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:

«Oldest   ‹Older   201 – 328 of 328
DP said...

And the Greeks will thank me too, because we found a way to stop them going BK.

DP said...

The €price of everything but gold wasn't significantly changed by this revaluation of gold. The €1M island retreat is still for sale at €1m. Later, the price of other things might be adjusted by the market process. But right now, no price tags were replaced.

More accurately, the € (and everything/everyone else currently denominated in it) was at a stroke devalued against gold. The € is denominated in gold terms, meanwhile other major currencies are not — they're denominated in cross-rates to other currencies (including the €). So unless something bizarre happens at the same time in the forex world, the other currencies were also devalued (in gold) along with the €.

pipe said...

DP said, "I can buy twice as many Greek islands."

Are you sure about that? You can't buy any more gallons of gasoline, and the number of silver ounces you can buy has declined substantially over the last year.

Sorry to confuse you with the facts, but gold is a store of value, also known as money. It isn't going higher in purchasing power. If it did that, it would not be real money, it would be an investment vehicle. Gold HOLDS its purchasing power, with respect to goods and services, and therefore it makes an excellent choice to use for money.

The problem for you is that you foolishly sold all your silver while it was being demonetized by banksters, at a gold:silver ratio of 75:1. As both gold and silver are remonetized, and the gold:silver ratio returns to the area of 15:1, you will eventually see the error of your ways.

DP said...

PIPE! hey buddy - I was just wondering if you are still around a day or two ago! :-)

DP said...

pipe: Sorry to confuse you with the facts, but gold is a store of value, also known as money. It isn't going higher in purchasing power. If it did that, it would not be real money, it would be an investment vehicle. Gold HOLDS its purchasing power, with respect to goods and services, and therefore it makes an excellent choice to use for money.

OK, I'm always ready to change my mind if someone's got a convincing case. Perhaps you can explain the mechanisms that make this reality?

Disclosure: Bernanke is with me.

DP said...

If you'd pulled me up instead on this part:

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?


Then, yeah I'd have laughed and agreed I got myself wound around the axle in my enthusiasm. Clearly I'd have to BUY 1% to add to my reserves, if I wanted the price to double. I'd sell to lower the price. D'Oh!

Bygones...

Ash said...

Pragmatic Capitalism piece about QE2 and the "monetization" of Treasury bonds, entitled, The Fed is Not Monetizing the Debt:

When the US government was working under the gold standard the US Treasury would literally print up certificates to purchase gold from the gold mines. These gold bars would be delivered to the government and the Treasury would issue a check to the miner. This new money would end up at the Federal Reserve Bank in the form of deposits. This would naturally increase the money supply. An increase in the money supply is scary for obvious reasons. So, the term debt monetization has its origins in the days of the gold standard, but persists to this day despite the fact that we are no longer on a gold standard. Not surprisingly, the term is still used today despite the fact that the US government can’t monetize its debt via Fed purchases.

A few of the author's conclusions:

3) Fear mongerers want you to believe that the Fed is the evil entity that “prints money”. The truth is that the Fed can do no such thing. Only Congress can print money and it’s clear that their actions in recent years have failed to generate significant inflation. This is a sign that the government’s spending has been ineffective and misguided. Although I acknowledge that the US Congress is never constrained in its ability to spend this by no means implies that the US Congress should spend beyond its means. To do so can possibly result in malinvestment or very high inflation.

4) The idea that the Fed is buying government debt might imply that there are is a shortage of buyers of US debt. This is impossible as government debt issuance serves only as a reserve drain. Auctions are designed around calculated reserves and are carefully designed so as not to fail.

7) Quantitative easing does not increase the money supply and is therefore not inflationary. Although this operation can have significant psychological impacts (such as inducing undue speculation) QE can only work in the same manner that traditional monetary policy is implemented at the short-end of the curve. This occurs by setting a target rate and by being a willing buyer of any size at that rate. This is NOT how the current policy is designed. The current structure of QE leaves interest rates entirely controlled by the marketplace and not the Fed. Therefore, the mixed results should come as no surprise to anyone as the policy was poorly designed to begin with and is likely doing little more than contributing to excessive speculation and promoting the continued financialization of the US economy. The Fed’s implementation of such policies (such as QE) and complete misunderstanding of such policies does nothing but help create disequilibrium in the marketplace and increase the odds of future instability.

8 ) Monetization is achieved by act of Congress via deficit spending and is independent of the Fed’s monetary policy. Anyone who uses the term in the context of the Fed’s contribution of government spending does not understand how the modern monetary system works. In a strict technical sense, monetization is always done by act of Congress and is voted on before funding is ever acquired for such expenditures – funding that will always be available regardless of tax receipts or bond sales….


Personally, I believe the author's application of MMT to QE2 is misleading at times, especially when he makes unconditional statements such as "funding is always available" for Congress or that IR are "entirely in control of the marketplace". Still, it provides an interesting perspective and should temper blanket statements that the Fed is simply "monetizing debt". That role is reserved more for Congress via its appropriations function, according to MMT.

Jeff said...

DP said: If anything, digital base money is more liquid and useful than physical base money.

Hold on there DP! From Just another hyperinflation post part 3:

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

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

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

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

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

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

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

CONT:

Jeff said...

Today the reserves are physical dollars. If you eliminate physical dollars you don't get hyperinflation, you get instant worthlessness. I suppose that COULD look like hyperinflation for a very brief time, but the idea is so ludicrous it simply won't be tried, NWO paranoids notwithstanding...The dollar is still backed by gold through the paper gold market. The externals that matter most (oil) are still cashing it in for physical gold. It is also backed by oil supporting it through pricing because trade surplus nations like China can use some of their surplus credits for oil that doesn't come from the US. And then oil uses those credits for physical gold from the paper gold arena. But this backing is breaking down now. For others, the dollar is backed by physical cash and Treasuries which are promises to pay physical cash. If the dollar was only a digit, then those Treasuries would be worthless to the externals...When the circulating currency was dollar bills, the reserve was gold. When that reserve was cut loose, the dollar plunged. Today the currency is mostly digital (tethered) credits and the reserve is dollar bills. If you can't understand this principle, then you can't understand money.

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

Dr. Octagon said...

From DP - 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?

Germany holds significantly more gold than Ireland. So in the event of a freegold-like rise in the nominal price of gold, two things will happen. First, everyone will suddenly be paying attention to gold - what it costs, and which countries have it. Second, all the people in Germany will smile, as their government has the largest stockpile of gold in Europe, and the people of Ireland will notice they have one of the smallest.

Now, let's say that all countries in the Euro zone agree that they're in it together, and go to save the Euro. As the holder of most of the gold, Germany will carry most of this burden. Their gold will flow from their central bank holdings into the hands of Euro holders in Ireland and other countries. The German stockpile will shrink, and the German people will watch this happen. This will actually be happening in all Euro zone countries, as all of them will see their gold reserves dropping (in ounces, not nominally). At some point, what if Ireland or some other country decides they would rather keep their gold for themselves, and stops selling? What if some country says "we have little gold, so we will let others sell theirs first"? Perhaps the others will no longer be as willing to sell.

Germany can decide that the Euro isn't what's important. It's the gold that holds the value, not the Euro, and they care more about their own citizens than they do about other Euro zone members. So perhaps Germany will allow German citizens to purchase their gold, but not others. The rising value of the German stockpile goes to the benefit of the German people alone. Again, why would they not make this choice?

DP said...

Jeff, a good point well made. :-)

DP [should have] said: If anything, digital base money is more liquid and useful than physical base money today.


FMP!

raptor said...

http://www.martinarmstrong.org/files/Outlook%20for%20Gold%2007-13-2011.pdf
....
The idea of coins was to facilitate trade by certifying the weight of the metal, NOT declaring that metal was MONEY. This invention of a bimetal monetary system emerged because, for the prior ECM cycle of 51.6 years, the gold coinage was actually a natural alloy known as “electrum” that was a mixture of gold and silver. Because it was natural coming in the Sardis River, the amount of gold content varied widely. Pictured here is a worn electrum stater with nine countermarks illustrating the business of a foreign exchange broker goes back quite some time. Perhaps prostitution might be the oldest profession with lawyers coming second to ensure she was paid and third the foreign exchange broker to test the quality
9
of the payment. Whatever the sequence of professions, after 52 years of these issues that still required certification by a broker, it was King Kroisos who invented refining the electrum and separating the gold and silver.
From the very beginning, MONEY has been a commodity – nothing more. When the Lydian King Kroisos (561-546BC) created the first bimetal monetary system, a gold stater was about 10.71 grams and the silver-gold ratio was 13.33:1 because gold was common in the Turkey.

DP said...

@Dr Octagon,

I guess there might be more than one scenario? The member CB (EMCB) can choose to sell its existing gold reserves.

Or another possible choice might be the EMCB could use trade surplus dollars (or whatever, euros perhaps) to buy gold from somewhere else, outside of the zone, rather than depleting the reserves of any EMCB?

So world gold price rises. Dollar (or other?) reserves are reduced. Gold came in and the transaction revalues the existing reserves of all EMCBs. Gold went out to satisfy demands, euros came in.
All EMCBs retained their gold reserves intact. Euro-holder achieved desired exchange for gold.

Germany has 583x as much gold as Ireland. Germany has far higher leverage to any increase in gold valuation.

DP said...

What if oil started to say they were so happy with the unmatched credibility in delivering gold for euro, that they now wanted to be paid in euro for their product?

How would everyone outside of the Eurozone get hold of euros to buy the oil they want?

I guess the only way is they'd have to have a trade surplus with the Eurozone somehow. Either by selling more goods and services to the zone than it required of them, or by selling something they happened to want in exchange for euros.

DP said...

Maybe silver?

[mutter] ... maybe not... [/mutter]

Mike said...

http://www.zerohedge.com/article/no-there-nothing-strange-about-surge-adjusted-monetary-base-past-two-weeks

Aaron said...

Hey DP!

"or by selling something they happened to want in exchange for euros."

Nice way to plagiarize me buddy.

;-)

--Aaron

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

So Gold's function is to value currencies, and the dollars days as the worlds reserve currency are done and instead of letting the debt destroy the dollar and the economic world the ECB will suddenly devalue the Euro a huge amount and all other currencies will follow so all items cost relatively the same except for gold priced in what ever currency you want to base it's value in but existing debt can be paid with depreciated currency?

And after the transition the amount of currency required to bid for gold will be 50,000 greater than it is today because... somewhere the paper gold market fits in here... any help?

Robert LeRoy Parker said...

What you are looking for is called punctuation.

Dr. Octagon said...

Indenture - the paper market fits in because currently the paper market sets the price of gold. There is somewhere around 100 times as much paper gold as there is real gold. Gold traders trade this paper with each other, and this is the "spot" price. Since there is 100x as much supply of paper gold as there is real gold, and prices are set by the supply/demand of this paper, it's amazing that real gold is priced anywhere near the paper price. It's a game of musical chairs.... once the music stops, and enough people try to convert their paper to physical and realize that they can't, the price for real gold will decouple from the paper price, going much higher, while paper becomes worthless.

Jeff said...

Indenture,

What if the dollar gets devalued...against the euro??

FOA: You see, the dollar is going to fail now because a good alternative is available now. All this has something to do with the coming new gold valuation, but that new price level is not related so much to gold backing a currency again. (more on that in a min). The dollar is toast because most of the world doesn't like the management policy.

Truly, most of the world likes the most conspicuous aspect of the euro that we describe as its biggest weakness; its management by several varied nation states. All supporting different thoughts, cultures, backgrounds and perceptions of government policy. Some compare it to the many nationalities in the US, but it's much more competitive than that. It's thought that this mixture will produce a "more good for all" management of a Euro world reserve currency.

Our dollar is not going to become a "banana" or "nada" in the future, as auspec notes. It already is and has carried this trait for some time now as does every fiat today. The only thing that keeps them from cascading away is world support and use.

When most of the major players that styled the Euro decide to swing even 1/2 support toward that new money, the exchange rate for our dollar will plunge to its true worth!

Indenture said...

RLP: I apologize. I left my copy of 'Eats, Shoots & Leaves' in the potato garden. If you are done examining the structure do you have any comments on the ideas?

mortymer said...

http://bphouse.com/honest_money/2011/07/14/gold-reserves-are-abstract-guarantees-bernanke-vs-paul-is-gold-money/

holdinmyown said...

Worthwhile reading: Debt Endangers Growth by Reinhart & Rogoff

"While we expect to see more than one member of the Organization for Economic Cooperation and Development default or restructure their debt before the European crisis is resolved, that isn’t the greatest threat to most advanced economies. The biggest risk is that debt will accumulate until the overhang weighs on growth.

...There is a growing sense that inflation is the endgame to debt buildups. For emerging markets that has often been the case, but for advanced economies, the historical correlation is weaker. Part of the reason for this apparent paradox may be that, especially after World War II, many governments enacted policies that amounted to heavy financial repression, including interest- rate ceilings and non-market debt placement. Low statutory interest rates allowed governments to reduce real debt burdens through moderate inflation over a sustained period. Of course, this time could be different, and we shouldn’t entirely dismiss the possibility of elevated inflation as the antidote to debt."

Edwardo said...

Thanks, DP and JR, for your responses to my "base money" question.

holdinmyown said...

Sorry my link doesn't seem to work. If you would like to cut and paste the address is: http://www.bloomberg.com/news/2011-07-14/too-much-debt-means-economy-can-t-grow-commentary-by-reinhart-and-rogoff.html

Robert LeRoy Parker said...

Lol. What can I say? I'm an asshole!

Imo, it seems you are focusing on the ECB's nuclear option too much. I think they'll kick the can long enough for the dollar collapse to initiate from another source. This is simply based on the total claims on dollars dwarfing the claims on euros. In other words, I think the realization that dollars are worthless could strike at any moment. Whereas I don't have the same conviction with the Euro.

As for existing debt in the USA, that will be papered over by the front lawn dump. Euro debt will be made whole by paper and gold.

During the aftershock of HI I expect massive price inflation in the US and the same in Europe, but with a lot less zeros. Barter seems likely in the US for at least a while. But once stabilization is reached, I expect prices to come back in line with supply and demand similar to what we see right now. Aside from gold of course, which should be remain in orbit.

This is my understanding of what Fofoa has written.

Texan said...

All,

Again, I recommend you all go to FT Alphaville. There are numerous articles by multiple analysts who get paid reams of money, including titans like el-erian, soros, etc, who all say that the "euro" is now binary.

Either Germany is going to cave and back the PIIGS in return for some kind of fiscal call on the PIIGS budgets, or the euro must be reconfigured.

This is the choice. It is not debatable. No no one knows how it will turn out, but I suspect the market will force a decision within the next few months.

Meanwhile, if you want a meaty read on just how endemic
the problem is at least in Greece, I highly recommend an article by Michael Lewis in Vanity Fair. Its a bit dated, but well worth it. Draw your own conclusions.

JR said...

Mike,

Nice post of the ZH article about the surge in the adjusted monetary base the past two weeks!

The Adjusted Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks. These data are adjusted for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories. They are updated monthly by the Federal Reserve Bank of St. Louis.

The Federal Reserve Bank of St. Louis' adjusted monetary base graph = a hockey stick.

FOFOA said...

Hello Edwardo,

You wrote:

"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?"


I think it is more than just a technical issue of non-vital importance. In fact, I think it is fundamental to understanding what changes the dollar is undergoing right now. To see this, it is helpful to put it in the broadest historical context possible, the entire history of the money concept since it first emerged.

In his latest piece, Martin Armstrong makes some great points about the money concept. Here is a quick excerpt (my emphasis):

"MONEY is by far not a fixed entity EVEN under a fixed exchange rate system or gold standard… It fluctuates in value and thus it really screws up our perspective of everything thinking its value is fixed. It is an economic language that simply replaces barter. Our concept of VALUE becomes increasingly complex with time and circumstance…

"We forgot what MONEY actually is and how to measure it. We have forgotten that it is NOT a constant measure of value… There is NO constant in money because money is simply another variable in the entire economic-mix…

"The idea of coins was to facilitate trade by certifying the weight of the metal, NOT declaring that metal was MONEY."


I agree with everything above. Money is an economic language that replaces barter. In a gold coin standard, it was the weight (specified volume) of a metal in sufficiently limited supply that was the unit of the concept, not the metal itself. And what you've labeled as "a technical issue and not of vital importance" I view as the purest dilution of that unit at the very center of our money.

"Our money" is that item, that fluctuating "commodity" on the forex exchange, which we use to value everything else. It is not a fixed value, just another fluctuating commodity. And the total "above ground supply" of that commodity is the dollar's monetary base. It does not include bank credit nor debt, which are both simply claims against various entities denominated in units of that "commodity". So does it matter if the "above ground supply" is suddenly tripled even if it doesn't circulate?

cont...

FOFOA said...

Date: Thu Oct 09 1997 19:00
ANOTHER ( THOUGHTS! ) ID#60253:


Background; to understand the following you must rethink your basic knowledge of money and investments. Get your aspirin ready.

Some time ago gold not only was used as money but also circulated as currency. It had always been money and people had no use for a separate currency to represent "gold money" so they stamped the gold itself and used it as circulating currency. From the start, one thing most thinkers can't quite grasp is that "money does not have to circulate"! The first "world money", gold money that is, could stay locked up and still represent value and wealth. People had but to agree on who owned it in exchange for goods and services. You have all read the articles about how paper receipts for "gold money" were later circulated and became paper currency receipts, then paper currency, then just currency.

The western world today, as we know it does not use money ! They use "paper currency".


Bank credit money today is analogous to "paper currency receipts" for gold above. Only today, we circulate bank credit receipts that are claims on the monetary base, which doesn't need to circulate in order to impart its (fluctuating) value to those credits. It is the base money that is the clearing system for the banks and their circulating credits, just like gold above would have been the clearing mechanism for paper receipts. And on the forex exchange where the value of our money fluctuates, it is the supply of and demand for base money, not bank credit or debt securities, that determines the price.

It's like the game of musical chairs we talk about with regard to paper gold. Only in dollar terms there are many more bank credit (and debt) claims circulating than there are actual base money dollars on which they are claims and from which they get their value. So when "the music stops," the deflationists imagine this credit/base money relationship will explode in the same way we imagine the paper/physical gold relationship will explode.

Of course it will not because, unlike with gold, with paper currency they can actually "turn lead into gold." In fact, it is no coincidence that Bernanke used this analogy and even used the term alchemist twice in his famous helicopter drop speech:

"The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal."

Bernanke understands this analogy very well. And he knows that now he is the modern alchemist from his speech. But modern alchemy is not turning lead into gold. It is, to quote JR, "transforming a saved "asset" - like securitzed debt - into cash/base money," what you labeled "a technical issue and not of vital importance." And what I say "is fundamental to understanding what changes the dollar is undergoing right now." So, from this perspective, would you still say it is just a technical issue?

Sincerely,
FOFOA

FOFOA said...

My apologies, Edwardo.

After rereading my comment I realized that I misread your comment. That the technical issue was your question and not JR's statement. **embarrassed**

Anyway, hopefully my comment is useful nonetheless. ;)

JR said...

Team Photocopier's resident cheerleader is ongoing a very public and embarrassing unraveling before our very eyes, as evidenced by the super LOL of going from riding Steve Keen's nuts ---> now repping MMT!

We knew you didn't understand economics too good but going full retard so soon - I was more hoping for a slow motion implosion - did you recently suffer a closed head injury? Helmets are important, perhaps you should find a better way to remind your self to put it on - or better yet, maybe you should just not take it off!! :)

"JR: Keen's got a pretty good idea of how the system would function if it couldn't collapse. In that sense it is very similar to MMT in viewpoint, but not as looney. For example, he gets debt ala minsky..."
link

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

Anybody remember that loon Greg form last year? Anyway, if its not instantly self evident that "Cullen Roche" is a mouth breather, then there is lots of good FOFOA discussion of MMT's silliness in his interactions with our former MMT acolyte Greg from last November in the comments Dilemma 2 – Homeless Dollars and
Open Forum

Cheers, J.R.

FOFOA said...

Hi JR,

Do you think my comment is at least relevant to MMT? (I'd hate for it to be a wasted effort ;)

"3) Fear mongerers want you to believe that the Fed is the evil entity that “prints money”. The truth is that the Fed can do no such thing. Only Congress can print money…"

Even from this MMT perspective, the Fed is still the modern alchemist, no?

" 7) Quantitative easing does not increase the money supply and is therefore not inflationary."

Perhaps, "Quantitative easing does not increase the broadest money supply [measurement]"? But it still turns lead into gold. And then the question becomes, does the demand side superorganism (which MMT is apparently unaware of?) intuitively understand the concept of money? Of course it does!

As you pointed out, MMT (or at least Keen's "lite" version of it) is "how the system would function if [the market force] couldn't collapse [its value at any moment].

Sincerely,
FOFOA

JR said...

FOFOA,

Never a wasted effort good sir!!

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

In particular, last November, in working on MMT acolyte Greg; you posited:

Greg,

Does MMT imply the possibility of a purely electronic currency system, with no circulating physical bank notes or coins? Or does it recognize the need for physical reserves like the FRNs we use right now?

Sincerely,
FOFOA


and then you replied:

Greg,

Let's explore this topic together. You said, "I will say this with 110% confidence, the possibility is there from an operational standpoint."

I'll try to show you why it's not. But that is a little beside my point....


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

I think this line of thought you engaged with Greg, and your comment of today continuing in this line of thought in highlighting the fundamental "digital v. physical cash" distinction, is *VERY* "relevant to MMT."

The significance of a necessary teethering of a "purely electronic currency system," of the need for circulating physical reserves like the FRNs - even to an MMT conception - is very a important concept as it certainly does "matter if the "above ground supply [of base money]" is suddenly tripled even if it doesn't circulate?"

MMT may play ostrich and willfully ignore the transformation of credit into base money (aka alchemy of turning lead into gold), but as you say the "demand side/superorganism" does, and it further understands its impact!

Cheers, J.R.

Indenture said...

Martin Armstrong's 'Gold - The Final Frontier?' (non pdf)

Joel said...

Thanks Fofoa, for another "aha" moment on this quote:
"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."

@ Blondie: a great quote from you on American wealth perceptions. You are dead on with most Americans having it backwards. We simply cannot get out of the mindset of viewing gold as a commodity (valued in terms of the dollar), as opposed to a store of wealth (with the dollar being the commodity that is valued against gold). It is that mindset, ingrained over years of dollar domination, that explains the relative lack of demand for gold in the US. When I share my views on gold with someone, they inevitably say, "I just can't buy something at the top." I just have to laugh as I tell them, "Yeah, I've bought the top about a hundred times so far."

costata said...

Dr Octagon,

In your last comment you wrote:
"... gold reserves must be made available to defend a currency.." My emphasis

That notion of "defense" cropped up at least twice more in your comment. I think that you might get a break through if you tried to approach this (as a mental excercise) from the perspective of defending gold against a currency.

Viewed from this perspective the aim of the "market maker" is to find the price at which the private gold market clears - willing buyers and willing sellers are prepared to trade gold for Euros and vice versa.

That would require the mobilization of a tiny amount of their reserves provided the price level is correct. It doesn't matter whether that price level is Euro 2,000 or 20,000. They would only mobilize enough gold to ensure liquidity.

It is self evident (IMO) that pricing gold too low in Euro, or US dollars, by the reserve holder would cause all of their gold to be bought. Clearly that is not going to be permitted.

If you can grasp this notion that the Euro will not be "defended" against gold (and ultimately the US$ wont be defended either) it would be possible to then work through the other issues you raise.

The Euro is merely a medium of exchange. As long as it circulates and there are transactions in Euro it doesn't require any defense. It derives its value from those transactions not from a particular Euro price in gold. Let's back test this assertion.

Did the Euro (or any of the other fiat currencies of the Western countries) fail to function as a means of transacting over the last 10 years as gold set higher highs when priced in currency?

The answer is obviously: No. In your current mindset it appears that you are thinking in terms of defending currency as a store of value. That isn't the ECB's objective. Their motives are quite different to the US dollar camp.

If you approach your analysis with a false assumption as your starting point it will lead to false conclusions.

costata said...

Dr Octagon,

My error in referring to "your last comment". I was looking at an earlier comment from the previous page.

I have now caught up with the most recent comments so my remarks may still be relevant. I think you need to revisit your assumptions before you consider the EU debt position and the alleged threat to the Euro.

Cheers

costata said...

JR,

This article by AEP will give you a good laugh. My emphasis.

"The ECB believes sluggish money supply figures reflect the reduction of an "overhang of liquidity" left from before the crisis and are benign. The claim has raised eyebrows among monetarists.

Tim Congdon from International Monetary Research said the ECB had drifted away from monetary orthodoxy after the departure of Otmar Issing as chief economist in 2006, tolerating "crazy lurches" in the broad M3 money supply. "The ECB did not see the collapse in money growth in 2008 and the great recession that followed, and they are getting it wrong again."


From the same article (my emphasis):

"RBS compares the euro crisis with exchange rate turmoil in East Asia in 1998, though the EMU effect has this time switched risk from devaluation to bond default."

"However, Bundesbank chief Jens Weidmann issued a caustic critique of the plan....."It is not our job to finance insolvent banks, let alone countries," he said.

That quote from the head of the Bundesbank demonstrates the true nature of the conflict. The TBTF banks are regulated by EU governments (politicians). The Eurosystem CBs (of which the ECB is a part) are responsible for the Euro.

A managed restructuring of the debt (AKA default) is the only option from the currency issuers perspective. Meanwhile the politicians want to protect their patrons in the private banking and finance sectors. So the politicians are between a rock and a hard place. Couldn't happen to a nicer bunch of A-holes IMVHO.

This piece does point to an interesting (emergent?) strategy by the ECB. When liquidity was tight in Ireland they allowed them to issue 50 billion Euro. If they do the same for Italy etc it may be a guide to how they are going to use the printing press to navigate through this crisis ie. respond to liquidity demands rather than debt levels.

Edwardo said...

No worries, FOFOA. Your post was a good read in any case.

Texan said...

Costata, what is ironic is that the northern CBs are arguing for bank haircuts on the debt ( default), and the ECB is saying no haircuts under any circumstances ( no default).

The ECB will be vaporized if there are haircuts - they hold a megaton of the debt. They are not defending the currency, they are defending their existence.

JR said...

Texan has been posting here for some time, but he still has no clue. He sounds like Desperado :)

Perhaps reading is more valuable than talking?

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

But like everything, there is also some truth hidden away. Despite his efforts getting in his way, he still stumbles on some gems! Texan says:

The ECB will be vaporized if there are haircuts - they hold a megaton of the debt. They are not defending the currency, they are defending their existence.

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

FOFOA writes in his above piece:

"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 [or in the case of the EURO, the currency's value is sacrificed, because they built a currency designed to be depreciated in value] to save the system. And there is a very simple formula for how they do it....

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."


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

[Giving you a little helpful spin,] Well done Texan!!!

"They are not defending the currency['s value], they are defending their existence."

They ECB does not defend their currency's value (that's what the inherently failure bound fixed-price gold standard currencies tried to do, which was LDO *very* unsuccessful). Rather, the ECB is "defending their existence!!!!" After all, the whole purpose of the ECB's existence is to administer the Euro system, and if the Euro currency system fails, their is no reason for the ECB's existence.

Just as FOFOA wrote above [as you may recall, FOFOA anthropomorphized the ECB (aka called it "he")] in FOFOA's extended metaphor/allegory "A Fairy Tale Expanded:"

His only job was providing scrip, announcing its value, and maintaining the system

Cheers, J.R.

JR said...

Thanks Costata,

AEP = :D

costata said...

Texan,

"..they hold a megaton of the debt."

The ECB hold what? About 80 billion out of trillions.

"Costata, what is ironic is that the northern CBs are arguing for bank haircuts on the debt ( default), and the ECB is saying no haircuts under any circumstances ( no default)."

The Bundesbank is part of the Eurosystem CBs. That system includes the ECB. What is the head of the Bundesbank saying above about insolvent banks and countries? No bailout.

As A/FOA said: "the politics of the ECB is a sideshow".

No one wants to take the hit. Same old. Same old. Sth American crisis - same deal. Asian crisis - same deal. Eventually the losses get apportioned and the game goes on.

The private banks and other bondholders will eventually have to take haircuts as part of a combination of measures.

The EU is not going to "sacrifice" the Euro. There is no incentive to do that. Nothing to be gained from it. Likewise there is nothing to be gained by any country attempting to leave the EMU (even if they could).

Ash said...

Texan (in case you missed it) & others interested,

The Emergence of Europe as a Union

The EU, therefore, illustrates the world's first "emergent property" of nation-states acting as an economic (currency) collective, without a very significant fiscal/political centralization of authority. Dr. Steve Keen, a renowned "Post-Keynesian" economist, recently published a presentation discussing the fact that prominent research in Neo-Classical economics has actually undercut the entire edifice of Neo-Classical theory currently taught in schools. [Video of Lecture].

Essentially, the research shows beyond a doubt that market demand curves cannot be modeled by aggregating individual demand curves which are subject to the "Law of Demand" ("all else being equal", demand for a commodity falls when its price rises and vice versa). While this law may hold for an isolated individual to some extent, it becomes little more than a coincidence at the macro-economic scale. Instead, complexity theory teaches us that when economic agents are aggregated to the macro-scale, the new collective is governed by novel, non-linear rules and exhibits "emergent properties".

"The first step is to make sure that, if the inevitable does somehow occur and one of the PIIGS technically defaults on their obligations, the major European bondholders (banks and institutional funds) will at least maintain some value on their books through fraudulent accounting. At the same time, however, the banks will need to "raise capital". That can be done directly through fiscal bailouts by their home countries, but those would also be very counter-productive to the underlying issue in the EMU - excessive public debts and deficits.

The more likely behavior is what we have already seen for Greece, Ireland and Portugal - an IMF/ECB sponsored public bond purchasing commitment. Another reason for executing this now standard European tactic is to protect against the trigger of CDS contracts that were taken out as default insurance. This issue is something Ilargi has written about extensively (see The Derivatives Pressure Cooker and Credit Downgrade Swaps), and it can only grow in importance considering Italy's 120% Debt to GDP ratio and the fact its 10-year bond is about 3% rich to Germany's.

Link to CDS Graph

From REUTERS:

"Fitch said it saw contraction at 4 percent in 2011, followed by a weak recovery next year. It said asset sales in 2011 appear feasible but the privatization plan will be increasingly challenging.

The Fund praised the recent creation of a privatization agency to help rake in a targeted 50 billion euros in proceeds until 2015, and said the target was ambitious but achievable."

..."The conservative opposition has opposed the bailout plan, saying it stifles the economy, but supports some state selloffs. A public resentful with austerity has staged almost daily protests against the measures."


Cont...

costata said...

Incidentally, to all of those folks talking about Germany abandoning the Euro and reissuing the Mark. Take a look at the Swiss Franc. Up from a low a few years ago around 0.86 to the US$ to arund 1.22 today.

Does anyone seriously think the Germans want that to happen to them? They are the second largest exporter on the planet.

Ash said...

Cont...

AP: Italy to Bolster Austerity Plan, Pass it by Friday

"Italy's finance minister says the government's package of austerity measures will be strengthened and passed in both houses by Friday.

Giulio Tremonti sought to reassure markets during a speech to a banker's association meeting in Rome that Italy would speed reforms and austerity measures that seek to balance the budget by 2014.

But he also said that the pressure on markets in recent days was not a problem "of a single country, but of the structure of Europe".


ME:The Greek population becomes more disenchanted with their economic situation and proposed "solutions" with each passing day, but the so-called "conservative opposition" gradually comes to support the PSI ["privatization"] plan, which is fundamentally very much the same as austerity. Now, Greece was the first to reveal the emergent behavior of the EMU collective, but it will by no means be the last. As we get closer to the collective's center, the need to privatize national assets and keep major bondholders afloat becomes even stronger.

So, does anyone now think that Rome will not be submerged in extensive "privatization plans" in the near future? Perhaps a big fat "FOR SALE" sign will be stuck in the center of the Coliseum? It is, as Tremonti says, a function of "the structure of Europe". Personally, I would say that Europe has fully emerged as a monetary union, and it is now behaving as any collective of nation-states would. There is no "turning back", and there is no "sustainable" plan to keep the collective together.

There are only games, tricks, cons and "private sector involvement".

And, then, there's riots and revolutions.

Indenture said...

Ambrose Pritchard Evans: Return Of The Gold Standard As World Order Unravels

Indenture said...

The Golden Truth: Gold Is Now A Flight To Safety Refuge?

holdinmyown said...

Hello Dr. Octagon
"Germany can decide that the Euro isn't what's important. It's the gold that holds the value, not the Euro, and they care more about their own citizens than they do about other Euro zone members. So perhaps Germany will allow German citizens to purchase their gold, but not others. The rising value of the German stockpile goes to the benefit of the German people alone. Again, why would they not make this choice?"

Maybe because they realize that they cannot make it alone? Who would they sell their goods to? The problem is that we at some point realize that we can never be entirely self-sufficient. Humans are ultimately social animals.

JR said...

Getting your sexy on holdinmyown,

Crush!!!!!

"Humans are ultimately social animals."

Echoing JR's favorite author!

FOFOA quoting JR's favorite author (FOFOA is a blogger, not "yet" an "author" - look out LvM) from The Return to Honest Money

"Mises: 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."

Visca el SUPERORGANISM!!!!!!!!

Cheers, J.R.

Michael said...

Hi costata
I ordered the new edition of Aftershock and when it comes I'll try to answer the question of how the Weidemers define hyperinflation and how it relates to the percentage of inflation.

mortymer said...

@Costata: (to your July 15, 2011 6:31 PM)

Rightfully, it was Max Keiser who articulated that "Germany is a superpower hiding in EU".

Angel Eyes said...

Any fool can create liabilities, but it takes a greater fool to accept them as assets.

mortymer said...

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

same old tricks :o) only instead a small ball they play with "value".

"...The swindle became very popular throughout the nineteenth century, and games were often set up in or around traveling fairs. Fear of jail kept these shell men traveling from one town to the next, never staying in one place very long...."

[Mrt: its Your risk if you try to play someone´s game, there is an option not to play.]

costata said...

Michael,

Thank you.

mortymer,

Germany 4.0 as Max Keiser styles it.

DP said...

Indenture: after the transition the amount of currency required to bid for gold will be 50,000 greater than it is today

I only make it about ~37 times or so — FOFOA's $60,000 divided by current market price $1580. Spookily enough ~37 is also $1580/$42.22

sean said...

I thought this well-written article by Jeffrey Snider on gold and tradition was interesting. It suggests that, in the same way Bernanke is using "pump and dump" to artificially inflate confidence in the market, the ECB is doing something similar causing credibility inflation in EU sovereign states. Both approaches are leading to erosion of faith in loan valuations, to the point where U.S. treasury bills are now the only accepted collateral in interbank loans. The author seems to be implying that this spells the end of the Euro and USD, and return to gold (in some way).
The difference of course, as well explained by Costata , is that the Euro can be freely exchanged for gold. But doesn't this saving point of the Euro depend upon it being widely known and understood? Is that actually the case? Or is it likely to be advertised by the ECB at the "appropriate time".

btw, this latest post of FOFOAs and ensuing discussion have been incredibly valuable, thanks once again to FOFOA, Costata, JR and others.

Texan said...

JR,

I don't agree with FOFOA on the "fair operator" role of the ECB. I think he is wrong. So once again, I don't need you to quote FOFOA, because yes, I read it.

The ECB may have originally been designed as he describes, but they have morphed into a lender of last resort. They are starting to resemblmeth Fed. And yes, I know that me debt will be saved at an cost.

But to do that will require further political authorization of all the member states, as well as capital contributions. Already they are in violation of the Maastricht Treaty by buying bonds and by providing rescue funding (you knew the ECB was prohibited by law from saving debt at all cost, right?). Already they are in violation of their single principle to keep inflation under 2%. Akready they are suspending rules on requiring investment grade ratings for collatera, going so far as to say they would accept defaulted collateral. The ECB is now out of ammo for any major extra- legal undertakings.

And we are only in the early innings! So now all the attention shifts back to the Finance ministers. Do they have the political will to craft something to buy the debt at all costs? Or will they impose defaults?

JR, do you know what they will do?

Jeff said...

Texan,

Since you keep asking the same thing over and over, and ignoring the answers, I wish you would tell us what you think will happen. Don't just say 'germany pulls out' or whatever. Take it all the way; does the euro collapse? Bartertown? Gold standard? Tell us the full story, texan.

Texan said...

Jeff, my opinion is that the Germans at some point will abandon their support of the current euro experiment in
favor of a more limited eurozone.

Crack said...

http://www.youtube.com/watch?v=akAj-TWUq0E

Indenture said...

Thanks DP. after the transition the amount of currency required to bid for gold will be 50,000 greater than it is today. Should have read '50 times greater' (although the other would have resulted in 8 mill an ounce and for that price a new guitar would definitely be on the list).

thedeadfauvi said...

People in Germany don’t care much about the euro. We are used to this “Tranferunion”.
There is no inflation at the grocery, Porsche shops are busy, people manage somehow their modest lives. We do not see the enormous social inequality you have over the pond as it is hidden and not so gigantic.

The vast, very vast majority know nothing about gold (except teeth and jewels), those who are more worried about the future think gold is already too expensive and cling to the promises politicians bought their vote with. I couldn’t convince anyone to buy gold and they go on saving in life insurances and similar. Those I know to have bought gold are not in panic, they don’t have but about 10 oz and they see that as a small reserve, not as a store of value. Not sure they would not sell it some day too soon.

There is some vague publicity for gold, deeper pockets (higher middle class) buy it, Westgold say there is a shortage of 500g bars on the secondary market ) but J6P aka Michel doesn’t care. However he expects to have less economic power in the future but that is nothing new.
No party has any acceptance, Merkel is expected to lose at the next elections, but the SPD with Steinbruck want to “save the euro”.
From 2016 on they endorsed new legislation (summer 2009!) stipulating to put a “debt brake” . Even the Bundesländer are no longer allowed to make any debts from 2020 on.
These are some preps, no? ;)

Texan said...

FOFOA,

Just read your comment on "system". Is your view that the sovereign CBs are part of a "system" (that includes the ECB) the way say, Texas is part of the United States?

In this "system" you describe, is there any central authority? Can the ECB tell Germany "the system neds gold, go sell 300 tons". Who decides that exactly?

What happens if one of the CNs "goes rogue" and
"secedes"? Or says "no" to the ECB's request? Do the they get invaded by the other states if they don't cough up the gold?

Or am I asking a stupid question, because there is just "no
way" any member of the sytem would ever abandon the
euro?

Robert LeRoy Parker said...

It seems logical that Germany seceding would certainly lead to war throughout Europe, which would defeat the purpose of the EU altogether.

When asked who the BIS represents Another told us

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

No doubt if Germany were to announce such intentions, there would be an international intervention. The Third Reich has not been forgotten.

Jeff said...

Rickards on gold:

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/7/16_Jim_Rickards.html

holdinmyown said...

Thank you Thedeadfauvi for your report on the ground in Germany. I find this very interesting and a way to gauge the degree of credibility in the $IMFS. I realize that the Euro is not directly part of the $IMFS and will eventually compete with it, but the way that I see it is that until Europeans rush to transfer and hold their savings in gold instead of Euros, credibility in the $IMFS remains strong. It seems to me that the people of the world are not yet ready to abandon the USD as their reserve currency. Although it (onset of FG/RPG) could happen suddenly, reports such as yours lead me to believe that we must suffer the prestidigitation of the Fed, BoE, ECB and BoJ (or whoever is really the wizard behind the curtain of this con game) for a few years to come.

For further colour on the state of the $IMFS in the ROW, I will provide my take on the situation here in Canada. Canadians are generally quite smug in their belief that they have escaped the worst of the GFC. Although the federal government did have to step in (in 2008) to provide liquidity and arrange for a controlled demise of the ABCP (asset backed commercial paper) market, none of our banks, life insurance companies or brokers failed and they seemingly remain healthy to this day. We did not get involved in either the issuance of sub-prime mortgage securitizations or the purchases of same (from the US) to any great extent. Our federal government had addressed an out-of-control debt situation many years earlier and due to several years of budget surpluses in the early 2000s we even managed to pay down our debt a little such that our debt-to-GDP is now among the lowest in the OECD. Also, in the late 90s the government addressed the problem of unfunded pension liabilities by raising the contribution levels of both individuals and employers in the CPP (Canada Pension Plan) and set up a sovereign wealth fund (SWF) to manage the accumulated contributions (before that they had been used to buy Canadian Government Bonds). Although the CPP is now on a much more solid financial footing it is still not completely fully funded.

That is the good news. The bad news is that Canadians haven’t really learned anything from the GFC and generally believe that the worst is over and it is now life as usual (ongoing growth and prosperity) with no need to make sacrifices. Canadians are generally aware of the financial problems affecting our southern neighbour and our European cousins but they believe that these issues will be resolved by TBTB in some fashion or another. (There is a high trust in government here.) The bad news is that individual Canadian households carry way too much debt. This is mostly due to a continuing belief that houses are the best investment (storage of wealth) and form of inflation protection. The housing market has rebounded after a short down period (08/09) and people are not afraid to borrow up to 95% LTV in order to buy a home. Places like Vancouver are experiencing a massive housing bubble but they will not admit it. They believe that new Chinese money is to blame for the higher prices and that this will continue indefinitely. Almost nobody owns any gold other than small amounts of jewelry. Even if they wanted to buy some gold the vast majority of people would not have any clue how to do so. We do not have coin shops in every city as the Americans do but it is possible to buy gold and silver bullion products from select Scotiabank branches that have a precious metals window. Very few people are aware of this.

In short this is a perfect recipe for financial disaster.

holdinmyown said...

I probably sould have mentioned that our provincial and municipal governments are in poor financial shape (except for the province of Alberta). Some of these governmental bodies could require a bailout by the BoC or the federal government in the future. Canada does have a system of fiscal transfer payments in place from the richer provinces to the poorer provinces that lessens the pain for the debtor provinces. The problem is that we are running out of surplus (richer) provinces to pay into the fund.

JR said...

Holdinmyown,

You say:

"the way that I see it is that until Europeans rush to transfer and hold their savings in gold instead of Euros, credibility in the $IMFS remains strong."

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

"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 the credibility they have in the $IMFS that is relevant.

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

This is not about a rush to convert paper wealth into gold. Rather, more like "switch[ing] on the virtual matrix" as the paper plane of wealth disappears ("Turning off the monetary plane that hovers over the physical plane") to reveal "the real physical world" as "true capital is exposed and revalued:"

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

How Can We Possibly Calculate the Future Value of Gold?

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

The "transfer" has already happened, gold is already cornered:

"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

Cheers, J.R.

holdinmyown said...

I agree completely J.R. The point that I was making is htat very few shrimps seem to be following the giants at this point. This leads me to believe that we have some way to go before credibility inflation hits its peak and the pendulum starts to swing back.

Jeff said...

Good reports from Canada and Germany, but truly the shrimps don't matter.

From A Classic Bank Run:" When a small Giant runs out of one of the Bullion Bank's front door announcing "the bank is out of gold," as Fekete puts it, all offers to sell gold against irredeemable paper currency will be abruptly and simultaneously withdrawn."

Or maybe a not so small Giant? IMO China is playing to win, making a big move into Euro paper. Texan, do you think China is buying in just before the euro shatters, or positioning for the bank run? Maybe they will kick off the bank run?

thedeadfauvi said...

Perfectly right. Shrimps don’t matter and never did.
Most intriguing for me is the timeframe for Germany’s decision to stop making debts.
Why exactly 2016??? Just a coincidence?

costata said...

I think this interview with Felix Zulauf is well worth listening to.

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/7/16_Felix_Zulauf_files/Felix%20Zulauf%207%3A16%3A2011.mp3

I am listening to it for a second time now.

"...filling up the holes of destroyed paper....."

Cheers

costata said...

You Don’t Have To Outrun The Bear…...

An article on the EBA stress tests from the BBC. (My emphasis)

Probably the most significant announcement by the European Banking Authority after publishing the results of tests of the resilience of European banks........

..... The EBA said it recommends that these banks be forced by their respective national regulators to raise additional capital as a protection against possible further losses from loans going bad, with a deadline of 15 October for the formulation of remedial plans and 15 April 2012 for implementation.


As I tried (and others tried) to point out to Texan these banks are regulated by the individual countries in the EU not by the ECB. Meanwhile the ECB is part of an EMU wide system of Central Banks. The interests of the various stakeholders (politicians, ECB etc) and their incentives are not necessarily aligned.

In his article the BBC journalist goes on to speculate that the EBA is advising the banks, and “their respective national regulators” to prepare for defaults (perhaps presented as something else) on sovereign debts by the weaker EMU/EU countries.

I think it is also worth noting that the impact of default by Ireland on the UK banks could be much greater than the effect of a restructuring of the Club Med country debts on the European banks (to which the UK banks are also exposed). How much money is China investing in UK debt and UK industry? Diddly squat.

An extract from the EBA stress test Summary Report:

The sample of 90 banks started the exercise with strengthened capital positions having bolstered their capital levels in recent years. Overall the sample of banks had an average capital ratio (CT1R) of 8.9% at end 2010 or approximately EUR1 trillion of which 95% was common equity. In total the CT1 figure included around EUR160 bn of government support of which EUR103 bn was common equity and the rest consisted of other capital instruments subscribed by governments or other public entities during the crisis. At the end of 2010 some EUR50 bn had been added to core tier 1 capital in the form of retained earnings from 2010.

There appears to be some effort in Europe to force their banks to contribute to repairing their capital position.

Texan said...

Jeff,

I guess China is buying (assuming they are buying, who knows) peripheral bonds on the margin ( ie not in huge amounts) for the same reason the ECB is buying peripheral bonds - to buy time. Because obviously if no one buys the bonds they have a failed auction and no euros.

The Chinese have a very big interest in keeping Europe functionining, for the same reason they have a big interest in keeping the US functioning and thus buy gigantic chunks
of USTs. The reason is that Europe is the second largest net importer of Chinese stuff, right behind the US. They don't want Europe to collapse, any more than the ECB does.

As to why the Chinese think it makes sense to "vendor finance" on such a giant scale for so long to both continents, despite their obvious repayment issues (especially on a real basis), well I haven't the foggiest idea.

Costata, there are numerous finance ministers and CB presidents on the wire insisting on bondholders haircuts. This would by definition include the ECB, since they hold bonds. The ECB in on the wire insisting on no haircuts. Trichet has said repeatedly that he will not accept any solution that includes a default. Put simply, the ECB and some of the CBs in the system are arguing with each other.

This is why I keep saying that there is such risk to the euro now. The ECB is insisting that the CBs accede to printing, as FOFOA said they would. But the CBs are now re-examining the deal, and seeing that some of these countries are totally hopeless, don't want to do that.

So the euro is now in the midst of a political battle.

In it's own way, it's not totally dissimilar to what is happening on the debt ceiling in the US. I think this will get resolved, mainly because there are very easy outs for both sides. But it's still a political discussion, and thus not necessarily rational from a Nash equilibrium standpoint.

Costata, I think you live in Australia, correct? Imagine if you were asked to endure a 20% decline in your purchasing power so that Indonesians (for example) could retire with full pensions. Would you be in favor of that? How about another 10% decline to help out the Phillipines? Vietnam? Thailand?

Look, I know I am posting way too much, so I am going to stop now. I just think the euro as a conduit to freegold is not going to happen.

Dr. Octagon said...

costata - thank you for your responses. I think you've convinced me that the volume of gold that would need to be released from a central bank would be much smaller than I originally thought. I need to let this rattle around in my head for a while.

Dr. Octagon said...

Texan said "As to why the Chinese think it makes sense to "vendor finance" on such a giant scale for so long to both continents, despite their obvious repayment issues (especially on a real basis), well I haven't the foggiest idea."

China's government wants to keep their people happy. Employed people are happy people.

Edwardo said...

Texan wrote:

"Put simply, the ECB and some of the CBs in the system are arguing with each other."

Consider that this "argument" may be akin to periodically reported disagreements amongst Fed Governors who invariably default, no pun intended, to the easy money/printing route.

costata said...

Hi Texan,

As to why the Chinese think it makes sense to "vendor finance" on such a giant scale for so long to both continents, despite their obvious repayment issues (especially on a real basis), well I haven't the foggiest idea.

Foreign direct investment (FDI) topped out at the same time as their holding of USG debt. Most of that FDI was from American companies and multi-nationals. The two amounts (FDI and USG debt) were within a single digit percentage of each other.

Think hostages! Technology, plant, equipment and so on.

Incidentally unlike other developing countries (who are generally desperate for FDI) China was selective about the investments they permitted to go ahead. Only about half of the "approved" FDI want ahead. Now some of that would be natural attrition I imagine. Some deals go sour. But I think they were cherry picking the FDI.

Imagine if you were asked to endure a 20% decline in your purchasing power so that Indonesians (for example) could retire with full pensions. Would you be in favor of that? How about another 10% decline to help out the Phillipines? Vietnam? Thailand?

OK I think I see how you are looking at this. Give me (or others) a while to think about how to frame a response that might help to bridge the gap on this issue.

Look, I know I am posting way too much, so I am going to stop now.

Not at all Texan. Post as much as you want to. Sometimes the discussion get's a bit fraught and frustrations spill over. But even when we disagree I have never felt you were insincere, playing games or not making an attempt to understand the arguments presented to you.

And I don't mind locking horns from time to time in case you haven't noticed.

Cheers

costata said...

Texan,

Re: China-EU trade

I forgot to mention that overall the EU trade account is balanced - neither surplus nor deficit. It doesn't require capital transfers to balance the books like the USA.

Dr Octagon,

Attempting to explain my perspective, or present an argument, often helps me to clarify my thinking, so no thanks necessary but appreciated nonetheless.

Cheers

holdinmyown said...

@Jeff
"...truly the shrimps don't matter."

@Thedeadfauvi
"Perfectly right. Shrimps don’t matter and never did."

I can't say that I agree with the 2 of you (and J.R.) on this matter. Put yourselves in the shoes of a giant for an instant. I personally would want the $IMFS to go on as long as I could stretch it out. That way I could continue to bid for gold with my excess fiat currencies at pre-freegold prices thus maximizing my share of annual gold flow (mining production, recycled gold plus whatever investment gold the weak hands are selling) which might total about what ... maybe 3000T per year? But as soon as the lesser giants plus the shrimps start buying then I can no longer deploy all my excess currency in gold. The other giants are then presumably feeling the squeeze also. It is not until this point that a giant would push the issue and point out that the emperor is naked.

As Another said: "Think now, if you are a person of "great worth" is it not better to acquire gold over years, at better prices?” As long as the flow of gold is enough to satisfy the demand of the giants then the music continues to play. But once the shrimps and lesser giants enter the dance floor in large numbers then the music stops and everyone scrambles to find a chair. Only then will we see a punctuation.

JR said...

Date: Sun Apr 26 1998 12:49
ANOTHER (THOUGHTS!) ID#60253:

REPLY:
Date: Sun Apr 26 1998 12:17
Haggis__A ( ANOTHER......... ) ID#398105:
This precise reason why the EURO has to be backed by GOLD. The boys on Wall Street and the USA will HAVE to fight this one. However, the key is for the Japanese and the Chinese currencies to be backed by GOLD. The Chinese may well be on their way, the Japanese a concern as they have as of July 97 0.5% of the Bank of Japan resources held in physical gold.


Mr. Haggis,
I think, China was buying a great deal of gold and gold commitments ( paper gold ) thru a HK trader. They became much of the "not enough physical gold " problem for the oil/gold trade. China dumped much of this paper and continued to take in gold even today. Japan is a story of "no happy ending" as they are seen as "not aligned with Europe" or the BIS way of things. The EURO may send Japan down with the USA dollar! Asia will be lead by China, as they do understand a "Euro world". The ECB does know that "all holes in earth, lead to china"!

Thank You

ANOTHER - Page Three - Mar '98 - Apr '98

JR said...

holdinmyown,

You say:

"But once the shrimps and lesser giants enter the dance floor in large numbers then the music stops and everyone scrambles to find a chair. Only then will we see a punctuation."

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

5/3/98 Friend of ANOTHER

Gold is valued by the number of outstanding claims against it. Kind of like a house for sale with ten bidders. Each bidder thinks the house is, in the bag because they have a valid bid ticket. Each one thinks he can have the house at any time,even thought nine others want it to, because all I have to do is bid alittle higher and take it! Insane, but that's what is going on! 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!

ANOTHER - Page Four - May '98 - Sep '98

The Euro group have and may certainly take steps to raise gold's profile and allow others to do some of the heavy lifting in terms of the gold price by increasing demand for physical gold, but even then, they are still the one's spinning the tracks.

Cheers, J.R.

holdinmyown said...

@J.R.
"The Euro group have and may certainly take steps to raise gold's profile and allow others to do some of the heavy lifting in terms of the gold price by increasing demand for physical gold, but even then, they are still the one's spinning the tracks."

And they will spin those tracks as long as the partygoers stay in control. Once they lose control of the crowd (everyone is too drunk/high) only then they stop playning the music.

JR said...

Hi Costata,

While you are thinking "about how to frame a response that might help to bridge the gap" with Texan on:

Imagine if you were asked to endure a 20% decline in your purchasing power so that Indonesians (for example) could retire with full pensions. Would you be in favor of that? How about another 10% decline to help out the Phillipines? Vietnam? Thailand?

While I'm not qualified to offer a comprehensive response, I might suggest that a part of it include consideration of the import of the fact that Germany uses the euro and issues bonds denominated in the euro too.

JR said...

"The wealth of gold, it does not change. It is hidden from view for the purpose of changing reserve currencies. The dollar has consumed the wealth of all who hold assets in these terms. The American debt is evidence of this consumption. The expansion of this debt now destroys the economies of countries that use the dollar as a reserve. The Euro will be forced to become a successful, hard reserve currency or "gold as a currency" will be backed by oil and take it's place! China and Arabia can force this outcome, as the Euro group will trade with China as the Japan has with America. China will devalue in time and break the American/Pacific economy as oil finds a "good price for commerce" in Euros. This is done as "intervention" into the oil markets, in dollar terms forces the oil price up! In this time the entire Euro Group /China / Middle Eastern economy will heat up to form the greatest demand for oil. All producers will rush to sell oil for Euros and dump dollars.

Gold will rise in dollar terms to values little understood to analysis of "supply and demand". As they know the commodity purpose for gold, little is thought of the "currency/wealth" purpose for gold. As "supply and demand" did not explain the dollar drop of gold for the past twenty years, it will not explain the dollar rise for the next decade! Soon, gold will rise "with the dollar", then the maker of your money will force this currency down in a effort to stop it from coming home.

Many do speak of supply and demand for reason of gold decline because of "extra leftover gold" held in ECB, however, they do not consider the "extra leftover currency reserves"? The Euro will hold forty to fifty billion in total exchange reserves, of that perhaps 15% in gold. This does leave perhaps forty billion in currency reserves to be held. The eleven Euro group countries now hold much more than forty billion in exchange currency. Do they sell these dollars at same time they sell leftover gold for dollars? I think all should talk to these new analysis about the "supply and demand" for dollars, not gold.

To close I offer the thought of a banker : "I would not sell gold for dollars when, as a district Central Banker, I could soon use it to purchase more Euros from the ECB. As all new local continent debt will now be issued in Euros, it is better to allow the new future Dollar / Euro exchange rate to pay old dollar debt. Yes, the coming American dollar inflation will make "good work" of this European debt problem, perceived by many to be "insurmountable! Even now as I ponder this thought, we may not even sell gold for Euros, as it is a true "exchange reserve" of our ECB! As oil will be priced in Euros, and a low dollar price of gold no longer necessary, perhaps, with it's future dollar value" increasing, I will purchase more gold with dollars for future payment of debt?"

We watch this new gold market together, yes?

Thank You

Another"

ANOTHER - Page Four - May '98 - Sep '98

JR said...

holdinmyown,

Context - the Washington Agreement on Gold

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

Mr Gresham (04/17/01; 10:33:51MT - usagold.com msg#: 52041)
ANOTHER: WA, BIS

Was the Washington Agreement the most significant event in gold since you were last posting in 1998? Do you have any reflections on those events?

Who were the players that made the price spike upward so quickly in 1999, and how was it managed back down? (How were so many "fearless" shorts recruited so quickly?)

What is the BIS' role in the "currency war"? Is it somewhat trying to walk the middle of the road? Did the US members take their seats recently as an attempt to manage BIS' involvement, or does this express any measure of US control over BIS?


Randy (@ The Tower) (04/17/01; 13:37:02MT - usagold.com msg#: 52046)
Mr Gresham, nice question

--- "Was the Washington Agreement the most significant event in gold since you were last posting in 1998?"---

If I may be so bold, let me anticipate ANOTHER's answer with an answer of my own.

The most significant event in gold since the dollar's gold default in 1971 has been the successful launch in 1999 of a long-awaited new currency system built upon neutral (meaning, multi-national) management and, more importantly, a floating gold reserve structure that finally abandoned the now obsolete "fixed" gold legacy of the failed Bretton Woods structure.

With this new reserve structure, the prevailing institutional incentive, from '71 to the end of the millennium, need no longer be one of "price suppression" for the perceived market value of gold.

In this light, the most significant element of the Washington Agreement is seen to be NOT the amount of pre-announced gold sales, but rather, the self-imposed curb on gold lending operations by these European central banks. And if you think about it, this action with the Washington Agreement was nearly just a predictable inevitability from the moment the eurosystem committed to provide for freely floating gold reserves. The "tools" of the prior suppression are on the outs. Believe it. The WA simply announced the foregone conclusion in a package suitable for newspaper headlines.

Just as the value of the post-'71 paper dollar has long been propped by the international yet artificial "mandate" to hold these dollars almost exclusively as reserves (acting in tandem with the dollar settlement for oil and the overhanging debts of the "Third World"), through this new currency structure gold (and its price/value!) has now been "officially" set free to replace these dollar reserves (savings).

The reason this full transition has not already occurred is that institutional interest still exists to foster the smoothest practicable transition until that unknowable moment where the final remaining *SNAP* in the adjustment occurs...

excerpted in "FOA on Currency Styling, Currency Management, Dollar Hyperinflation and End Game Scenarios"

Cheers, J.R.

holdinmyown said...

Maybe we all need to abandon the God complex and strive to make "good mistakes".

http://www.ted.com/talks/tim_harford.html

JR said...

Sexy:

"China will devalue in time and break the American/Pacific economy as oil finds a "good price for commerce" in Euros.

costata said...

JR,

Thanks for the suggestion.

Flore said...
This comment has been removed by the author.
Flore said...

for gold to come IN play.. you have to let it play and get it on the field..; thats what uncle sam wants to avoid..thats what the ECB is doing and what the graph are telling us...

Uncle Sam is doint the dirty tackles on the ecb now.. only for the ECB reserve player to emerge..
The reserve player which will win the game

are you ready for a different ballgame ?

sean said...

@holdingmyown, some of those Ted talks are great! I think we've been making mistakes with our monetary systems for the last few thousands years, so it's about time someone finally had the brilliant idea of separating the saving and exchange functions of money.

DP said...

Hi Flore,

I see your point and I don't dismiss it, although I personally can't quite see altruism is the top priority.

My take is that the ECB sales have been "credibility establishment". Let the people who want gold see that they can reliably get it for euros through the BIS. Then they are happy to just keep the euros to some extent and the outflow slows. Happier keeping euros than keeping dollars and hoping the public paper gold market can be relied upon indefinitely. As long as there are euros, there IS gold in reserve to match every last one of those liabilities and the important holders now know it can and WILL be released to them, if required.

Flore said...
This comment has been removed by the author.
Diamond Jack said...

FOFOA is accepting bitcoins. He believes the value of bitcoins will be zero (on a long enough timeline?).

FOFOA accepts US dollars, FRNs. He believes the US dollar has already hyperinflated.

FOFOA does not accepts euros, eruogold or gold.

Gentlemen: I smell a mole.

The time for activism is nigh. Details to follow.\

Indenture said...

Diamond: Have you ever asked FOFOA if he does or doesn't accept gold? But now that I think about it it would be an excellent idea to find an incredibly intelligent and well read individual like FOFOA, have them start a blog and over the course of a few years see if he can get as many people as possible to buy gold just so the 'Powers That Be' can crash the price.

Way to go FOFOA!!!! I'm sneaky weasle but you my friend fooled me!!!!

Nick said...

Diamond Jack,

FOFOA accepts US dollars because that's what he uses in the USA. He has stated before that he does not use these dollars to add to his gold position, so I'm assuming that's why he doesn't accept gold either. He encourages you to add to your own gold position as much as your understanding of the concept lets you, and to donate if you see fit as this is his only job/source of income. Simple enough.

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

From Bob Chapman: International Forecaster
"The European Union and the euro zone were ill conceived and bound to failure. After having lived in Europe for years, and being able to speak several of their languages, you get to understand people and the way they think. Both entities were anthropologically unnatural. Europe is still tribal. Just look at countries like Germany, France and Belgium where people speak different variations of the same language. In Belgium they speak two distinct languages. The EU’s major flaw was sovereign countries ran their own fiscal policies, as bureaucrats ran the EU. You have to either federalize all the way or forget it. The euro zone foisted one interest rate fits all, all on countries that should have never had the same interest rates as say Germany. We talked about both these issues 14 years ago, but as usual, no one was listening. From the very beginning the EU and the euro zone were doomed. Both are going to now begin the process of disintegration, as both are a failure. The six countries will go bankrupt, as will the banks. That will dislodge England and push it into bankruptcy and that in turn will force the US to follow. That may be the catalyst that forces a meeting of all nations to revalue, devalue and multilaterally default, hopefully such a meeting will occur long before this stage is reached. There is no question now that the game is over. The question now is when?"

Indenture said...

Texan: "Look, I know I am posting way too much, so I am going to stop now. I just think the euro as a conduit to freegold is not going to happen."
Please continue posting. I'm still trying to understand the Euro.

MatthAu said...

value this discussion?
sleep better at night after reading this blog?
think this post/comment section alone is worth more than an issue of the economist? wall street journal?

Yes? me too.

Donate.


support someone who actually deserves it.

holdinmyown said...

I've been wondering how the ECB can "print" EUR given the strict restictions imposed on it by treaty. My understanding is that the EFSF is severely limited as to the amount of PIIGS debt that it can purchase.

What if the ECB did a swap with the PBoC ... EUR for CNY with a side letter of agreement that the ECB will employ its CNY to buy USTreasuries and the PBoC will employ its EUR to buy PIIGS debt? Both would win in the short run no? ... and the dance would go on and the music would play.

holdinmyown said...

Good article by Simon Johnson

http://www.bloomberg.com/news/2011-07-17/contagion-in-three-forms-now-has-grip-on-europe-simon-johnson.html

Joel said...

Gentlemen, how about some thoughts on the plausibility of this scenario: Let's say the public remains extremely dimwitted and slow to see their wealth being stolen from them by inflation, and don't recognize the opportunity to buy gold until it is too late. A few giants have demanded their physical, but the gold market has limped through the crisis, and the paper gold market has held up. Gold has moved up steadily to $2600 or $5000 an ounce on inflation fears from the continued monetization of debt, but there hasn't been the expected massive gold buying as a store of wealth because: 1)most were too late to the party and lost the majority of their purchasing power over a five year period; or 2)They continued to rationalize that they must have missed the move, and no way were they going to jump in now at "the top", and 3)many of them are proletariat sheep that voted for Obama, after all, and never will understand what happened. In the meantime, the politicians and bankers promise to never do it again, and agree to lop off a few zeros and trade in the old currency for new currency, to the tune of 1000 to one (or some other serious devaluation). The lemmings actually buy into it, as they have nothing left to lose. They are mad, but they need money to transact, and simply roll over in the name of "fixing the system". Gold, while providing a great return, never has it's "Free" day. Thoughts?

Ash said...

JR,

Please take a moment to reread my post re: the Prag Cap article. Then, consider this comment I made in an email to the person who directed me to the article:

After reading this article again, I think there are several ways in which the author misapplies MMT to derive questionable and/or incorrect conclusions. The best example is probably this one:

[Roche]: 7) Quantitative easing does not increase the money supply and is therefore not inflationary... The current structure of QE leaves interest rates entirely controlled by the marketplace and not the Fed.

This is where he really starts to misapply MMT, when he says "QE leaves interest rates entirely controlled by the marketplace". It is quite clear that the QE programs have successfully manipulated the prices/yields of various debt-assets by creating a demand for them that would not otherwise exist, which incentivizes other institutional investors to allocate leveraged capital towards both Treasuries and risk assets they otherwise would not invest in. So I fail to see any way to argue that the Fed has not heavily influenced rates in financial markets...

The bond market must be the constraint for federal government spending (or "debt monetization"), and the Fed's monetary easing programs significantly diminish the power of that constraint. Political ideology/pandering to various constituents may also act as a constraint, but I have little faith in that one holding up for too long.


Then, take a look at this comment I made on TAE in response to someone asking about Richard Koo's "modest proposal":

Asim,

The one (and perhaps only) problem I have with Dr. Keen (and Koo) is that they tend to be a bit too idealistic about the application of otherwise accurate post-keynesian economic theories. That is evidenced by the suggestion that Europe would be better off if they further centralized financial authority in the ECB, to make it more like the Fed, in an attempt to maintain the ponzi via cheap financing for EU countries, gradual re-capitalization of the banking sector after the losses have been properly imposed on it and its shareholders, "productive" infrastructure investments, etc.

They are quite correct that austerity measures, especially the way they are being imposed now, are the equivalent of economic suicide. And theoretically, a well-intentioned and highly efficient group of politicians, financial officials, regulators, etc. could potentially pull a plan like that off in OECD countries. It would not necessarily fix the more fundamental problems we face, such as the environmental ones, but it would probably "buy" us a significant amount of time to work on those. However, as SA pointed out, that's just not how the system works.

The entirety of the structure, from its basic economic arrangements and incentives to its cultural and sociopolitical values, has been irreversibly compromised, and therefore a "modest proposal" like that of Koo's would most likely make the situation even worse in the medium to long-term.


Then, reconsider what you think you know about my argument.

mortymer said...

Some new food for thoughts :o)

http://anotherfreegoldblog.blogspot.com/

costata said...

Hi mortymer,

Link King, I finally visited your blog. I thought those extracts from Tustain's writing were interesting. Thank you.

Cheers

mortymer said...

Its nothing but a backlog of my readings to navigate and store some interesting articles once the need to recheck-return arises.
The extracts are just personal picks, usually articles have higher value read in full.
Other issue is I did not want to overflow fofoa´s Discussion forum with links destroying too much some exchange of opinions.
May it serve also to others :o)

mortymer said...

Costata, I made one new on your behalf :o) @others: just a new fresh study material.

Jeff said...

Joel,

You can't start lopping zeros off the reserve currency without a run; it would be HI. And don't worry about what 'the lemmings' buy into, they don't matter. The Giants have already made their decision. From the Judgement of Value: "Those that DO have the luxury and power of passing judgment on the value of the dollar are the people that have great surpluses of wealth and real goods. Those that control the industries of the world and those that control the stockpiles of real wealth and the stuff we all want and need."

On another note, euro bond spreads are blowing out today. Gold at 1600. Cue David Bowie's 'Under Pressure'.

Indenture said...

This will solve everything:)
Moody's Suggests US Eliminates Debt Ceiling

Goatmug said...

I've have been thinking about risks to my pm portfolio and here is one that I felt could be one that I hadn't addressed.

When there is a collapse of the Euro or other currency will there be a massive decline in gold and silver as related to margin call selling as banks, insurers, and central banks sell to meet capital losses or even reserve minimums?

In other words, we could see an initial moonshot in the price of gold and silver, but then an snapback collapse. Any thoughts would be appreciated as I hadn't thought about this as a risk till this weekend. I can see myself celebrating my allocation strategy while the world burns only to get crushed in this manner.

Goatmug
www.goatmug.blogspot.com

Ash said...

ZH TIC data (May) summary:

"The Treasury released its May Treasury International Capital data today, which confirms recent trends: while China, both domestically and through the UK, and Japan both added to their gross exposure of US debt in May, Russia's holdings continued to tumble in line with warnings out of Moscow discussed previously and with the continued Kremlin rotation out of Treasurys and into gold. And while Putin has obviously had enough with shenanigans in the US, the same can not be said for his posturing colleagues in China (and Japan) who at least two months ago, brought their holdings of US to 2011 (and record) highs of $1159.8MM and $912.4MM respectively. So much for China dumping bonds. Another source of Treasury demand: petrodollars, which saw their UST holdings in May hit an all time high of $229.8 billion."

Michael H said...

costata,

Thank you for your response.

Although I see where you are coming from, isn't the Euro gold price also affected by the concerns regarding the solvency of the Euro nations? Or do you see the PIIGS as a sideshow?

I suppose another way to look at it is that, if freegold will likely be born in Europe, then that is the best place to look for advance warning.

JR quotes FOA:
"The result will be a massive dollar price rise in gold that performs over several years; as the reserve function transition politically begins."

Who says that events since 2001 haven't played out as A/FOA expected?

In other news, that shameless gold pumper, Karl Denninger, is at it again:

http://market-ticker.org/akcs-www?post=190229

"When investors get nervous about stocks, they usually flow to bonds. Today, they're not. They're buying Gold instead which is up just under 1%, or silver, which is up 3.2%, both on the day"

Stocks down, US bonds down, gold up.

JR said...

Hi Goatmug,

You comment:

"When there is a collapse of the Euro or other currency will there be a massive decline in gold and silver as related to margin call selling as banks, insurers, and central banks sell to meet capital losses or even reserve minimums?"

Silver is separate matter, but for gold, I think a key is your reference to "margin call". How much physical gold do you think these entities hold, as compared to physical gold?

One of the "four key aspects to Freegold" described in Freegold in the Proper Perspective and discussed extensively in FOFOA's blogging is:

2. The end of parity between paper gold price discovery and physical gold price discovery

Do you feel you have strong grasp on the import of that aspect of Freegold?

Cheers, J.R.

Blondie said...

Goatmug said:

”...we could see an initial moonshot in the price of gold and silver, but then an snapback collapse.“

To approach JR’s point from another angle, consider for a moment:

What is gold?
What are you pricing it in?

Boil these two down to their essence, and we are left with a very simple answer:

You are valuing an asset in liabilities.

To take it further, if you don’t see my point yet, consider then:

What is an asset?
What is a liability?
What is value?

Careful consideration of these questions leads to another simple conclusion:

Assets value liabilities, not the other way around.

The Price of Gold is Arbitrary

Wealth is measured in assets, not liabilities; in troy ounces, not fiat paper. Reread this comment.


By owning gold at this time you have already demonstrated to yourself that you are way ahead of the game, that you have ample speed to outrun the bear, any bear.
Relax. Your greatest asset, your greatest wealth, lies between your ears in your capability and willingness to think for yourself. This applies to anyone reading this blog.

Place as much of your surplus value into physical gold as you feel comfortable with, and get on with enjoying life. That’s the real payoff, and it doesn’t require some arbitrary price to do anything.

Blondie said...

THe link that does not work in my comment above is to Angel Eyes' comment 20 or 30 comments or so above on this thread, which read:

"Any fool can create liabilities, but it takes a greater fool to accept them as assets."

Flore said...

Damn.. keep it simple...

http://barondayne.blogspot.com/2011/07/talking-point-net-debt.html

All those holding gold should hang this above their bed..

All those holding silver will wish they had it above their bed

All those holding nothing will perhaps don't even have a bed left

Indenture said...

"Any fool can create liabilities, but it takes a greater fool to accept them as assets."
Didn't the Fed purchase bank liabilities and placed those securities on their asset side?

costata said...

Michael H,

Continuing that radio signal signal metaphor for another moment. I think the Euro gold signal is less noisy than other currencies but it is not without static.

Unfortunately we still have to filter the signal and finetune it with our own analysis.

As for the Club Med countries (I dislike the PIIGS acronym) yes I think it is a sideshow. Offer the EU California in exchange for any of them and see if you get any takers.

costata said...

Indenture,

"Didn't the Fed purchase bank liabilities and placed those securities on their asset side?"

Perhaps I'm not fully awake yet but shouldn't that read "purchase bank assets and placed those securities on their asset side" in exchange for FRN liabilities.

Indenture said...

costata: This is exactly why I read and participate in FOFOA! You're right. It is fairly difficult to remember that a dollar is a liability. I only have decades of learning to unlearn:)

Steve said...

FOFOA, remarkably, bankrupt Greece recently added 1000 troy ounces gold to their holdings. Very interesting!

Mashuri said...

I have to agree with Octagon and Texan. The Euro is doomed due to political reasons. The people of Greece, and soon Spain and Italy, will continue to revolt until they get a government in place that flips the bird to the European Union. If the German government is dumb enough to actually try and eat all the resulting defaulted debt, then the people of Germany will start burning buildings until they get what they want as well. The U.S, will start seeing this as well once states start going into default.

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