Monday, July 11, 2011

Euro Gold

(Photo: REUTERS)
A gold bar carrying the Euro sign is seen during the European Central Bank's Euro Exhibition organised by the Romania's Central Bank in Bucharest March 10, 2011.

A little over a week ago on "Snapshot Day" (Thurs., June 30), the Eurosystem MTM party began with the CB rendition of "Whoop, There It Is" –-> Gold: EUR 1,043.382 per fine oz. – promptly followed by a dip down to EUR 1,022. Of course it has now recovered and is up at the all-time high in the EUR 1,100s. And even though this wasn't the all-time high quarterly snapshot in EUR terms, it was only 1% under the previous ATH and it was the first ever quarterly close over $1,500.

Then on Wednesday the ECB released its quarterly ConFinStat (Consolidated financial statement) for the Eurosystem. Here are the top two lines from that statement (my emphasis):

In the week ending 1 July 2011 the increase of EUR 12.6 billion in gold and gold receivables (asset item 1) reflected quarterly revaluation adjustments.

The net position of the Eurosystem in foreign currency (asset items 2 and 3 minus liability items 7, 8 and 9) decreased by EUR 0.6 billion to EUR 176.6 billion.


In other words, the decade-long trend continues, with the Line #1 asset gold floating upward while the Line #2 asset, foreign currency, sinks downward.

Value and Volume

Now, the ECB puts out a ConFinStat every single week, 52 weeks out of the year. And every week it makes quantitative volume adjustments, like net increases or decreases in both gold and foreign currency reserves. But it only makes qualitative or value adjustments on four of those 52 statements. This is when the ECB marks its reserves to what the market says they're worth. The MTM party! And for the last 12 ½ years the trend has been that, proportionally, the Eurosystem's gold reserves have been rising while their foreign currency reserves (mostly dollars) have been falling. Here's the chart:


Yet if we look at those reserves only quantitatively by volume, the opposite is true. Foreign currency reserves (again, mostly dollars) have grown over 12 ½ years in volume, from roughly $260 billion to $310 billion from a dollar-denominated perspective. Meanwhile the Eurosystem's gold reserves have fallen, again, only quantitatively, from 402 million ounces to 347 million ounces in volume.

This view, the volume-only view, is the fundamental modus operandi of the $IMFS that praises quantitative (voluminous) expansion and "growth" while ignoring qualitative (value) degradation. The reason is that governments and central banks can only print volume, not value. Think about this for a moment.

A clear example, of which I'm sure you are all aware, is that the official US monetary gold stockpile is still held on the books at $42.22 per ounce. But would you believe that this arcane (some would say moronic or worse) treatment of national reserves is actually codified in the official guidelines governing global central bankers operating under the $IMFS?

It's true! Since 1993, the last word in international reserves has largely gone to the IMF as set forth in the Fifth Edition of its Balance of Payments Manual which can be found on the IMF website here. Under 'Structure and Classification' you'll find chapter XXI: Reserve Assets, paragraph 444 on Valuation (my emphasis):

Valuation

444. In principle, all transactions in reserve assets are recorded at market prices—that is, market exchange rates in effect at the times of transactions, market prices for claims such as securities, and SDR market rates as determined by the Fund. Monetary gold transactions are valued at the market prices underlying the transactions. For valuation of stocks of reserve assets in the international investment position, market prices in effect at the ends of appropriate periods are used.


In other words, the IMF guidelines are out of step with modern best practices insofar as they lamely prescribe that reserve assets be recorded at the market price in effect at the time of the transaction that acquired them. Hence, there is no provision for periodic MTM adjustments to provide a rational reassessment of the evolving market-health of the balance sheet.

Recognizing this particular valuation/accounting shortcoming (along with "a few" others), the ECB has been at the institutional forefront implementing useful deviations. Essentially acknowledging the IMF's own admissions of ambiguity within the manual, the ECB tactfully says, "the definition of reserve assets included in the 5th edition of the IMF Balance of Payments Manual leaves some room for interpretation," setting the stage for its own definitive refinements as put forth in its "Statistical Treatment of the Eurosystem's International Reserves" formally published October 2000 and found on the ECB website here.

So, from this volume-only view loved by the $IMFS, here's what a chart of the Eurosystem's gold would look like:


But from the volume times value view (which ldo makes tonnes more sense and also assists the little guy deciphering the monetary mess), here's the true picture:


A different view, wouldn't you say? Do you remember this quote from ANOTHER?

"Know this, "the printers of paper do never tell the owner that the money has less value…"

The funny thing is that writing this post made me want to go look up that quote. It was written on 5/26/98, six months before the euro launched as a unit of account and 42 months before the ECB launched its euro medium of exchange. Now yes, of course, at that time (1998) no printers of paper currency told you their product was losing value. The dollar was still showing gold on its books at $42.22. But here's what I started to think about: Today, the printer of the euro, the ECB, tells all the owners that the money it prints has less value in gold… once every quarter! And not only that, but it encourages people to save in gold through system-wide mandates. Dang, now that's quite a 'something different' when you really stop to think about it!

You see, there are two fundamental differences between the euro and the dollar that most Westerners simply can't grasp, no matter how many times you try to explain their significance. Wim Duisenberg, the first ECB president, stated them pretty clearly in this 2002 speech:

"The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to the euro."

There's a lot in that one paragraph, but the two fundamental differences with the dollar are the severed links to gold and the nation-state. Hopefully I have sufficiently addressed the former above. I will now try to explain the significance of the latter.

Choices

Homo sapiens generally tend to focus on the minutiae of any situation, or else on what everyone else is saying about it. And in the case of the euro, that would be "the debt" or "Greece". Somehow most people always seem to miss the giant big-picture elephant tromping about the room. And in this case, that elephant is the euro's severed link to the nation-state. When Duisenberg said this was a "first", he meant it. And Milton Friedman also said it in 2001 (my emphasis):

"The one really new development is the euro, a transnational central bank issuing a common currency for its members. There is no historical precedent for such an arrangement." [1]

In the world of currencies, there are many varieties. The way a nation chooses to manage its currency relative to the world outside its boundaries can have a wide range of effects and consequences, ranging from long-term stability to periodic hyperinflation. If you want a hard currency, then, ideally, you want it managed by someone else—a disinterested third party. Here's Milton Friedman again:

"A hard fixed rate is a very different thing. My own view has long been that for a small country, to quote from a lecture that I gave in 1972, “the best policy would be to eschew the revenue from money creation, to unify its currency with the currency of a large, relatively stable developed country with which it has close economic relations, and to impose no barriers to the movement of money or prices, wages, and interest rates. Such a policy requires not having a central bank.” [Milton Friedman, Money and Economic Development, (Praeger,1973), p.59] Panama exemplifies this policy, which has since come to be called 'dollarization.'"

Currency instability is a common problem for smaller nations. The hard fixed exchange rate described above is one way a small country can share the same currency stability enjoyed by larger nation-states. This is in contrast to the (dirty) floating exchange rate among most large, modern economies or the pegged rate of countries like China today, where a central bank uses brute force to try and overpower the normal market adjustment mechanism in order to maintain its desired valuation peg.

Bretton Woods was a pegged system, and one of the characteristics of pegging seems to be the buildup of market pressure that must be periodically released through a currency crisis like we saw in 1933, 1971 and again in the 90s with Mexico and East Asia. The market wants what the market wants, and trying to fight a force as powerful as that always ends in tears for someone. But sometimes the market simply bypasses the choices of the currency manager by using secondary media of exchange.

There are many examples over the last century where the dollar was used by the marketplace as a hard currency in conjunction with a local, unstable currency. Even today it is a common practice in small nation-states for the dollar to be the market's longer term store of value circulating in concert with the local medium of exchange, which you only want to hold for the short term. And this is an example of how the market force, or the demand side of the currency equation, fights back against profligate nation-state printers.

As I explained in Big Gap in Understanding Weakens Deflationist Argument, the value of any currency is determined by a kind of tug-of-war between supply and demand. The demand side is the marketplace and the supply side is the printer. This was true even when gold was the currency. If the market demand for gold was rising faster than it could be pulled out of the ground, the value would rise and the circulation velocity would slow, often causing a slow-down in the economy sometimes resulting in recession or even depression. This tends to lead to monetary revolt and the re-emergence of easy money.

The point is, all the market wants is a stable currency, not too hot, not too cold. It is like a sleeping giant. Give it a stable currency and it will keep sleeping. Wake it and you (the printer) will lose control of the value of your currency and everything else you try to control. The market is the demand side of the equation. And the market is by far the more powerful of the two sides in this tug-of-war. If this isn't making sense, please read my post linked in the paragraph above because I'm not going to explain it all here.

To summarize, there is a whole menu of options for the aspiring money printer to choose from when stepping into the supply side shoes of the monetary game. And as a supply sider, his job is providing a service to the demand side, the market, which wants one thing and one thing only, a stable currency. And if he wants to keep his job, he'd better give his clients what they want, because if they wake up to an unstable currency, they can easily take the reins of control away from him. So if his mandate is—or evolves into—anything other than a stable currency, he will not be long for this monetary world. And one last thing; instability means quick changes both up and down. The client doesn't want drastic inflation or deflation.

The Debt

Most of you already know this quote from FOA:

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction."

Now that's not the whole quote, of course. But that's enough to warrant some extra thought. Just think about it for an extra few seconds before continuing onward. And then next I want to jump from that to this; chapter 82 from The Triumph of Gold by Dr. Franz Pick, written in 1985:

"82. How currencies die

As currencies become more and more devoid of substance, they perpetuate their existence through their multiples. The milreis replaced 1,000 reis, and the bilpengoe tried to substitute for a billion pengoe. The conto was worth 1,000 escudos. The Greek talent was equal to 6,000 drachmae or 36,000 obols. In Java, the bahar was good for 100 million candareens. In India, the nil replaced one hundred billion rupees

Some coins were flattened to the point where they were as thin as a sheet of paper, or actually chopped up into strips, or cut into bits of all sizes and shapes. Some were punctured and the holes then plugged with inferior metal.

These strategems did not and will not save currencies, which are all doomed by the passage of time."


He's talking about debasement. Debasement is not monetary expansion through credit expansion. Debasement is the base money behind the credit being expanded in volume by the supply side as its only possible response to value degradation coming from the demand side. Note in particular the last line: "doomed by the passage of time." And here is some more FOA from 2000 which I reposted in Freegold in the Proper Perspective:

"...Our dollar has had a usage period that corresponds with the society that interacts with it. Yes, just like people, currencies travel through seasons of life. Even gold currencies, in both metal and paper form have their "time of use". Search the history books and we find that all "OFFICIAL" moneys have at one time come and gone with the human society that created them. Fortunately, raw gold has the ability to be melted so it may flow into the next nation's accounts as "their new money".

This ebb and flow of all currencies can be described as their "timeline". We could argue and debate the finer points, but it seems that all currencies age mostly from their debt build up. In a very simple way of seeing it, once a currency must be forcefully manipulated to maintain its value, it is entering the winter of its years. At this stage the quality of manipulation and debt service become the foremost determinant of how markets value said money. Suddenly, the entire society values their currency wealth on the strength and power of the state's ability to control, not on the actual value of the money itself. Even today our dollar moves more on Mr. Greenspan's directions than from the horrendous value dilution it is receiving in the hands of the US treasury.

This is where the dollar has drifted into dangerous waters these last ten or twenty years. If you have read most of Another's and my posts, it comes apparent that preparation has been underway for some time to engineer a new currency system. A system that will evolve into the dollars slot once it dies.

Out here, in deep water, we can feel what the Euro makers are after. No one is looking for another gold standard, or even something that will match the long life and success of the dollar. We only know that the dollar's timeline is ending and a new young currency must replace it. No great ideals, nor can we save the world! But a reserve currency void is not acceptable.

Now look back to shore and watch the world traders kick ankle deep water in each other's faces over the daily movements of Euros. From here, up to our necks in blue water, you ask "What the hell are they doing?" I'll tell you. They are trying to make $.50 on a million dollar play! Mostly because they are seeing the chess game one move at a time. (smile) Truly, their real wealth is in long term jeopardy.

Our dollar has already entered a massive hyperinflation. Its timeline is ending and there will be no deflation to save it..."

And a little more from Franz Pick:

"85: Few people understand the concept of currency debasement

This process of debasing the currency to pay for government deficit spending has been going on for centuries. The Egyptians did it, the Greeks and Romans did it. Countless other nations have done it. Now it's going on all over the world. The process of monetary inflation – and its result, soaring prices – is a simple concept. Adam Smith understood it, as did John Stuart Mills, David Ricardo, and other classical economists.

But, alas, today few people understand the concept. Instead, thanks in large part to the writings of John Maynard Keynes, higher prices are laid at the feet of excessive labor wage demands, greedy corporations, Arab oil sheihs, and the disappearance of anchovies off the coast of Peru. Mon Dieu! The media – woefully ignorant of currency theory – propagandize these stupid explanations, and the public is left totally in the dark as to the real cause."


And to complete FOA's quote at the top of this section:

"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! (bigger smile)"

Saving the Debt

Now I want to talk about "the process of saving debt at all costs, even buying it outright for cash" because this is something they are doing in Europe as well, and, therefore, is one of the arguments the euro critics use to claim that the euro is no different—or even worse—than the dollar. Should we be surprised or shocked that they are doing this in Europe having read A/FOA all those years ago? Well, no. Unless, like many, you didn't really understand what you read.

In my 2009 post Gold is Money – Part 2, I wrote, "And it was always known, but has now been proven, that the system will be saved at ANY cost." When I wrote that I was discussing the dollar and the dollar system, aka the $IMFS, aka Wall Street. But this applies to any monetary and financial system. The system always takes political precedence over the currency. The currency will always be debased if that is needed to keep the system functioning nominally. This is nothing new and it should not be surprising, yet it's apparently very surprising to 99.9% of all financial analysts.

Politicians and central bankers can only expand the monetary base in volume. They cannot expand its value. And at the first sign of systemic trouble, this is what they do. They do this because to not do it would make them redundant. A void, a vacuum of empty space with no politicians or CBs would do nothing which would allow our money, credit, to collapse down to its base, so the politicians and CBs have to do something to distinguish their fine selves from nothingness. Sure, they talk the hard money talk during normal times, but at the first sign of systemic trouble they print. Here's one more chapter from Franz Pick, 1985:

"83. The pious pronouncements to hold the money supply in check will not be kept

The fellows in the central bank make pious pronouncements about fighting inflation and holding the money supply in check. But they panic immediately when they see signs of distress-borrowing in the banking system, as debtors, many of whom are corporations having interest payments larger than their pre-tax profits, try to keep their enterprises from going under.

Although the Federal Reserve system makes a lot of noise about controlling the money supply and reaching monetary targets, it is at times difficult to understand just what exactly they are controlling. Be that as it may, they will in time revert to form and resume the process of what is coyly referred to as "reliquifying the economy."

This will lay the groundwork for another cycle of currency destruction, which could assume unprecedented dimensions. Though "to deflate or not to deflate" may be the question, the only answer to America's growing financial and economic malaise is to debase."


The point is that the Eurosystem's response (volume expansion) to its current systemic threat (the debt crisis) is not surprising. Does this mean the euro will collapse (experience hyperinflation)? No. Because, for one reason, it has severed the link to the nation-state. The euro is behaving perfectly predictably in maintaining the nominal performance of its system through expansion, but it cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion. That link is severed.

But the dollar, on the other hand, is nominally on the hook not only for the debt mistakes of the past, but for all future dollar-denominated liabilities, obligations, entitlements and promises of the biggest debtor in all of history, on top of a debt mountain that is probably another $100T in size depending on your measurement criteria. That's a big difference. The dollar is an old currency in the winter of its life, linked to the greatest profligate debtor the world has ever known. The euro is a young currency that has severed its link to the nation-state. The ECB can save its own system, but the member states cannot force it to fund perpetual profligacy.

Here are a few simple principles that will save you the hassle and embarrassment of constantly being surprised by the actions of politicians and central bankers. They will never sacrifice the system to preserve the value of the currency. But they will always sacrifice the currency to save the system. And there is a very simple formula for how they do it.

There are four players to keep in mind; the debtors, the savers, the banks and the printer. They never print and give the money directly to the debtors to pay off their debt. Instead they print and give the money to either the creditors (banks) or the savers (e.g. pension funds) in exchange for the older bad debt which they then put on the public balance sheet to socialize the lost value.

So they "bail out" the banks and the savers nominally, which in turn (through currency debasement) actually bails out the debtors and screws the savers. The banks come out even because they only require nominal performance. But the retirees and pensioners that require real performance at the supermarket get screwed.

It is important to understand the difference between nominal and real. Nominal means you get the number you expected. Real means you get the purchasing power you expected. Nominal expansion is volume-only expansion which is all the politicians and central bankers can do. Real degradation is the value degradation that goes along with nominal expansion or debasement. The banks don't mind this because they only require nominal performance and their CEO's are comfortably seated at the business end of the printing press where they can turn their personal share of the bailout into real returns.

So now that you know what is, and always has been, perfectly predicable and expected, perhaps you will not be so surprised at the news coming out of Europe. Instead, far more interesting is the news coming out of Washington DC.

A Fairy Tale Expanded

Now I'm going to share with you an analogy that I think will help as we compare and contrast the EU and the USA from a currency perspective. As I have discussed on several occasions, the pure concept of money which maintains continuity from thousands of years ago when it first emerged until today, is the common knowledge of the relative values between real goods and services conceptualized and symbolized by a shared and agreed upon unit. And currency, in the context of the pure concept of money, is nothing more than the clearing system for the trade of real goods and services.

As a foundation for this analogy, please read A.E. Fekete's "A 'fairy' tale" from a speech he gave in 2008 (pdf) which I have used on a few occasions:

A ‘fairy’ tale

Let us look at another historical instance of clearing that was vitally important in the Middle Ages: the institution of city fairs. The most notable ones were the annual fairs of Lyon in France, and Seville in Spain. They lasted up to a month and attracted fair-goers from places as far as 500 miles away. People brought their merchandise to sell, and a shopping list of merchandise to buy. One thing they did not bring was gold coins. They hoped to pay for their purchases with the proceeds of their sales.

This presented the problem that one had to sell before one could buy, but the amount of gold coins available at the fair was far smaller than the amount of merchandise to sell. Fairs would have been a total failure but for the institution of clearing. Buying one merchandise while, or even before, selling another could be consummated perfectly well without the physical mediation of the gold coin.

Naturally, gold was needed to finalize the deals at the end of the fair, but only to the extent of the difference between the amount of purchases and sales. In the meantime, purchases and sales were made through the use of scrip money issued by the clearing house to fair-goers when they registered their merchandise upon arrival.

Those who would call scrip money “credit created out of nothing” were utterly blind to the true nature of the transaction. Fairgoers did not need a loan. What they needed, and got, was an instrument of clearing: the scrip, representing self-liquidating credit.


The Modern European Fair

Now imagine if you will a giant fair with dozens of E-Z Up tented booths and tables full of merchandise, kind of like a swap meet at your county fairgrounds. As Fekete says, you show up at the fair with your goods and services for sale, your E-Z Up tent, your table and your shopping list. But when you arrive you must first check in with the fair operator to pick up your scrip money. I imagine the husband then works the booth while the wife goes shopping.

At this particular fair we are imagining, let's call it the Eurosystem, when you register with the fair operator you pay a small fee, deposit your gold for safekeeping during the fair and also for publication of your amount of gold to the other fair participants, and you are issued your scrip money for trade at the fair. But your scrip money is not a receipt for your gold. It is simply the clearing system for trade at the fair, so you are issued an amount consistent with the goods and services you brought to market.

There are a wide variety of booths at this fair. To give you a bit of a mental image, there's a large booth called Germany where you can buy fast cars and good beer! (I know, a strange combination.) There's another one with a fancy custom tent called France. There you can buy funny hats and cheese. And then there are smaller booths, one is called Greece. At Greece you'll find a table loaded with stacks of colorful vacation brochures.

Our fair, however, is a little different than Fekete's fair above. What we've seen over time at our fair is that some of the smaller booth operators like Greece took home more goods and services than they brought to market. And they did so on credit. Large operators like Germany, it turns out, gave Greece some extra goods in return for promises to pay later, and those promises were denominated in units of scrip money from the fair.

After some time, it became apparent that Greece could never pay back the debt at full value. This realization actually threatened the system, I mean the fair. So what the fair operator decided to do was to buy those promises to pay from Germany at face value, with newly printed scrip. This kept Germany in the game although it did devalue the scrip since now there was more of it than there were goods at the fair. But this was fine because the fair operator published a ConFinStat in which he told all the fair participants that the fair's scrip money was now worth less.

Those, like Germany, that had actually saved some income in promises to pay denominated in scrip, and then found those promises severely devalued by the recognition they would never be paid back at full value, received a nominal gift of the same number loaned to Greece, even though it was now devalued. Those that had not saved in scrip, but instead had cleared with gold at the end of each fair, simply carried on trading at the new, lower value of the scrip. You see, the fair operator, we'll call him the ECB, did not participate in the fair itself, primarily because he had severed his link to any specific booth operator. His only job was providing scrip, announcing its value, and maintaining the system, I mean the fair, even if it came at the cost of debasing the scrip money.

Back Across the Pond

Now in your mind's eye I want you to take a bird's eye view of this fair, looking down on all the colorful tents, and then zoom way out as if you were using Google Earth, spin the globe and zoom back in on a different fair "across the pond." We'll call this fair the USA.

On the surface, this new imaginary fair looks very similar to the other one. There are many different tents, tables, goods and services, buyers, sellers, debtors, creditors and, of course, a fair operator who we'll call the Fed/USG. And that's the first difference you'll probably notice, probably because I will point it out. The Fed/USG is not only the fair operator, but also a participant, just like Sy Sperling. At this fair, the link is not severed.

Here are a few more differences. The fair operator is not only a participant, but he is also the biggest debtor this fair or any other throughout all of human history has ever seen. He is literally printing up scrip to buy things from the fair. He is not only funding his ongoing (perpetual) trade deficit by printing and spending scrip, but he is also paying the interest on his past debt by printing scrip. And whenever his creditors start to worry about him paying his debts, he simply prints more scrip to buy back the promises to pay at face value. And he does all this without ever telling the fair participants that his scrip now has less value.

But it gets worse. This fair operator is truly cashing in on the reputation of his forebears. He's emptying his bank of credibility like there was no tomorrow. You see, for a long time his scrip has been used as the inter-fair clearing system instead of gold. So he is not only able to purchase goods and services with his freshly printed scrip within his own fair, he is also able to shop at far away fairs with his printed scrip, simply on the basis of squandering past credibility. And don't think this isn't getting noticed. Ooh baby, you better believe it is getting noticed!

But it gets even worse! The other participants at this fair include a wide variety just like the Eurosystem, including a large surplus vendor called Texas where you can buy ten gallon hats and concealed carry permits. There's also a large deficit/debtor vendor booth called California where you can pose on a fake wave while someone takes your picture. But these participants don't have to deposit any gold when registering, mainly because the fair operator confiscated the gold from their economies 78 years ago and hid it away out of sight. (Note: gold does not have to be in the hands of the state itself to benefit the economy in its stabilizing role in clearing.) So, unfortunately, they don't have any gold unlike the participants at the Eurosystem fair.


Some of the participants in the USA fair, like California, have lots of debt just like Greece. But unlike the ECB, the Fed/USG can't really deal with that right now because it has its own debt problems it is dealing with (printing away). Here's a thought… The USA states are republics not unlike the Eurosystem participants, and certainly as large. What would happen if the Fed/USG just gave that gold it confiscated 78 years ago to the states? Then the District of Columbia, with its modest population of gentlemen busily trying to distinguish themselves from nothingness, could just default on its ridiculous debt and unfunded liabilities. I, for one, would call that move "distinguished!"

Believe me, I know I'm fantasizing here. Remember? This is an imaginary world of fairs and E-Z Ups. But just think about it. We could still have the scrip (common currency) we are all used to (see: Mises' Regression Theorem here), the US dollar. The Fed's mandate could be modified to "only a stable currency" giving the marketplace the one and only thing it wants. Instead of "End the Fed" we could "End the Fed/USG". Doesn't that sound nice?

And in such a fanciful utopia as I am imagining right now for the dollar fairgrounds, one could rightfully proclaim that the dollar had joined the euro in severing its links to both gold and the nation-state. But, of course, this is just fantasy. Such a thing could never happen by choice of the printer, the supply side, because the USG is so large today that it literally forms its own giant parasitic organism, fighting for survival. In the EU, however, there is no such thing.

Quarterly Reflection

Over the latest quarterly cycle we have witnessed several curious advances in Europe. To name just a few, on May 24th the European Parliament's Committee on Economic and Monetary Affairs agreed unanimously to allow gold to be used as collateral in clearinghouses. [2] And then on June 7th the ECB encouraged investors to buy new Greek bonds to replace maturing securities with two separate unnamed European officials saying investors may be given collateral as one possible incentive to roll over the debt when it matures. [3] And finally, on "Snapshot's Eve", June 29th, we learned that China's SAFE (State Administration of Foreign Exchange) is actively doing all it can to transfer billions of its dollar-denominated holdings into euros. [4][5]

The monetary plane is changing. The signs are everywhere. Euro gold just broke EUR 1,100 today. Here's what it looks like in dollars:

Tuesday, January 1, 2002 - Launch of euro transactional currency
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500

Do you think this is the top? Do you think gold is expensive at $1,550? Do you think gold is just another commodity and will therefore collapse back to its 2002-2005 range if the economy tanks? Think again.

On timing, look up. It's already begun. But here is, I think, the question you should be asking yourself. It comes from John Rubino with a couple of Freegold edits from me [in brackets]: "Do you wait until it [the rapid RPG-Freegold revaluation] is underway at the risk of missing the discontinuity [gap up, punctuation, phase transition, etc.] that growing imbalances make likely, or do you load up on precious metals [sic—only physical gold IMO] and short Treasury bonds now, and just accept the fact that the coming year might be dominated by delusion?" [6]

Do you remember my "Orbital Launch Pattern" from Gold: The Ultimate Un-Bubble? "For all you technical analysts out there plotting and planning your eventual exit from gold before the blow off phase, I have a new pattern to introduce to you. I call it the Orbital Launch Pattern, or the Inverted Waterfall. In this pattern there is no blow off! It looks something like this..."


Feel free to reflect on this while you enjoy the music below!

Sincerely,
FOFOA

[1] One World, One Money?
Robert Mundell and Milton Friedman debate the virtues—or not—of fixed exchange rates, gold, and a world currency.
[2] Bid to Use Gold as Collateral Advances (WSJ)
[3] Trichet Gives First Signal Endorsing Greece Bond Rollover (Bloomberg)
[4] It's Official: China Is The "Mystery" Daily Buyer Of Billions Of Euros (ZH)(WSJ)
[5] I also discussed these stories in this comment under the last post.
[6] Bondholders Should Be Under No Illusions (Rubino)

328 comments:

1 – 200 of 328   Newer›   Newest»
Tyrone said...

Euro Gold is good, but Tyrone Gold is better!
Cheers!!

Flore said...

a picture says more than a thousand words... this should be an eyeopener for the first time visitors over here

costata said...

FOFOA,

Back in scintillating form I see. Great post.

Did you mention a record for Euro gold?

From FMX connect:
"We think it’s interested that gold was so strong considering silver’s lack of participation in today’s rally. It’s convenient to say this, but we’re going to say it anyway: gold is money and silver is not. Silver is an industrial metal with precious qualities.

Believe us, Europeans are not buying bars of silvers because their economy is going to hell in a handbasket; they are buying gold. While we think silver will catch up to gold is in a sustained rally we think staying long gold is still the way to go in the current environment."


http://www.fmxconnect.com/fmxmetalsconnect/post/2011/07/11/FMX-7c-Connect-Gold-Options-Report-ndash3b-July-11-2011.aspx

radix46 said...

Delightful!

mortymer said...

The Euro sign on the gold bar picture rings some bell in my memory...

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

12 stars in Euro Flag
12 ounces in a troy pound

(one from many explanations it is)

Texan said...

Of course the "saving the debt at all costs" is the nub of it. You may posit that it's axiomatic, but it's not. It requires political will to do so.

And as with the US, I think there are political elements now in the eurozone that are at least posturing as "hard money".

This in turn renders the entirety of the PIIGS debt as " bid less". So we are talking several trillion that the ECB will have to print to support their banking systems, roll their debt, etc.

I don't think the Germans will support that, they will demand private haircuts. And the problem with that is then the question becomes "where do the haircuts stop", so debt stays bid less, requiring more haircuts, etc. It's a Rubicon.

The ECB, far from having an advantage here, is completely powerless. If the Germans demand a haircut, the ECB will be holding defaulted bonds in it's capital base, and its not at all clear what that means for the ECB going forward. And here's a bonus question- how much gold does the ECB, not the "eurosystem", hold?

My view is that the euro has several fatal flaws. First, there is no enforcement mechanism for expunging or otherwise penalizing countries for overspending. Second,
the ECB is not a " buyer of last resort" as you intimate in the post. It just isn't, and I believe El erian or Oneill or Soros said the same thing just yesterday. And I don't think the political will is there to give it that power.

So, we'll see how this plays out.

mortymer said...

"...*Stability to us is worth its weight in gold*..."

http://anotherfreegoldblog.blogspot.com/2011/07/guardian-of-financial-stability.html

[Mrt: The same revaluation of gold reserve asset and lowering of the portion of the foreign exchange reserves is seen on each and every sub-CB of the ESCB system; pls check the linked Belgian doc for an example. Selling (at this point, remember that they can even be buying) some of the gold makes sense - e.g. managing currency bit down for export purposes, holding the system together, PR, oil, etc...]

Texan,
- ECB has a veto to other monetary policy decisions of the particular states; even has partly power over their gold and other reserves.
- Germans do not want private haircuts but Gr. public haircuts IMO.
- Is it bad that it will be in ECB where those worthless bonds will collect dust?
- Yes, there is no enforcement mechanism; but I would add "yet". It would be unacceptable before in early stages when states would refuse to loose part of their control/power.
- About the buyer of last resort... let me offer this docs:
http://anotherfreegoldblog.blogspot.com/2011/06/neither-borrower-nor-lender-be-by.html
http://anotherfreegoldblog.blogspot.com/2011/06/what-size-is-fire-exit-by-daniel-gros.html

DP said...

Ahhhh, finally — some fresh meat! :-)

Wejn said...

Comments...

Texan said...

Mortymer, the chairman of commerzbank came out today calling for a haircut on Greek debt. Not sure how he feels about Portugal, Spain, Ireland, Italy.........but the Germans are DEFINiTELY pressing for a private creditor haircut.

As for the ECB having power over member state gold reserves, sorry, but no. Maybe "on paper". When the member states start to defect, or are forced to leave, they are taking their gold with them. At least the smart ones will. This was the whole purpose of the Die Welt article last week to try and create some momentum to get Portugal and Greece to sell their gold. As for collateralizing it, well they both remain silent on the topic, don't they? I think they are also big readers of FOFOA! But seriously, they are not stupid.

The ECB can buy on the margin to create time, though it creates an enormous problem for itself by doing even this (it becomes insolvent). It cannot monetize indefinitely
trillions worth of debt. The harder currency regions (northern Europe and Germany) won't tolerate it.

Texan said...

This partial monetization is, by the way, the precise fight the head of the German CB (weber) had with Trichet last year. Weber was then dumped by Merkel, and now Merkel is in trouble politically.

Yannick said...

@FOFOA:

Concerning the euro, I guess you say that in the end the ECB will buy bonds of PIIGS, indirectly, by bailing out the banks & funds once the eurozone enter another crisis? By doing this, they debase the currency, as you say.

Why, because of that, could the fear not switch from "not enough euros" to "euros are getting worthless", which would make a proper hyperinflation?

Thanks.

mortymer said...

@Texan: (all IMO and how I see it)

"As for the ECB having power over member state gold reserves, sorry, but no. Maybe "on paper"."
-> Actually it is in the articles. Found and posted it some months ago. Hard to dig now, time issue, will try later...

"When the member states start to defect, or are forced to leave, they are taking their gold with them."
-> Leaving does not make sense, would Greek debt be re-negotiated into Drachmas and then straight defaulted in full? Why? All will lose. Who would trade with vulnerable Greece then? Nono, they are happy to be under ESCB umbrella and ECB is happy that they are in. :o) Germany is bailing out partly their own pension funds, banks, not Greek citizens, besides in time when all blocks try to debase their currencies down... :o)

"To take gold with them?"
-> Like with the IMF, there are clauses about how to exit and where the gold which is at in ESCB and IMF systems goes then :o) Look how USA had to hide their gold on 42USD so it would not be picked after their Nixon default!

"create some momentum to get Portugal and Greece to sell their gold."
- The best reserve asset is sold only when there is nothing else to trade or nowhere else to go. Correct indeed, playing for time but note that ECB started to rise rates slowly.

"The ECB can buy on the margin to create time,..."
-yes, indeed. Insolvent? look here:

"...Insolvency can certainly be avoided as long as liquidity is (almost) free and available in unlimited amounts. However, unlimited cheap financing (‘liquefaction’) has its disadvantages. First of all, it is obviously not a solution for insolvent debtors; it just postpones the day of reckoning – and makes it more painful when it does arrive because the debt burden will be even larger. Secondly, it is addictive. The European Central Bank will remain by far the cheapest source of funds for banks in the euro periphery. Those countries will thus try to maintain and increase their recourse to ECB funding for as long as possible, with the result that the risk on the balance sheet of the ECB will also increase. This is why the ECB recently had to tighten its eligibility criteria for the collateral it accepts."
(http://www.ceps.eu/book/neither-borrower-nor-lender-be)

=> The value of Collateral will rise.

mortymer said...

Texan, from the previous I would add:

==> The value of having Valuable good quality your own Collateral will rise even more!

Look now... there is an net inflow of gold into Greece. (One can even claim that they play the game well and hard). Lets try to imagine what it will create if masses get the same ideas in Italy and Spain :o)

costata said...

Texan,

You wrote:
So we are talking several trillion that the ECB will have to print to support their banking systems, roll their debt, etc.

You are overstating the problem. You are also misstating the problem.

JR said...

Hi,

The Euro is different in 2 ways:

... there are two fundamental differences between the euro and the dollar that most Westerners simply can't grasp, no matter how many times you try to explain their significance....
the two fundamental differences with the dollar are the severed links to gold and the nation-state.


******************

FOFOA focuses on what it means for the Euro to be severed from the nation-state:

The point is that the Eurosystem's response (volume expansion) to its current systemic threat (the debt crisis) is not surprising. Does this mean the euro will collapse (experience hyperinflation)? No. Because, for one reason, it has severed the link to the nation-state. The euro is behaving perfectly predictably in maintaining the nominal performance of its system through expansion, but it cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion. That link is severed.

But the dollar, on the other hand, is nominally on the hook not only for the debt mistakes of the past, but for all future dollar-denominated liabilities, obligations, entitlements and promises of the biggest debtor in all of history, on top of a debt mountain that is probably another $100T in size depending on your measurement criteria. That's a big difference. The dollar is an old currency in the winter of its life, linked to the greatest profligate debtor the world has ever known. The euro is a young currency that has severed its link to the nation-state. The ECB can save its own system, but the member states cannot force it to fund perpetual profligacy.


cont.

JR said...

cont.

A metaphor: "The Modern European Fair"

At this particular fair we are imagining, let's call it the Eurosystem, when you register with the fair operator you pay a small fee, deposit your gold for safekeeping during the fair and also for publication of your amount of gold to the other fair participants, and you are issued your scrip money for trade at the fair. But your scrip money is not a receipt for your gold. It is simply the clearing system for trade at the fair, so you are issued an amount consistent with the goods and services you brought to market....

After some time, it became apparent that Greece could never pay back the debt at full value. This realization actually threatened the system, I mean the fair. So what the fair operator decided to do was to buy those promises to pay from Germany at face value, with newly printed scrip. This kept Germany in the game although it did devalue the scrip since now there was more of it than there were goods at the fair. But this was fine because the fair operator published a ConFinStat in which he told all the fair participants that the fair's scrip money was now worth less.

Those, like Germany, that had actually saved some income in promises to pay denominated in scrip, and then found those promises severely devalued by the recognition they would never be paid back at full value, received a nominal gift of the same number loaned to Greece, even though it was now devalued. Those that had not saved in scrip, but instead had cleared with gold at the end of each fair, simply carried on trading at the new, lower value of the scrip. You see, the fair operator, we'll call him the ECB, did not participate in the fair itself, primarily because he had severed his link to any specific booth operator. His only job was providing scrip, announcing its value, and maintaining the system, I mean the fair, even if it came at the cost of debasing the scrip money.


***********************

The metaphor continued "Back Across the Pond" - US fair:

On the surface, this new imaginary fair looks very similar to the other one. There are many different tents, tables, goods and services, buyers, sellers, debtors, creditors and, of course, a fair operator who we'll call the Fed/USG. And that's the first difference you'll probably notice, probably because I will point it out. The Fed/USG is not only the fair operator, but also a participant, just like Sy Sperling. At this fair, the link is not severed.

Here are a few more differences. The fair operator is not only a participant, but he is also the biggest debtor this fair or any other throughout all of human history has ever seen. He is literally printing up scrip to buy things from the fair. He is not only funding his ongoing (perpetual) trade deficit by printing and spending scrip, but he is also paying the interest on his past debt by printing scrip. And whenever his creditors start to worry about him paying his debts, he simply prints more scrip to buy back the promises to pay at face value. And he does all this without ever telling the fair participants that his scrip now has less value....

Some of the participants in the USA fair, like California, have lots of debt just like Greece. But unlike the ECB, the Fed/USG can't really deal with that right now because it has its own debt problems it is dealing with (printing away)....


Cheers, J.R.

Indenture said...

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JR said...

Well said Indenture!

Its basically been a year since the Public Opinion Poll!!.

Fiat is for spending, gold is for saving! Spend your fiat wisely.

The Dork of Cork said...

You cannot destroy a 400 year experiment and hope everything will be fine.
Europe will enter a turmoil unimaginable for some.
Italys take out by the ECBs buddies in the CDS market is especially disturbing.
Italy always had a conservative attitude to debt hence their high fiscal money ratio relative to private credit.
I see the ECB as the 21 rst century version of the Dutch banks of the 1600s , plotting the destruction of the old clan system - artifcally creating the modern nation state using effecient money making mechanisms to raise large well equipped armies.
Social enginnering is a distasteful practise.

JR said...

Hi Yannick,

You say:

"I guess you say that in the end the ECB will buy bonds of PIIGS, indirectly, by bailing out the banks & funds once the eurozone enter another crisis? By doing this, they debase the currency, as you say."

FOFOA from above:

"The euro is behaving perfectly predictably in maintaining the nominal performance of its system through expansion, but it cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion. That link is severed.

But the dollar, on the other hand, is nominally on the hook not only for the debt mistakes of the past, but for all future dollar-denominated liabilities, obligations, entitlements and promises of the biggest debtor in all of history, on top of a debt mountain that is probably another $100T in size depending on your measurement criteria. That's a big difference. The dollar is an old currency in the winter of its life, linked to the greatest profligate debtor the world has ever known. The euro is a young currency that has severed its link to the nation-state. The ECB can save its own system, but the member states cannot force it to fund perpetual profligacy."

********************

Yannick continues:

"Why, because of that, could the fear not switch from "not enough euros" to "euros are getting worthless", which would make a proper hyperinflation?"

I think it may have something to do with gold as a secondary media of exchange. FOFOA from above:

"... Today, the printer of the euro, the ECB, tells all the owners that the money it prints has less value in gold… once every quarter! And not only that, but it encourages people to save in gold through system-wide mandates." ...

The Euro is clear it will debase currency to keep the system going, it publishes, quarterly, the debased value compared to its reference point (the secondary media of exchange, aka gold), and encourages people to save in that secondary media of exchange. More FOFOA from above:

"After some time, it became apparent that Greece could never pay back the debt at full value. This realization actually threatened the system, I mean the fair. So what the fair operator decided to do was to buy those promises to pay from Germany at face value, with newly printed scrip. This kept Germany in the game although it did devalue the scrip since now there was more of it than there were goods at the fair. But this was fine because the fair operator published a ConFinStat in which he told all the fair participants that the fair's scrip money was now worth less.

Those, like Germany, that had actually saved some income in promises to pay denominated in scrip, and then found those promises severely devalued by the recognition they would never be paid back at full value, received a nominal gift of the same number loaned to Greece, even though it was now devalued. Those that had not saved in scrip, but instead had cleared with gold at the end of each fair, simply carried on trading at the new, lower value of the scrip. You see, the fair operator, we'll call him the ECB, did not participate in the fair itself, primarily because he had severed his link to any specific booth operator. His only job was providing scrip, announcing its value, and maintaining the system, I mean the fair, even if it came at the cost of debasing the scrip money."


The ECB tells people the euro is going to be debased. There is no fear of not enough euros and there is no fear that they will become worthless (because the ECB is open about debasement and the reference point against which it is debased - its secondary media of exchange, gold.) Why run from the euro system out of fear of debasement - just hold the secondary media of exchange:

Those that had not saved in scrip, but instead had cleared with gold at the end of each fair, simply carried on trading at the new, lower value of the scrip.

Cheers, J.R.

S said...

" Does this mean the euro will collapse (experience hyperinflation)? No. Because, for one reason, it has severed the link to the nation-state."

Interesting in view of the Soros editorial in the FT pressing for more fiscal unity - echoed by the chorus of chimps on Wall Street.....

Yannick said...

JR, Thanks.

S said...

Is this a case of the system sacrificing the currency or a case of systems attacking each other (oil, Euro, $IMF)? Something to consider on the recent inflamation in Italy:

(1) several weeks ago the Italy FM called for end to kinetics in Libya

(2) not few days later the IEA strategic oil release (recall the rumored US/Saudi swap that was discussed in context of Brent-WTI spreads and Europe shortages). ENI is a major player in Libya...and also a player in The Russian sponsored Sud Stream the key pipeline comp to the US/NATO sponsored Nord Stream

(3) Last week as ZH highlighted the attack on the Italian banks and insurers began off exchange (dark pools)

(4) Berlusconi then breaks ranks and says he was opposed to Libya from the getgo (domestic politics or something more?) Bunga bunga

(5) Wikileaks document months ago suggesting Berlusconi (& Italy) is way to close to Russia for NATO comfort

(6) As FT Alphaville reports this morning Eurozone has effectively become a sequential CDO with the Italy the Mez piece. But as far as structures go why did the market jump over the Spain tranche and go directly to Italy? (http://ftalphaville.ft.com/blog/2011/07/12/619741/eurozone-cdo-we-have-a-mezzanine-problem/)

(7) France says it is for negotiating an end to Libya (as Lagarde says this am that the IMF is not a cash machine!)

(8) Russia media reports Obama will back Russian mediation for Libya provided Gadaffi goes

(9) No word out of the UK on Libya, yet...


Much more with the developments in Iraq as Panetta off to Iraq to push troop extensions by invoking Iran, again.This editorial in the WaPo fotld the article this am in Haaretz saying the Palestineans are going to declare statehood this fall and the US road map is dead.

http://www.washingtonpost.com/opinions/palestinian-rights-wont-be-denied-by-the-united-states-and-israel/2011/06/07/AGmnK2OH_story.html

http://www.haaretz.com/print-edition/news/israel-and-palestinian-sources-to-haaretz-u-s-peace-efforts-have-failed-1.372726

One final anecdote...Australai trade balance beats expectations on higher gold exports...
"Exports of non-monetary gold were the fifth highest on record, hitting $1.62 billion"

http://www.abc.net.au/news/2011-07-05/23b-trade-surplus-beats-expectations/2782984

Italy To Big to Save
http://ftalphaville.ft.com/blog/2011/07/12/619826/no-the-ecb-cant-prop-up-italy/

The Fiscal Union put
http://ftalphaville.ft.com/blog/2011/07/12/619911/the-fiscal-union-put/

radix46 said...

The problems that I see with the ECB model is that they are not widely telling people to save in gold. Most people have no idea about gold. It’s mostly demonised in fact. Yes, I know it is all in the ConFinStat, but what percentage of people actually read that, or even know it exists?
Also, of those that would be inclined to read the ConFinStat, many of them disagree about the function of gold or do not understand it all. Even if they understand that the ECB is causing monetary inflation, this is not necessarily a signal to buy gold because of the ambiguity in the system.

Finally, the ECB has an inflation target. In fact, that is its only target. Now, if everyone plays ball and buys gold when the ECB debases, then inflation is soaked up and the currency remains stable, but this requires the above two points to hold.

Now, I know that there are a few nudges and winks to try to cajole people to buy gold, with the tax rate and the ease of purchase etc, but this in no way overcomes the problems I mention. For it to function effectively, they should be announcing on the news, every day, exactly what they are doing and why, detailing upcoming planned debasements, etc. They need to spell it out for J6P, because without this explicit information, people will have no clue whatsoever.

Given that hyperinflation is not caused by the ECB, but as a demand-side driven event, then what is to say that the clueless masses won’t run out and buy ‘stuff’, rather than gold when the fear hits? Regardless of whether the ECB remains capitalised during debasement is irrelevant, it’s the masses that have to understand this Euro-Freegold system for it to be effective.

I stand ready and eager to be corrected...

DP said...

@radix, to go balls-out announcing "buy gold you idiots" to anyone and everyone, would be to essentially advocate the end of the $IMFS. Nobody *wants* the end of the $IMFS, as far as I can tell; just to be there ready and waiting with a system that can pick up the balls when they eventually drop.

As you indicate, the "Stop Me and Buy One" sign is already hung out for anyone wishing to buy gold if/when they are ready and willing — even here in the UK, outside of the Eurozone. My understanding is it's even easier still in, say, Germany — where you can walk right up to the bank teller and swap euros for gold.

So, the balls are still tucked up in the Y fronts for now ... but I reckon they could be whipped out in a hurry if people started screaming for a 99 on a hot day, and there would be an ice cream man parked almost on every street corner in readiness.

radix46 said...

DP,

"to go balls-out announcing "buy gold you idiots" to anyone and everyone, would be to essentially advocate the end of the $IMFS."

Yeah, I did think of that just after I posted. Baiting the gorilla ain't a good idea.

Still, it might be a good idea at least to start slipping in some pro-gold analysts on TV. It can't be that difficult to start spreading the meme - most people are off-loading their gold to Cash4Gold, not buying.

The biggest problem that I see is that gold is still widely seen by many either as a commodity or a slightly weird and commical relic. This is a massive hurdle to overcome, especially if the message to buy it during a time of utmost stress is being delivered by an authority that will have attracted a fair amount of animosity by that point.

People do tend to make pirate jokes about buried treasure when it is mentioned. This is a pretty tough hurdle to overcome.

"So, the balls are still tucked up in the Y fronts for now ... but I reckon they could be whipped out in a hurry if people started screaming for a 99 on a hot day"

Given the nature of hyperinflation, could this be accomplished?

The view held by many here is that the euro won't experience hyperinflation because of the gold buying. However, it seems a bit flimsy to be relying on the "the balls being whipped out" just at the perfect moment - that hyperinflation is a flighty creature. FOFOA and others are very explicit in their "no euro hyperinflation" view. Is it that certain? I agree that the ECB will be recapitalised, but I'm not sure that hyperinflation will definitely be avoided. There are too many variables, regardless of best laid plans.

I assume it would be the ECB itself accepting all the offers and providing the physical?

radix46 said...

I did actually hear gold mentioned on Radio 4 a few weeks back, as it had hit an all time high.

However, the analyst said that he had made money by selling some of his jewellery and that ETFs were a good buy to protect from inflation.

Sell physical, buy paper! Great advice!

JR said...

Hi radix 46,

You write:

"Still, it might be a good idea at least to start slipping in some pro-gold analysts on TV. It can't be that difficult to start spreading the meme - most people are off-loading their gold to Cash4Gold, not buying.

The biggest problem that I see is that gold is still widely seen by many either as a commodity or a slightly weird and commical relic.
"

You sound like an American? JR's favorite commentator Costata posted this article excerpt above:

Believe us, Europeans are not buying bars of silvers because their economy is going to hell in a handbasket; they are buying gold."

And from FOFOA's response to your query in the comments to From the Treasure Chest, recounting a reader email to him:

I live in Europe, and I am constantly impressed with how far ahead of the Anglo world is continental Europe's thinking on gold. As FOA anticipated, every EU member country has one or more gold coin(s) (equivalent to the American gold Eagle) which is completely tax free-- no VAT, no capital gains tax, nothing.

and FOFOA from the same comment:

Remember from Indicium that FOA wrote, "1 gram coins will be the norm; being the size of our one ounce now, but with alloys." At other times he also wrote about how gold is divisible to ANY size necessary. Well here we have three Swiss politicians proposing a constitutional amendment to make a new set of official Swiss gold francs down to the smallest size of.... wait for it.... 0.1 grams of gold!

And from the wording of the initiative it sounds like they would be meant to float in value with the price of gold, without a fiat face value. I get this from the use of the term "fixed gold content" and the later reference to the value of the coin relating to the "cost" of its gold.


Cheers, J.R.

JR said...

October 12, 1998 - COUNCIL DIRECTIVE 98/80/EC of 12 October 1998 supplementing the common system of value added tax and amending Directive 77/388/EEC - Special scheme for investment gold

"THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community and in particular Article 99 thereof,

Having regard to the proposal from the Commission (1),

Having regard to the opinion of the European Parliament (2),

Having regard to the opinion of the Economic and Social Committee (3),

Whereas, under the sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - common system of value added tax: uniform basis of assessment (4) transactions concerning gold are in principle taxable although, on the basis of the transitional derogation provided for in Article 28(3) in conjunction with point 26 of Annex F to the said Directive, Member States may continue to exempt transactions concerning gold other than gold for industrial use; whereas the application by some Member States of that transitional derogation is the cause of a certain distortion of competition;

Whereas gold does not only serve as an input for production but is also acquired for investment purposes; whereas the application of the normal tax rules constitutes a major obstacle to its use for financial investment purposes and therefore justifies the application of a specific tax scheme for investment gold; whereas such a scheme should also enhance the international competitiveness of the Community gold market;..."


Cheers, J.R.

costata said...

Two thoughts from JSmineset and a quote from Tim Geithner via Stewart Thomson for Team Dot Connection:

1. "Bloomberg, a political independent who had flirted with a presidential run, said in a statement the federal government must avoid damaging the nation’s economy and its credibility around the world with a first-ever U.S. default."

First ever? LOL

2. "At least once, everyone should have to run for his life, so he will know that eggs don’t come from stores, that safety does not come from police, and that ‘news’ is not something that happens to other people."
–Robert Heinlein

3. "I told you that the head of the US Treasury, (currently Tim "The Terminator' Geithner) would begin to show his teeth, and eventually replace Ben Bernanke as star of the accelerating crisis show.

Here are the latest inspirational words for Elmer Fudd public investor, from Timmy the terminator, '...it's going to feel very hard, harder than anything they've experienced in their lifetime now, for a long time to come....' ~ Associated Press, July 10, 2011."

radix46 said...

JR,

"I live in Europe, and I am constantly impressed with how far ahead of the Anglo world is continental Europe's thinking on gold."

That might explain it, I'm from the UK.

However, I have been speaking to some good friends in Spain, specifically to guage the perception of gold and it is not on any of their radars. None of them say that they have ever thought about it or discussed it with anyone and these are people that are fully aware that they are in a depression and that there never was any recovery.

I know that's not a statistically significant sample, but it is an indication at least.

radix46 said...

JR,

I think a big issue is that most people are simply not aware of the financial world at all.

I think it is easy for our perceptions to be distorted, those of us in this blogoshpere bubble, and assume that others know what we know.

I don't have a single real-world friend who has any clue whatsoever about the true state of the financial world. None of them have any inclination to seek out this sort of information. They just go about their lives, oblivious.

sean said...

Very nice post and makes a difficult point easy to understand with clever use of the fair metaphor. thanks FOFOA!

JR said...

Hi radix46,

I agree WRT to "in real life," and also with the idea that most people aren't aware of the financial world.

"If you are one of "small worth", can you not follow in the footsteps of giants? I tell you, it is an easy path to follow!" --ANOTHER (THOUGHTS!) 1/10/98

Its the Giants whose footsteps we follow, and it is what "they" understand and see that is of significance. Us few shrimps on the trail are just along for the ride, so yes, I would expect that most shrimps haven't a clue where things are heading.

Cheers, J.R.

DP said...

"the application of the normal tax rules constitutes a major obstacle to its use for financial investment purposes and therefore justifies the application of a specific tax scheme for investment gold"

I can take a hint.

M said...

@ FOFOA

Not fully through yet but i wanted to get in before the comments go out of control.

The way you have been explaining the "save debt at all costs by printing"
insinuates that money must be printed for the currency to go to zero(hyperinflation)

These deflationists are going to jump on this because basically you are saying that without the printing, the deflatinists are 100% right.

But they are not right. Look at the Thai Baht in 1997. Did the Bank of Thailand print a ton of Baht that caused the 50% fall in the value ? No, the Thai baht fell because people where fleeing it, not because it was being printed.

I don't see it any different for the US dollar. They can stop printing tomorrow and it will still hyperinflate. As the economy that services the debt that backs the dollar implodes, the tax revenue stream implodes leaving the dollar worthless even if Bernanke ordered everyone to burn their base money cash.

JR said...

Hi M,

Some background. The Thai bhat was pegged to the dollar. They were unable to maintain with peg in the face of market pressure (Asian financial crisis), and let it float, causing the devaluation:

In early 1997, Thailand was experiencing rocky economic times. Major Thai banks were undercapitalized, leading to government warnings in March to ten banks to increase their capitalization, and, in April, a Moody's downgrade of the long-term senior debt and deposit ratings of five Thai financial institutions.

Furthermore, the U.S. dollar was appreciating significantly, which meant that the Baht appreciated as well, since it was pegged to a basket of currencies, of which the U.S. dollar was the primary component. The Bank of Thailand attempted to defend the Baht against pressure for devaluation, leading to significant depletion of foreign currency reserves as investors anticipated depreciation of the Baht.

On July 2, 1997, Thailand announced that the Baht would float. The Baht immediately dropped significantly in value, losing 20% in one month, and falling to less than half its former value within six months.


*****************************

FOFOA from above on a currency peg:

Currency instability is a common problem for smaller nations. The hard fixed exchange rate described above is one way a small country can share the same currency stability enjoyed by larger nation-states. This is in contrast to the (dirty) floating exchange rate among most large, modern economies or the pegged rate of countries like China today, where a central bank uses brute force to try and overpower the normal market adjustment mechanism in order to maintain its desired valuation peg.

Bretton Woods was a pegged system, and one of the characteristics of pegging seems to be the buildup of market pressure that must be periodically released through a currency crisis like we saw in 1933, 1971 and again in the 90s with Mexico and East Asia. The market wants what the market wants, and trying to fight a force as powerful as that always ends in tears for someone.


Can you see some fundamental differences between the world's reserve currency and the Thai bhat, which was pegged to the world's reserve currency?

Cheers, J.R.

Texan said...

S, on your point # 6, the reason Spain was jumped over in favor of Italy (and perhaps soon to be France), is gamma. It is very cheap (or was cheap) to buy CDS on Italy, short it's banks, etc, relative to the cost for Spain. Then Italy "jumped" (ie, gamma). So now it will be game on for France, as that CDS is still pretty cheap. So if starts to widen even a fraction, bye bye. You get an immediate pop on your CDS investment as all bids pull and the spreads just gap wider.

Costata, if anything I am understating the problem. Italy alone has over a trillion of debt. How do you think that is funded. By other Euroepan banks. How are they funded? Etc etc. Only deposits are "relatively" secure, thougha s we are seeing in Greece, that funding can go away also.

If bids disappear for Italys debt, who is going to step in and
buy it? No one is big enough. Not even the ECB. The marvelous FT Alphaville has a great series of posts today
about this very topic.

The only possible solution is to have Germany commit it's own balance sheet to fund all the debt. This is why we saw a bit of weakening on bunds today. That is the top of the capital structure, and the system needs more capital. The ECB just doesn't have it.

Which is why I have been saying for months now that this is very thorny political decision, and not at all a given that Germany will get there. The German voters may decide they prefer the DM after all.

JR said...

Also M,

Consider FOFOA's discussion of Iceland - a country whose currency collapse was analogous to the 97 Thai bhat devaluation - from Dollar Repudiation :

"Let's take a look at what happened in Iceland ten months ago. Practically overnight the Krona lost more than half of its purchasing power. Luckily the Krona was a small fish in a big pond and a number of bigger fish came to its rescue including Germany, the Netherlands, the UK, Norway, Sweden, Finland, Denmark, Poland, Russia and the IMF. These big fish put a bottom under the Krona waterfall, but for the local Icelandic population, the damage was already done.

Call it a currency collapse, a hyperinflation, a devaluation or a repudiation; call it whatever you want. But the cost of everything people use and need in Iceland doubled or tripled in one month. And at the same time, the things they counted on as a store of value, the banks, real estate and the local financial industry collapsed. Hit from both sides! A brutal double whammy!

You see, in Iceland almost everything produced is an export, and almost everything needed is an import. And imports and exports are the hardest hit in local hyperinflations.

Local hyperinflations primarily affect imports and any domestic product that can be exported. In other words, if it can be sold somewhere else for better money then it EXPLODES in price. But locally produced and consumed products and services become quite cheap in real terms. And by real terms, I mean for those who have some gold! This includes real estate, which is difficult to import or export!

But who is going to come to the rescue of the biggest fish of all? Who is going to bail out the dollar and put in a bottom? The aliens? I have a sneaking suspicion that the dollar's collapse will be a little different (read: worse) than past recorded events. It will certainly be a sight to behold. Just think about it; Where will you be, what will you be doing, how will you react, and how will you be feeling when it starts? Gold delivers a LOT of peace of mind in this regard!"


**********************

From Deflation or Hyperinflation? , FOFOA on the idea that the big difference between a Icelandic currency collapse deflation and hyperinflation is the "ample incentive for these politically connected Power Elite Giants to actually encourage" massive printing and the difference between a local currency (the krona) and the world's reserve currency (the $):

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....


Cheers, J.R.

DP said...

radix: The view held by many here is that the euro won't experience hyperinflation because of the gold buying. However, it seems a bit flimsy to be relying on the "the balls being whipped out" just at the perfect moment - that hyperinflation is a flighty creature. FOFOA and others are very explicit in their "no euro hyperinflation" view. Is it that certain? I agree that the ECB will be recapitalised, but I'm not sure that hyperinflation will definitely be avoided. There are too many variables, regardless of best laid plans.

I assume it would be the ECB itself accepting all the offers and providing the physical?


My definition of "hyperinflation" is when people increasingly feel that the currency will no longer buy all the things they will want to buy — it's no longer as good as gold. So they cease to accept it in payment for goods and services, perhaps even rush to exchange it for something while it still has any value at all. If a currency ceases to perform this vital function, people will flock to an alternative and superior currency; historically this "superior alternative" has been the dollar. But what if the dollar is among the non-performing currencies? Gold is clearly the last refuge.

The euro is guaranteed to deliver gold —already tested and proven to be the case (see FOFOA article above!)— from the ECB if necessary, at the stated floating market price. Meanwhile the dollar never guaranteed any gold. Which is most likely to be the last currency standing in a global collapse situation? The euro might not get you as much gold later as it does now, but it will always get you some. Right down to the scraping of the last piece of gold from the reserve barrel in exchange for the last euro liability. As the euro is perhaps clearing down that last transaction to finally square the books somewhere in the dim and distant future, how do you think the dollar might be faring? Still current, accepted to be as good as gold?

The euro isn't as good as gold, but it's close. That's why, IMO, the euro won't go hyper.

DP said...

And one for the road...


radix: I have been speaking to some good friends in Spain, specifically to guage the perception of gold and it is not on any of their radars. None of them say that they have ever thought about it or discussed it with anyone and these are people that are fully aware that they are in a depression and that there never was any recovery.

me: My understanding is it's [retail buying of gold] even easier still in, say, Germany — where you can walk right up to the bank teller and swap euros for gold.

This pairing lead me to further thoughts...

Spain: Currently an economically-challenged economy with a trade deficit, where the very last thing that TPTB would want right now is for the few people who actually do have some capital saved to hoard it and park it in gold. If you've got any capital and you are within Spanish borders, they want you to circulate your euro savings ASAP to stimulate employment and kickstart a recovery. What they really don't want you to do is send your euros to the highest bidder (quite possibly outside of the Spanish economy) in exchange for a little economically-inert gold that you will bury under your house or something. It would be irrational for them to encourage this "anti-social behaviour" in these circumstances, I suspect?

Germany: Currently an economically-vibrant economy with a trade surplus, where TPTB are rightly concerned their population will be somewhat miffed if their accumulated capital gets wiped out because of The Tribe's actions to support the less-vibrant economies they are in a currency union with. It seems rational for them to encourage people to sink their surplus capital, which it is not necessary to encourage the circulation of and in fact further stimulation of their economy would result in unwelcome inflation, into a place that can soak up the potential general inflation problem and also protect voters from debasement of their saved capital?

Texan said...

DP, I think you just summed everything that's wrong with the euro "union" in that last post.

Texan said...

And DP, as for your comment that the euro is guaranteed to deliver gold, this is where I could use the FOFOA quote on that. He starts with a quote on how the euro is explicitly severed from gold, so I don't quite follow. The ECB sdoes not hold gold to deliver, and even if it did, the euro is not convertible unless "gold bids for euros".

Do you think gold will bid for euros as the whole enchilada is going poof? What does one own, exactly?

With USD, it's at least universally accepted in the US, and absent visible hyperinflation "manifestation", it will be in the foreseeable future also. But with the euro, there is no guarantee it will be accepted in ANY country if one of the big countries pulls the plug.

Let's say tomorrow that Germany says for German nationals only who can prove they had X in their count on June 30th, we exchange for 1 DM. Where does that leave euro holders everywhere else? What do they have? The euro now becomes an exchange option, at an unknown and probably very deleterious rate.

Precisely the conditions that spark hyperinflation. There is no one "there"', there. No sovereign entity.

Good luck.

Ash said...

Response to CRA's "thought experiment".

Part 1/4

I have a major issue with the setup of the experiment, as I have expressed several times before.

CRA: "For the purpose of our thought experiment let’s take the advice offered by Team Photocopier and see where that takes us."

What proceeds is not necessarily my specific "advice" to anyone, but the most general guidelines I could give you without knowing anything about your personal situation (and even with that, #3 is misleading). I have noted before that sometimes Stoneleigh (Nicole Foss) and Ilargi do not make this distinction as often and as clear as I believe they should, but I know for a fact that they generally agree with my view on this matter.

CRA: "1. Pay off our debts.

2. Hold physical cash in our own possession.

3. Store our savings/wealth in US Treasury securities."


#1 and #2 would qualify as parts of my most general investment guidelines for near-term dollar deflation, but #3 is questionable at best. While I wouldn't be surprised in the least bit if the value of Treasury bonds and notes (3-30 year durations) increased in value for a good part of a deflationary episode, I would generally only recommend them as very short-term investments that can be easily liquidated (so, perhaps a mutual fund that allows simple online transactions). For the most part, I would recommend short-term Treasury bills as "cash equivalents", if you want to invest in Treasuries at all.

That being said, I will address CRA's thought experiment as it is presented in the next 3 parts, after debt deflation has once again accelerated and the dollar has spiked on exchanges and in domestic purchasing power.

Ash said...

Part 2/4

CRA: "Firstly having paid off our debts before the physical US dollar’s purchasing power increased sharply we may find ourselves regretting that decision precisely for the reasons Nicole Foss pointed out above. The creditors (banks presumably) we owed money to are now desperately short of cash. The law of supply and demand would rule here to, would it not? Those creditors who are desperately short of cash might offer us a discount for early repayment of the principal instead of waiting patiently for the loan repayments to trickle in."

It is very unlikely that the benefits from paying off debt and having a decreased real interest burden after the dollar has spiked would be outweighed by the benefits of holding onto debt and hoping your creditor gives you a "deal" on the principle when things get hairy. While the latter is certainly possible, it is not something you would generally want to bank on (pun intended), because if you are wrong (or the "deal" isn't much of a deal), then you will find yourself with much less affordable debt burdens.

CRA: "Wow! A few big problems emerge straight away don’t they? Right off the bat that advice is great provided the holders of no more than 5 per cent of the claims on that currency supply attempt to act on her advice today. Otherwise we launch immediately into bank runs and systemic collapse if the bank credit money isn’t redeemed for base money."

The bolded statement is true (when "isn't" becomes "is"), and a major reason why the advice to hold physical cash is good in the first place. Nicole has analogized it to a game of musical chairs, and you don't want to be one of the people scrambling for a chair when the music stops. The nature of complex, irrational financial markets is that most investors will remain invested in the debt-dollar asset ponzi until it is too late, and they will all be rushing for the same narrow exit at the same time (as we saw in 2008). The advice doesn't become bad simply because it would "crash the system" if everyone acted on it, because the system will crash no matter what... the only question is when, and that is one which is fundamentally impossible to answer in the short-term. Better safe than sorry, and all that.

CRA: "We are really regretting paying off those debts now aren’t we? We might have had the deal of a lifetime on an early repayment to those supposedly* fractionally reserved banks that we borrowed from."

Once again, this will not generally be true. While the some of the banks may offer debtors discounts on their loan principles, there are many other factors which make it foolish to rely on that, instead of paying off debt right now when you can still afford to do so. For example, they may only give deals to those with very large outstanding loans, or the largest creditors may be subsidized for a significant portion of their losses (again), or they may simply choose to foreclose on your assets and take the loss (which may be less than currently expected, because “non-recourse” jurisdictions could become “full recourse” in the blink of an eye).

Ash said...

Part 2/4 Cont...

CRA: "Now all of these deposits are either guaranteed by the FDIC/USG or if those guarantees had lapsed before debt deflation hits experience tells us the USG and every other government (who can) will put them back in place at the slightest hint of a bank run."

As stated in my earlier comment to Bron, experience tells me that the federal government is very little more than an enforcement arm of the super-wealthy financial sector. If paying out full value to depositors becomes more costly than implementing a "bank holiday" in certain locations for some time, then I imagine the latter is what would occur. As we saw in 2008, even a bank as big as Lehman Brothers or Bear Stearns is not immune from being sacrificed for the "greater good" of other financial institutions. I expect that the next time around (which, given the situation in Europe, may be quite soon), the "blowback" will be more severe, but the response will be as well, and that response doesn't necessarily = all out "money printing".

Ash said...

Part 3/4 and 4/4

CRA: “Steve Keen claims that money printing (presumably Zimbabwe style) is what causes HI. If they print all of that money wouldn’t that cause HI? No it would not if you follow the logic in Part A of this comment.”

Without getting into too much of a debate about what Dr. Keen did or did not say/imply, I think we can all agree that money printing is a necessary condition of HI. That doesn’t mean it is the root cause, or it is sufficient by itself, but it must happen somewhere along the way.

CRA: ”The “tickets” we were holding in a much smaller base money lottery have been increased by multiples through the deposit guarantee for all deposits. Any advantage we had by holding “physical currency in our own possession” has been massively diluted.”

When we pre-suppose deposit guarantees for all dollar-denominated deposit accounts, it is difficult to see how HI could not proceed to take place (although there are a number of “shadow banking” debt-assets that essentially serve as money within the financial system, via “repo” transactions, so the extent of their conversion to “base money” would depend on the extent to which institutions holding those assets as collateral are subsidized for losses). Basically, it comes down to whether US political authorities will be forced to make those guarantees and make good on them, or whether they will instead be forced to “reneg” on many of their promises.

CRA: “If we listened to Ash we are going to have to wait for up to 10 years for those debts to mature so that we can get our capital back in the form of physical currency. We could always try to sell them on the secondary market of course. But will that market be liquid when there is huge demand for base money cash?"

Not true, for reasons stated in my response to Part 1/4. There are several risks associated with T-bonds that are not present with physical cash, including the liquidity risk CRA mentions, and those must be considered in conjunction with their ability to maintain or increase in value over the short to medium-term.

CRA: “But let’s assume that we followed Nicole’s advice and we stuck to “short term Treasury bills”. We can put those back to the government in exchange for currency over the next few weeks and months. Damn. I just thought of another problem. Can you see what it is? Those debt instruments aren’t backed by physical currency either."

Now this brings us to some interesting discussion, IMO. We must remember that not all government spending, including pay downs and servicing of specific debt obligations, is purely a function of deficits. It does, after all, still collect about $1-1.5T in tax revenue. The question is, how much of that revenue will be re-directed from other expenditures towards servicing of debt, and also how much foreign capital will be willing to support deficits. As many Europeans can tell you right now, there is a decent amount of wiggle room for corrupt governments beholden to the financial sector to keep their bondholders afloat. That is even truer in a relatively larger US economy, when Europe and Japan are in relatively more precarious financial positions.

CRA: “Congress still has their constitutional “money powers” and only a fool would argue (and he probably will) that they would not override the Fed legislatively if the Fed “refused” to print.”

Cont...

Ash said...

Parts 3/4 and 4/4 Cont...

CRA is right… I will. Only someone who hasn’t studied Constitutional Law would argue that the Constitution is worth the paper it is written on. The history of the United States has been one in which the Constitution is consistently interpreted to benefit those with extreme wealth/power, with few exceptions, and that has become especially true in recent years after 9/11. Politicians who wish to be “populists” invariably figure out who their real boss is, and if they don’t play ball, then they don’t last very long in office. While the entire federal government has certainly increased its power over the states (and people) since this country’s creation, the executive has come to dominate the legislative (as it almost always does throughout history), in no small part due to its structural ability to act in a faster and more flexible manner.

Since CRA’s Part 4/4 is largely a sumamry of his arguments from earlier parts, I will treat the new component within this response.

CRA: “I suppose that the USG could impose capital controls as FOA hinted they would. That would make those US dollars “stranded assets” in countries where they are not legal tender. Now that would make for an interesting situation. Since the USA runs a trade deficit who is going to export to the USA and accept US dollars that no one wants outside of the USA which they are not allowed to bring into the USA?”

I imagine that by the time the US is forced to impose those levels of capital controls, the HI process will be well underway. Which brings me to my final point – the real “capital control” is to suck as much capital as possible into the system, by maintaining the value of the USD and stability of the Treasury market. I was going to quote myself on this topic, but I just came across this comment by “Steve from Virginia, who is a blogger and a regular commenter on TAE, and I think it provides a very interesting perspective:

Steve: “No euro equals no petroleum: of course the banks will be bailed out. Someone in euro-landia will print and print some more: either the ECB, some consortium of EU central banks or some country's treasury. Maturing assets will be 'married' to instant 'liabilities' cooked up in some closet then locked away to be (hopefully) forgotten.

The US cannot default, either. The debt/dollar/banks are sacrosanct. To risk default means the US ceases to exist as an industrial state, literally overnight. The US imports 2/3ds of its petroleum from overseas, you see ...

This is why the dollar plug wasn't pulled by Bernanke by way of QE. No (somewhat) valuable dollar, no petroleum. How do you spell starvation in a world whose food- and water supply and distribution is absolutely, completely and totally dependent upon petroleum?

What is taking place is energy conservation by other means, like it or not."


“Energy conservation by other means” is a very interesting way to frame it (and something followers of Freegold may connect to), and reinforces my argument that the “Debt-Dollar Discipline” will be both the first true global order to exist and, most likely, the last to fall. CRA says that the rest of the world is “feeling a little nervous about the US dollars and dollar denominated debt securities they are holding”. That may be true to some extent, but nervousness is merely an outgrowth of fear, and systemic fear leads to extremely irrational behavior, such as giving countries oil and finished goods for “worthless” pieces of paper. What do people fear more right now, the collapse of the Euro, the Yen or the Dollar? A shortage of “tangible assets”, or a shortage of liquid paper? These are the questions that I believe we must continue to consider without bias, and to some extent, it depends on who you are and where you live, but I generally believe that many dollar-holders would be wise not to divest themselves of that paper just yet.

Ash said...

Addendum

I am anticipating some may take issue with my last post, and specifically "Steve from VA"'s quote about oil/energy, by saying "yes, BUT... that's why the system of Freegold will be implemented", or at least, "the implementation of Freegold will alleviate the issue of swapping energy for worthless paper".

That's correct. If Freegold were to be implemented as envisioned (and assuming away any issues of Peak Oil), European countries would most likely have relatively cheap access to imported oil. And although the US economic entity would be lower on the food chain, it's new dollar backed by the reserve asset of gold would also be accepted for imported oil. Which raises a question in my mind that I'm curious to hear answers to, if anyone is inclined:

If you had never read or heard about the concept of Freegold, how would you feel about the near-term dollar deflation argument? Would your opinion change at all, or would still expect HI in short order?

JR said...

From Of Currency Wars

I think, the currency of a country does no longer hold "backing". This term, it is used often, but is not correct. Today, all modern money does have "reserves", and such is used only for "the dirty float" in currency warfare. As in war, the larger and better equipped army in "reserve" does rule over the lesser force. Perhaps we should think in this way: in a "cold war" of modern exchange rates, "digital currencies from reserves are used", however, when a "hot war" of major default does begin, "nuclear weapons of GOLD" are deployed!

As in real war defense, of today, some countries hold a much lesser army, and depend on "the alliance" with other stronger nations to defend them. Such it is with the currencies! Many states hold but a few "digital currencies" as reserves for currency wars and see no need for "gold nuclear weapons". They sell off these weapons and do join "the currency alliance" of stronger nations. We see this in Europe, yes?

- 5/21/98 ANOTHER (THOUGHTS!)


*****************

FOA (09/03/00; 16:27:20MD - usagold.com msg#34)
Of Currency Wars

Gold will reset itself in value compared to all world fiat currencies. But, that percentage reset will be viewed in a different context than when gold money was ordained by governments. Gresham's understanding applied more to gold as a bankable currency, not an asset holding "in and of itself". This is the future of "freegold" in our time. It will be much like comparing an advancing stock to the currency it's denominated in, a rising asset,,,, not a competing money!

Now look northeast, into the valley:

What will make this "modern gold market evaporate"? Well, value in a paper contract is a funny thing,,,,,,, it can change radically when no market bid exists for it to trade in. Like paper dollars, contracts have no value without a trading market demand. Walk into any store,,,,, if everything is suddenly priced in a physical barter format, our dollars suddenly become worthless, no?

If the gold market was to shift to say, 5 day hard delivery, how could one trade their contracts for gold? Yes, you guessed it, paper would trade all right,,,,, at a huge discount. But in short order, as a spiking price lunges upward into the thousands,,,, and doesn't come back to earth,,,,,, what counter party on the other side of your contract could deliver? Further, how could the bullion banking system match liabilities and make good on a cascading default?

Stop here and see how it could happen two ways (or a combination of both):

You see, all it takes is for one or two government and/or private entities to pull the cord. Most all of you long ago came to the same conclusion; a Dollar / Euro currency dispute could set this off. Outside parties begin buying gold with dollar reserves,,,,, on the barrel head for 5 day placement. It begins with twenty or thirty 100 ton orders ,,,,,, a billion$$ or so each! Not derivative orders, mind you,,,, hard delivery orders that aggravate and outline the soft nature of modern gold banking. They keep coming,,, days on end! Then, suddenly the paper markets "are no more".


cont.

JR said...

cont.

FOFOA from Of Currency Wars:

"This was ANOTHER and FOA's whole purpose through four years of postings. To get the word out that gold would be revalued by the Giants once the dollar reached its inevitable dead end.

In my last post, Greece is the Word, I wrote that the euro has a secret "nuclear" weapon. This is what I was talking about. What Another said at the top:

"As in war, the larger and better equipped army in "reserve" does rule over the lesser force. Perhaps we should think in this way: in a "cold war" of modern exchange rates, "digital currencies from reserves are used", however, when a "hot war" of major default does begin, "nuclear weapons of GOLD" are deployed!"

And yes, the euro is the better equipped army in this regard. The main point I made in Your Own, Personal, Freegold and Freegold was that the Eurosystem's gold is very much in play!

"The Eurosystem holds 10,800 metric tons of gold, roughly one third of world gold reserves."

Cheers, J.R.

Texan said...

JR,

It is quickly becoming apparent that the "Eurosystem" is full of fair-weather friends. The Pm of Greece and FM from Spain both blasted the northern core over the last 24 hours for

Let us watch Germany together to see if it's hard working population is willing to part with it's "accumulated capital" to help it's southern brethren pay not just their debt, but their growing annual fiscal deficits (pensions have to be paid, after all).

Once that decision is clear, and we know just who wants to keep playing as part of the "system", then we can really determine how much gold there is within it.

JR said...

From Of Currency Wars:

"Quitting Euroland, on the other hand, would leave Greece - or Spain, Ireland or Portugal, or all of them together - horribly alone. Gold Standard historian and former IMF advisor Barry Eichengreen posited an Italian exit back in late-2007. Only the names have been changed:



"The very motivation for leaving would be to change the parity [between Greece's new domestic currency and the now-neighboring Euro]...Market participants would be aware of this fact. Households and firms would shift their deposits to other Euro-area banks. A system-wide bank run would follow. Investors anticipating that their claims on the [Greek] government would be redenominated into [the Euro's devalued replacement] would shift into claims on other Euro-area governments, leading to a bond-market crisis...

"It would be unlikely that the ECB would provide extensive lender-of-last-resort support. And if the government was already in a weak fiscal position, it would not be able to borrow to bail out the banks and buy back its debt."

In short, "This would be the mother of all financial crises," guesses Eichengreen. But no matter, he says; it can't happen. "The decision to join...is effectively irreversible. Exit is effectively impossible."

How come? "The insurmountable obstacle to exit is neither economic nor political, but procedural," says the professor. Short of a coup, revolution or state failure, you have to agree.

First, all contracts - both domestic and cross-border - would either be void (which again means revolution, state failure, coup or all three), or they'd be subject to a sweeping redenomination law. That would require long, detailed, co-operative discussion, both internally and with governments, business and private individuals across the European Union and beyond. So no dice there, then.

Then there's the logistical nightmare of re-pricing all goods and services, replacing all those vending machines, and reprogramming all Greece's bank and till systems - a fun project when Euro accession approached, but hardly a laugh as hyperinflation looms.
So again, we're back to revolution... if not a coup or failed state ...and you don't need to be Helmut Kohl or Jacques Chirac to wince at the irony of Europe's greatest unifying dream (to date) ending with chaos and bloodshed west of the Balkans.

Greece's problem, therefore, really is "a Eurozone problem" as finance minister George Papaconstantinou has repeated throughout this crisis. Since it cannot devalue or exit, something else has to give.

Excerpts from 1931 For The Euro Part II
by Adrian Ash
23 February 2010"


cont.

JR said...

cont.

From Greece is the Word , quoting Jim Rickards:

"...But it's impossible to think about Greece without thinking about the euro system as a whole, because, of course, Greece is a member of that. I mean, does it have its fiscal house in order? No, not completely, but its debt to GDP ratio is only about one half of Japan's. Its deficit to GDP ratio is not that much worse than the United States. So they look bad compared to Germany, but they don't look that bad compared to other members of the G7 for that matter! So it's not as if they've been reckless, or it's not as if they're that different from all these other countries, but they have become the eye of the storm. For a while the Greek stock market was going down. Their interest rates were going up. Credit default swaps spreads were widening out. You know, maybe that was a good opportunity for day traders, but I wasn't really worried about Greece defaulting. I'm quite sure Greece will not default at the end of the day. They seem to be moving in the right direction.

But because their debts are denominated in euro, and because they're a member of the euro system, at the end of the day they are going to be backstopped by the ECB which ultimately is controlled by Germany. And the reason I say that is if you're Germany, and you're the ECB, and you're Trichet, and you start throwing members under the bus, where does that end? I mean if you allow Greece to default and, in effect, impugn the value of sovereign bonds denominated in euros, who's next? I mean it probably will be Ireland, and it will be Spain, and then it will be Portugal. And if you start losing four or five members, there goes the whole euro system. The whole thing falls apart and there's a flight from that currency.

Now the history of this is very significant. ... I mean you go all the way back to the Counter-Reformation in the late 16th century which was extremely bloody. And then the Thirty Years' War which was devastating. And then the Seven Years' War and the Napoleonic Wars, the Franco-Prussian War, World War One, World War Two... this is one catastrophe after another! And Europe literally destroyed itself and exhausted itself in fighting all these wars. And finally after WWII they said enough! We're going to pursue unification. It's the only way to keep from fighting each other.

...I mean, they view it in a much broader historical context than Wall Street and Americans. And so it's of the utmost importance to them. And they're going to do everything they can to preserve it. And that's one reason, along with the gold, why I have confidence that Greece will not default."


*********************

more FOFOA from Greece is the Word:

The current system of infinite debt accumulation is unsustainable and has been destined for collapse from the very beginning. There is no device in place for a periodic reset, and there is no automatic counterweight to balance ongoing trade deficits, correct imbalances and hold profligacy accountable. If it weren't for the hard fixed currency zone of the euro, Greece would be headed toward currency collapse and hyperinflation right now, just like in 1944, and just like Iceland, Argentina, Brazil, Zimbabwe, Weimar Germany, Bulgaria, Hungary, Peru, Bolivia, Ukraine, Yugoslavia and so many more.

The euro did not cause Greece's troubles. It has actually spared Greece the worst of it. The problem is the dollar system of debt accumulation that simply continues unabated until finally someone can no longer pay.


Cheers, J.R.

S said...

Texan,

The fiscal union rhetoric from Soros and the eurocrats about the may be the underlying motivation. Just like the French holding out on the Irish may be payback for their no vote. Italy as you rightly point out is to big to save (agree Alpha ville had some very good posts today). What better way to trump the Constitutional German Court and the musing of the German Finmin then to step on the gas and drive the car over the cliff. Sovereign takeover defense perhaps. Call it flanking or whatever. It really is all that is left - a closing act if you will in this grand theater. As for the French CDS spreads yes they are creeping wider and you correctly point out that once the core is violated - endgame for the geographically challenged BNP/Agricole/Socgen. But isn't the entire Euro crisis one big $IMFS firewall exercise anyway? It can't be an accident that Weber stepped back and the Italian somehow forged his way to head the ECB. Accident? I doubt it. And the drama sure helped paint a strong 3yr auction. Will the Euro collective give way to a fiscal union? It is hard to believe the Germans will countenance such a move even under duress. The Greek ordeal suggests that the only hope of pulling the Germans across the finish line is to send in the kamikazes?

JR said...

Some quick ideas why Greece might not want to leave (aka they have no prayer on their own):

The very motivation for leaving would be to change the parity [between Greece's new domestic currency and the now-neighboring Euro]...Market participants would be aware of this fact. Households and firms would shift their deposits to other Euro-area banks. A system-wide bank run would follow. Investors anticipating that their claims on the [Greek] government would be redenominated into [the Euro's devalued replacement] would shift into claims on other Euro-area governments, leading to a bond-market crisis...

...all contracts - both domestic and cross-border - would either be void (which again means revolution, state failure, coup or all three), or they'd be subject to a sweeping redenomination law. That would require long, detailed, co-operative discussion, both internally and with governments, business and private individuals across the European Union and beyond. So no dice there, then.

Then there's the logistical nightmare of re-pricing all goods and services, replacing all those vending machines, and reprogramming all Greece's bank and till systems - a fun project when Euro accession approached, but hardly a laugh as hyperinflation looms.


********************

Some quick thoughts on why Germany might not want Greece to leave (aka Germany uses the euro and issues bonds denominated in the euro too):

But because their debts are denominated in euro, and because they're a member of the euro system, at the end of the day they are going to be backstopped by the ECB which ultimately is controlled by Germany. And the reason I say that is if you're Germany, and you're the ECB, and you're Trichet, and you start throwing members under the bus, where does that end? I mean if you allow Greece to default and, in effect, impugn the value of sovereign bonds denominated in euros, who's next? I mean it probably will be Ireland, and it will be Spain, and then it will be Portugal. And if you start losing four or five members, there goes the whole euro system. The whole thing falls apart and there's a flight from that currency.

Michael said...

FOFOA has emphasized the MTM feature of the ECB gold enough that I have started to wonder....could the ECB simply begin a bid for gold and in doing so create its own explosion on the asset side of its balance sheet?
I suppose that this would be equivalent to a devaluation of the currency but it would emphasize the gold they hold. At any rate they are well positioned for a rise in the POG aren't they....

julian said...

FOFOA,

that's some supremo-shizz right there, for the Freegold chronic!

Euro talk, further elucidation of the view, by helping me understand better the nature of the euro

and the bigger picture

the monetary and economic philosophy is of highest quality in your writing


bless you!


Kindly,

Julian

mortymer said...

Sino-German Financial Stability Forum

...with details at bis. (!)

http://bis.org/review/r110712a.pdf?ql=1
http://bis.org/review/r110712b.pdf?ql=1

"...Sino-German workshop, which is being held within the framework of the Financial Stability Forum in Frankfurt. Our goal of an in-depth exchange of ideas and experience relating to financial stability is part of the overall project of closer cooperation between China and Germany, as agreed last summer during Chancellor Angela Merkel’s state visit to China. This closer cooperation is evidenced both by the first Sino-German intergovernmental consultation in Berlin that took place from 27 to 28 June 2011 and by this workshop."

[Mrt: I would put this latest development into: Expected.]

China and Germany occupy the top two spots on the list of leading export nations and, as countries that routinely run up a current account surplus, therefore sometimes hear calls to contribute to global “rebalancing” by strengthening domestic demand.

In this introductory statement, I would like to focus on the following four points:
- Strengthening the international financial system
- Interactions between monetary policy and macroprudential policy
- Risks of the low-interest rate environment
- And developments in commodity prices

costata said...

Hi Texan,

I should have explained what I meant. That's the problem with commenting on the run.

If an EMU country cannot pay its debts then the architecture of the Euro makes default the only remaining option.

All of the EMU countries can service some level of debt. If the existing level is too high then a combination of principal reduction, interest rate adjustment and lengthening the maturity can get the job done. Sure there are big numbers involved but not as high as some of the more sensational commentators claim.

It's a hard road but it's doable IMO.

JR said...

Hey,

Did you read this this comment from Costata in the last thread?

No? Then what are you doing reading this, click the link!

radix46 said...

DP,

"This pairing lead me to further thoughts..."

It seems that the problems of fiscal transfer between the members of the union is a problem until the crisis erupts further.

In this stage, when countries are talking about options falling short of the "nuclear option" of gold deployment, then politicians are put under pressure within their respective countries.

Remember, also, that most people within these respective countries don't have a good grasp on the whole situation and merely see the headlines of "bailing out" another country. Politicians give the people what they want or they have no career.

So whilst these bail-outs are still on the cards and the problem has not escalated, the euro project is in danger from regional political pressures. However, if there were to be a sudden crisis and the ECB would have to buy bonds with printed cash, then the gold would come into play and Freegold architecture would emerge to do its job.

Can the politicians hold it all together until D-Day?

costata said...

Hi Michael,

You wrote:
"could the ECB simply begin a bid for gold and in doing so create its own explosion on the asset side of its balance sheet?"

Sure they could but IMO they would probably only do this as a last resort. The only safe time to do this is when the USG is fully on board with the Freegold-RPG solution to their problems.

mortymer said...

Something to think about:

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

mortymer said...

http://www.gcc-sg.org/index8f2f.html?action=News&Sub=ShowOne&ID=2087

~> as per ~>GoogleTranslator:

Completion of the most important requirements of the GCC Customs Union
Secretariat - Riyadh

HE / Abdullah bin Juma Al-Shibli - Assistant Secretary-General for Economic Affairs of the Secretariat of the Cooperation Council states that the Council had completed the most important requirements of the customs union and a single customs territory with the outside world. And still to Member States to agree on some of the relevant requirements of the movement of goods between the GCC countries..."

Nick said...

Just now in Bernanke's testimony to Congress:

Ron Paul: "Do you think gold is money?"

(long pause)

Ben Bernanke: "No."

DP said...

radix46: It seems that the problems of fiscal transfer between the members of the union is a problem until the crisis erupts further.

In this stage, when countries are talking about options falling short of the "nuclear option" of gold deployment, then politicians are put under pressure within their respective countries.

Remember, also, that most people within these respective countries don't have a good grasp on the whole situation and merely see the headlines of "bailing out" another country. Politicians give the people what they want or they have no career.

So whilst these bail-outs are still on the cards and the problem has not escalated, the euro project is in danger from regional political pressures. However, if there were to be a sudden crisis and the ECB would have to buy bonds with printed cash, then the gold would come into play and Freegold architecture would emerge to do its job.

Can the politicians hold it all together until D-Day?


Hi radix,

When you say the "nuclear option" of gold deployment, do you mean the sale of gold?

I ask because my view of the ECB charts FOFOA included in this post above, suggests that the ECB have been selling gold for the last decade or so, at a decreasing rate — decreasing to nothing lately by the look of the line trajectory.

My view of the "nuclear option" is they would bid to buy, at increasingly high prices in the market. This would automatically increase not only the weight but also the value of their reserves backing the currency. This rising value of pre-held reserves (and also newly purchased reserves) would provide much latitude to print further euro to buy up failing assets and tuck them away on the ECB balance sheet, without lowering confidence of international investors and trade partners.

It would also exacerbate the problem of a thin supply of physical in the market, which has pushed the market price up even in the face of ECB sales until quite recently. Perhaps it would stretch the supply of physical underpinning the confidence of the gold market so thin that it might snap and take the paper contracts market down. Which might have some interesting effects.

So I would say the ECB have been holding things together, until such time as it is no longer possible for the politicians to keep the wheels on and there is no other choice but to release Freegold from the cage. The shape of that chart of oz held, to me, suggests D-Day may be upon us sooner than we might have preferred.

julian said...

WOW !!

what an exchange between Ron Paul and Ben Bernanke!!


ron paul, direct as can be:

"do you think gold is money"

bernanke, after a short pause:

"no"

rp: why do cb's hold gold?

ben: as a reserve

rp: why don't they hold diamonds?

ben: it's tradition


that was awesome!

Jeff said...

I'm all for tradition. And I hope your ConFinStat, dear FOFOA readers, in benefitting from this traditon as well.

Vlad Putin is a bit testy; apparently he doesn't like his dollar holdings being printed away. Someone should remind Vlad that he has two aces up his sleeve; gold and oil.

S said...

JR,

if germany left the Euro and intro'd a DM, owuld it not appreciate vs. the Euro?

radix46 said...

DP,

Yes I was referring to the ECB bidding for gold, rather than selling it.
You wrote:
"So I would say the ECB have been holding things together, until such time as it is no longer possible for the politicians to keep the wheels on and there is no other choice but to release Freegold from the cage. The shape of that chart of oz held, to me, suggests D-Day may be upon us sooner than we might have preferred. "

What do you mean by 'keep the wheels'? Is this keeping the wheels on the euro being a freegold currency - ie keeping it together, or keep the wheels on the whole global economy? I know those two things might have some stuff in common, but my question is attempting to determine exactly what situation you would think the ECB would consider to be fairgame for taking open actions again the $IMFS?

You wrote:
"D-Day may be upon us sooner than we might have preferred. "
What set of circumstances were you referring to in your description of D-Day here? Looking back over what I wrote, I didn't perfectly articulate mine, I'd like to know what you were referring to.

Jeff said...

Radix,

If ECB made a freegold bid they would make a market on the sell side also. Gold has to flow both ways.

I'm not DP but perhaps he was referring to keeping the wheels on the ponzi system, which is getting quite erratic.

As for that question Ron Paul asked 'why do cb's hold gold', ask a silverbug that question. I've never found one yet that had a good answer.

DP said...

@Jeff, I thought something similar when I read that comment of julian's earlier too. I considered commenting:

"Why diamonds? Why not...

rp: why don't they hold silver?"

But I was on my phone at the time and frankly I couldn't be bothered with all the inevitable typing corrections and then I thought... no, not the S word again already! :->

Indenture said...

The Big Picture
"There is already talk of the ECB buying sovereign bonds. Rather than hanging on to their Euros or buying dollars, gold could and should be the first choice of capital flight from Europe."
Run from the Euro into Gold!!!!
I love reading articles with a FOFOA Filter.

M said...

@ JR

No, there is no fundamental difference to see. No matter how you slice it, it amounts to the same thing. The dollar ir artoficially high in value do to the Yuan peg, Japanese keynesianism, Fed printing ect. When the game is up, just like the Baht, the dollar will fall in value.

The dollar is being forced to float right now, no different then the Baht.

M said...

@ JR

Again, you are not proving that the dollar must be printed in order for it to devalue.

DP said...

I was referring to keeping the wheels on the whole economic enchilada.

- Keeping people in jobs.
- Keeping people's savings in the banks.
- Keeping inflation expectations in the bag.
- Keeping deflation expectations OUT of the bag!
- Get people spending rather than hoarding cash.
- Retaining investment assets rather than dumping them for cash.
- Trying to prevent a descent into the "fear of fear itself" abyss.
- Keeping people off the streets protesting when they don't feel like things are going so well for them.
- Everything!

People want to keep jobs for themselves and their workmates, but won't accept pay or benefit cuts. But at the same time, they're cutting back. Who buys the things they stopped buying? How do THOSE workers keep THEIR jobs?

People sort of know the public services are bankrupting a string of countries, but don't want any of the services or welfare programs cut. They on some level appreciate that there is something wrong, but very few want to think it through. You alluded to this yourself a few comments back of course, radix. They know the value of money to themselves, but somehow money for public services is different?

The deflationists look around and see that everything and everyone must be devalued against the dollar, because that's the supposedly fixed centre of the monetary universe today. They look at the Great Depression and see it happening again, maybe a lot worse. But things are very different today. People were no less willing to accept cuts in the days of yore, but they simply didn't have a choice because the dollar was on a gold standard. Today, there is a choice. Perhaps it's more accurate to say, today there is NO choice.

Anyway, by D-Day I meant the day the political choices effectively run out, and more drastic action becomes unavoidable.

I don't see why it would take very long for any CB to instruct its member banks to buy/sell gold with a spread around their official price, and people all over the place suddenly find they can do what the Germans already can. You can do it for currencies already, why not just add gold to the list of currencies? Apparently, this is already possible — where it is considered politically desirable.

radix46 said...

DP, Jeff,

It will be very interesting to see just how far the ECB is willing to go in its game of brinksmanship.

What actions would they take if there was a default or haircut on say... Greek bonds, due to political decisions out of their control?

Jeff said...

Radix,

Costata answered that question upthread. Maybe if you explain what you think a default would do, we will understand more.

radix46 said...

Jeff,

Ah, so he did.

He wrote:
"If an EMU country cannot pay its debts then the architecture of the Euro makes default the only remaining option.

All of the EMU countries can service some level of debt. If the existing level is too high then a combination of principal reduction, interest rate adjustment and lengthening the maturity can get the job done."

So the entities taking the haircuts here will be banks. Costata says at the end of that last paragraph:
"Sure there are big numbers involved but not as high as some of the more sensational commentators claim."

I think that the banks' balance sheets are so fragile, going on the analysis of Reggie Middleton, who seems to have his sh!t together, that they would just implode even at the notion of having to take hits. The fear would hit and interbank lending market would collapse.

So, here we are talking about bailouts needed to make them whole. I think that this would be more likely to be accepted than bail outs for sovereigns as the effects are much closer to home for most people - their own money is at risk. This seems much more real than the amorphous bogeyman of austerity.

I don't know what the mechanism for these bailouts would be though. Can the ECB just buy the defaulted securities from the banks or do swaps? Is there an existing mechanism for this, or would it have to be a force majeur?

Costata then says:
"It's a hard road but it's doable IMO"

For whom is this a hard road? The ECB? The politicians in their respective countries? The people, due to the turmoil felt?

JR said...

Radix,

The ECB has been buying debt from banks for over a year now, although they have recently (past 3 months or so) not been buying much. You comment:

"I don't know what the mechanism for these bailouts would be though. Can the ECB just buy the defaulted securities from the banks or do swaps? Is there an existing mechanism for this, or would it have to be a force majeur?"

******************

The ECB has been buying bonds on the secondary market since May 2010, because that's all they are allowed to do.

"The European Central Bank said it will buy government and private bonds as part of an historic bid to stave off a sovereign-debt crisis that threatens to destroy the euro.

The ECB wants “to address severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy,” the central bank said in a statement at 3:15 a.m. in Frankfurt. ...

While the euro’s founding treaty bans the ECB from buying bonds directly from governments, it can do so in the secondary market.
"

From May 2010 Bloomberg article after ECB first announced bond buying program: ECB Plans to Buy European Bonds to Ease Greek Crisis

Cheers, J.R.

radix46 said...

JR,

How are these bond purchases funded?

Is it through one of the funds set up, or are they just "issuing scrip for the fair"?

So, if they can do this, then the ECB really shouldn't care if the sovereigns default on their debt.

Indeed, it may make things easy for them to usher in RPG through freegold-level gold bids, or whatever mechanism they choose, as they would have the political cover of a massive crisis and it wouldn't be seen as specifically targeting the $IMFS.

radix46 said...

Martin Armstrong's latest piece is a call for freegold. Straight out.

Texan said...

Radix,

The ECB has been buying sovereigns outright, but more critically they have been doing wholesale repo for the PIIGS banking systems. Ie a bank in Portugal may have Portugese gvt bonds, but it can't fund them because it is shut out of the repo market. So they pledge it at the ECB in return for cash.

Who knows how much the ECB is funding this way right now ( and maybe it's public, but I don't know). I figure though it's in the hundreds of billions. This is why the ECB made a stink about all the ratings downgrades, because nominally they aren't supposed to take collateral below a certain rating. Throw out the window.

What is really interesting is how the ECB is now turning into the dumping ground for this stuff, despite all their rules against their recent actions. I think what Trichet is justifiably afraid of is tht if the ECB balance sheet gets too toxic, and in effect starts to resemble the fabled MLEC from pre-TARP days in the US (remember that?), then the core may just walk. The ESM and EFSF aee so vague and have no funding, and won't be implemented until 2013 ( which is too far away).

As I said before, I think the only thing t this point to avoid a full blown meltdown will be in effect a core (Germany) guarantee on all of it.

Now you tell me what they will want in return, and if they will get it. I am not European obviously, and unfortunately it's been awhile since I visited, but I do believe there is just a wee bit of cultural conflict between the regions, to put it mildly.

Separate topic, FOFOA the Bernanke comments to RP deserve their own post. TRADITION???? WTF?

Texan said...

Oh, and once the masses get wise to the ECB have "euros bid for gold", it's game over for the euro. No FG, sorry. Everyone will be bidding for gold. Think "bit coin".

JR said...

Radix,

They very much care about preventing sovereign default, that's the whole point of the bond buying program.

The bond buying is done through the EFSF, which is notionally funded by euro area member states (EAMS) but mostly funded by its own debt issuance, which is backed by a pool of guarantees by EAMS.

http://www.efsf.europa.eu/about/index.htm

Cheers, J.R.

JR said...

FOFOA from Bitcoin Open Forum - Part 3, expounding on the concept of money he presented in The Return to Honest Money, aka the EURO has a well developed regressive link to gold, bit coin has no such thing. Guess which one wins as the $IMFS fades and peoples want the gold?

FOFOA: "This gets a bit deep, but the concept of money is just that, a concept. It is almost literally just a word that we know and relate to money. Dollars. When I write a check for $28 at the grocery store and take $28 worth of food home, no actual dollars will ever change hands between me and the store. This is the way it has ALWAYS been. I didn't get that until I had read the Gold Trail at least three times.

We think in terms of dollars, therefore dollars are our money. This is the Misean Regression I discussed in The Return to Honest Money. The most likely path for Bitcoin to monetize would be for a major global meltdown to wipe out the present concept of money. In other words, to wipe out the shared knowledge of price ratios between all real things. Then a barter good like gold would begin to rebuild this knowledge base from the ground up, and if Bitcoin became the symbolic currency valued by gold holders for its qualities, it could then establish a reliable and stable Bitcoin-gold market.

But you can't just shoehorn a new symbolic currency into a failed paradigm and expect it to be adopted and fix the paradigm. It simply doesn't work that way, hope, speculation and neat ideas notwithstanding. You can't just look at Bitcoin through the dollar lens and describe how it's better than the dollar. It's not about that. It's not about Bitcoin versus the dollar. It's about Bitcoin versus the next in line after the dollar. And in this case there are two new competitors, each specializing in separated parts of the money function.

Bitcoin obviously capitalizes on the crisis that the dollar now faces. And as I just pointed out, if the collapse was bad enough that the knowledge base of price ratios was wiped out, Bitcoin could then compete with other currencies to establish a new regressive link to gold or even silver. But oh my, what if some other people already saw this coming four decades ago and sought to create a currency to prevent a major meltdown from occurring that would have set us back to having to reestablish a fresh barter link? Hmm, maybe that's why the second most widely used medium of exchange in the world today was created based on its fundamental regressive link with the barter money par excellence?
"

So does our modern money concept crash to barter and thus bitcoin can compete with other currencies to try to build a regressive link to gold, or instead do the Giants keep the oil and goods flowing and just use the second most widely used currency in the world, cause its already got a well developed regressive link to the gold? Hmm, that's a no-brainer

Cheers, J.R.

Edwardo said...

Costata,

"Sure they could but IMO they would probably only do this as a last resort. The only safe time to do this is when the USG is fully on board with the Freegold-RPG solution to their problems."

Who thinks that the U.S. Monetary authorities are even partially on board with the RPG solution?

JR said...

Who knew? BB reaffirms axiomatic truth - he [shockingly] intends to comply with his dual mandate - the debt will be saved

...the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate.

On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally. Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs. However, prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant...

Texan said...

Well JR, If I was an oil giant whose giantness was the result of decades of feudal tyranny, I would trade my oil to the guys who could best drop a few battalions around my palace to protect my little racket. And maybe if I took their worthless currency and gave most of it to the peasants (and used the rest to buy gold and villas), i really wouldnt care about its "fundamental" value.

Somehow I doubt the peasants will understand the regressive link to gold of the euro as they watch pictures on TV about riots in europe, but I am pretty sure they will understand the USMC.

But that's just me. You of course are free to protect your palace with the French foreign legion, and pay the serfs in euros.

It's all going to come down to Germany. They either start the bailing, or the euro as currently constituted cannot survive. For all his flaws, bernanke understands that at least.

Texan said...

Edwardo, the USG has never heard of FG. And even if they had, they wouldnt have the slightest clue how to operationalize it.

It is not an easy concept to grasp, as JR keeps reminding me.

And JR, I sincerely thank you for the exchanges. As with all the commenters, it keeps me thinking, and more importantly keeps me sane in knowing there are like-minded folks out there.

Jeff said...

Texan:

FOA: the ECB can use not only it's excess dollars to buy physical gold sold from other banks, they could use Euros printed outright to buy physical spot delivery. If their currency continues to fall before the dollar begins it's terminal phase, this option is wide open to them. Certainly, "Free Gold" is not going to compete against them as it would against the dollar because it's their policy to mark all it's rise to the market. Because Free Gold will not be an official currency, it's wealth building power will compliment the bank's reserves...Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold.

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

Jeff, who will sell them the gold for the freshly printed euros? Will you?

This is the argument FOFOA made about revaluing USG gold, to which I replied that the moment the USG says it is, in effect, bidding for gold, is the moment all gold holders say " niot my gold for your now officially worthless currency". And it is also the moment all savers go, " oh, sh1t", where can I get some gold. Ie, it's the day the dollar dies. It would be the same for the euro. No one is going to fall for that con.

This is why Bernanke said what he said. He said, in effect, that gold is totally worthless. Is it money? No, he said. Because if it is NOT money, it is nothing. A rock. But if it IS money (and please I mean from a store of value sense), then the USD is, well, not worth much to put it mildly. And guess who issues the USD? He does! The Federal Reserve! RP was asking Bernanke if gold is a RESERVE, and bernanke said, nope. The USD is THE reserve. He could not say anything else or the entire point of the Fed would be mute.

So how does any CB " bid for gold" with it's own emission? When you go to a coin shop, will they take an unenforceable IOU from you? Why even bother to pay them in paper? Just say, here, we both know my currency is worthless, so just give me your gold.

The ECB has no gold. It was designed that way. It has no call on gold. It cannot force any country to do anything the country doesn't want to do. See PIIGS. The euro has no legal right to be converted into any amount of gold. The only connection with gold is that it publishes it on it's " balance sheet" , which isn't a real balance sheet. The ECB could also put famous churches on it's balance sheet, but they are obviously not "assets" the way we would think of such. It's just " hey, look at us, united we are greater than the sum of our parts".

Until we aren't united anymore.

Every CB has gold on it's balance sheet, or a

Texan said...

Finishing last sentence...every CB has gold on it's balance sheet, or a call on such from it's sovereign. Except the ECB, which has no sovereign.

This is Trichet's fear, IMO. He knows that the ECB and the sovereign community it represents are not one and the same.

Indenture said...

One Of My Favorite FOFOA Images
Fed Chairman Bernanke Says "Gold Is Not Money" ... But His Predecessor Alan Greenspan Disagrees

Jeff said...

Yes, if I was in Europe I would sell some gold for euros, for the right price. Remember, there will be a buy and sell price. But most gold sales won't be between central banks and individuals, but between individuals and other individuals. The central bank only makes a market to establish its bona fides. Once that is established, I would rather just trade in fiat; the fiat will be easier to trade and the price will be stable in euros.

Texan said...

Jeff, I get what you are saying. But the ECB cannot even control the price of Greek debt. You are thinking that ECB will be some omniscient arbitrator over the price of gold once it gets to a " market price" , of euros for gold and vice versa.

What I am saying is that if the ECB announces it is bidding for gold, there will be no sellers, and private holders of euros will panic and race to buy what little gold they can find.

Just stop and think about what it means if the Fed or the ECB comes out and says they are going to print currency to buy physical gold because it's a better store of value than the currency being printed. It's just completely nonsensical.

Ash said...

Texan said... "The ECB could also put famous churches on it's balance sheet, but they are obviously not "assets" the way we would think of such. It's just " hey, look at us, united we are greater than the sum of our parts"."

Forget churches. The ECB could have held any European RE on its books since its inception, and it would have made a fortune in MTM value (not volume)... until oh, say, right about now.

Indenture said...

Texan: Currency is not suppose to be used as a store of value.
If you choose to use currency as a store of value the nominal value of your currency will decline over time because of inflation.

Edwardo said...

Well, Texan, you may be correct, but your comment strikes me as a bit too sweeping. For example, while he isn't an official big wig in the U.S. Government, Robert Zoellick, with his comments about RPG, would seem to have more than a clue about Freegold.

And while it's certainly possible, I find it hard to believe that Mr. Zoellick's views stand entirely in isolation. Let's connect some dots shall we.

Before he ascended to the top spot at The World Bank, the estimable Mr. Zoellick was a managing partner of The Vampire Squid, arguably the most connected financial firm in D.C. Among the other posts Mr. Zoellick has held among the corridors of power and influence are Deputy Secretary of State and U.S. Trade Representative. Again, while it is possible that Mr. Zoellick has only recently come to his RPG epiphany, I think it's more likely that he has, for quite some time, harbored his interesting notions about gold's place in the monetary firmament.

However, much like the proverbial giant's gold hoard that lies very still for long periods of time, Mr. Zoellick lay very still with his RPG views until a suitable moment arrived for him to express his ideas publicly. Amongst the professional planner class, ideas tend to percolate quietly long before they ever come to the fore.

And so, with RPG, just as with so many other ideas, I imagine that Mr. Zoellick has shared his ideas with other high powered operators. In short, while many many, even most, in the halls of government may have no clue about RPG, some number almost certainly do.

How initiates feel about RPG is another matter altogether, but, be that as it may, I don't imagine it is an entirely novel, let alone bizarre, notion to a select few.

Finally, regarding Bernanke's responses to Representative Ron Paul's questions on gold, I'm reminded of a comment attributed to Fed Chairman Arthur Burns, and here I paraphrase, "A Fed Chairman is under no obligation to tell the truth."

With Bernanke, as with so many in officialdom, one is forced to decide whether one is dealing with a liar or an idiot, and not infrequently, both.

FOFOA said...

Hello Texan,

From where I'm sitting, it seems that your emphatic protestations do more to confirm rather than disprove Jeff's contention that the ECB in fact does have the ability to raise the price of gold by bidding with its own emissions should it ever choose to do so.

In Jeff's quote from FOA (found on goldtrailtwo) where he said the ECB could buy gold with printed euro, what do you think would be the ECB's purpose of doing that? Would it be:

A.) To get moar gold? or
B.) To raise the price of gold?

FOA wrote that particular post in September, 2000, right when the euro had just tumbled from $1.10 down to 86 cents. FOA wrote: "If their currency continues to fall before the dollar begins it's terminal phase, this option is wide open to them."

Lucky for us that turned out to be lowest point the euro ever touched. (See here) Otherwise we wouldn't be buying gold so cheaply today.

I agree with you, Texan, they wouldn't get much gold, but that's okay because that wouldn't be their goal. You write:

"What I am saying is that if the ECB announces it is bidding for gold, there will be no sellers, and private holders of euros will panic and race to buy what little gold they can find."

Yup! Agreed. And…

"the moment the USG says it is, in effect, bidding for gold, is the moment all gold holders say " niot my gold for your now officially worthless currency". And it is also the moment all savers go, " oh, sh1t", where can I get some gold. Ie, it's the day the dollar dies. It would be the same for the euro. No one is going to fall for that con."

Exactly! And what happens to the price of gold when the Giants clinch and the paperbugs say "oh, sh1t"? I guess you fell for "the con" after all, Texan, because that's exactly how they hoped you'd react.

In the CB world buying gold from the London markets and taking it into CB possession is called monetizing it. Selling CB gold into the commodity market is likewise called demonetizing the gold. Commodity gold/paper gold trades in dollars. If any CB enters the London commodity market as a physical buyer, at best that's going to skyrocket the price in dollars, at worst it will destroy the dollar paper gold market.

As the price of gold rises, so does the published value of the Eurosystem's gold reserves. Compare that USDEUR chart I linked with the gold value chart up in the post. Can you see any similarity? In fact, the ECB could potentially buy gold from London and NY while simultaneously selling gold for euro to Europeans, you know, those European savers saying "oh, sh1t". That would cause a physical inflow of gold from the US/UK into Europe while supporting the value and market convertibility of the euro with gold sales inside the zone. Making sure physical gold is always readily available for sale at a floating price prevents a currency from collapsing. Something to think about.

Sincerely,
FOFOA

Flore said...

Here is something for RP to consider

You should ask Mr Bernanke why the US isn't marking its gold to market like the ECB does.. his beard will fall off then

mortymer said...

@Flore
A: Tradition
[Mrt: think, if it would it is a straight message that Dollars are not necessary anymore as a reserve asset, but hold your horses, it is not as easy to just replace one by another. An opposite Q would be: why was the gold deep frozen in 2004? The present system still lives, strives, broken but on surface it fulfills the function, are we ready to transit?]

From TheTimeLine
2004
*(BOJ) abandons active intervention, promotes yen carry trades.
*R out of LBMA "paper" market
*GLD is launched
*The change in status of US-goldreserves (deep storage)
*The session of the EABH in Athens changed the statutes. The new name of the EABH is the European Association for Banking and Financial History. There was also a change in the leadership of the association. The former head of the European Central Bank Willem Frederik Duisenberg became the new chairman of the Executive Committee of the EABH in place of Sir Evelyn de Rothschild, who headed the association for thirteen years.
*March 8: Joint Statement on Gold signed, The second version of Washington Agreement on Gold .

mortymer said...

Central Bank designates Chinese “Renminbi” for
Banking Transactions in Sri Lanka

http://www.cbsl.gov.lk/pics_n_docs/02_prs/_docs/press/press_20110629ea.doc

"The Monetary Board, at its meeting on 27th June 2011, decided to include the Chinese Renminbi in the list of designated currencies permitted for international transactions through banks in Sri Lanka in terms of the provisions of the Banking Act..."

Casper said...

"Making sure physical gold is always readily available for sale at a floating price prevents a currency from collapsing."

I think this is one thing that many "forget" when analysing various instances of HI events (Weimar, Zimbabwe,...) and I mean rise in prices of goods. People were starved of SOV (store of value) so only goods were left to store their savings in.

Casper

mortymer said...

http://www.cbsl.gov.lk/pics_n_docs/02_prs/_docs/press/press_20110614eb.doc

Sri lanka, 14-june-2011

"No Gold Sales by Central Bank
Recently, there have been certain news items in print and electronic media quoting certain parties that the Central Bank is trading in gold, locally. Such statements are baseless and appear to have the intention of misleading the public.
...
Accordingly, the Bank does not engage in any gold transactions in the domestic market.
The public is therefore, notified that these statements in print and electronic media regarding sale of gold by the Central Bank are blatantly false and should not be misguided by such false information."

mortymer said...

@all: ...so it seems that at least in the SriLanka example the entry to the local gold trading is not how things would work out in short future. CBs keep the division between the private physical and international gold markets separated.

mortymer said...

Iran Starts Crude Transaction in Kish Oil Bourse

"TEHRAN (FNA)- Iran on Wednesday started transaction of crude in the international trade hall of the Iranian Mercantile Exchange in the Persian Gulf island of Kish, ending months of western media speculations that the bourse is just a political game with no trade and economic implications..."

http://english.farsnews.net/newstext.php?nn=9004221272

[Mrt: to be specific, it is just the IIIrd phase which started.]

mortymer said...

FM: Vienna Visit Can Herald New Beginning for Expansion of Iran-EU Ties

"TEHRAN (FNA)- Iranian Foreign Minister Ali Akbar Salehi who has just begun a tour of Vienna reiterated that the trip can serve as an opening for the further development of relations between Tehran and the European Union..."

http://english.farsnews.net/newstext.php?nn=9004211011

[Mrt: Hmm, after China visit in Germany, another important, this time Iranian visit follows. Re-opening of the Silk Road?]

mortymer said...

India Underlines Expansion of Strategic Ties with Iran

"TEHRAN (FNA)- Indian officials are strongly resolved to develop strategic relations with Iran and they have informed Tehran of this deep interest during a recent visit to Iran by Indian Foreign Secretary Nirupama Rao, reports said..."

http://english.farsnews.net/newstext.php?nn=9004200421

mortymer said...

India Mulling Rupee to Make Overdue Oil Payments to Iran

"TEHRAN (FNA)- The Indian finance ministry is considering the option of allowing the buyers of Iranian crude to open letters of credit in rupee terms which can be used by Iran to purchase Indian goods, mainly tea, machinery and engineering services, reports said..."

http://english.farsnews.net/newstext.php?nn=9004200402

[Mrt: Khoda hafaz USD as a reserve currency]

Michael H said...

costata,

A while back you wrote "watch the Euro gold price". I believe at that time, gold was making new highs in USD but not yet in Euros.

What were your expectations for the time near new Euro highs, and are they playing out? What are you watching for?

Usil said...

Not sure, but, in your 'fair' analogy, isn't there a difference between the 'original' instanciation - where the organizers of the fair used their own gold and resources to fund the event -- therefore not being beholden to any of the fair-goer finances .vs. the ECB - that really owns no/very little gold of its own. The Euro members 'deposited' gold with the ECB from what I understand. That gold seems to be an agreed upon 'mirage' that could unravelat any time. Therefore the ECB 'script' seems to have counterparty risk - am I missing something here?

Joel said...

Fofoa, others,

"Making sure physical gold is always readily available for sale at a floating price prevents a currency from collapsing."

I am still haven't a hard time wrapping my arms around this concept. Can someone elaborate how this works to keep a currency from collapsing when the currency is not officially redeemable for gold? I.e. gold is readily available in the US right now at a floating price, yet it seems like a continued rampant monetization of our debt could still create enough lack of confidence in our currency that it could still collapse, or at least be devalued significantly as people flee from it.

Joel said...

Sorry, should have read "having" a hard time...

DP said...

@FOFOA, truly a great comment! ;-)

Yannick said...

Report from the field @Paris, France:
Paper-physical spread on the Napoléon coin (most popular, 5g) jumped from ~5 to ~50 euros (out of a now 250 euros physical price) in two days.

DP said...

Joel: I am still [having] a hard time wrapping my arms around this concept. Can someone elaborate how this works to keep a currency from collapsing when the currency is not officially redeemable for gold? I.e. gold is readily available in the US right now at a floating price, yet it seems like a continued rampant monetization of our debt could still create enough lack of confidence in our currency that it could still collapse, or at least be devalued significantly as people flee from it.

Will gold still be readily available in the US, when there is a serious question mark hanging over the dollar? My understanding is they're already not really quite so readily available as you imply today, and few people are interested in buying for now.

How about in Europe, if there was a serious question mark hanging over the euro and you could call the forex desk of your local bank branch and order not just a thick wad of dollars but a few gold coins while you're about it? (Or take your gold coins back to the bank and have them swapped for euros instead.)

JR said...

Joel,

Think "paper gold"!

THE ECB is about the ongoing move to a physical gold market *from* the $IMFS paper gold market. In the $IMFS, gold is available, in limited amounts, according to this paper price. But that paper price is only so good as enough physical flows to support the paper gold market.

FOFOA in "From the Treasure Chest"

"The physical gold must continue flowing into the physical boundaries of trade surplus zones while the price of gold rises. Weight-based flow and price level offset each other somewhat. But ultimately this will break the paper gold market because we’re talking about physical flows from the debtor zones into the saver zones"

In an comment above in this thread, FOFOA wrote:

"If any CB enters the London commodity market as a physical buyer, at best that's going to skyrocket the price in dollars, at worst it will destroy the dollar paper gold market."

*******************

FOFOA from "Freegold in the Proper Perspective"

"There are four key aspects to Freegold. There are also many more, but these four are key. That's not to say they are all necessary. They are not. But it is to say that in order to understand Freegold you must at least understand the significance of these conditions:

1. The end of the dollar standard (the end of its timeline as the main global reserve currency)
2. The end of parity between paper gold price discovery and physical gold price discovery
3. The Euro-Freegold concept/project, (at least) 31 years in the making
4. The flow of oil"

...

Trail Guide (08/21/00; 21:04:03MT - usagold.com msg#: 35283)Reply

"Eventually, either before or after the dollar's transition, the illusion that makes currencies real will also undergo a change. That illusion / vision is the current world paper gold market. Often known as the dollar gold market. This marketplace will fail with the dollar's timeline and so too will its use to value gold. In this time gold will not soar in value, rather all currencies will seek their true relationship to a "FreeGold" market. The US dollar will someday see $30,000+ for an ounce of gold. So too will the Euro price gold much higher ($$3,000 to 6,000???).

It is here that our Euro has planned to play the game to the end."


cont.

JR said...

cont.

Freegold Foundations


"Paper Gold

My purpose here is not to pick on the gold ETFs. Admittedly, all gold ETFs are not created equally. But they are all a reasonable current example of "paper gold" in that they are (for the most part) just claims on gold held by Bullion Banks, not gold itself. The paper markets exist because the public believes gold is a commodity like any other. And I say, paper markets schmaper markets, it's not really about the paper markets, it's about gold being a fractional reserve in the banks.

It is much less important to Freegold that the investing public believes gold is a commodity. Those that really matter already know it's not. And the paper markets and the public's misunderstanding of gold simply help the banks manage their fractional reserves to keep everyone happy.

Yes, the paper markets by their very nature, and only because gold has the highest stock to flow ratio, automatically act in harmony to suppress the price of the actual product. And yes, they do provide a means for the banks to occasionally control the price of paper gold in an effort to manage where their fractional reserves of the real thing actually go.

But the actual physical portion of the paper markets is tiny compared to global gold. COMEX does not project its price discovery globally because it is so powerful. That price is accepted, not projected, because the Bullion Banks choose to use it in their fractional reserve gold banking. The paper markets are markets for claims on gold held by the BBs, not for gold itself.

To put it another way, if the Bullion Banks and their fractional reserve gold banking is a dog, then the COMEX (or "the paper markets") is its tail, not its heart. And the tail doesn't wag the dog. Paper markets will be the price discovery mechanism for gold as long as fractional reserve gold banking exists."

....

"I'm only saying that when you hold "paper gold" you are the same as those that held (external) dollars from 1970 right through until 1972. Dollars were once paper gold too.

There may be a very high price to be paid in the future for the high liquidity of paper claims on gold held by the Bullion Banks today.

FOA: Somehow, the BIS and the major private gold holders know the total claims, as does Another. The Euro group is going to force those claims into real bids instead of just claims!"


Cheers, J.R.

JR said...

"The Free in Freegold

Okay, here it is. What you've been waiting for patiently, I presume. This is what gold will be freed from: The fractional reserve banking practice, which is a carryover from the gold standard.

This is the free in Freegold."


Freegold Foundations

Joel said...

I agree that the demand hasn't taken off here yet like it has in China, India, etc..., but there is absolutely a liquid market, even for large sized (US$500,000-$1,000,000) orders. I talk with the big dealers (Apmex,Tulving)all the time to keep an eye on liquidity. But again, convertibility at a price doesn't seem to stop a currency freefall if the govt. continues to print and spend like drunken sailors.

JR said...

Joel,

Hopefully you get the idea of the importance of understanding the paper gold market in the context of FOFOA's statement:

"Making sure physical gold is always readily available for sale at a floating price prevents a currency from collapsing."

******************************

You commented:

"Making sure physical gold is always readily available for sale at a floating price prevents a currency from collapsing." Can someone elaborate how this works to keep a currency from collapsing when the currency is not officially redeemable for gold?"

All "officially redeemable fro gold" means is the G is trying to defend a fixed price for gold, which it can only do for so long (the gold's gotta flow, and if the price doesn't go up,...).

******************************

Getting to the heart of your query, which is how does the ready availability of physical gold for sale in your currency prevent hyperinflation, Texan already inadvertently answered this above. Amidst the weeds and thick underbrush, there is a hidden gem highlighted in bold below. He wrote:

"Well JR, If I was an oil giant whose giantness was the result of decades of feudal tyranny, I would trade my oil to the guys who could best drop a few battalions around my palace to protect my little racket. And maybe if I took their worthless currency and gave most of it to the peasants (and used the rest to buy gold and villas), i really wouldnt care about its "fundamental" value."

See that - he calls the currency "worthless", but the "oil giant" can use it to buy gold. It appears the currency isn't as "worthless" as he thinks it may be, no?

See that idea - a link to gold is a key to currency stability. The currency isn't inherently what's valuable, but its the currencies ability to procure that which is valuable that renders the currency valuable.

*******************************

FOFOA quoting Mises from The Return to Honest Money on what FOFOA calls "RPG" - Reference Point Gold.

"No government is, however, powerful enough to abolish the gold standard. Gold is the money of international trade and of the supernational economic community of mankind. It cannot be affected by measures of governments whose sovereignty is limited to definite countries. As long as a country is not economically self-sufficient in the strict sense of the term, as long as there are still some loopholes left in the walls by which national governments try to isolate their countries from the rest of the world, gold is still used as money. It does not matter that governments confiscate the gold coins and bullion they can seize and punish those holding gold as felons. The language of bilateral clearing agreements by means of which governments are intent upon eliminating gold from international trade, avoids any reference to gold. But the turnovers performed on the ground of those agreements are calculated on gold prices. He who buys or sells on a foreign market calculates the advantages and disadvantages of such transactions in gold. In spite of the fact that a country has severed its local currency from any link with gold, its domestic structure of prices remains closely connected with gold and the gold prices of the world market."

Cheers, J.R.

JR said...

Joel,

We are talking about gold being the currency of oil, a worldwide reference point for Central Banks to look to in managing their national currencies, and you are talking about miniscule gold orders in the ($500k-$1 million) range.

********************************

Consider FOFOA's quote of Jim Rickards from Open Letter to EMU Heads of State

"One point that does not get enough attention is the impact of size in the physical market. It’s one thing to say that COMEX is $1,100 per ounce and physical might be $1,200 per ounce for one metric tonne if you can find it. But what about 100 tonnes? 500 tonnes? Physical orders of that size are impossible to execute outside of official channels. Size of order is relevant in any market but I have never seen a market (short of a full blown manipulation or short squeeze) with as much price inelasticity as physical gold which is why the buy side overhang keep their intentions to themselves."

********************************

We of small worth (aka shrimps) follow in the footsteps of giants:

"Think now, if you are a person of "great worth" is it not better to acquire gold over years, at better prices? If you are one of "small worth", can you not follow in the footsteps of giants? I tell you, it is an easy path to follow!" --ANOTHER (THOUGHTS!) 1/10/98

"If ANOTHER's claims are true -- that a consortium of oil states has cornered the gold market (and given the impressive circumstantial evidence, this could very well be the case) -- these "footsteps of giants" become the most salient and persuasive case for gold ownership I have seen in the past decade, if not the full twenty-eight years I have been in the gold business." -- Michael J. Kosares, president of Centennial Precious Metals, Inc.; author of The ABCs of Gold Investing

I Love This Intro

Indenture said...

Ron Paul vs. Bernanke: Is Gold Money?

Joel said...

JR,
Thanks for the reply, but I am well versed in the concept of freegold, the fractionally reserved gold market, etc..., and have long ago bought into the concept of gold as the best store of wealth. But my earlier question remains: Can't a govt. still print money and destroy the value of their currency, even though there is plenty of gold available for purchase in their zone? I just don't see how the mere presence of gold in a zone defends the value of a currency. The more they print, the less gold it buys, right?

DP said...

On miniscule gold orders:

$1,000,000 @ $1580/oz
= 632 oz (troy)

632 oz(troy) = 0.019657 mt

In my terms, yeah sure that's a giant order right there at $1m!

But in the wider scheme of things, I can see that this is still firmly in "shrimp" territory.

JR said...

Hi Joel,

You say:

"I just don't see how the mere presence of gold in a zone defends the value of a currency."

Neither do I :)

***********************

The ECB is clear that its euro currency and that the value of its currency is falling (FOFOA from the above post):

"Value and Volume

Now, the ECB puts out a ConFinStat every single week, 52 weeks out of the year. And every week it makes quantitative volume adjustments, like net increases or decreases in both gold and foreign currency reserves. But it only makes qualitative or value adjustments on four of those 52 statements. This is when the ECB marks its reserves to what the market says they're worth."


The euro currency printer, the ECB tells people every quarter its currency has less value:

"Today, the printer of the euro, the ECB, tells all the owners that the money it prints has less value in gold… once every quarter! And not only that, but it encourages people to save in gold through system-wide mandates. Dang, now that's quite a 'something different' when you really stop to think about it!"

Its about a stable currency; "instability means quick changes both up and down. The client doesn't want drastic inflation or deflation:"

"The point is, all the market wants is a stable currency, not too hot, not too cold. It is like a sleeping giant. Give it a stable currency and it will keep sleeping. Wake it and you (the printer) will lose control of the value of your currency and everything else you try to control. The market is the demand side of the equation. And the market is by far the more powerful of the two sides in this tug-of-war. If this isn't making sense, please read my post linked in the paragraph above because I'm not going to explain it all here.

To summarize, there is a whole menu of options for the aspiring money printer to choose from when stepping into the supply side shoes of the monetary game. And as a supply sider, his job is providing a service to the demand side, the market, which wants one thing and one thing only, a stable currency. And if he wants to keep his job, he'd better give his clients what they want, because if they wake up to an unstable currency, they can easily take the reins of control away from him. So if his mandate is—or evolves into—anything other than a stable currency, he will not be long for this monetary world. And one last thing; instability means quick changes both up and down. The client doesn't want drastic inflation or deflation."


cont.

DP said...

If the price starts to get out of hand to the upside, and people in the US sit up and take notice en masse... where will the required emergency supply of gold appear from? A run on gold won't be a nickel and dime thing. If the Fed prints $ to buy gold, can't see nothing good appearing in their balance sheet.

The ECB have demonstrated their commitment to ensure the right people get what they want. They can and will print euro and hoover the gold off the international markets, spray it all over bank customers inside the Eurozone if necessary. And their balance sheet? It's all good no? Euro got printed. Gold got bought. Gold got sold. Euros taken in and maybe destroyed... mmmm, maybe we'll let them go free let's see...

The US didn't have enough gold to go around for themselves in the first place, but if half of Europe are hoovering it out...

JR said...

cont.

Its about keeping the system going:

"They will never sacrifice the system to preserve the value of the currency. But they will always sacrifice the currency to save the system."

The ECB keeps the currency system working; they expand volume and then tell people the valuation effect of this expanded volume.

Their only job is providing scrip, announcing its value, and maintaining the system, even if it came at the cost of debasing the scrip money.

"After some time, it became apparent that Greece could never pay back the debt at full value. This realization actually threatened the system, I mean the fair. So what the fair operator decided to do was to buy those promises to pay from Germany at face value, with newly printed scrip. This kept Germany in the game although it did devalue the scrip since now there was more of it than there were goods at the fair. But this was fine because the fair operator published a ConFinStat in which he told all the fair participants that the fair's scrip money was now worth less.

Those, like Germany, that had actually saved some income in promises to pay denominated in scrip, and then found those promises severely devalued by the recognition they would never be paid back at full value, received a nominal gift of the same number loaned to Greece, even though it was now devalued. Those that had not saved in scrip, but instead had cleared with gold at the end of each fair, simply carried on trading at the new, lower value of the scrip. You see, the fair operator, we'll call him the ECB, did not participate in the fair itself, primarily because he had severed his link to any specific booth operator. His only job was providing scrip, announcing its value, and maintaining the system, I mean the fair, even if it came at the cost of debasing the scrip money."


Cheers, J.R.

JR said...

On the "separation" of monetary functions, or why a "medium of exchange" (aka script money) is primarily for exchange, and need not also be a "store of value." From The Return to Honest Money:

"Here's the thing, 'store of value' and 'medium of exchange' are relative terms. Anything real stores value (a painting, a computer, a jewel), and lots of things are media of exchange in various settings (dollars, other currency, cigarettes in jail, etc). And for stores of value, there is a continuum as to how long things store value. What we are talking about is degree. And this gets to the heart of a semantic issue about money being media of exchange and a store of value.

Menger: [I]t appears to me to be just as certain that the functions of being a "measure of value" and a "store of value" must not be attributed to money as such, since these functions are of a merely accidental nature and are not an essential part of the concept of money.

Mises: Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange.

Both of the above quotes get at the idea that, because money is a medium of exchange, it is also, to some degree, a store of value. Even Zimbabwe dollars were a brief store of value, but being a store of value isn't what money is all about. Being a store of value is not its central function—it is derivative of its being a medium of exchange. Being a medium of exchange is money’s essence—what makes money money. This means that, by definition, money’s ability to serve as a measure of value and store of value is secondary.
"

DP said...

JR, you're really on a mission lately!

radix46 said...

What was that? Ahhhh, Bernanke opened his mouth

Joel said...

Guys,
You seem to be giving me reams of "apologetics" on Freegold, and on gold as a store of wealth, the fractional reserve nature of gold, how demand for gold will gold through the roof in currency crises, etc... I clearly see all that. But DP, even in your example, the ECB can print Euros out the arse and devalue the hell out of them, irrespective of the amount of gold in their zone, either in the hands of individuals, or the hands of the various European CBs. Granted, the ECB/CB balance sheets stay strong, because the resulting higher gold prices keep it whole (or maybe even improve it, in a Freegold style revaluation). DP's example clearly shows how the ECB maintains a strong balance sheet given the hedge their gold holdings provide them, but how does that translate into a stable currency if they are printing like mad trying to bail out the PIIGS?

Joel said...

For example, lets say I personally owned all the gold in the US, and the Treasury had none. The govt. is printing like crazy, "saving the debt at all costs", to quote our hosts. The dollar still gets killed, even if my 10,000MT of gold are in the country, doesn't it? In other words, how do personal gold holdings provide stability to the dollar?

radix46 said...

Joel,

I've been thinking about that too and I think I understand it, so I'll give my thinking and others can correct me if I'm wrong.

Here goes:
What is a stable currency? It is a currency that functions for the purpose that you want - buying stuff.

Most importantly, it must buy the the really important stuff, like oil and gold.

Even if the value of the currency is going down, it doesn't matter, as long as the units that you have of it are actually functioning to buy the things you want. Each unit that you have may buy less over time, but that's ok, because you know this, you are being told openly. So you don't use it as a store of value. You use gold.

Now the important thing is to hold a currency with which you can freely go in and out of gold whenever you want. There must be a market for physical gold. If there is a market for physical gold, then people can easily move in and out of their currency, only holding it when they need to buy something.

Plus, if you want oil, then the currency with which you want to hand over in exchange for this oil must be functioning in respect of buying physical gold.

In this scenario, what difference does it make if the value of each currency unit goes down over time? The value of each currency unit is irrelevant as long as you don't use it as a store of value.

radix46 said...

Joel,

You wrote:

"The dollar still gets killed, even if my 10,000MT of gold are in the country, doesn't it? In other words, how do personal gold holdings provide stability to the dollar? "

They do not provide stability by themselves, it is the ability of others to buy them from you and and of you to buy from them that allows the currency to function, ie be stable.

Here, I am using the word "stable" differently from how it is used at the moment. Today, a falling currency is not stable as most people use it as a store of value.

In a free physical gold market, stability has a different meaning. In fact, I would imagine it simply wouldn't be talked about as much. The key issue is currency functionality - in respect of its ability to buy gold and be accepted for gold.

DP said...

teamFreegoldRPG=teamFreegoldRPG+1;

Nick said...

radix46,

you wrote:

"Even if the value of the currency is going down, it doesn't matter, as long as the units that you have of it are actually functioning to buy the things you want. Each unit that you have may buy less over time, but that's ok, because you know this, you are being told openly. So you don't use it as a store of value. You use gold."

This makes sense to me, but what about the current system where the opposite is true? Do all the current holders of Euro's that are last in line to convert to gold just bite the bullet and lose out on convertibility (getting the worst deal of little gold for a lot of Euros)? It seems these people will be the ones least likely to have any confidence after the fact. Still confused on that a bit, any explanation would be much appreciated.

Joel said...

Ah,
Thanks Radix, but still not seeing it. It solves the store of wealth issue, yes. But all of the issues attendant to fiat currency still exist, i.e. the Keynesian print fest, the unfettered welfare state, no checks and balances to what they can do. When the gold is on their balance sheet, they have a offsetting entry to keep their balance sheet strong, but when it's in private hands, no such hedge.

radix46 said...

Nick,

You wrote:
"Do all the current holders of Euro's that are last in line to convert to gold just bite the bullet and lose out on convertibility (getting the worst deal of little gold for a lot of Euros)?"

Yup! That's just the way it goes. Life aint' fair. The transition will be painful for some, but the ensuing system will allow them to participate on fair and equal grounds, rather than being taxed by stealth at present.

The move away from this system, however it happens and to what, is never going to have a symmetrical effect on everyone. At least Freegold will be equitable once it is up an running.

Those that lost out in the transition may be a bit miffed at first, but they will benefit in the long run. Plus, they won't have any option - it'll be like it or lump it. This ain't a choice, we are moving to this system organically.

It is like fighting a tidal wave, you can moan about it all you want, but believe me, you're getting wet and swept along regardless.

DP said...

Joel: how does that translate into a stable currency if they are printing like mad trying to bail out the PIIGS?

radix: What is a stable currency? It is a currency that functions for the purpose that you want - buying stuff.

Now, you need to determine who "you" is.

A stable currency for J6P is one that buys the same amount of bread, beer and broccoli. OK, forget the broccoli then...

A stable currency to an oil Sheikh is one that can buy him the same amount of gold for the same amount of oil he's meant to supply.

The ECB mandate is all about keeping J6P happy with his cheap broccoli. The managed rise in price of gold is for Sheikh Yabatti, and any other superproducers that happen to position themselves appropriately alongside him.


radix: The move away from this system, however it happens and to what, is never going to have a symmetrical effect on everyone. At least Freegold will be equitable once it is up an running.

radix46 said...

Joel,

You wrote:

"But all of the issues attendant to fiat currency still exist, i.e. the Keynesian print fest, the unfettered welfare state, no checks and balances to what they can do. When the gold is on their balance sheet, they have a offsetting entry to keep their balance sheet strong, but when it's in private hands, no such hedge. "

In a freegold system the government has its hands tied in terms of the print fest. Sure, they can print all they like, but the effect will be neutral in terms of gold. At the moment, when they print, they can steal value from those that are unaware. This is why they do it. However, if everyone stores their surplus value in gold, printing is neutered.

Indeed, it is the gold in private hands which is the best counter to the print fest! More gold in private hands means people are voting against the management of the currency. Governments will have to be responsible, or they will be punished by a free physical gold market which votes with its feet and refuses to hold the currency, making it less stable. Hence the government will be less popular and will be more likely to be voted out (in a democracy).

At present, governments get away with their theft and subsequent obfuscation of their actions as the "money" is opaque and misunderstood. Government in a Freegold world will have to be much more competent. I would imagine it will be peopled by VERY different characters than it is today.

In order to be successful in government today, you must be able to game the currency system. You must be a good actor/liar/conman. In a Freegold world you must have effective policies and be able to deliver. It will be a different world altogether.

Freegold now please!

Indenture said...

Yannick: Thanks for the report from the field.

DP said...

DP: A stable currency for J6P is one that buys the same amount of bread, beer and broccoli.

As Jeff might possibly say, "Put it in a global hyperinflationary depression context". :-)

Robert LeRoy Parker said...

Nick,

Gold will be revalued once. That's why I'm so happy I found this website. Shrimps who follow in the footsteps of giants will do very well, everyone else is in for the shock and dismay of hyperinflation. It will take some time for stabilization. Fofoa thinks 3-6 months.

Joel,

Fiat currency will still exist, but the flow of gold will act as the checks and balances. Governments that are profligate will see gold outflows and purchasing power of their currency will decline significantly. Responsible regimes will see gold inflows and benefit from purchasing power increases.

This should lead to much better stability imo, which agrees with the orbital launch pattern.

Jeff said...

Joel,

Euro freegold means the euro deflates against gold. The ECB gold acts as a brake, so even as the euro deflates against it, the ECB balance sheet value of gold expands. So the euro channels all depreciation into gold! You can still buy euros to buy other goods, especially oil. As FOFOA often says, the price of gold is arbitrary. the euro will still function.

The dollar is another story. First the gold dealers will get wiped out of inventory, then dollars will flee into any real good. A true hyperinflation with nothing to stop it. The dollar will burn. Real goods will be very expensive.

JR said...

Hi Joel,

You comment:

"but how does that translate into a stable currency if they are printing like mad trying to bail out the PIIGS?"

"When the gold is on their balance sheet, they have a offsetting entry to keep their balance sheet strong, but when it's in private hands, no such hedge."

*********************************

Currency value is all about demand - FOFOA from above:

This view, the volume-only view, is the fundamental modus operandi of the $IMFS that praises quantitative (voluminous) expansion and "growth" while ignoring qualitative (value) degradation. The reason is that governments and central banks can only print volume, not value. Think about this for a moment...

As I explained in Big Gap in Understanding Weakens Deflationist Argument, the value of any currency is determined by a kind of tug-of-war between supply and demand. The demand side is the marketplace and the supply side is the printer...

Politicians and central bankers can only expand the monetary base in volume. They cannot expand its value.


So monetary authorities control supply, but its the marketplace demand for that currency that determines value.

*********************************

Onto the gold stuff - FOFOA from above:

"In fact, the ECB could potentially buy gold from London and NY while simultaneously selling gold for euro to Europeans, you know, those European savers saying "oh, sh1t". That would cause a physical inflow of gold from the US/UK into Europe while supporting the value and market convertibility of the euro with gold sales inside the zone. Making sure physical gold is always readily available for sale at a floating price prevents a currency from collapsing. Something to think about.

So people go "oh, sh1t" - where do they then go get the gold?

"The Eurosystem holds 10,800 metric tons of gold, roughly one third of world gold reserves."

And EURO people have gold in their "private hands" too.

So people go "oh, sh1t" - where do they then go get the gold?

....wait......
....for......
....it.......here

Guess what currency "here" wants for its gold? :)


**********************

Do you see - people want your currency if they can get physical gold - the link to free floating physical gold, the fact that physical gold is convertible in a currency makes people demand that currency, no?

As FOFOA says, its the end of parity between paper gold price discovery [aka dollar gold market] and physical gold price discovery [euro gold market].

Cheers, J.R.

Jeff said...

DP said "If the price starts to get out of hand to the upside, and people in the US sit up and take notice en masse.."

Gold volatility is as low as I can remember. Price is being walked higher. But FOFOA said (JR can paste the quote :)) he expects a big upside price surge to stretch the physical supply further. So either we should expect a big price jump, which indicates price is still under control, or a sudden price drop that represents the collapse of paper gold. Thoughts?

Nick said...

radix,

Thanks for confirming my Thoughts. The one thing I guess I'm still hazy about is how the Euro won't experience HI. Is it more the severing of the ties to the nation state that will prevent the HI? Or is the ability to convert at banks your Euros to physical what will still lend credibility to the currency so that it won't lose purchasing power?

JR said...

Yes, FOFOA is *that* smart. But he's even more humble and selfless, cause he keeps dropping this knowledge on us.

If you appreciate, throw him a donation. And the best part is that when you make a donation you get to leave a comment, or a reason, or a purpose for the donation. FOFOA loves comments!

Nick said...

nevermind, JR answered my question above. Thanks!

Jeff said...

Sprott funds add 6.6 tons of physical gold. Interesting that Sprott is buying gold. Didn't he sell a lot of physical silver near the top a few months ago? :)

costata said...

Hi Michael H,

"A while back you wrote "watch the Euro gold price". I believe at that time, gold was making new highs in USD but not yet in Euros.

What were your expectations for the time near new Euro highs, and are they playing out? What are you watching for?"


I think that the Euro price of gold gives a clearer signal (think radio reception). With the US dollar you have flows that reflect activities such as the carry trade.

In other major currencies you also have various influences operating that create "noise" in their signal on gold. In the case of the "resource" countries there is for example the "China factor" to consider.

I expected that over time the Euro gold price would become the barometer for public attitudes to gold ownership. Despite the "old Europe" jibes the EU is a huge, sophisticated and wealthy population. A public move en masse into gold there would reverberate around the Western world in a way that Asian buying does not. (Melbourne (Australia) had the second largest Greek population after Athens at one time.)

Let me put something else on the table. Sometimes the phrase "the new black" is used to describe a fashion trend. Look at that table in the Euro Gold post. How many years will it take for the rising price of gold to make it the "new real estate"? In other words the "investment" that always rises. It appeals to my sense of irony that people might get on board the right train for the wrong reasons.

costata said...

Yannick,

Thank you very much for that field report. I responded to Michael H above before I read your comment.

In 2008 the premium on physical gold leapt higher as the price fell hard. I think it may be significant that you report a move higher when Euro gold is making new records.

I realize that this is anecdotal evidence but it is interesting nonetheless.

costata said...

JR wrote in this comment:
“…. gold is a key to currency stability. The currency isn't inherently what's valuable, but its the currencies ability to procure that which is valuable that renders the currency valuable.”

If you newbies reading the comments understand nothing else strive to understand this statement by JR.

The Euro Freegold-RPG architecture imposes this reality on the EMU through the ECB Eurosystem Central Banks. The Indian, Vietnamese, ME and other populations impose this reality on their CBs and Treasuries.

BUY. PHYSICAL. ELSE. NOW.

Dr. Octagon said...

I've been silently watching this blog for a while, but Joel's excellent questions bring me out of the shadows. I think I'm in the same boat, in that I don't see how the holders of Euros are able to convert those into gold, any differently than US citizens can.

In the US, I can go to a coin store and purchase a gold coin, today. This purchase is a private transaction between two parties, and it does not involve the gold owned by the US treasury in any way. I believe that the same is true in the Euro zone - any person can take their Euros to a gold dealer and purchase a gold coin. I believe that this is the same sort of transaction as in the US - it's a private transaction that in no way touches the gold held in reserve at the various Euro zone member central banks.

Now, I know that the ECB has 363,252 in "Gold and gold receivables", but that gold is in the central banks of Germany, France, Greece, etc. The US also has gold reserves.

There are some small differences. The US gold is held by the US Treasury, not the Federal Reserve, where as the Euro zone gold (I believe) is held by the central banks. Also, the US has a fixed value attached to that reserve instead of a floating value, but I don't see why that matters. Either way, there is a specific number of ounces held by the governments behind the currency.

I don't understand why Germany is any more inclined to part with their government-held gold any more than the US is inclined to part with theirs.

FOFOA and many excellent posters here have stated that the Euro holder can access this central bank gold, at any time. I can understand the mark-to-market price of the Euro reserves, but I'm missing the part that says that the Euro zone central banks will want to sell their gold at the mark-to-market price, in these end-of-the-currency situations. I very much appreciate any help with this.

Robert LeRoy Parker said...

The ecb can buy gold, spiking the price, and at the same time sell gold at the new price all in defense of the euro's credibility. They would only do this as a last resort to save the euro and prevent world war 3. Germany doesn't want to go back to the mindset of encirclement.

The CB induced run on gold would hyperinflate the dollar due to the lack of available gold and gold infrastructure in the USA. The dollar reserve dies, freegold emerges, and stability is ushered into the global economy.

My take anyway.

It doesn't matter if the CB holds gold as long as the currency can buy gold. The flow of gold and directs currency credibility.

zenscreamer said...

I distinctly remember an explanation of the reason that a country will be better off with gold in the hands of private citizens, and did some digging, but I ran out of steam.

I know that FOFOA explained it more than once, and it just "popped" for me the last time he mentioned it. That's not saying I can truly articulate the case.

Let me try it this way. You have country A with citizens holding gold as an asset, and also a simple exchange currency; and you have country B with citizens that only hold their country's exchange currency as the store of value. Citizens from each country want to buy items from a third party, and the third party will accept each country's exchange currency, only in larger and larger amounts. The third-party vendor takes the exchange currencies he received to his own bank, and exchanges them for his own exchange currency.

The bank takes the currencies to the central bank and does the same. The central bank does not want to hold these currencies for its own reasons, and so asks the central banks of A and B for a means to clear the account. The central banks of A and B agree and sell the third party central bank some gold, but as the fiat bids for gold the price of gold in each currency goes up.

What has happened back in countries A and B? In country A, where citizens hold gold, their store of value has stayed stable in terms of their exchange currency. In country B, no such support has been provided, and items just get more and more expensive as the third party vendor demands.

In such a situation, citizens will be more willing to hold currency A, and third parties to trade in it, because there will always be buyers for it. The citizens of A will, because they store their wealth in gold, need on occasion to sell it, and buy currency; to the extent that country A's central bank acts as a seller of last resort to make sure that a sufficient FLOW of gold exists within the currency's area of use, it is acting in the best interests of the citizens, and also maintaining the currency's long-term stability.

In It’s the Flow, Stupid, FOFOA states:

You see, the European gold reserves are far better, far more credible than the US gold reserve, simply because they engage in a two-way gold market, and have for decades. The US gold has been hoarded and locked away for more than 30 years, never deployed in case of emergency. The European CB's took a lot of flak for selling gold over the past two decades, but that action is precisely what makes them so much more credible (and valuable!) than the US gold hoard. Any trading partner knows full well that if all else fails, gold will be paid.

That’s what counts.

Dr. Octagon said...

Thank you zenscreamer for pointing me to It’s the Flow, Stupid. I hadn't read that one, but having read the writings of Another and FOA, it was a quick read.

I can understand the credibility that Euro zone central banks gain by selling gold, and the lack of credibility that the US has, as US gold sits untouched, and unavailable. But this past credibility is meaningless in a crisis. What matters is the availability in during the crisis itself, and I can see the possibility of the US congress opening up the US gold reserve during a dollar crisis (most likely by making the mistake of pegging the dollar to gold) just as easily as I can see Germany preventing desperate Greeks from accessing German gold reserves. As Another said, "Who can know the minds of men and countries as paper burns?".

As FOFOA states in this post, the Euro has "severed the link to the nation-state". But this is only partially true. Today we read about problems with the financial position of Greece, Ireland, and others, and with each announcement, the Euro drops against the Dollar. If the Euro was truly severed from the nations that use it, this would not happen. But the reality is that when Greece defaults on its debt obligations, obligations denominated in Euros, the holders of that Euro-denominated debt will take a hit. Other countries on the edge may also be pushed into default. So while this isn't so much a collapse of the currency, as much as a collapse of the countries that use the currency, the result is the same.... a failure in the banking system for the Euro.

If private citizens own physical gold, their wealth stored in that gold will continue through the collapse of their currency. This is true regardless of the currency they hold, be it Euros or Dollars. Freegold, if it occurs, is the same for everyone, everywhere. So holding physical gold, today, is the best protection we have in the event of currency collapse. As for which currency begins that collapse, the Euro or the Dollar, I don't see the difference. It seems to me that the holders of either currency will have the same fate. The only question is, who goes first.

Texan said...

Dr. Octagon,

The ECB has no gold. And the euro CBs who have it will not sell. They have not been selling for years now. The euro, like the dollar, will buy less and less stuff, and less and less gold.

Joel said...

Zenscreamer, thank you! Finally, my pea brain had an aha moment. I diagrammed out the cash flows from your example and finally understand what Fofoa was saying. That two-way market(gold holders buying currency when they need to sell, and savers using currency to buy gold) creates the liquidity needed to make the currency useful as money. So now I finally understand how "gold in the zone" creates a more liquid environment for a currency. Questions:
1)Are all other CB's (non US) still actually clearing accounts with gold, ie..have any other countries besides the US closed the gold window,clearing with Treasuries.
2) Won't gold come to the US at a price as our fiat bids for it? I understand DP's earlier point that very little size (relatively speaking) has been bought in the US, but gold will come over at a price, as long as we pay some spread over a competing currency.
3) So a country like the US, with no official redeemability,is still free to devalue their currency if the idiots in that country demand it (and I totally agree with Fofoa that they will demand it), and they won't give up their gold to clear their accounts, they will just print money and buy their own BS, in the name of avoiding "systemic collapse" (again, lol...). They could easily MTM their gold, go bid for it, and do the same thing the Euro banks are doing and sell it to the US savers who have finally figured it out, but I don't see them giving up their power until it's way late in the game (hyperinflation first).

costata said...

Part 1/2

Dr Octagon, Joel and other commenters are posing some interesting questions. How are the transactions in gold in the Euro/EU any different from those in the US$/USA? What, if any, is the interest in or role of the respective CBs in these private transactions?

As I was following the conversation above i was thinking back to a time when I was asking similar questions. Back then one of the ways that I tried to develop my understanding wasby looking at the transactions as well as the incentives and the motivation of the stakeholders. So I’m going to try to contribute to this discussion by reviewing these issues in order to see if it helps anyone else to clarify their thinking. In the process I may repeat some of the excellent points made in other responses. A blanket hat tip to all for their contributions.

Firstly let’s look at the relationship between the Euro and gold mediated through the ECB Eurosystem Central Banks. Point 1: the Euro is not backed by gold but these banks can exchange gold for Euro at any time. They can be the market makers if they choose. This creates a de facto link between the Eurosystem gold and the Euro which no player in the private market can ignore. The USG could do the same if they chose to (more on this below).

The ECB is going to have to print more Euro as part of the process of resolving the systemic problems in the EU. This brings us to point 2: the Eurosystem gold reserves act as a shock absorbing system for the Euro. As Euro issuance increases the gold “price” of the Euro falls but the value of those gold reserves improves their reserve position - the “latent backing” of the Euro.

One of the reasons that the quarterly MTM matters is because the ECB is effectively saying to the world: “Our Euro is a medium of exchange while gold is our reserve, our store of value (and so are some of your currencies) ”. Point 3: can the USG/Fed make a similar statement and expect the US dollar to survive? The USG/Fed says to the world: ”The US dollar is our medium of exchange, a superior medium of exchange for you, our store of value (gold is only worth $42 bucks an ounce) and it is your store of value too.”

The Euro doesn’t have the reserve and international trade currency roles that the USG/Fed has to try to protect. Point 4: therefore the Euro is designed to withstand, if not benefit from, a rising Euro gold price without diminishing its use as a medium of exchange.

Continued/

costata said...

/Continued

Part 2/2

If there is a threat to the Euro is to its role as a medium of exchange. If the Euro remains relatively stable over time it can safely devalue slowly. The balancing act for the ECB is that it must ensure that the Euro does not devalue rapidly against other things (hyper-inflation). The catastrophic loss of confidence in a currency, that is HI, would kill the Euro as surely as it has killed other currencies in the past.

So from a transaction perspective when anyone, anywhere decides to exchange their Euro savings for gold the ECB says: “That’s fine with us”. Under normal circumstances this doesn’t diminish the underlying demand for the Euro to meet expenses. It is only the surplus that flows into gold not the “rent money”. It’s worth repeating that the Euro's only role is as a medium of exchange.

For the US dollar every decision, by anyone anywhere, to buy gold is a nail in the coffin of the $IMFS because it contradicts the "statement" to the world that the USG/Fed is making. The $IMFS is the “empire” and the status quo which the USG/Fed is defending. So buying gold has fundamentally different implications for the USG and the EMU at present.

However, if (when?) the US dollar goes into HI at some point in that period the incentives for the USG/Fed turn 180 degrees. Currency stability will become the No.1 priority. How do they halt the HI? They could redirect the HI “energy” into gold by becoming the market maker in US$ gold. The market would set the price, not the USG through a fixed exchange rate as Jim Rickards posits.

The USG/Fed will have to find a buy/sell quote that allows the market for both US dollars and gold to exchange freely. That price will need to discount the “mountain” of US dollar liabilities, built up over decades, back to a value that is sustainable. The young Euro currency has a much smaller “hill” to discount in a gold revaluation. Currency exchange rates will then adjust accordingly in a new alignment based on their value in physical gold.

Joel said...

This begs a second question for me:

How would the US ever make the transition without giving up all their gold? By nature of our egregious amount of debt, aren't we forced to wait until the gold market goes ballistic before we monetize our gold, so that the valuation is high enough for us to have a decent balance sheet once again?

costata said...

Joel,

Bullseye with that last comment of yours IMHO.

Joel said...

And I sure as H*&% don't want to give all our gold to unelected, uncontrolled friggin' Fed banksters. Anybody thought of how the Treasury might be able to perform the same functions under control of Congress, without a Fed bank?

JR said...

FOFOA comments from Forum 201

"The legal problems the US faces with regard to past gold history have only to do with controlling gold to avoid real meritocracy moving forward. This is why another confiscation or a new fixed dollar-gold standard are simply not in the cards. Both are attempts to control gold and end-run meritocracy. The world will not tolerate that again. Fool me once, shame on you; fool me twice shame on me.

We can't turn back the clock. But we can move forward. The world would not resist the US revaluing its gold. There is no reason to. FOA said the US would eventually mobilize its gold at a much higher price. That means revalued, at the floating Freegold price. The US will ultimately have to make a market for its own dollars by buying them up with physical Freegold from Fort Knox.

When the trade deficit is no longer possible, the US will have to import all that inflation it has been exporting if it wants to keep oil flowing in. Real goods going out (gold) and less real goods plus some inflation coming back in. That's the reverse of today's trade deficit. "

...

"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.

That's the choice. You can collapse your currency against the non-economic good gold, killing the paper gold market and driving up the price of physical in advance of hyperinflation by buying it up.
This gives you some hope of avoiding the worst of hyperinflation by providing a real outlet for unwanted surplus dollars.

Or you can wait until your currency collapses against economic goods and then you will have to buy back your own currency with your gold, also at Freegold prices. Even if you start a new currency you will still have to make a market for it because your credibility will be shot by that point."


Credibility = making a market for physical gold in your currency

JR said...

FOA (08/06/01; 09:37:25MT - usagold.com msg#91)
Gold Mobilization


We are asked to expand our thoughts pertaining to "a future U.S. gold mobilization in defense of the dollar" and elaborate on what "the settlement price in such a situation" could be? These truly are exceptional, thought provoking questions, and will require an equally dynamic explanation...

I am sure most Americans are uncomfortable at the prospect of our stores of Political Gold being shipped off to defend the dollar. Uncomfortable as this may be, unprecedented it is not. During most of the years of an active Gold Exchange Standard gold was routinely "shipped off" from nation to nation to satisfy foreign demands. Not just entirely to defend our dollar's value; the aim of these operations was, then and now, more so to keep the dollar in settlement use...

From a dollar point of view, shipping gold then, and now, was in the same context of defending one's currency on the exchange market. In the context of this use; gold was not sold as a commodity, rather it is clearly traded as an officially earmarked "good" that can further support the "tender status" of internationally held dollars.

The psychology of "gold exchange" is more manifest in our "legal tender" function than most strive to understand. Standing aside, for a moment, from our previous discussions concerning modern fiat demand's impact on the dollars recent value; we look more closely at the logic of this "tender"
function.

Local dollar currency, circulating within US borders, is given political value because of it's legal tender designation. Dollars outside our domain, while often sharing the same trading value, are not covered by that law. Even though, through protocol they are commonly accepted, they are not legal tradable money; unless they re-enter the US again.

The process of defending the dollar by shipping gold is, today as much as yesterday, an expression of maintaining political "Legal Tender" status for international clientele. Indeed, as an ongoing trade deficit in the US has become irreversibly structural to the integrity of the local economy and remained in this function for many years; the legal tender function of foreign dollar reserves comes very much into question. It begs this suggestion: does the international dollar have any internal political force backing it's value overseas? This question can only be addressed by shipping gold in a legal "currency defending" process...


cont.

JR said...

cont.

"Over the last decade or so, with both it's gold deed function and "legal tender" function blocked by political motive and structural economic forces; the currency can and must be defended through other means. Further, our international dollar has degenerated away from being even basic "money"; to being little more than an international derivative of derivatives; that represents currency swaps, gold loans, uncollectable foreign debts and still more gold swaps. In this end stage of failure, our external dollar arena must eventually be defended with performance, if demanded; if it's use and credibility as an international settlement medium is to continue. With the US now clearly proceeding into a recession, and doing so with the competition of another reserve currency for the first time, local price inflation will prove irresistible in undermining international dollar exchange values.

If foreign political motive decides to no longer support international dollar denominated gold derivatives with physical delivery or refrain from using gold as a trade settlement; the US will have to choose between shipping it's gold or seeing all international dollar structure and use fail! In it's place, Euro system currency would easily become the main reserve as soaring gold values would replace "tender" value lost from dollar failure.

We think that: given ongoing lifestyle enhancements afforded to US citizens from the current dollar's value as a reserve currency; the loss of this standard is of greater importance than the loss of gold! Local political motive will answer this foreign dollar value challenge by using gold as somewhat of a bribe for letting the air out of the dollar slowly. The result will be a massive dollar price rise in gold that performs over several years; as the reserve function transition politically begins.

The nature of the current dollar based gold market, outside US borders, is perhaps leveraged 1,000+ to one and will require ever greater physical gold shipments, at ever higher values, to maintain dollar credibility. This failure process will draw US gold stores out in the form of "currency defense"; not as gold sales aimed at keeping the price down. A purely legal defense use of politically owned gold.

Still, gold shipments will always be far behind the price curve and only be done as last resort crisis operations. Further, the rise will be so intense as to provoke a complete cessation of all derivative gold trading within US borders. Long before this occurs traders, both foreign and local, will bail out of our gold derivative markets even as physical prices rise. A spot physical gold market will be all that remains. Something local citizens will cherish and paper brokers will deplore!...


From here

Joel said...

Thanks guys, for bearing with me. I have learned a great deal from all of you. One other question I have been pondering. In hyperinflation, when the masses demand their cash from the banks, forcing the govt. to crank up the presses to avoid defaults and deflationary panic, doesn't the non cash digital market dry up(which is what, 85% of our money supply?). Doesn't this loss of supply counteract the printing in spades, given that it is so much larger than the cash base?

JR said...

Joel,

The IMF/U.S. Treasury Gold Auctions - 1975 to 1979

On January 1, 1975, after 42 years, it again became "legal" for individual Americans to own Gold. Anticipating the demand, the U.S. Treasury in particular and many other Central Banks sold large quantities of Gold, taking large paper profits in the process. This had two results. It depressed the price of Gold, which fell to $US 103 in eighteen months. More important by far, it "burned" large numbers of small individual investors.

But this "pre-emptive strike" against the Gold price did not solve the imbalances inherent in the floating currency regime. As the Gold price began to recover from its August 1976 low, the (US-controlled) IMF along with the Treasury itself, began a series of Gold auctions in an attempt to hold down the price through official means...

JR said...

Joel,

Read Big Gap in Understanding Weakens Deflationist Argument . Yes credit dies in a hyperinflation, but its not simply about an increasing supply of money counteracting collapsing credit - its also about the demand side (they control value). When the demand side fades (confidence wanes), velocity of circulation increases.

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

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

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

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

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

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

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

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

Cheers, J.R.

Aaron said...

@Costata

Brilliant! Just brilliant! I don't know what else to say. Your last comment just summed up the whole sha-bang.

"So from a transaction perspective when anyone, anywhere decides to exchange their Euro savings for gold the ECB says: “That’s fine with us”. Under normal circumstances this doesn’t diminish the underlying demand for the Euro to meet expenses. It is only the surplus that flows into gold not the “rent money”. It’s worth repeating that the Euro's only role is as a medium of exchange."

A true separation of function (medium of exchange only). I'm still astounded by the clarity of your Thought!

Bedtime.

--Aaron

costata said...

Joel,

The disproportionately larger quantity of bank credit money versus base money is a core argument of the debt deflation branch of Team Photocopier (deflationists).

FOA:
"Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

It's a matter of political will. If the USG wants to replace the bank credit money with base money they can do it. In effect the deflationists say they wont. The HI folk say they will.

I hope you will also appreciate the irony that Steve Keen cleared his debts a couple of years ago when he sold his unit and went back to renting. These days he doesn't have a front lawn either. So I guess he misses out either way.

Robert LeRoy Parker said...

@costata

I'm a big fan of Jesse's gold charting. Do you know any sites that are doing something similar for euro gold?

Joel said...

When this is all over, I'm inviting all you guys over for Steaks and Spatenweiss. I'm buying. Gonna trade on of my American Eagles in on a herd of corn fed Angus beef, hire Ash to cook em' for us, and fire em' up. Just kidding Ash, you are invited too. You will probably be a successful trial lawyer in a DC law firm by then, or maybe teaching neo-Marxist economics at Harvard (which will by then be suffering from record low enrollment). It will be fun to compare notes anyway. I promise to pull Costata off you if he gets crazy.

costata said...

Joel,

Sorry for my flippant remark I couldn't resist setting up that joke about Steve Keen. JR's response presents the correct perspective in my opinion (h/t FOFOA). It isn't the quantity of money in circulation that matters (above a sensible minimum level of distribution) it's the confidence and velocity.

Aaron,

Thanks, you are more than kind. I'm glad you valued my comment.

RLP,

I have seen Euro gold charts but I'm scratching my head at the moment to recall where I saw them. If it comes to me I'll let you know.

Cheers

Michael said...

Aftershock is the book that first got me 'thinking' about our current financial problems. I know Robert Weidemer (and a coauthor of an earlier book America's Bubble Economy Eric Janszen) were part of FOFOA's awakening. As part of a promotional video for an update to Aftershock Weidemer states he does not believe the US will experience hyperinflation. He states it will be severe inflation (100% per year, but not hyperinflation.) I have read little on FOFOA that conflicted with what was in Aftershock. It will be interesting to see how the authors of Aftershock see us avoiding hyperinflation.
I'm fairly sure this will get FOFOA's attention too.
It is at the points where similar thoughts divergence that I learn the most.

Indenture said...

Gentlemen: Today's comments were incredible! Bookmark these exchanges because they will be pointed to in the future. Bravo! Really brought it home.

Joel said...

I agree Indenture. Some of the best discourse yet. Like a free Harvard education, but without the socialism. Found a good article addressing my own question on trade imbalance settlements, highlighting Germany and Spain's dilemma, similar to that of US and China, but on a smaller scale.

http://globaleconomicanalysis.blogspot.com/2011/07/hugo-salinas-price-and-michael-pettis.html

costata said...

Hi Michael,

You wrote:
"As part of a promotional video for an update to Aftershock Weidemer states he does not believe the US will experience hyperinflation. He states it will be severe inflation (100% per year, but not hyperinflation.) I have read little on FOFOA that conflicted with what was in Aftershock." My emphasis.

It would be interesting to hear the rate he defines as HI and his methodology for defining a particular rate.

JR said...

One way to think about fading demand for a currency (loss of confidence) and the resulting increase in velocity is in the context of "debt being saved" by converting it into cash/base money.

FOFOA talks about the process of saving debt by converting credit money into base money. As Costata points out, "Team Photocopier" focuses on the disproportionately larger quantity of bank credit money versus base money, and thus the "herculean" effort to print that much leading to deflation for the near term because "OMG they have sooo much to print" and such.

First off, the massive printing doesn't cause hyperinflation, its the response to the hyperinflation. Hyperinflation is the loss in confidence in a currency that *results in* massive price increases.

But more to the point, base money is different than credit money. This idea sorta is a form of the
cantillon effect.

What the Fed is doing is transforming debt (aka securitized debt instruments held as assets) into cash/base money to keep them nominally performing. Its essentially an issue of the loss of confidence in the dollar's secondary medium of exchange, the dollar debt market. The dollar needs people to keep saving in debt, and the Fed is pumping base money to keep this debt nominally performing so as to prop up the debt/credit system, which is all about debt as an asset (e.g. structured finance, sovereign and corporate debt markets as opposed to traditional bank lending).

So here is the point about velocity. The FED is transforming a saved "asset" - like securitzed debt - into cash/base money. They are monetizing a debt, taking a saved asset and converting it into cash/base money.

Is it no surprise more liquid cash/base money is spent more "frequently" (aka higher velocity) than dollar denominated debt held as a saved asset? Markets are losing confidence in the dollar debt market as a store of value, and as a result this debt is being turned into a more liquid form.

Its not just the amount of cash/base money compared to the amount of deflating debt, but the fact that they are different. Like debt as an asset is held to be saved, but more liquid cash/base money is not so much held to be saved, but to be spent.

Cheers, J.R.

FOFOA said...

Hello Joel,

You asked, "In hyperinflation, when the masses demand their cash from the banks, forcing the govt. to crank up the presses to avoid defaults and deflationary panic, doesn't the non cash digital market dry up(which is what, 85% of our money supply?). Doesn't this loss of supply counteract the printing in spades, given that it is so much larger than the cash base?"

It's not supply (volume) that is lost, but value. The non-cash digital money simply loses value faster than cash. But that doesn't mean the cash is gaining value. Only an imbecile could come to that conclusion.

JR and Costata are totally correct that it is the demand side—the marketplace—that devalues any currency. Sometimes it just comes as a quick collapse to a lower value, devaluing all the built-up debt (denominated in that currency) to a more realistic and manageable level. Other times TPTB fight to retain their power by printing up payments (to vital vendors) that can still be exchanged in the real terms implied by previous nominal agreements.

In Mugabe's case, he had to keep upping the denomination of bills on the printing press to keep paying his security forces in real terms. If an apple costs a million, then you've got to pay your goons at least ten million an hour. This creates a conundrum in the real physical world of paper printing. The only way to increase your output faster than the market is devaluing your damn currency is to start upping the denominations faster. Otherwise it is physically impossible to do.

I have a $100Trillion Zimbabwe bank note sitting right here on my computer. Here it is. This one single note, all by itself, replaced all non-cash digital money a hundred times over. One note! One single slip of paper. Of course they don't just print this one big note right out of the gate. There's a market process that leads them there.

As the length of time in which a currency holds its value grows shorter, bank credit gets discounted by the market versus cash. Cash holdings can be flipped quicker than bank credit which must be cleared. This discount raises demand for physical cash. The deflationists think this means cash is becoming more valuable against goods and services, but it is quite the opposite. The value of bank credit (debt) is simply collapsing faster than cash.

Bank credit money inflation (debt inflation – credibility inflation) raised the debt burden too high. The debt is no longer worth its face value, so the market devalues it. The system responds by replacing that bank credit with base money to keep itself functioning nominally. But in the case of the dollar the actual debt burden has been masked for so long by a myriad of self-interested supporting forces that when it collapses, it will be a sight to behold.

And anyone that thinks the dollar has less incentive to print "real terms" payments to its supporting cast members than Mugabe's ZimDollar is either high or delusional.

Remember, it is value, not volume, that disappears when credit collapses. The printer tries to replace that value with volume, the only thing he can print. It is the supply side easy money camper trying to outrun the demand side bear that is killing value faster and faster. More and more volume replaces less and less value until finally the bear catches up.

Sincerely,
FOFOA

radix46 said...

All,

I don't think that anyone addressed Dr.Octagon's point here:

"What matters is the availability in during the crisis itself, and I can see the possibility of the US congress opening up the US gold reserve during a dollar crisis
(most likely by making the mistake of pegging the dollar to gold) just as easily as I can see Germany preventing desperate Greeks from accessing German gold reserves."

Along the same lines as Texan's point:
"The ECB has no gold. And the euro CBs who have it will not sell."

This is something that I have been wondering about. Is the ECB's access to the gold necessary for making a liquid market in physical dependent on the political stability within the euro member countries? Animosity and suspicion is growing amongst the people. Could this cause a problem for the availablity of gold?

FOFOA said...

@ Texan,

"The ECB has no gold. And the euro CBs who have it will not sell. They have not been selling for years now. The euro, like the dollar, will buy less and less stuff, and less and less gold."

LOL!! You should really pull out your dictionary and study the word "system". The ECB is a construct of Europe. Get a grip on reality, and I mean that with the utmost OWO respect.

Sincerely,
FOFOA

Blondie said...

Joel said:
”In other words, how do personal gold holdings provide stability to the dollar?“

They don’t, unless the gold holder demonstrates the value of the dollar by exchanging gold for dollars. The rate of exchange publicly defines that value.

That is everything anyone need know to understand monetary value and stability, with that transaction is the foundation of both. That is also how the ECB see it, as evidenced by the architecture of the euro with MTM gold openly valuing it on their balance sheet.

Gold’s function is to value currencies, never the other way around.

I would go as far as to suggest that almost every westerner has their entire concept of "money" bass ackwards: The proper chart would be the one that shows currency priced in gold (bear market).

When we observe prices going up around us everyday few see it for what it is: the value of our currencies declining. A barrel of oil, a head of broccoli, a tonne of lead, they are all just like gold: tangible assets. Gold is just the most durable and thus the best store of value through time. A tank full of gas propels your car the same distance no matter the amount of currency required to purchase it.

Just like gold, assets are what they are. Nothing more. Nothing abstract.

Currency is as valuable as the owner of the asset says it is, and gold is simply the proxy for all assets, for value, supplying objectivity to all market participants.

Very simple. Wealth is measured by weight in gold. It's the lowest common monetary denominator, as value objectified.

Only a fool would measure their wealth in dollars... because what is a dollar?

Paul said...

some notes hold real value
nice one FOFOA

;-)

Paul

FOFOA said...

Ha! Hello Paul!!

Paul sent me that Z$100T note! Which I suppose makes him my all-time greatest supporter in nominal terms.

Thank you, Paul!

Paul said...

It is the thought that counts !

you know you deserve it
;-)

Edwardo said...

JR wrote

"so here is the point about velocity. The FED is transforming a saved "asset" - like securitzed debt - into cash/base money. They are monetizing a debt, taking a saved asset and converting it into cash/base money."

This is, I think, a technical issue and not of vital importance, and my apologies if this is a dumb question, but the cash/base money exists almost entirely in digital form, yes?

Dr. Octagon said...

radix46, yes, this is the primary issue I'm stuck on. I understand that gold reserves must be made available to defend a currency, because if the currency can be used to buy gold, then the currency can be used to buy anything, and therefore it has value.

Another and FOA both thought highly of the Euro. When they were writing, it was a new currency, with what they believed to be a superior design compared to the US dollar. Its presence could bring on the collapse of the Dollar because people finally had a real alternative.

Our host, FOFOA, has continued this praise of the Euro, but recent events seem to have brought to light some Euro flaws as well, that were not predicted by Another and FOA (or perhaps I missed it). The flaw of course, is that each Euro zone government will do what governments do, which is direct government funding to the organizations and people that keep them in office. If a single government with a single currency does this for too long, the currency will loose legitimacy eventually, such as Zimbabwe, Argentina, and perhaps soon the US. But in the Euro zone, the currency has the strength of all member nations, and any misbehaving country in the zone may be able to "get away with it" for much longer, because the stronger countries provide balance. There are rules for Euro zone membership that were supposed to prevent this sort of thing, but those rules were not followed, and today, confidence in the Euro currency is waning.

cont.

Dr. Octagon said...

cont.

The Dollar and Euro seem more alike than different to me. Both currencies are under threat, because of excess printing in the US, and upcoming defaults in one or more PIIGS nations. I believe that citizens in both economic zones primarily hold currency, currency derivatives, and equity investments, not gold, as their savings. Both currencies have gold reserves held by the central governments, which may or may not be mobilized to defend the currency. In the US, that gold can be used to stabilize or at least slow the collapse of the US dollar in the event of hyper-inflation. In Europe, if confidence is lost in the Euro, gold can be mobilized there too, but unlike the US, there is not a one-to-one relationship between who holds the gold, and who is responsible for defending the Euro. Again, in the US, there is one currency to defend, and one large government stockpile of gold to defend it with. In Europe, there is one currency to defend, but the gold to defend it with is under the control of individual governments, who I believe care more about their own people than they do about the Euro.

Think of the Germans, who have the largest gold reserves, and are getting tired of bailing out Greece and others. Today the bailouts are done by providing the free-spending nations with more Euros. This will continue until Greece defaults, and starts a chain reaction among other weak Euro zone nations, leading to a sell-off of the Euro. Now, at this point we expect member nations to start selling their gold reserves to defend the currency? Germany has 3,500 tonnes of gold, and Ireland has 6 tonnes (so says http://en.wikipedia.org/wiki/Official_gold_reserves). Will Germany want to take that step, from bailing out PIIGS with Euros, to bailing out Euros with their gold? Or will they let the Euro collapse, keep their gold as it resets to freegold prices, and go back to the Deutsche Mark?

If the US dollar begins to collapse, and you personally have gold in your sock drawer, are you going to sell your gold to help defend the dollar? Or are you going to let the dollar collapse, watch your gold reset to freegold prices, and move on to the next currency when hyper-inflation runs its course? I know which I would choose. I know which one giants will choose. I believe Germany, France, and others have this same choice. Which will they choose?

DP said...

Jeff: DP said "If the price starts to get out of hand to the upside, and people in the US sit up and take notice en masse.."

Gold volatility is as low as I can remember. Price is being walked higher. But FOFOA said (JR can paste the quote :)) he expects a big upside price surge to stretch the physical supply further. So either we should expect a big price jump, which indicates price is still under control, or a sudden price drop that represents the collapse of paper gold. Thoughts?


While the paper $IMFS market price for gold is still supplying actual, physical gold where it is required for delivery, the price in that market is supported. Given the increasing tightness in the supply of physical as more and more parties choose to take delivery rather than trade for $ gains, the evidence the market continues to function is the price chart continues its steady march upwards (stretching the value of gold over a larger and larger volume of dollars).

If/when there is a failure to deliver and the intended recipient of the goods is not OK with $ settlement, even at a premium, the contract is broken and the 4 minute warning siren is triggered. The evidence for this is a collapse in the paper $IMFS market price for gold — but an eerie lack of sellers of physical, at the "market $price" at least, when you step in to BTFD.

If someone with euros wishes to exchange them for physical gold at the bank, the ECB will step in, if necessary, to ensure the exchange is possible. Not to do so will put the credibility of their currency in question, and that is an unacceptable risk.

Most of the time, while the €price is deemed to be right by market participants, gold will be forthcoming from those participants rather than from the ECB. If, however, the market participants are unwilling to part with gold for euros at the prevailing €price, the ECB will step in and bid up the €price until gold starts to flow through the market again. Liquidity is restored. Or, alternatively, it might choose to satisfy orders at lower prices than the market demands (strengthening the currency), if they feel their currency is losing value too quickly. They can exert some degree of control over the value of their currency in both directions.

Arbitrage will ensure that the price globally will follow the highest price anywhere. So if the ECB is bidding high to bring out the flow in the Eurozone, gold from outside will flow into the Eurozone if the price is not also bid up elsewhere to encourage flow there. Of course ultimately the price in the other zone will have been brought into line by the arbitrageurs anyway. Similarly, if the ECB tried to flood the market with gold to satisfy demand at lower and lower prices, the market will arbitrage this flow of gold out to other zones where it will sell for a higher price. So the self-interest of the ECB, and all other CBs, will be to allow the market to set the price naturally, globally — with perhaps from time to time a little assistance if liquidity is becoming problematic and flow needs to be encouraged out of hiding, before a problem becomes evident.

JR said...

Base money is currently mostly created via electronic debit into a bank's reserve account at the FRB. This is a Fed promises to print on demand.

Money Talk Continued

14) Base money is either physical cash or a liability (IOU) that traces directly back to the Fed, which includes reserves held at the Fed. In other words, it is physical cash, or the promise of physical cash from he who can print physical cash. The Fed is willing to issue these promises willy nilly but hopes it doesn't actually end up having to do the printing.

*******************************

http://www.ny.frb.org/aboutthefed/fedpoint/fed01.html

"To meet the demands of their customers, banks get cash from Federal Reserve Banks. Most medium- and large-sized banks maintain reserve accounts at one of the 12 regional Federal Reserve Banks, and they pay for the cash they get from the Fed by having those accounts debited....

"When the public's demand for cash declines—after the holiday season, for example—banks find they have more cash than they need and they deposit the excess at the Fed. Because banks pay the Fed for cash by having their reserve accounts debited, the level of reserves in the nation's banking system drops when the public's demand for cash rises; similarly, the level rises again when the public's demand for cash subsides and banks ship cash back to the Fed."

DP said...

Edwardo: This is, I think, a technical issue and not of vital importance, and my apologies if this is a dumb question, but the cash/base money exists almost entirely in digital form, yes?

I can't speak for anyone else, but when I spend my cash/base money, most of it is done via my "digital form" debit card.

If I held my wealth mostly in bonds though, even if I do trade them digitally, I won't be able to walk into any store, online or meatspace, and just on a whim decide to impulse-buy, say, some very expensive naughty knickers for my mistress so I can give them to her tonight and she might, well... y'know...

Anyway, base money and credit money are just qualitatively different is all I'm trying to say. If anything, digital base money is more liquid and useful than physical base money.

DP said...

Dr. Octagon: Germany has 3,500 tonnes of gold, and Ireland has 6 tonnes

Which of these countries benefits most from a significant revaluation of their gold?

If I am a super-giant and I sell some trivial (to me) number of ounces of my reserves — let's say 1% of my holdings for the hell of it — for double the current market price, thereby influencing a doubling of the market price for all gold ...

Is the value to me of my reserves still just about doubled now, even though the volume of them is 1% smaller by weight?

DP said...

I can buy twice as many Greek islands.

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