you will bore the s#@t out of most people with your half-baked theories and predictions."
Déjà vu!!

Cheers, J.R.

matt said...

@ Pipe

^^To be honest, I don't know how you could make any of the above statements if you read and at least understood a quater of FOFOA's main points.

You are living in a goldless world.

Robert said...

@ Jeff above with a question about what to spend DURING the hyperinflation.

My guess (and action so far) is to spend your SILVER! Silver is meant to be spent (I believe our congenial host wrote this). If things get REALLY BAD, then things like cigarettes, ammo, etc. might work as well.

A great, great piece as always, FOFOA!

MnMark said...

I don't understand people who gripe about the length of the posts.

(a) They're free.

(b) Has your attention span so atrophied under the assault of television and "tweets" and the other 30,000 forms of instant gratification we have now that you whine if wisdom isn't dispensed to you in a neat 30 second sound bite?

OLD.FRT said...

Finally, a definitive defense of the expenditure for a an efficient laser printer!
Thank you for your efforts.

costata said...

If you want to see a contemporary curtain raiser for the "US$ Hyper-Inflation Show" keep an eye on Vietnam ;)

The US$ has been the hard currency of choice in most (all?) of the HI events since WWII.

If Vietnam goes into HI it would be a shock, would it not, if the hard currency alternative (to their soft local currency) chosen by the Vietnamese people was not the US dollar this time.

Consider also that another fiat currency has always been the alternative hard currency in HI events since 1971. Should we give the Yuan a wildcard entry in this tournament? (The Yuan is referred to as the "red dollar" in some countries neighbouring China according to an article I read some time ago.)

http://www.bloomberg.com/news/2011-04-24/vietnam-inflation-accelerates-to-fastest-pace-since-2008-government-says.html

It's not a long read if your A is a little DD at the moment. It may also inspire the acquisition of gold, perhaps enabling sufferers to fund their ritalin needs for the rest of eternity.

Roual said...

@JR

... but unlike our humble writer, I do not think the currencies will be inflated to zero. All the mechanisms that germinates hyperinflation will not come to fruition. Gold can suck up a ridiculous amount of money.

We'll head to situation like that of Japan, but with a skyrocketing goldprice. The real winners will be holders of physical gold, as the paper market will collapse and cause a flight to real physical gold as well.

You suppose all hell will break loose at the final turn of events. But I submit life will be like it's now, but most will have the regret that they don't have gold to get themselves out of debt.

richard said...

in the words of the late great steve irwin- what a crock o shit
first off if the "powers that be"
allowed the currency to hyperinflate- which I'm assuming
means a loaf of bread would cost at least a 100 bucks- there would be immediate rioting in the streets - see the middle east for reference- you want us to believe that the "powers that be" want riots in the streets-- hell to the
no- better revise your predictions
to take that into account dear sir

FOFOA said...

Hello Rick,

It's nice to see you here again. My hat is off to you. I am extremely humbled by your response to my post. I always viewed this discussion as more of a dialectic than a debate, and I was looking forward to your response. But now, I am really excited to read whatever you might write on the subject!

As you probably noticed, this post was written specifically for you. So it is certainly not the be-all and end-all for all deflationists and their individual barriers. But with your intellectual and analytical firepower aimed through a fresh perspective at a clearly-defined target, I will surely enjoy any and all salvos you launch!

You bring a formidable and potent presence to the ranks of physical gold advocates, concerned about the collapse of our dollar, as we stand firm against the "gold bubble" crowd and their dangerous, ill-conceived message. And what, with 13,000 unique visitors in one day—for a 14,000-word essay no less—it appears there just may be an audience for this topic.

Sincerely,
FOFOA

dojufitz said...

When will it suit the powers that be in the USA to have a massive Gold price....? There must be some time in the future when this will help them....?

It seems that there are times when a low Gold price suits them......so there will be a time when a huge Gold price suits them...? No?

mortymer said...

Rather important considering what happened in Finnish elections.

http://www.ecb.int/press/key/date/2011/html/sp110426.en.html

nterview with Helsingin Sanomat and Kauppalehti
Interview with Jean-Claude Trichet, President of the ECB , conducted on 20 April 2011 by Mr Jorma Pöysä (Kauppalehti) and Mr Juhana Rossi (Helsingin Sanomat), published on 26 April 2011.

Michael H said...

Roual,

In previous posts, FOFOA has written that a skyrocketing price of gold is the ONLY course of action that can keep the USA from hyperinflating. But, he thinks it is the less likely course of action, due to the political will described here.

richard,

When bread goes to, say $10 a loaf with wages remaining stagnant, there would be riots if the government DIDN'T print.

Ash,

Look at what is happening right now with residential real estate in the USA. Sure, mortgages are secured by collateral, but that collateral is now worth far less than the original loan was. A 'bailout' of the bank is money printing, which is what FOFOA says will lead to hyperinflation.

Likewise, being 'paid by the taxpayer' now means 'paid partly through money-printing', thanks to QE2.

pipe said...

Hi JR and Matt,

If it so easy to store wealth on a MACRO level, would you please tell me where the baby boomers' wealth has gone? The EuroLand's wealth? The post WW2 Japan Economic Miracle wealth--where did it go?

Can you not offer even a brief explanation why there is no evidence that any of the trillions in dollars of vast wealth created since WW2 is still in existence. In Tokyo, I see a bunch of 35 year old buildings, and they are a depreciating asset.

In the USA, we have SS and Medicare trust funds that holds trillions of 'dollars' worth of i.o.u.'s, that isn't even pretend wealth. The USA govt. took the boomers' wealth, and spent it, and it is gone.

In Zimbabwe, a country used by FOFOA to make points, they not only didn't store any of the huge wealth generated by White Farmers, they turned off the wealth generating engine by confiscating their land and giving it to folks who don't know how to do large scale farming.

So could you please give me an ONE example how a huge amount of wealth was successfully stored, on a MACRO scale, other than taking steps to maintain your economy? I predict you can't, or you already would have done so.

Matt's comment is quite immature. I have posted many times that I think gold is a great store of wealth, for individuals, and that I own some, as part of a diverse portfolio. However, neither gold, nor anything else, can store wealth successfully, once you get to the size where you are moving the price against yourself trying to get in.

JR said...

Hi Raoul,

Its obvious you disagree with FOFOA, and its equally obviously you haven't tried to (and perhaps can't) comprehend what he writes.

So maybe go start your own blog!! :) Or alternatively, you could try to read and understand FOFOA before you comment. If you really wanna try to learn, lots of smart and helpful are around who will offer encouragement on your intellectual journey.

But if you keep hatin, people will just laugh at your garbled nonsense and mock your silliness. Haters Gonna Hate, so:

"If you cannot be bothered to read FOFOA's archive (BTW did I mention that this is his blog) you will bore the s#@t out of most people with your half-baked theories and predictions."

Cheers, J.R.

JR said...

Hi Pipe,

Trolling is easy but it sure ain't fun:

If it so easy to store wealth on a MACRO level, would you please tell me where the baby boomers' wealth has gone? The EuroLand's wealth? The post WW2 Japan Economic Miracle wealth--where did it go?
...

So could you please give me an ONE example how a huge amount of wealth was successfully stored, on a MACRO scale, other than taking steps to maintain your economy? I predict you can't, or you already would have done so.


WTF do you think freegold is? Oh yeah, its a reaction to the dollar collapsing becuase it isn't a good store of value.

From the FOFOA post you are responding too:

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.
...

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

[...]

Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough "stock" is reassigned to "flow" to meet demand.


Its obvious you have no clue what is going on but thank for the amusement! I feel guilty, I must admit. I sorta enjoy watching you make arguments for Freegold, enjoy you waving these pro-Freegold arguments in peoples faces as if they were evidence against Freegold! Unintentional comedy at its finest! Bravo, mon ami.

Cheers, J.R.

Casper said...

Hi Pipe,

If I may jump in here:

why are you so sure the baby-boomers were "savers" rather than "debtors". Maybe the wealth isn't there for you to see because, as you rightly point out, it has been consumed. We can also assume that based on amount of dollars flowing around the globe far far more wealth has been consumed than created in the USA in the last 30 - 40 years.

About gold:

The reason you think it's hard to store wealth in gold right now is because the dollar price is so low. Imagine how much easier it would be to store wealth in gold if the dollar price was 10x higher. That's why it's a "perfect" store of wealth - the higher the price, the better/easier to store wealth in gold.

Casper

ad said...

@Pipe

1)Take a trip to a poor country. Meet the average person. Make a list of their possessions including whats in their garage [if they even have one] Take some photos of uptown and downtown, go see a rich area and a slum, see what goods and services are available, check out the nightlife.

2)Go back to the US and do the same.

3)Spread the lists and photos out on the floor...on the left put the poor country and on the right put the US.

4)Report back to FOFOA.blogspot on your findings and lets see if we can spot some of this elusive macro wealth.

costata said...

pipe,

You wrote:
"If it so easy to store wealth on a MACRO level, would you please tell me where the baby boomers' wealth has gone? The EuroLand's wealth? The post WW2 Japan Economic Miracle wealth--where did it go?

It's all around you..

So could you please give me an ONE example how a huge amount of wealth was successfully stored, on a MACRO scale, other than taking steps to maintain your economy? I predict you can't, or you already would have done so.

If we give you "one" will that suffice or will you demand two, or three or four or more. Name your price numbskull - will one suffice - as you claim. What do we get in return? A blessed silence free of your narky, stupid voice? If so, then one you shall have "one".

mortymer said...

The last paragraph from T: "Question: You have a smart phone and a tablet computer on the table in front of you. I take it that you use them actively in your work. How do you find the user experience?

I am absolutely fascinated by the scientific and technological progress we are presently experiencing. I sometimes have the feeling that I am myself in a science fiction novel, because of the new marvels that technology displays every other year. You see new possibilities, but at the same it creates challenges. When you make jumps in science and technology, it transforms society. If I have a message to my own sons and granddaughters, it is: be prepared. We all have a tendency to underestimate the pace of change in our society and in the globally integrated economy."

DP said...

pipe: So where did it all go? It was spent on the prior generation, those born before 1946.
That prior generation has lived a standard of living above and beyond their productivity, and the boomers' wealth is gone.


Hello again my friend. I am pleased to see with this note you have finally brought us a nugget of useful insight for people to chew on at their leisure. I look forward to your second, at some point soon I'm sure. In the meantime, I hope you enjoy the library. A bientot, mon ami...

DP said...

Jeff: I see FOFOA has increased his freegold price target. 60k?

On another point, what does one save in for spending purposes DURING the hyperinflation? Dollars will quickly be devalued and cash will be in short supply; we don't want to spend gold before we arrive at Freegold. How is one to meet needs for six months or so?


A couple of very interesting side paths off the main trail, I am surprised nobody else has gone for a walk yet.

Ahh... here is our good friend Robert, right on cue!

Robert: @ Jeff above with a question about what to spend DURING the hyperinflation.

My guess (and action so far) is to spend your SILVER! Silver is meant to be spent (I believe our congenial host wrote this). If things get REALLY BAD, then things like cigarettes, ammo, etc. might work as well.


Now now, Robert. Be careful with that S word; you might draw the unwelcome advances of Desperado again already... :-)

Michael said...

have we not seen this code before? US talking Strong Dollar Policy. time to exit if you are paper long anything.

http://www.marketwatch.com/story/geithner-talks-tough-on-us-dollar-2011-04-26

DP said...

“We will never embrace a strategy of trying to weaken our currency to try to gain economic advantage,” Geithner said.

Survival, yes. Advantage, nah.

Patrick said...

Well Fofoa,

We now have proof that lobsters are good for the brain.

;)

Opu said...

Hello everyone, months ago I started reading Another and FOFOA from the ends toward the center, since I'm such a slow reader, I fear it will take me forever. The reading has been quite enlightening and I thank FOFOA and all those who actively comment for that.

I'm lost in several ways, but the one bothering me at the moment is about the revaluation of gold. I'm pretty sure that FOFOA was previously stating that gold would attain a value of $55k in today's buying power. I'm not hung up on the dollar amount, and in general this helps many things make sense to me. However, recently (roughly the last two or three articles) FOFOA seems to have changed this to be $55k (or $60k) in future dollars. So, Casper, when you say:

"The reason you think it's hard to store wealth in gold right now is because the dollar price is so low. Imagine how much easier it would be to store wealth in gold if the dollar price was 10x higher. That's why it's a "perfect" store of wealth - the higher the price, the better/easier to store wealth in gold."

That makes sense too me, assuming that the value of gold is rising, not just the dollar amount assigned to it. I would appreciate any clarification you guys have to offer on this. Thanks!

Mickette said...

I totally agree with @Roual´s point of view.
And to @ J.R.:
What bothers me the most is reading yours disparaging comments on some readers´opinions. I hate any kind of censorship by muzzling thoughts and "intellectual masturbation" in general.
We will have to help financially and morally our children and grandchildren. Any question and comment about our future is to take with seriousness.

Best regards from a french reader living in Germany.

Mickette

Michael H said...

Regarding FOFOA 'upping the ante' by raising the current dollar purchasing power target of gold in freegold:

My guess is that he is adjusting his figure based on the continuing decline of the dollar purchasing power. So maybe it was $50k in 2008 dollars, $55k in 2009 dollars, and now in 2011 it is up to $60k.

In general, I believe the 'purchasing power' calculation comes from the gold:oil ratio. The oil:stuff ratio is assumed to stay the same, as is the dollar:stuff ratio (by definition of 'constant purchasing power').

So another way to look at it, is that with the rising $-price of oil, the $-purchasing power price target of gold also rises.

Joel said...

From time to time I go back and reread FOA/Another's comments to compare to our current timeline. I found this gem, so aptly describing (written back in 2000)the inflation problems the Chinese are dealing with in pegging to the dollar (and soon to be the Japanese as their savings come out of hiding to rebuild the country). It even portends their eventual selling of reserves when the going gets bad, as they are now contemplating per the zero hedge article I posted a link to. They may have underestimated the timeline a bit, but the predicted results are dead on.

Joel said...

Here is the post:

Japan and much of the Asian block are clearly "supporters" of the dollar faction because their entire trading structure was built on selling into a "US dollar trade deficit". Any buying of gold or Euros with dollar reserves would wreck their economy further by driving the Yen straight up. If they do elect to do this it will be in response to a much larger American economic crisis and occur further along in the dollar inflation timeline. Talk of the Yen being the third part of a "tripolar" currency world will be proven completely off the mark. Japan and any other of their close economic allies will sacrifice their money's viability for some time to stay with the dollar. In the process suffering the same full blown dollar hyperinflation effects that are coming to the US. Other Asian nations sold gold during their recent crisis not in support of the dollar so much as they were forced by the IMF to do so. In a story I have told before, their physical buying was hurting the manipulation game. Breaking them was all in an effort by the BIS to maintain a Pre Euro low gold agreement. Today, the lesser nations of the Asian block have returned to buying gold. Something that is in their culture, rather than a desire to destroy the dollar. Only this time we will not witness a political effort to stop this buying. To there credit and good fortune many (asians) will retain this wealth asset as our dollar is eaten from price inflation.

Ash said...

Michael H,

"Look at what is happening right now with residential real estate in the USA. Sure, mortgages are secured by collateral, but that collateral is now worth far less than the original loan was. A 'bailout' of the bank is money printing, which is what FOFOA says will lead to hyperinflation.

Likewise, being 'paid by the taxpayer' now means 'paid partly through money-printing', thanks to QE2."

First, I think it is important to realize that the collateral secured by debts is not just real estate, but includes factory equipment, machines, patents, receivables, etc. In addition, the real property collateral may go down in value on paper, but that loss is not realized until the foreclosure process is completed. Until then, the institutions holding the debt have massive leverage (in the non-financial sense) over the debtors, since we are talking about peoples' homes, farms, etc.

Once the deflation gets so bad that large portions of private debts simply can't be paid, a significant amount of outstanding losses will be transferred to the taxpayers once again. Yes, that process does involve the printing of money by the Fed, but it is through the credit filter of the U.S. Treasury market. That means there is strict control over how much will be monetized, and exactly where the funds will be directed.

Think about it this way - if financial elites are going to dump most of their dollar debt-assets on the Fed and various investment funds, what exactly do they expect to get in return? Worthless dollars? And why go through the extremely risky process of HI to secure monetary and hard assets, when you can accomplish the same thing through debt slavery and explicit legislation or executive decrees?

Debt is not merely a means of making interest, it is a means of controlling people's lives in every way imaginable. This process has been employed numerous times in the developing world over the last 60 years, so why should we expect anything different for the developed world? Once you hyperinflate a fiat currency, you are effectively executing all of the hostages in your robbery of the productive economy.

Jimmpy said...

Hello FOFOA,

If I may add a quote from ORO out of the Archives :
"The hyperinflation phase of a credit money system is a substitute for the deflationary phase. It is a choice made by the leaders of the monetary system to retain leadership through the supply of as much monetary base as is needed to fulfill all obligations of the banking system. The inflation of the high-power monetary base prevents the transfer of asset ownership that occurs during deflation:
From bankrupt corporations and individuals to banks
From bankrupt banks to bank liability holders.
From bankrupt banks and cash strapped bank liability holders to the holders of cash.

Remember that 30% of private and corporate industry was bankrupted in the Depression. But 50% of banks were bankrupted by the same process. The ultimate beneficiaries of the wealth transfer would have been the holders of cash (then gold). This last transfer phase was avoided by confiscation of cash=gold and the inflation of the monetary base.

Why was this done? So that the captains of industry would retain their positions rather than lose out to ma an' pa coin hoarders - the sworn enemies of the leveraged finance world."

mortymer said...

@costata - adding to your thought about Vietnam:
http://goldchat.blogspot.com/2011/04/vietnam-government-resisting-move-to.html
..other Bron´s latest posts are also worth.

Luke said...

I feel like the writer is incorrect here:

"Total worthless token debt in the US, both public and private, is around $55 trillion, four times as big as that backed by physical real estate. If we add in the government's unfunded liabilities (which definitely apply shear stress to the dollar's lynch pin), that number comes in around $168 trillion. And that is simply the promises to deliver worthless, purely symbolic tokens, at some time in the foreseeable future, emanating from within the United States. Meanwhile the US produces enough "goods and services" (loosely defined) every year to be purchased by 14 trillion of these purely symbolic tokens at their present level of purchasing power. And with a trade deficit of around $500 billion per year, it appears the US is consuming roughly 103.5% of what it produces every year, in real terms.

So in real terms, that is, in terms of the dollar's purchasing power as it stands today, it would take, let's see… $168T/($14T produced - $14.5T consumed)= x years… hmm… somehow it's going to take us negative 336 years to deliver those promised dollars at today's purchasing power."

This math would only be true if the 168 Trillion was totally owned by foreigners. He uses our trade imbalance to say we consume more than we produce, but it only shows we import more than we export. We aren't paying 14.5 Trillion every year to foreigners and receiving 14 trillion. But it is more correct to say we are simply paying foreigners 500 billion a year. The rest of the 14 trillion we could use to pay down debt(theoretically).

Desperado said...

@Mickette: "What bothers me the most is reading yours disparaging comments on some readers´opinions. I hate any kind of censorship by muzzling thoughts..."

So you notice it too, Mickette? I would say that Costata, JR and DP are wearing freegold jackboots. One can see how they would fight to see their "precious" given a monopoly on being the metallic store of wealth. And if one looks back a little in history, one sees all the wars and millions murdered by those faithful true believers who demanded that gold have this sacred monopoly. By all appearances Another not only had strong connections within that privileged club of central bankers, could it also be that he was a blue blood? Could he have had an elite's bias towards silver going back generations?

By all appearances, there is no room for consideration for silver on this blog, or more worryingly in this freegold paradise that they are so certain about.

Silver is the workingman's precious metal, and that is why the big British and American banks of the era had it demonetized in 1873. Gold is far more for the elite, many of whom have had it stockpiled for generations. Could a populist revolt in post collapse America lead to a demonetizing of gold in favor of silver across the country or in some region of it?

Blondie said...

pipe said:

”FOFOA-I was very impressed... However... your analysis of gold as a store of value is deeply flawed.”

With all due respect, pipe, is it possible your understanding is flawed?

”Rather than floating bizarre or unproven theories, why don't we just look at a real world example. How about the USA for the last 50 years?“

OK.

” So where is all the wealth created by this unprecedented bulge of well educated, hard working population [baby boomers]moving through life? “

Good question. The fact you are asking it shows the flaw in your understanding... please bear with me here...

”Nothing can bring back that wealth. It has been consumed.“

Indeed (wealth is the term for the stock of value).

It is value that has been consumed, and you are correct, it does not come back. In order to consume it, it must have been created, right? A zero-sum game. No free lunch.

”...would you please tell me where the baby boomers' wealth has gone? The EuroLand's wealth? The post WW2 Japan Economic Miracle wealth--where did it go?“

You already answered your own question, to a degree:

”The USA govt. took the boomers' wealth, and spent it, and it is gone.“

The USA govt. is not the only debtor on the planet.

Every borrower has consumed value they did not create.

They have looted the wealth stored in fiat denominated assets in the quest for a free lunch. Govts have borrowed with the mandate of the voters. Austerity measures (aka living within one's means) would have seen every govt replaced with one willing to borrow.
The fiat value storage mechanism is faulty, which is why you see that stored value consumed all around you by those who in large part are consuming more than they have ever created. No good crying about the poor boomers; fact of the matter is they have already consumed their value supposedly saved for retirement as much as anyone else.


”...could you please give me an ONE example how a huge amount of wealth was successfully stored, on a MACRO scale, other than taking steps to maintain your economy?“

Sure. CB physical gold reserves are an excellent macro example.

You will need to wait until its value is stated to see how this fully plays out, as per Another: "real value does not have to always be stated or converted thruout time. It need only be priced once during the experience of life, that will be much more than enough!"
Why do you think CBs continue to hold these reserves? Why are they buying more?
The gold value storage mechanism is not faulty, you have just not seen it required to function yet.

There is little to no actual value left in that stored fiat “wealth”, as it has already been consumed, in no small part by the boomer themselves.

”we have met the enemy, and it is us.”


Casper said:

”Pipe... why are you so sure the baby-boomers were "savers" rather than "debtors".“

pipe said:

”Check your emotions at the door before making financial decisions, I say.“

You said it.

Michael H said...

Ash,

"Once the deflation gets so bad that large portions of private debts simply can't be paid, a significant amount of outstanding losses will be transferred to the taxpayers once again. Yes, that process does involve the printing of money by the Fed, but it is through the credit filter of the U.S. Treasury market. That means there is strict control over how much will be monetized, and exactly where the funds will be directed."

This is where we are now. The question is, where is it headed?

Can QE be stopped? What if no buyers for treasuries step forward? What if there is another economic collapse and tax receipts decline?

In short, what if the 'strict control' over the US treasury market breaks down?

"if financial elites are going to dump most of their dollar debt-assets on the Fed and various investment funds, what exactly do they expect to get in return? Worthless dollars?"

It is, as FOFOA wrote,about outrunning the public, not outrunning the HI. So the dollars won't be as worthless when the elites get them, as they will be when you and I get them.

Wandee said...

You won over Charles H Smith and Rick A!!I am in awe!!! never have I seen 2 accomplished writers such as these so humbly accede to any other's logic.

Silverax of Metal augmentor published an essay partly agreeing with your HI scenario.
http://www.metalaugmentor.com/eforum/?p=6726
the major disagreement is:
Hyperinflationary collapse, however, cannot be externally imposed on a country with a free floating currency, the ability to issue its own sovereign debt and a functional domestic economy. Simply put, official or de facto currency devaluation will boost the price competitiveness of exports (China has used this very principle to ascend as an economic world power). This is especially true in an economy with high worker productivity, excess manufacturing capacity, a large financial and investment asset base, commercial enterprise operating under the rule of law with property rights and largely free of corruption, and large amounts of natural resources. These are all attractive things from an economic standpoint and generally support inward capital flows. Not so attractive: interest rates effects. This is a separate consideration that certainly deserves further study but it is beyond the scope of the current analysis.

personally I don't agree with all his assumptions esp rule of law and lack of corruption! I do enjoy the intellectual discussions.
My question would be can we have rpg (60K+/-)without a total HI collapse where the $ retains some value and functionality just much much less than what it has today???
thanks

Casper said...

Hi Desperado,

If I may point you to a great article written by Mencius Moldbug (hope FOFOA doesn't mind me making an advertisement). Actually FOFOA has a link on righthand side of the page directly to Moldbug's blog.

It's about game theory and Nash equilibrium - a rather long piece but I think it's worth a read. I think it's a shame that FOFOA has written such a great piece at the same time as Moldbug published his thoughts.

I understand you're the proponent of silver (for/of the masses) and I think you can check if your scenario is more probable than FOFOA's.


@Opu

I don't recall FOFOA talking about future dollars but it has always been and still is today's dollars and that assumes, as you have correctly pointed out, a rising price of gold in today's dollars in order to reflect a true value of gold that is already there .. hidden ..waiting to be released.

Casper

Opu said...

Casper, and perhaps Michael H(if that was addressed to me), Thank you for the reply to my question. Casper, I was in particular inquiring about this quote from FOFOA in the Forum 201 comments section:

"By the way, that's post-hyperinflation I'm talking about. They may well lop 12 zeros off the dollar before making a market for it. Exchanging one trillion old dollars for one new dollar. But gold will still be at Freegold prices (e.g. 55,000 new dollars/ounce) and they will have to make a market for that new dollar or it will continue to plunge like the old one."

isn't this a contradiction? He does say "new dollars." Sorry if this is being nitpicky, at any rate you've answered my question, I just wanted to make sure I didn't miss something very fundamental.

Thanks!

Ash said...

Luke,

"This math would only be true if the 168 Trillion was totally owned by foreigners. He uses our trade imbalance to say we consume more than we produce, but it only shows we import more than we export. We aren't paying 14.5 Trillion every year to foreigners and receiving 14 trillion. But it is more correct to say we are simply paying foreigners 500 billion a year. The rest of the 14 trillion we could use to pay down debt(theoretically)."

This is a great point! I knew something was really off about that math, but I guess the implicit mistake was too simple for me to put my finger on it.

Michael H,

"In short, what if the 'strict control' over the US treasury market breaks down?"

I do not believe this a likely outcome in the next 2-5 years, due to both the preference of global financial elites and the natural dynamics of our complex financial system. I have outlined the reasons for my opinion in a number of relatively recent posts on The Automatic Earth (theautomaticearth.blogspot.com)

"It is, as FOFOA wrote,about outrunning the public, not outrunning the HI. So the dollars won't be as worthless when the elites get them, as they will be when you and I get them."

I understand the logic, but as I said, that is a very high-risk strategy for the elites. It's not as if the dollars are instantly credited to every institution/individual who has the financial/political clout to subsidize their losses. Perhaps I am missing a piece in FOFOA's chain of logic, but it would seem that the HI process would outrun even the elites' ability to spend all their cash, even with modern technology, or perhaps because of it.

IMO, the frustrating truth is HI in Chile or Zimbabwe has little to teach us about our present predicaments, and the latter are not only financial, but also resource-based and environmental. If you want to know where we are most likely headed, you have to take one of the biggest possible perspectives, and Freegold just isn't it. That's also why I believe FOFOA mischaracterizes the legitimate debate from the very beginning of this post:

"The whole point of the deflation versus hyperinflation debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end..."

I'm not sure which argumentative deflationists he is referring to, but none that I respect would ever say that fiat currencies are a long-term viable store of wealth or trusted medium of exchange. The "ultimate end", if we can even call it that, is something encompassed in much much bigger systemic forces, and they cannot be isolated from financial dynamics. We also should not assume that financial elites are not at least partially aware of this.

Ash said...

Also, as is probably clear by now, I am in no way saying that the financial elites will solely determine whether we have HI or deflation in the next 5 years... just saying their preferences/mentality is one of the significant influences.

Casper said...

@Opu,

those 55.000 "new" dollars are dollars that had a few zeros lopped off. That means gold in "old" dollars could have a price tag of 55.000.000 per ounce.

Casper

DP said...

Desperado, if you have such a problem with the viewpoint of Costata, JR and myself (as well as others who choose not to engage), that's fine. But if you want to stand up you better fight. Bring us the compelling argument that shuts down our view, and we will all willingly rollover and bow in your shadow I assure you. Seriously, you'll be doing the whole community a great service if you can bring this compelling argument that you have held back.

So far all we see is you repeating that silver will outpace the dollar. Big whoop. What won't? That is an effect of hyperinflation, sure, but what about Freegold? This blog is the home of Freegold, with a side order of hyperinflation that you can also get elsewhere (but not in such high definition).

Roual said...

@ JR

First your reply :

Hi Raoul,

Its obvious you disagree with FOFOA, and its equally obviously you haven't tried to (and perhaps can't) comprehend what he writes.

So maybe go start your own blog!! :) Or alternatively, you could try to read and understand FOFOA before you comment. If you really wanna try to learn, lots of smart and helpful are around who will offer encouragement on your intellectual journey.

But if you keep hatin, people will just laugh at your garbled nonsense and mock your silliness. Haters Gonna Hate, so:

"If you cannot be bothered to read FOFOA's archive (BTW did I mention that this is his blog) you will bore the s#@t out of most people with your half-baked theories and predictions."

Cheers, J.R.


My thanks to you for such helpful advice. I'll gladly tell Larry Hagman what a credit you are to the character that he made famous in “Dallas”. Or perhaps the way your heart is palpitating, you'll end up meeting him prematurely, and then I won't have to.

As to FOFOA, I read what I like, and if there is a concept of contention within his writings, why not point it out ??? Surely FOFOA can deal with that ???

As to the hyperinflation argument, the rogue element is the Fed itself. Will the Fed acquiesce to the wishes of the Treasury, and monetize ad infinitum ??? If you read up on your history (1) , you'd know that the Fed dared to raise rates while America was in the midst of the Korean War. This caused a spat with the Treasury, which the Treasury lost. Will history repeat itself ???

And another thing : In a hyperinflation the Fed will loose influence. And while the loss of wealth is unpleasant, the Loss of Power by any institution is untenable. The Fed might just become feral in such an environment, and institute a system of controlled deflation (2) with which to justify its existence.

However, if I'm wrong about this, I'll give FOFOA all the credit for making a profound argument, and an even greater prognostication. In the meantime JR-deary, I'll go and watch “Dallas” … I promise … :-)

(1)http://www.richmondfed.org/publications/research/economic_quarterly/2001/winter/pdf/hetzel.pdf
(2)http://libertarianpapers.org/2010/43-boyapati-why-credit-deflation-is-more-likely-than-mass-inflation/”

Art said...

FOFOA propaganda: "'The hit' [from deflation OR hyperinflation] can be socialized:
"'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…'

'"…hyperinflation is the process of saving debt at all costs, even buying it outright for cash… because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!'

"(The quotes are from FOA on Hyperinflation and FOA on Currency Styling, Currency Management, Dollar Hyperinflation and End Game Scenarios respectively.)"

EXPLANATION: No one in his right mind would throw good money after bad. No one would buy worthless bonds or other worthless paper assets by paying real cash (gold and silver) for them. Hyperinflationary events like the ones described by the FOA/FOFOA crowd are only possible IF we are using something other than money (gold and silver) as money so that those who control this fraudulent money can issue and use it without putting REAL wealth or money (gold and silver) at risk. FREEGOLD sanctions the use of fiat or fraudulent currencies as money. Hence FREEGOLD supporters are abettors of hyperinflation.

FOFOA propaganda: “...money inflation...should have started a deflationary fall in our credit markets. It almost happened, several times, but never followed through. It seemed that the market function had evolved to accept fiat inflation as a prerequisite to modern economic function.”

EXPLANATION: No, the real reason the bond market did not crash is because the vast majority of the fraudulent money issued by the bankers and the ruling classes was KEPT by the bankers and their collaborators. The advertised nominal increase in the money supply was a diversionary tactic and a coverup to hide the fact that the bankers and the international ruling classes were not paying for resources and goods and services that they acquired with any REAL money (gold and silver). The ruling classes accomplished this feat by directing your focus on the numeric increase in the money supply INSTEAD of the fraudulent and ultimately WORTHLESS nature of the money that they were illegitimately creating and spending to take possession of YOUR goods and YOUR labor.

Biju said...

Jimmpy,

Thank you for the nugget you posted from ORO - During 1930's depression they rpevented the cash holders(gold owners) from toppling the system and coming out on top by confiscating Gold and during 2008 prevented the same from happening using TARP, but how do you see things play out when HI if/happens ? How can they prevent Gold holders from coming out on Top ? But then again Gold holders are a minority except CB's and Indians.

helix_mechanic said...

Dear FOFOA,
Bravo! It's clear you put a great deal of time and thought into conveying your message - with epic success.
I'm still reveling in my own relatively recent 'OMG!' moment of epiphany, a life changing moment, of that I am sure..
Again, thank you..
-Dave

Pete said...

@Ash

If you were running a large US financial institution and had some really underperforming assets (loans, whatever), would you look at the big picture hyperinflation possibility, or would you take cash for them today?

This is the point. The cash will have value the day it is offered. It will be a lot better than the underperforming assets.

The bigger picture never comes into it. If you were competing with ten other financial institutions, and you could choose either to a) accept the cash on offer for your junk assets, or b) hold on to your junk assets as they degrade, you'd be forced to take option a), due to the simple fact that the other financial institutions would take it anyway. The only reason you'd take option b) is for moral obligation - and since when do these guys think like that?

In the exact same way that the financial institutions went down the path of low-doc loans and MBS's, it is a case of 'hang with the pack, or perish'.

Just because Hyperinflation will be a concern, doesn't mean the banks won't go along for the ride, especially if they look like winners at the time.

costata said...

Biju,

In the initial phase of the Great Depression there was a high (if not hyper) deflation. Approx 42% over two years in the USA according to one paper that FOFOA linked in one of his posts. This deflation was caused by increasing CB/Treasury gold reserves in France and the USA according to that paper. This led to a shortage of gold around the world.

Wages were not falling along with prices so there was a huge increase in unemployment and great stress in the banking system. I'm not suggesting that this was the only factor at work.

There was an unfolding drama in the international bond markets as well. A growing number of defaults were wiping out savings. The massive increase in debt that built up in the system in the 1920s also contributed to the misery (as it inevitably does).

Re: Gold

There is only around 30,000 m/t in the CBs while over 130,000 m/t is in private hands worldwide. This is a different ball game compared to the 1930s. Back then the bulk of the gold was inside the banking system. Remember most currencies were on the gold exchange standard. (China was still on a silver standard until around 1934.)

The gold is much more widely distributed today. It's not just India. Remember the Middle East and SE Asia have a cultural affinity for gold as well.

The major gold producers who have low CB gold reserves can grab the gold in the ground if they have to. This group includes Australia, Canada and South Africa.

The USA has large gold reserves (and mine production) and the EMU Central banks have large reserves. Russia has both growing mine production and growing reserves. Likewise China. As I said, this is a different ball game.

Ash said...

Pete,

"This is the point. The cash will have value the day it is offered. It will be a lot better than the underperforming assets."

No doubt, but only if that value is retained for some period of time or increases. Is cash not a debt-asset that could underperform? And perhaps you, FOFOA or someone else could explain to me what he means when he says the financial elites will dump all of the cash "on your front lawn".

"If you were competing with ten other financial institutions, and you could choose either to a) accept the cash on offer for your junk assets, or b) hold on to your junk assets as they degrade, you'd be forced to take option a), due to the simple fact that the other financial institutions would take it anyway"

When you phrase the options like that, I agree they would choose option A, but not necessarily because they are in "competition" with each other. There is certainly a group dynamic, but it's fundamentally not the same as the irrational herd dynamic involved with average financial investors. An analogy could be the Mafia bosses of different families who all follow the same code and frequently cooperate in order to make it easier for them to collectively fleece local businesses.

I understand that FOFOA does not necessarily believe the elites are all part of one unified group, and I would agree, but I also think he underestimates their degree of coordination, explicit and implicit, and their mentality. Which is also why I don't think we should assume they are loyal to specific corporate or political institutions, because those are always transient and can be replaced.

Also, I think you left out a few critical options that can undertaken in combination with option A, such as papering over your asset losses with false accounting, or making up the difference with public backstops and bailouts.

Texan said...

I would like to ask a question to everyone, which is why hasn't gold revalued yet? What is holding it back?

If it is so obviously a Nash Equilibrium, why isn't it occurring NOW? It isn't for lack of understanding.

Is it because the true Nash Equilibrium is the current $IMFS? Isn't a NE by definition "something is better than nothing"?

It seems like the conditions for RPG require a very high degree of spontaneous acceptance by CBs, most of whom are heavily invented at present to not endorse RPG.

costata said...

Ash,

I have been following your comments and I think you are tying yourself up in knots with statements like this:

Is cash not a debt-asset that could underperform?

Let's leave the Fed Treasury relationship to one side for a moment and look at how the citizens would recieve this "cash as debt" perspective.

It is difficult for most people to reconcile the notion of cash as a debt with the commonpace understanding of debt. For most people the debt coin has the word owe to someone on the other side. Even unsecured lending, such as a credit card, comes with a form of soft "collateral" (eg. your credit score, future access to credit) and a monthly reminder about who you owe. To most people cash is what you use to pay off debt.

You seem to have picked up Rick's "baggage", the C. V. Myers dictum by labeling the FRN/US$ as a debt. If cash is a "debt" who is the lender and who is the borrower?

If you look at cash as a way to transfer purchasing power in space and over time it starts to become a more meaningful perspective. A wallet perspective? The use value of that cash becomes apparent as does the vulnerability of its exchange value to depreciation against real or actual goods. (I concede that it can also appreciate theoretically but history testifies that, in practice, depreciation is the norm.) Can we then agree that this loss of stored value, totally reliant on confidence, can be gradual (inflation) or catastrophic (hyper-inflation)?

If we revisit your original question from this perspective it is obvious that cash is vulnerable to underperformance against tangibles and the loss of its role as a means to store value with which to acquire future goods.

matt said...

@ Wandee, metal argumenter

So the path to prosperity is a devalued currency you say ??

Why does Japan and Germany have higher wages and currencies then the United States yet they both have trade surpluses with China ??

costata said...

The currency wars continue.

Michael Pettis via
http://macrobusiness.com.au/2011/04/pettis-on-yuan/

(My emphasis)
According to an article in last Friday’s Financial Times:

China has imposed strict price controls on basic consumer items and is expected to allow faster appreciation of its currency in the coming months after annual inflation in the country reached its highest level in nearly three years in March.  In a speech this week to the governing State Council, Chinese Premier Wen Jiabao said Beijing would, along with other policy measures, “further improve the yuan exchange rate mechanism and increase yuan exchange rate flexibility to eliminate inflationary monetary conditions”.

Analysts said this was the first time Mr Wen had publicly and explicitly mentioned the renminbi exchange rate as a tool for fighting inflation, and this reference meant Beijing was likely to allow faster appreciation to counter rising global prices of oil and other commodities.

Perhaps we will indeed see faster appreciation of the RMB in the next few months.  The market certainly seems to be expecting it – in my central bank seminar on Sunday a trader at Citibank told the class that .the demand for RMB-denominated assets is so strong that dim sum bonds are actually trading at negative yields.  If I remember correctly she mentioned yields of -1.5%.

Robert said...

My third reading of FOFOA's post. I am a slow learner, just ask anyone I know... GPA in college: 2.48...

All of you do not need to know that this post is absolutely brilliant! Next week I'll be looking for a player to react!

Of course it is possible that the central bank of DoChenRollingBearing may act in the next few days...!

Physical gold... As FOFOA recommends, is the way that this guy (Bearing?) will go. Best of luck, and best of foresight friends of FOFOA!

FOFOA said...

Most of you know that I don't promote this blog. I don't try to attract new readers. I believe that you must find your way here on your own. In other words, I could care less about raw visits. But some of you have told me you like to see the stats. So here they are. Today was bigger than yesterday. That's pretty much double any previous high days. This hyperinflation subject seems to have some legs. Stats42611

Motley Fool said...

Heya FOFOA

I tried playing devils advocate, it's a fun game. Unfortunately the few things I could find fault with are so trivial that it's almost hairsplitting.

I will note I do this in a friendly manner, since I agree with you on hyperinflation.

"So in real terms, that is, in terms of the dollar's purchasing power as it stands today, it would take, let's see… $168T/($14T produced - $14.5T consumed)= x years… hmm… somehow it's going to take us negative 336 years to deliver those promised dollars at today's purchasing power."

So here then is my first problem. It's cute, but that sum is a contradiction in terms. Paying off means to reduce the debt. While you consume more than you produce you can't pay off debt. The sum therefore is not relevant. Of course you clarify thereafter why you chose to use that illustration, and what follows is perfectly logical.

"Rick Ackerman's view of the banks' incentive or preference to prevent (as if they had that control) hyperinflation is exactly bass ackward. A bank's balance sheet becomes severely damaged in deflation, yet it is made whole through hyperinflation."

Let me state ignorance as cause, but I do not see how a hyperinflation helps the value of a banks balance sheets. Whether banks experience a loss due to people unable to find money in a hyperdeflation, or unable to find enough highly denominated bills to meet the payment during a hyperinflation, either is a loss to the bank. What would banks do with the funny money payments during a hyperinflation anyways? Of course I do agree that for banks hyperinflation would be the easier path than hyperdeflation. :P

"1. the storage of purchasing power is size-unlimited"

No it is not. Gold is able to store value through unlimited time and unlimited distance, but the amount of value stored depends on the circumstances.

A simple way to illustrate is to imagine that 6 billion people died tomorrow due to some virus. The value that is stored in gold would decline significantly.

In this regard a question, what percentage of true value (not paper) do you think will be destroyed in the panic of the transition? Obviously neither gold nor land can be destroyed (if we exclude the possibility of a nuclear panic). Houses of course could be destroyed, but this I think will be minimal. My question is rather directed to the font of value, being thought. If a farmer is killed, the loss is much greater than if his land is plundered. I'm just curious as to your judgment of the loss of valuable human lives we will see during this transition.

Hehe, that’s the best I could find to find fault with. Not much given the length of your post. Ohh well, I tried. :)

Peace

The Fool

Ps. I did a post on my blog yesterday to give my opinion on what effect Freegold will have on the world. There you will find a few further points of disagreement if you care to look.

J said...

MF,
"What would banks do with the funny money payments during a hyperinflation anyways?"

Hand out record breaking bonuses

Indenture said...

Guest Post: Gold As a Hedge: A Back-of-the-Envelope Calculation

Toby said...

in 1923 the measurement of German hyperinflation was based on the dollar/mark ratio. Wouldn't it be ironic if the Eurozone was to breakup before this hit and US hyperinflation was measured by the dollar mark ratio?

costata said...

MF,

"A simple way to illustrate is to imagine that 6 billion people died tomorrow due to some virus. The value that is stored in gold would decline significantly.

Yep. So what?

samix said...

FOFOA I am reading the book *the inflation of france that you posted* and it feels that I am reading exactly what is happening today..Mr. Deflation, you do not stand a chance!

Print they will and do the front lawn dump...

DP said...

Ash: perhaps you, FOFOA or someone else could explain to me what he means when he says the financial elites will dump all of the cash "on your front lawn".

I don't think I have seen anyone else has already stepped in to respond to this query of yours, but apologies for any toe-treading if I have simply missed it somehow.

The cash is not what will be dumped on the public's lawn; that will be the toxic weedkiller "assets" - the ones that the financial elites will have sold to the CB for the lovely fresh cash, printed up for this very purpose. Call it pulling a tarp over your problems, if you like. Going to take a lot of lawn feed to patch things up afterwards though. (sigh)

bmusic said...

Looks like you turned Ackerman.

http://www.rickackerman.com/2011/04/at-last-a-hyperinflation-argument-that-persuades/#more-34127

Michael H said...

DP,

Thank you for posting the Moldbug article,

On monetary restandardization, Thursday, April 21, 2011

http://unqualified-reservations.blogspot.com/2011/04/on-monetary-restandardization.html

I found it a worthwhile read but it gets very confusing at times. In one section he uses 'gold and silver' to mean 'gold and dollars', and later he referrs back to those arguments when talking about actual gold and silver.

The relevant quote (where gold means gold and silver means silver):

"It is no surprise that silver is appreciating rapidly relative to gold, because comparable quantities of saving are pouring into each metal. However, because silver was fully demonetized in the 20th century and gold was not, the market capitalization of the gold stockpile is 60 times the capitalization of the silver stockpile. Thus, comparable volumes of gas are pressing in to the gold tank and the silver tank, but the silver tank is 60 times smaller. It is actually surprising that silver has not risen faster and harder.

But this present advantage is also silver's long-term Achilles heel. The silver tank, being so much smaller, cannot take this kind of pressure. It will almost certainly explode. I have personal advice for those playing the silver market: bring your steel balls. If you buy into a bubble when it's small, and get out before it pops, you can do quite well.

How will gold defeat silver? If silver wins, it will go to $500 and well beyond. But consider the dilution with silver at $500! First, it will draw every last silver fork out of the attic. Secondly, today's silver mines are the silver mines which are profitable with silver at, say, $12. The set of silver mines profitable at a price an order of magnitude higher: a considerably larger set.

Because the present stockpile of monetary silver is so small in relation to productive capacity, even present productive capacity, that stockpile is easily diluted. In contrast, because gold was never demonetized, gold is much harder to dilute even if it revalues by orders of magnitude. By Sprott's figures, annual silver production: 50% of the present stockpile. Annual gold production: 2%. As you see, gold is a much harder currency than silver.

Therefore, when gold competes against silver, rational actors choose gold, because silver will dilute much faster ..."

Michael H said...

Ash,

"Also, I think you left out a few critical options that can undertaken in combination with option A, such as papering over your asset losses with false accounting, or making up the difference with public backstops and bailouts. "

What is the difference between 'option A' and backstops and bailouts?

It seems to me that a backstop is a promise to pursue 'option A' in the future.

Michael H said...

Someone earlier asked / commented about the effect of hyperinflation on their antiques business, and someone replied. I can't find the relevant posts, unfortunately, but I have a different opinion on what the timeline would look like from that perspective:

At First, prices of food and energy will rise, crowding out other spending. Sales of antiques will drop, hard, as people won't be willing to spend on them. This is where we are now, and it will probably continue to get worse.

The mania to exchange paper for antiques would only come once it becomes perfectly clear that prices are rising and they will not stop. In other words, after the spiral is well and truly underway, when wages start to adjust upwards along with prices.

Unfortunately, at that point the real prices received for the antiques are likely to be below current real prices.

In fact, during the hyperinflation it is likely that the public will be net sellers of antiques, as they try to find something to liquidate on a daily basis in order to pay for food.

Michael H said...

Art,

"Hyperinflationary events like the ones described by the FOA/FOFOA crowd are only possible IF we are using something other than money (gold and silver) as money so that those who control this fraudulent money can issue and use it without putting REAL wealth or money (gold and silver) at risk. "

Your writing would be more clear if you used different terminology for fiat currency and for gold/silver.

"Hence FREEGOLD supporters are abettors of hyperinflation."

You mistake the purpose of this blog. It is not an advocacy group. FOFOA is an observer, and is describing the likeliest outcome of our current path.

Question for you: what is money?

DP said...

@Michael H, I think you must be confusing me with Casper.

DP said...

... or perhaps DiverCity

Michael H said...

DP,

Yup, I was confused. Apologies.

DP said...

@Michael H, No problem!

BTW I don't recall noticing any inconsistency as you describe, when I read the article - so perhaps extra credit is yours for spotting an error? Or marks off for publicly admitting losing track? I don't know! :-)

kateangelfire said...

Thank you for your generous edification. One question -- is there any place in a survival toolbox for gold mining stocks after bullion, food, generator, etc.?

Michael H said...

DP,

It's not necessarily inconsistent, just very confusing.

"Fiat currency, though historically evanescent, is no exception to any valid theory of money. But the enormous cognitive complexity of existing fiat financial systems makes for poor thought-experiments. Therefore, we'll consider only restandardization between metallic currencies. If we need to create these metals, we'll need alchemists. As a convention, we'll suppose that silver is collapsing (due to excessive alchemy), and the new standard is gold."

The he discusses his theory, using silver as a proxy for the Dollar, and gold as the proxy for a generic upstart. Then,

".. let's go back to the real-world players. It is not silver but the dollar which is the falling incumbent currency."

And he talks about dollars some more.

Then,
"So much for the theory. Let's take a quick moment to apply it to present-day reality"

And he discusses dollars, gold, and silver in turn, this time actually meaning gold and silver.

Indenture said...

kate: Mining Stocks are paper promises.

Ash said...

costata,

"You seem to have picked up Rick's "baggage", the C. V. Myers dictum by labeling the FRN/US$ as a debt. If cash is a "debt" who is the lender and who is the borrower?"

Fair enough. It is backed by debt but not in such a direct sense. What I really meant was that financial investors, esp the "big players", always look at expected rate of return when deciding how to construct their portfolio. So funds, such as Pimco for example, have chosen cash because they expect its depreciation (or appreciation) will be higher than the rate of return on other assets (bonds in this case). I think we agree on that, though.

"Can we then agree that this loss of stored value, totally reliant on confidence, can be gradual (inflation) or catastrophic (hyper-inflation)?"

If the inflation is a result of speculative credit growth, then I would not say the stored value has been absolutely "lost", only temporarily diluted by a ponzi scheme. It is lost for a majority of investors, but not necessarily for the one running the scheme.

If we are talking about a sociopolitical crisis of HI, then I would agree it can be catastrophic, but in the sense that the initial tipping point from relative confidence to a complete lack of confidence can be quite abrupt. I do not believe, however, that anyone can predict the timing of this tipping point or the exact rate of inflation after it occurs.

I'm curious to hear what people think will happen if, after the major financial institutions and connected investment funds dump a majority of their bonds and equities to the Fed for cash, they decide to hoard the cash (rather than re-invest), pay a lot of it out in massive salaries /bonuses and the wealthiest people in the world keep their levels of spending the same?

Ash said...

Michael,

"What is the difference between 'option A' and backstops and bailouts?

It seems to me that a backstop is a promise to pursue 'option A' in the future."

Yes it is, and so the difference is getting cash right now or in the future. Either way, you would obviously prefer for the rate of inflation to be low, but especially for the latter option, because there would be less time to "outrun" the inflation by spending your cash. Similarly, the promise to pursue option A is only valuable if the Treasury market (and Fed) remain viable for some period of time.

DP said...

@Michael H, methinks Moldbug is merely attempting to drive home one aspect of how and why silver and dollars are both "easy money"; different to "difficult money" (gold). I believe the interchanging of the two in the piece is an intentional mental masturbation (H/T Mickette :-) ). A device to illustrate silver can be considered to have as much in common with the dollar as with gold, in a certain context.

Although, clearly, I wouldn't want to start such a conversation right here and now of course.

Were.... were you tricking me into starting a conversation like that? Shame on you! I won't be drawn.

Jeff said...

Ash,

Look at what they already did with the money from the last bailout; they bid up 'assets'. Look at the sinking dollar. They know this process leads to HI and selling to the Fed is the way they will outrun you and I.

Indenture said...

From Moldbug's On monetary restandardization:

"Moldbug Monetary Theory (MoMT) is a post-Austrian theory of money. It is a minor refinement of Mises' standardization theory, which asserts that money is standardized by the demand for a standard medium of exchange. Rather, I assert, the demand is for a standard medium of saving."

"As natural market fluctuations push one metal above the other, the rational saver will rebalance into the rising standard and de-diversify away from the falling. As gold rises and silver falls, he will exchange silver for gold. Or at least, the sooner he figures out this strategy, the more gold he will end up with. The collective behavior of all rational savers results in an industrial silver market and a gold standard. Thus, the bimetallic standard is like a pencil standing on its point: stable only as a perfect mathematical abstraction."

helix_mechanic said...

This new follower has two questions, if any here are so inclined to entertain one or both..

First, comes as a student to a teacher:
If cash is hard to come by in a hyperinflation, by what mechanism do payroll departments, small business owners, the self-employed obtain, and/or pay, escalating wages? i.e. how do The People actually get those 'wheelbarrows' of cash to chase/push prices upward?

My second question, is more rhetorical in structure:

FOFOA: But history has taught the world that while easy money regimes end in financial collapse, hard money regimes usually end in bloodshed. And it's usually the blood of the hard money campers that is shed.
and,
And with a little understanding of how a monetary collapse actually unfolds, flipping the switch on illusions and revealing reality, you'll find that the actual crisis itself will be relatively short-lived. My best guess is 6 months maximum...

Me: How on earth can we expect a peaceful transfer to Freegold when so many citizens have bought into the easy-money (entitlement) camp?
Me: It won't be peaceful. After 6 month flipping period - all hell breaks loose.

...and would love to hear why that may not be true.

Cheers,
Dave

costata said...

Ash,

If I appear to be nitpicking it is only because your words are so familiar. They stir my memory. You wrote:

"It is backed by debt but not in such a direct sense."

I presume you mean the FRN/US$. It isn't backed by debt it is sold/swapped to the US Treasury/Others for debt. Once it reaches the hands of J6P it is more ephemeral. It is a "debt" in so far as a shopkeeper will accept it as payment for goods on his/her shelf rather than calling the cops as you walk out the door after tendering it in payment.

You wrote:
"So funds, such as Pimco for example, have chosen cash because they expect its depreciation (or appreciation) will be higher than the rate of return on other assets (bonds in this case)."

I think we agree on that, though.

Only in part. PIMCO is a bond fund. It has two choices, bonds and cash. You infer a choice that is predicated on "better". These specialist funds also make choices predicated on a "less worst" or "least worst" basis.

Here again you seem to be tying yourself in knots (my edit):

"If the inflation is a result of speculative credit growth, (almost always so) ... then I would not say the stored value has been absolutely "lost", (if the money stock is expanded the stored value is diluted), only temporarily (permananently) diluted by a ponzi scheme (until the greater fool comes along?). It is lost for a majority (every?) of investors, (ah, this is key) but not necessarily for the one running the scheme (because this "one" has already cashed out their profit into something safer).

"I do not believe, however, that anyone can predict the timing of this tipping point or the exact rate of inflation after it occurs.

Agreed, but would you concede that a student of monetary history might be able to ascertain the conditions under which the tipping point's inevitability is assured?

You are confusing two radically different asset classes here:

"... dump a majority of their bonds and equities to the Fed for cash...."

In anticipation of HI the "funds" (who can do so within their charter) will dump bonds for equities if they cannot dump bonds for cash from the Fed.

You teeter on the brink of revelation here:

"... they decide to hoard the cash (rather than re-invest),".

This is an investment decision in a given time frame.

".. pay a lot of it out in massive salaries /bonuses and the wealthiest people in the world keep their levels of spending the same?"

Look at what has been happening for the past several years.

How are those bonuses spent? On gold, FX and other hard assets perhaps? I'm being arch here, I apologise. I know some of these "Masters of the Universe" (they aren't). A few (very few) put their money into gold and collectibles, mostly it is put into equities, FX, highly (and I mean highly) liquid bonds and hard assets if the location is deemed safe.

Ash said...

costata,

When I say it is "backed by debt", I mean that every note represents a liability to either you or someone else (because it was initially generated as part of a loan to governments, businesses or individuals). The more notes that are hoarded, the more difficult it is for aggregate debts to be paid down, and the more demand there is for the notes.

"You infer a choice that is predicated on "better". These specialist funds also make choices predicated on a "less worst" or "least worst" basis."

That's what I meant... "less worse" just means a lower negative rate of return, which is also "better".

"Agreed, but would you concede that a student of monetary history might be able to ascertain the conditions under which the tipping point's inevitability is assured?"

If the time line is generalized enough, then I would say the probability of the tipping point occurring can get close to 100%, but it would have to a student of more than just monetary history. The dynamics of industrial, environmental, social and political systems must also be factored in.

"In anticipation of HI the "funds" (who can do so within their charter) will dump bonds for equities if they cannot dump bonds for cash from the Fed."

There seem to be two narratives going on this thread - one says that the connected institutions/funds will not be expecting HI but will still be able to outrun it, and the second (the one you allude to above) says they will anticipate HI and therefore get into equities/commodities or, alternatively, into cash so they can quickly spend it before it becomes relatively worthless.

I take issue with both of them, but especially the latter. Most equity securities are practically the same as bonds now, because they are highly leveraged and rely on the (perceived) performance of a company to make returns. I do not believe there will a favorable perception of future share values in an unfolding scenario of HI.

"A few (very few) put their money into gold and collectibles, mostly it is put into equities, FX, highly (and I mean highly) liquid bonds and hard assets if the location is deemed safe."

So I guess we are both on the brink of a revelation...

The bonuses are spent on financial instruments to make profits, which are only realized by selling those instruments into a market (or to the Fed). As for hard assets and services, those are also purchased with cash, but they become much more affordable if prices are allowed to first come down in a deflationary episode. That is achieved by hoarding a lot of the cash and cash equivalents (highly liquid bonds) for a significant period of time.

Zack Weinberg said...

I really appreciate this analysis, but I'm about to ask you to do it all over again with one change to your assumptions. See, you have embedded in your entire discussion the assumption that gold has intrinsic value, and I just can't go there. Gold is no different than any other commodity metal, except that in a whole lot of people's minds it has been defined as different, and I see no reason why that definition should survive a crash of the magnitude that seems to be looming.

So, please, for the sake of the exercise, reanalyze the problem on the assumption that nothing, not even gold, has intrinsic value.

Desperado said...

@Casper,

Thanks for the Moldbug link, I am still digesting it. My initial reaction is that he hasn't really said anything about silver that Fofoa hasn't already written here, specifically his discussion about Nash equilibrium.

My main point is that his argument, like Fofoa's, is constructed in a "mental petri dish" where all outside disturbances can be isolated. The real world is not nearly so black and white, nor is the history that Moldbug races over. Take the fact that China didn't leave the silver standard until 1934, an entire lifetime after England and the US, despite all the efforts of the banks of the worlds two greatest empires. Or the way that he dismisses the crime of '73 as "In the late 19th, gold emerges as a global monetary standard".

As I have stated before, gold as money has a long sordid history, including thousands of years of slavery. Currently the elites hold an unknown proportion but likely the vast majority of it. Moldbug states that this hoard is so critical to its Nash end state, but this could well be its undoing.

Fofoa is convinced that HI (and later freegold) is a certainty due to politics and culture. Although I tend to agree, I would hedge any such suggestion with the caveat that with politics, culture and especially war, nothing is certain. It does me no good if I have put all my eggs in the freegold basket when in the country or region where I live freegold hasn't taken hold until after I have died.

Costata stated in the last thread: "4. If you want to promote a multi-metal strategy here expect to draw criticism.". For some reason certain thugs on this blog think that they have some obligation, let alone right, to determine who is entitled to make posts here. Just look what DP has stated on this thread:

the unwelcome advances of Desperado

Or this pearl:

"Desperado, if you have such a problem with the viewpoint of Costata, JR and myself (as well as others who choose not to engage), that's fine. But if you want to stand up you better fight. Bring us the compelling argument that shuts down our view, and we will all willingly rollover and bow in your shadow I assure you. Seriously, you'll be doing the whole community a great service if you can bring this compelling argument that you have held back.

So far all we see is you repeating that silver will outpace the dollar. Big whoop. What won't? That is an effect of hyperinflation, sure, but what about Freegold? This blog is the home of Freegold, with a side order of hyperinflation that you can also get elsewhere (but not in such high definition)."


Sorry DP, I don't feel compelled to lower myself to your level. Why don't you find another concentration camp blog to post your "freegold macht frei" sign.

mortymer said...

@ Desperado, let me offer you this view...

R.Zoellick: "...Would a return to the gold standard be beneficial?

I think gold is already being viewed as an alternative monetary asset because holders of money perceive uncertain prospects in all countries and currencies other than China, and the renminbi is not free for exchange and investment. The antidote is for major economies to pursue sustainable, pro-growth policies based on structural reforms, open trade, and sound money. This is not the same as a gold standard, nor would I recommend a return to that standard or the old Bretton Woods system. We need to move toward flexible exchange rates and autonomous monetary policies for major economies in a new multipolar, international economy. This world economy is likely to evolve toward multiple reserve currencies, with the U.S. dollar still dominant, but not exclusive. This system will need NORMS of monetary and broader economic behavior with the IMF as a "referee," [and] gold might be an INFORMATIONAL, not OPERATIONAL, tool to assess markets' confidence in underlying growth and MONETARY POLICIES..."

costata said...

Ash,

I'm genuinely sorry but this is just plain ridiculous:

"When I say it is "backed by debt", I mean that every note represents a liability to either you or someone else (because it was initially generated as part of a loan to governments, businesses or individuals)."

It's pure fiat. The currency itself is no one's "liability". It doesn't matter who caused it to be generated. You are confusing the transaction with the numeraire.

"The dynamics of industrial, environmental, social and political systems must also be factored in."

Agreed, in so far as you view those areas of study as separable from a study of monetary history.

"There seem to be two narratives going on this thread - one says that the connected institutions/funds will not be expecting HI but will still be able to outrun it, and the second (the one you allude to above) says they will anticipate HI and therefore get into equities/commodities or, alternatively, into cash so they can quickly spend it before it becomes relatively worthless."

No, wrong way to look at the dialogue. You have the wrong interpretation of the actors being discussed here and their roles. For example: as FOFOA mentioned in his latest post the (pension) fund managers will go along with HI because it gives them the nominal returns they require. HI will screw their clients (the pensioners) not the fund managers.

"I take issue with both of them, but especially the latter. Most equity securities are practically the same as bonds now, because they are highly leveraged and rely on the (perceived) performance of a company to make returns.

"Most equity securities are practically the same as bonds"? Facts are not malleable to your opinions. A cow isn't "practically" the same as a horse just because you "take issue" with reality. Leverage may be used to acquire but it does not alter the nature of the thing acquired.

"I do not believe there will a favorable perception of future share values in an unfolding scenario of HI."

Zimbabwe.

"The bonuses are spent on financial instruments to make profits, which are only realized by selling those instruments into a market (or to the Fed)."

"The bonuses are spent on" a range of things (hard assets) not just "financial instruments" used to store profits and remain highly liquid in order to seize opportunities to make short term profits.

"... but they become much more affordable if prices are allowed to first come down in a deflationary episode.

Have you been asleep since 2007? That WAS the "deflationary episode". The big money has been, and is, hoovering up hard assets at "more affordable" prices.

"That is achieved by hoarding a lot of the cash and cash equivalents (highly liquid bonds) for a significant period of time.

The FX market turns over trillions of dollars a day and the average trade has a duration of seconds. That is an extreme case (if you exclude high frequency trading). No one hoards "cash and cash equivalents" in times like these. They hoard hard assets when currencies are at war.

Seriously kid, your heart seems to be in the right place but either your arguments are poorly constructed or you don't know what you are talking about. Go back to Automatic Earth. Tell them how you showed those "hyper-inflationists" a thing or two and let's have done with your sophistry.

Carl said...

ShockonT said...

Any dollar deflationist out there please try to explain how a contracting dollar supply won't lead to massive liquidation of debt. How does this benefit the banking elites? And while your at it, explain why QE will suddenly stop? Why would they have started QE in the first place?

-----------
A massive liquidation of debt benefits the banking elites because they end up with all the assets that were used to back that debt. See: The Great Depression.

The “dollar” supply isn’t contracting; it has risen by over $200 billion since Aug. 2007.

I don’t know if QE will suddenly stop but it was started in the first place to prop up asset values, which are the backing for the credit dollars everyone uses as if it’s money.

Desperado said...

Really, this is what has been getting to me. Ron Paul has spoken on several occasions about currency competition. In a world of islamists, drug gangs, gulag governments, and most representative of all, that cesspool called the UN, I want to be able to choose whatever currency or store of wealth I choose and support. One of the things I liked about freegold was the idea of how it freed people from their governments. I have grown beyond that. What I now see is that gold is probably already "owned" and corrupted.

Before I support gold as a "legal tender" I want those pushing for gold to accept any and all other metals as legal tender too. Just a little insurance, don't ya see...

Carl said...

costata said...
Ash,

I'm genuinely sorry but this is just plain ridiculous:

"When I say it is "backed by debt", I mean that every note represents a liability to either you or someone else (because it was initially generated as part of a loan to governments, businesses or individuals)."

It's pure fiat. The currency itself is no one's "liability". It doesn't matter who caused it to be generated. You are confusing the transaction with the numeraire.

-------------
Costata, you’re half right. While it is true that one could hold a Federal Reserve Note (FRN) free of liability, the same is not true of credit currency, which is ultimately a bank’s liability. And keep in mind that well over three fourths of our “money supply” is little more than digits held within accounting programs backed by a bank’s promise to pay FRNs, which is backed by a broke FDIC.

Ash said...

costata,

Honestly, I'm not sure what you are arguing any more, because you seem to contradict your position or confuse the issue in every line. Let my try again...

"It's pure fiat. The currency itself is no one's "liability". It doesn't matter who caused it to be generated."

It is not "pure fiat" if you mean that in the same way as "sovereign money" - money printed by a central authority and spent into the economy without generating any liabilities. It is credit-based fiat, as every dollar as an asset is matched by a dollar owed as a liability, and it is required to be accepted as legal tender. If you still can't understand the difference, then I'm not sure how much clearer I can make it.

"For example: as FOFOA mentioned in his latest post the (pension) fund managers will go along with HI because it gives them the nominal returns they require. HI will screw their clients (the pensioners) not the fund managers."

You are artificially limiting the actors involved to create the illusion of support for your HI argument, which I believe is also a flaw in FOFOA's argument, as I stated a few times before (re: the global elites and their mentality). Pension fund managers are a drop in the bucket of this elite class, which includes high-level financial executives, government officials, corporate execs (for ex., those managing major defense contractors), managers of major investment funds (other than pension funds), and a myriad of other people.

On top of that, many of the "pension fund managers" are employed by state and local governments... they could very well be screwed along with public employees, regardless of whether the economy experiences deflation or HI.

"Leverage may be used to acquire but it does not alter the nature of the thing acquired."

Actually, that is the whole point of speculative finance and its instruments... it is designed to alter the very nature of underlying assets, by inextricably tying their value to the financial system. That fact should be painfully obvious by this point. It is you who is denying reality by believing a traditional label ("equity") accurately describes the nature of the instrument.

That also relates to why your reply of "Zimbabwe", which I'm assuming is supposed to be an analogy that will convince people share values always become more valuable during HI, is completely meaningless when referring to the massive dollar-based financial system.

"The bonuses are spent on" a range of things (hard assets) not just "financial instruments" used to store profits and remain highly liquid in order to seize opportunities to make short term profits."

It seems you have somehow managed to contradict yourself twice in one sentence here... perhaps you do not understand the term "hard assets". They are not "highly liquid", and they generally are not purchased for "short-term profits". You also seemed to miss the fact that asset markets and prices have been artificially propped up since 2008. What exactly do you think was the purpose of backstopping 90% of the mortgage market?

"The FX market turns over trillions of dollars a day and the average trade has a duration of seconds."

"No one hoards "cash and cash equivalents" in times like these."

Keep watching those FX markets with the expectation that no one is siphoning off trading profits denominated in dollars. I'm guessing you think the Euro is about to take off any day now, after it comes out the other side of the currency wars victorious...

My arguments may be poorly constructed, but I aim for logical consistency above all else. That is something you clearly need to work on.

John said...

FOFOA, thanks for the great commentary. Please consider addressing this issue with hyperinflation. The US is not Zimbabwe. The USD is the world's reserve currency. If hyperinflation comes, politically motivated or otherwise, it will have political implications well beyond the borders of the US. This is a big issue not included in your thoughts.

Indenture said...

Desperado: You can "choose whatever currency or store of wealth" right now. In fact, you are.

Gold is already owned.
Gold is corrupted by 'Fractionalized Paper Derivitives'.

Why, for someone who has been reading FOFOA for a long time, why would you use the term "legal tender"? Try 'Vehicle to Store Value' instead and then you can continue to argue that silver is a better 'Store of Value Vehicle' than Gold. I don't agree but at least we will all be using the same terminology.

costata said...

Carl,

"A massive liquidation of debt benefits the banking elites because they end up with all the assets that were used to back that debt. See: The Great Depression."

Over 4,000+ US banks went broke in the Great Depression. Deflation destroys their balance sheets.

The Catholic church became the largest real estate owner on the planet during the great depression. I guess Bishops and Cardinals are part of your ruling elites.

"And keep in mind that well over three fourths of our “money supply” is little more than digits held within accounting programs..."

It's closer to 95% than 80%.

"...backed by a bank’s promise to pay FRNs, which is backed by a broke FDIC.

"..the same is not true of credit currency, which is ultimately a bank’s liability.

Can you read a balance sheet?

Edwardo said...

Zach, wrote,

"Gold is no different than any other commodity metal."

That assertion is flatly wrong, and FOFOA has covered why that notion is quite mistaken. In the meantime, ponder why CBs hold only gold, not silver, not platinum, not palladium, or copper, or molybdenum etc. etc.

costata said...

Indenture,

In Desperado you are talking to a guy who can comment on this blog for over two years and still come out with things like this:

For some reason certain thugs on this blog think that they have some obligation, let alone right, to determine who is entitled to make posts here.

Sorry DP, I don't feel compelled to lower myself to your level. Why don't you find another concentration camp blog to post your "freegold macht frei" sign.

I want those pushing for gold to accept any and all other metals as legal tender too.

He's an echo chamber. A total moron.

Edmond Dantes said...

Excellent post. Thank you to FOFOA for setting this out so brilliantly.

I first came across the hyperdeflation/hyperinflation paradox in The Black Obelisk by Erich Maria Remarque... set during the Weimar Republic this novel contains many useful insights on hyperinflation...highly recommended if you haven't read it

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

@ John
“If hyperinflation comes, politically motivated or otherwise, it will have political implications well beyond the borders of the US. This is a big issue not included in your thoughts.”

John, the bottom-line is that the ROW does not vote in U.S. elections. The government/politicians will always take the route of least resistance.

Indenture said...

costata: Thanks. I look at it like the old stump just down the hill from my house. You work on it for a while and when you get tired you give the axe to someone else. While you're fresh it's fun. I don't mind taking a couple swings at it.:)

Ash said...

costata,

I wrote a reply to your latest logically inconsistent post, but Blogger ate it up, so I'm not going to do it again.

Here is the cliff notes version:

What you call "pure fiat" is entirely different than credit-based fiat. The former aka as "sovereign money" is printed by a central authority and spent into the economy without any corresponding liabilities. The latter is almost always generated as a loan, meaning every single dollar bill in your wallet is recorded as a liability on someone else's balance sheet. If you still don't understand the difference, then I can't make it any clearer for you.

Pension funds are a very limited part of the financial elite class, which includes high-level corporate execs, government officials, non-pension fund managers, etc., and many of their managers are not even in that class. You focusing on "pension fund managers" is merely a way of creating the illusion of support for your HI argument.

Speculative finance and its instruments ARE a way of altering the nature of an underlying asset, by inextricably tying its value to the financial system. That fact should be painfully obvious by now... relying on traditional labels, such as "equities", to understand the nature of an instrument is failing to understand the complex reality of the situation.

That is also why your (and FOFOA's) use of Zimbabwe as the fundamental analogy for everything about our situation, from monetary dynamics to the prediction of increasingly valuable stock shares and the decisions/mentality of financial/political elites, is quite meaningless in our massive, complex dollar-based financial economy. The former was actually contained within the dynamics of the latter, as was every other case of HI since at least the 1970s.

Let's see, what else... oh yeah, I don't believe you really understand the meaning of "hard assets", or you just invariably contradict yourself when attempting to make it sound like you have a logical argument. They are not "highly liquid", and they are not typically purchased to make "short term profits".

Re: FX markets, no one is saying that leveraged trades are not used to make profits off the relative disparities between currencies. A good amount of those profits are and will continue to be siphoned off by some of the bigger players without being re-invested. A significant portion of that is denominated in dollars. So yes, someone does hoard cash and cash equivalents, including an increasing % of the American people (what dwindling cash they left).

My arguments may be poorly structured, but I aim for logical consistency above all else. That is something you desperately need to work on...

mortymer said...

The whole system is corrupted, not just IMFs

http://en.wikipedia.org/wiki/Trichet#2009_Banking_Crisis
->
http://en.wikipedia.org/wiki/Credit_Lyonnais#Recent_controversy
->
http://en.wikipedia.org/wiki/Clearstream#Refusal_of_the_European_Commission_to_open_an_investigation:_20_Minutes_.27_revelations
->
http://en.wikipedia.org/wiki/Clearstream#Nadhmi_Auchi.2C_largest_private_share-holder_of_BNP_Paribas_bank

So I share some of Desperado points. One is that high value-price, good portability, anonymity and wide market is a good prescription for money laundering, cross boarder crime and terrorist financing... BIG issue here.

(this time I choose not post link, just - http://en.wikipedia.org/wiki/FATF)

The Dork of Cork said...

Great post but what if credit money was turned into goverment money.
Commercial bank balance sheets were termed a fraud.
"Risk capital" was left holding the assets and selling into a depressed cash only market to get perhaps 1 or 5 cents on the dollar.


In effect term deposits in private banks would become treasuries.
This money could seek to buy assets at cash prices without credit.
This would clear the market and let it reach equiliberium quickly.

Highly unlikely I know given the power dynamics of credit money but is it possible ?

Carl said...

costata said...

Over 4,000+ US banks went broke in the Great Depression. Deflation destroys their balance sheets.

------------
It was closer to 9,000 US banks that failed, and they took over 3 million indebted farmers, merchants and homeowners with them. The banks got theirs, even in failure and what they took became assets for the surviving banks that bought the failed banks and got those assets at pennies on the dollar.
-----------
costata said...
Can you read a balance sheet?

-----------
Why yes I can, why do you ask?

matt said...

@ Indenture

Not true

FOFOA does not subscribe to the theroy that there will be total mad max collapse.

In Germany, Siemens stock made it through 2 world wars and a hyperinflation.

I think some debt free, unhedged mining stocks, who have connections to Russia and China, will be fine.
Eldorado, Kinross for example.

matt said...

@ John
You said-
"The USD is the world's reserve currency. If hyperinflation comes, politically motivated or otherwise, it will have political implications well beyond the borders of the US. This is a big issue not included in your thoughts."

^That is central to why freegold is likely, because the USD is the reserve currency. Read the FOFOA post called "Greek is the word".

Texan said...

Ash and Carl,

You seem to think the major banks are still "private".

They of course are, but only nominally at this point. They are effectively guaranteed.

If the Fed had to, it would take every asset on their balance sheet and repo it for "sovereign money". That was TARP, in a nutshell. That is what the ECB did with the peripheral sovereign bonds. This is also what the government is doing with Fannie/ Freddie, as there is an " unlimited guarantee" on the agency debt ( and since the Fed buys the Treasuries, it's just a back- door repo). And on top of all of this, there are the QEs.

So at this point one could argue that the entire private financial sector is " backstopped" by it's sovereign. So does credit money still have to be paid back? Some of it yes, but only up to a point. After that, the sovereign will say "Cluck It", and just absorb the losses by paying out the creditors in fresh cash.

This is exactly what happened in Ireland. Their banks collapsed, and the public somehow has to make good on PRVATE bank debt! If Ireland could print ( and they did a bit), they would deval like mad and pay off this debt. It would not be allowed to default.

And this is what FOFOA means by " who gets paid first". The creditors. Then they run off with their cash and do anything BUT relined it ( lending would sterilize the hyper effect).

I think this is the strategy, but to do it over a period of years to prevent a hyper event. So high inflation, but not currency collapse.

Ash said...

It helps to understand the underlying argument before debating its flaws with other people... So does this summary capture some of the most important premises? (in my own words):

Monetary dynamics in any economy are fundamentally driven my political decisions (which includes central bank policy), just as we saw in Zimbabwe recently, and the massive dollar-based financial system is no different. The financial and political elite class, which is not necessarily unified, will take either a) high inflation or b) hyperinflation (distinctly separate events) over wide-scale deflation every time. The reason is because most of them will get first dibs on spending the cash after they dump debt-asets onto the Fed's balance sheet, and so they can effectively outrun the devaluation of the dollar by purchasing "hard assets".

That latter argument is based on a key and insightful observation - in periods of true HI, there is actually always a shortage of cash relative to real goods/services from the perspective of those within the economy. The hard money with intrinsic value, gold, will be the best means of preserving your wealth through this time (much much more so than RE), because there will be a severe deflation (falling prices) of all assets and goods when priced in gold.

Nick said...

Zach,

To echo Edwardo, the reason gold works is because it has infinite marginal utility to the person holding it and it doesn't impede on others lives. Since it has no other use than storing wealth, it is perfect. Which gives it its intrinsic value.

http://fofoa.blogspot.com/2010/12/value-of-gold.html

Rui said...

@Desperado

Gold and silver played their monetary roles fine historically so yes silver can always be accepted as money albeit needing quite some extra work after being de-monetized for so long.

Gold, being more rare and durable, was preferred by the rich as the store of wealth and the ideal transaction unit for international trade (b/c of less effort needed to ship gold from country to country).

Gold was somehow too precious and rare for local daily commerce so silver came in with its 15/16 times more abundance filling the role of money for ordinary transactions just fine.

Nowadays in the western world with bankers, politicians and fractional reserve lending system forming an axis of FIAT evil against hard money, gold and silver have to fight their ways back. It's especially tough for silver as it has to rebuild the stockpile up to be abundant enough again. So be prepared for a long and choppy battle. Don't get too cocky like lots of nowadays Johny-come-late silverbugs who assume it'd be an express lane to silver being restored as money.

Ash said...

It seems I left out a few critical points in my summary posted above:

1) Financial and political elite decisions are the supply side of the monetary system, while consumers/debtors are the demand side. (I don't think this is different from the deflationary perspective)

2) F&PEs will be forced by the demand side to dump their increasingly worthless debt assets onto the taxpayers, in return for cash, since holding on them to means crashing the entire financial system and giving up power (not too much different from my deflationary perspective - at least in the most extreme and uncontrollable deflationary scenario)

3) The elites will be forced to spend the full value of the cash received from the Fed into hard assets, because otherwise they will be stuck with worthless cash once a tipping point in confidence is reached for the dollar (this is the part that doesn't seem to logically flow from the other points)


Re: #3 - Why not just hold onto most of the cash, and also treasuries to keep that market stable, while allowing other asset prices to collapse. Whatever loans that default when they are still on your books can be foreclosed upon to get the secured collateral, or even unsecured property in some situations (ex. recourse states for mortgage defaults).

Or, the losses can be socialized after the fact, directly (bailouts) or indirectly (homebuyer tax credits, government guaranteed loans, etc.) as they have been since 2008. Banks and funds that get wiped out and are forced to file for bankruptcy can be soaked up by the larger institutions for a fraction of what they were worth.

Hard assets can be bought up once their prices significantly come down, to levels much lower than they are today. Shortfalls in federal tax revenues can be offset by cutting entitlement benefits and other aid programs in the name of "austerity".

No doubt it will eventually become an extremely delicate and dangerous situation for them to manage, but they could at least keep it going for a few years while they make plans for the next phase, if there is a next phase. If there is, it would most likely be a "command and control" approach to maintaining wealth and power, and then deflation vs. HI will be the least of our worries.

Tom said...

Hi FOFOA -

This is my first visit and like many commenters, I've spent hours working through the post and links.

The savers/debtors conflict is not new to me, but your explanation adds sense. I wouldn't expect the world to be binary in this way, but that may be an effect of monitization in societies. Even aboriginals off the grid are affected by the actions of the debtors.

Having first read about the debt problem on The Daily Reckoning about ten years, it took me nine years to really try gold and silver. For me, metals were not investment. Investment is to buy stocks or bonds in fledgling companies. We really don't get to do that, but I've known people who did it the old way and, after 20 years, reaped a big benefit.

Gold as a way of preserving wealth at the expected crossover makes sense in this story, though it seems one could get stuck with dumb gold at some point.

The characteristic of gold as a social holder of value, now suppressed by the fiat money people, is questioned by many. If it wasn't suppressed, might the story be different?

The U.S. gold stocks are discussed as a deep safety net for the hyperinflation scenario.

For an out-of-this-world scenario, what if there were no gold, silver or equivalents on the planet?

We could still have civilization and economies and need some form of money accounting to be an intermediary for trade. Relative values of goods and commodities would have to be established for trade purposes.

Money tied to a single commodity is primitive. If that commodity is a "truth-teller," it may be due to the fact that there are too many liars in societies on the planet. Are we dealing with an ethical problem more than a monetary problem?

Are debtors inherently dishonest or is it the use by intermediaries who gain from the debt? Seems to me to be more of the latter, though borrowing can be easily learned, particularly if you're offered six credit cards with $25,000 limits, which could lead to even more.

I found this part of pipe's comment particularly telling:

"When you get to the level of super power, the only way to store the excess wealth of your country is to educate your youth, maintain your infrastructure, and keep your economy growing and innovating at about the same pace as population growth."

Rather than this being only the U.S. problem, I think it is the problem of Humanity.

Life is an unfunded mandate. When a child is born, he or she doesn't bring the resources to pay the way. Society must do that, as it was done for each child since the emergence of mankind, monetary system or not.

Now we have this great capacity to share perspectives about what gave us this present time and its characteristics. We look forward, using what understanding we can muster from the reported history of the times we actually lived through.

Born in 1946, I was really paying attention since the 1950s - thanks to TV and a politically oriented mother, but it is difficult to understand how the world of investment for the future has ended up in a pile of unpayable IOUs?

In the current reality, precious metals, well played, may enhance survival. That this will be, big as it is likely to be, just another cycle is distressing.

Perhaps given this medium for shared thinking, humanity will advance its knowledge about how it organizes and acts with a future of centuries, not fiscal quarters.

Can savings and loans be brought into a dynamic balance where there is slow, but persistent growth over time on a broadbased foundation? Imagine, human and social capital not destroyed by war or other human induced violence.

Mike Hogan said...

I liked your insights, but I have a nagging question I would like you to resolve for me: Your claim that hyperinflation enables banks to bailout of their underwater loans. However, they lend long and borrow short. So yes some guy will be paying his mortgage at 5% fixed, but at the same time paying 25% on a 6-mo. CD. How does the math work for the banksters?

Casper said...

Hi Ash,

I'm a bit late and have just gone through your discussion with Costata.

From your posts I get a feeling that you're primarily focused on USA alone. Long time posters here mostly share the view that the HI event (loss of confidence) will come from the RoW. The actual printing is just going to be the response to that fact.

I've also gone through your latest post and have 2 remarks:

a) I believe the "financial and political elite" you talk about are firmly in the debtors camp, so they represent the demand side (this is also the reason HI is very likely since they also control the supply side).

b) your scenario implies that it is the (flow of) fiat (I assume you talk about USdollars) that is at the center of the whole financial system and that by applying monetary tools the CB/elite can control the system as a whole. I on the other hand think that it's the (flow of) gold that the whole system is based on, not fiat.

When you say:

"Why not just hold onto most of the cash, and also treasuries to keep that market stable"

This has been going on for the last few decades - see all the reserves (cash+treasuries) in vaults of various CBs around the world - which are there only too facilitate the flow of true value, that is gold.

Casper

FOFOA said...

Well, I guess I'll keep posting these unbelievable stats as long as they keep rising like a Phoenix named Freegold. I just can't believe the attention this post is getting. Let's see, my longest post ever gets the most visitors ever? And here I thought length would have the opposite effect.

For Wendy and others who have difficulty accessing page 2 comments, I'm going to let them run for a while. There are several links out there that lead only to the main URL rather than the post itself. So you might want to post a comment and click the box marked "Email follow-up comments to…" That way you won't miss any, Wendy. Otherwise there are at least two ways to read the comments. Click the post title and the comments will be under the post. Or you can read them on the page where you write your comments. Just right-click the button and select "open in a new tab" so you get the full-page display. After 200 you'll have to click on newer or newest at the bottom.

Sincerely,
FOFOA

DP said...

@Indenture/costata

I just think it's important to clean up pollution, so that when new people come to visit, they don't think we're a bunch of clueless hicks, drinking downstream of the toilet block. Sometimes you have to put on boots when you clean up a lot of... excrement. Unless you want to put up with wet socks making a nasty mess of the carpets for the rest of the day.

Redhill said...

Excellento FOFOA.

Subscribing follow-up comments via emails.

mortymer said...

There is one aspect of HI which is interesting in present time...

http://en.wikipedia.org/wiki/Hyperinflation#Computerized_transaction_issues

"Western Europe, North America and many parts of Asia and Australasia have economies that depend heavily on computerized transaction procession of money transfers. However, most nations that are subject to hyperinflation risk have not done assessments as to the ability of the electronic part of the finance system to remain intact under hyperinflation.

It is assumed (based upon IT practices for transnational processing that have evolved since the 1970s) that most money held by banks is not represented by 64 bit floating numbers. Under hyperinflation conditions most bank processing systems could fail due to overflow conditions"

Motley Fool said...

Hey Desperado

From one of your last comments I finally see what you have a problem with. That makes it possible to try and help.

I will begin by stating it in clear terms to see if you agree. At present you have a problem with the way the 'elites' have control of our world. You think that because these selfsame 'elites' now own the bulk of the gold they will remain in control after Freegold occurs. For this reason you are advocating silver as a better store of value, since the 'elites' do not control it. Correct?

I will continue on the assumption that I am. As regards your view there are some things that you miss.

Let us start with some basics, just so I can see what we agree about. It is my hope that at the least you agree with the concept of Freesomething, where a physical item( or items) serve as store of value and paper serves as currency. If we agree on that part, it is a simple matter of looking at what would influence the choices of the masses to see what element will emerge victorious. I am not going to go into why even if we start with Freesomethings it will end eventually in only one Freesomething. Unless you insist.

Right, so. When choosing a Freesomething it needs to have certain characteristics. Limited, unable to be created, widespread, homogeneous, divisible, durable. Many metals would qualify for this part. Then there is the question of stability of value. We would need something where new production(mining or recycling) is not a large percentage of the available 'unused' stock. This limits our possibilities to gold or silver, with gold having the clear advantage at present. Then there is the whole 5000 year old psychological question, gold has the advantage here too. Another thing to consider is transportation cost. With silver at the same price as gold , gold costs less to transport due to higher density and weight. Since silver is roughly half the density of gold it would need to be roughly double the price of gold to have advantage here. Do you think that likely? Then there is the issue of use. A commodity that is used less will have a more stable value over time. Here gold has the advantage again. For these and many other reasons I conclude that gold is a more sensible nash equilibrium than silver.

Now for your other, more pertinent mistake.

Firstly, you are correct that should gold be used as the wealth store then the 'elites' will have remained in a beneficial position. What you seem to miss is that there are three stages to this, and things don't remain the same throughout. This is the true power of Freesomething.

The first stage is now. The second stage is the transition. The third is fully incorporated Freesomething.

Why do the 'elites' have so much power over us at present? Simply because they can take value from us by inflation and taxation and we are unable to protect ourselves from them. This means it's a serious struggle for any newcomer to challenge their powerbase and win. So they remain in power.

The transition itself is not worth talking about, except to mention that yes they will still have advantage in terms of survival over us ants.

(cont) p1

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