Wednesday, August 3, 2011

Go Go South Korea



The Bank of Korea released its new foreign reserve statement yesterday, which can be downloaded from its website here. In it the BoK disclosed the purchase of 25 tonnes of gold in July (or possibly June and July as reported elsewhere). It also reported a $6.55 billion revaluation gain which it attributed mainly to dollar weakness as reflected in its yen and pound-denominated reserves. Its "deposits" line shows an increase of $6.45 billion, which appears to correlate with the $6.55 billion gain.

Likewise, the $1.41 billion decrease in "securities" appears to correlate with the $1.24 billion gold purchase. The BoK describes its "securities" as "including government bonds, government agency bonds, international financial institution (IFI) bonds, financial debentures, MBSs, ABSs, and others." It also points out that "securities" make up a whopping 88.5% of its reserves.


Since the BoK reports its reserves in their dollar-denominated value, changes in the value of the dollar will affect its yen and pound reserves, but not its dollar reserves. So I feel it is fair to surmise that its yen and pound reserves reside primarily as "deposits" (which rose) while its dollar reserves are held mostly in "securities" (which fell, probably because of sales). Furthermore, it would appear that the BoK decided July was a good month to sell some US dollar bonds and use the proceeds to buy gold for the first time in more than a decade.

I know a few of you were incensed by parts of the news reports, particularly the part that said the BoK "entrusted all of its gold holding to the Bank of England for possible use in gold lending and other related transactions in future." I actually think this makes perfect sense in the context of the BIS that I learned from ANOTHER. I'll get into this a little more below. But first, a bit of Korean history is in order.

A part of the news reports that I found quite misleading was this: "During the 1997-98 Asian financial crisis, patriotic Koreans collected the precious metal as part of a campaign to boost the country's foreign reserves, when it was on the verge of a sovereign default."

I'm sure many people that don't remember the real story read this part to mean that patriotic Koreans hoarded gold during the Asian financial crisis. But actually it was quite the opposite.

The Asian financial crisis spread via contagion from Thailand to Malaysia, to Indonesia, to The Philippines and ultimately to South Korea. As the crisis reached Korea, the currency markets put downward pressure on the won in the bet that the BoK wouldn't have enough foreign reserves to defend its currency. The bet paid off.

In 1997 it was believed that South Korea's $25 billion in foreign reserves was enough to defend the won. Even Alan Greenspan thought so, as he wrote in his book The Age of Turbulence: Adventures in a New World:

"Korea's central bank was also sitting on $25 billion in dollar reserves- ample protection against the Asian contagion, or so we thought."

But as it turned out, only about $9 billion of the $25 billion was liquid enough to be deployed in defense of the currency. The rest was tied up in, among other things, government guarantees on foreign debt lent to Korea's debt-addicted industrial titans—family-owned companies like Hanbo Steel, Daewoo and Kia that soon went bankrupt and were dismantled or sold off. So, finding its foreign reserves sorely lacking, the government asked its citizens to chip in and defend the won with the last line of defense, their gold jewelry!

As my regular readers know, any gold inside a currency zone, public or private, is a viable reserve. And as the won was tumbling on the foreign exchange market, gold priced in won was rising. So the desperate government implored its citizens to dig out their gold and sell it into the rising price. Millions of patriotic Koreans literally lined up around the block to sell their rings, necklaces and other gold trinkets which were melted down and sold into the international gold market in defense of the won. Some even turned in their gold for free, in support of their country. Here's a poignant quote I found:

"I sold two gold rings and one necklace", said Lee Suk-ja, a housewife. "It was a small amount, but I take a great pride in taking part in helping the country in time of need."

In all, the people of Korea spewed around 250 tonnes of gold to the outside world, about a quarter ounce for every adult in Korea. But it did no good other than to rid Korea of her reserves. That's ten times the amount of gold the BoK just purchased last month. But at $300/oz. in 1998, it was barely a drop in the bucket. That was a mere $2+ billion in US dollar value to add to the $9 billion in foreign currency the BoK was able to deploy.

Here are some quotes from ANOTHER during the Asian crisis:

Date: Fri Dec 12 1997 21:33
ANOTHER (THOUGHTS!) ID#60253:


Even Korea will find out that oil is all that counts. Their paper will die! Gold would have helped them in a different world, but for now gold is in the background as the IMF tries to add more paper to this inferno. If one owns real gold, it will be with ease to view the world currency developments. They will be truly of biblical proportions!


Date: Wed Feb 04 1998 23:23
ANOTHER (THOUGHTS!) ID#60254:


REPLYS:

Mr. Studio. R.,
Will several ( or many ) bullion banks fail?

"when one cannot repay a loan, it is done" !

Are the bullion banks bonded?...

In the real national/ world there is no such thing as "bonded".

Look to Korea for proof!



Date: Sat Apr 18 1998 19:18
ANOTHER (THOUGHTS!) ID#60253:


But, how can this be, you ask? It is done, "right before your eyes" and we see it not! I ask you, if you have one ounce of gold, and sell it on the market for $300, it is worth $300, yes Now, what if CB hold one ounce of gold, and sell it twenty times, that one ounce is now worth $6,000, no? The difference between you and CB? The persons that hold "interbank" IOU for gold, value it at the multiple of leases/sales made against reserves. This leverage, it is held for performance on bank part. The BIS, it force performance, on any economy! You ask Korea about gold, yes?



I hope these quotes from ANOTHER make a little more sense now that you have the context in which they were written. And now back to the BoK gold purchase.

The news reports said the BoK "entrusted all of its gold holding to the Bank of England for possible use in gold lending and other related transactions in future." That sounds like an "interbank IOU for gold" doesn't it? Perhaps it's even in a BIS sight account!

Now, what if CB hold one ounce of gold, and sell it twenty times, that one ounce is now worth $6,000, no? The difference between you and CB? The persons that hold "interbank" IOU for gold, value it at the multiple of leases/sales made against reserves. This leverage, it is held for performance on bank part. The BIS, it force performance, on any economy! You ask Korea about gold, yes?

Aww gee, do you think maybe there's a difference between you and the CBs when it comes to gold? Could it be? I wonder why the CBs call their gold "monetary" gold while your gold is commodity gold or non-monetized gold.

Physical gold is different than modern currency. At the CB level, it rarely gets moved. This was a big reason for the creation of the BIS in the first place. If you think about the purpose of the BIS as a clearing system or gold broker for interbank sales, it makes perfect sense that most of the gold deposited with the BIS would be sight or unallocated.

The purpose is so that CBs can transfer gold around the world without having to physically ship it. Avoiding the cost and risk of physically shipping a heavy metal is an important service provided by the BIS. And it does this mostly in unallocated form. When the BIS physically moves gold, the risk is shared, i.e. the risk is on the BIS.

The BIS is owned by its customers, the CBs. They set it up and subscribed to it (bought in) so it could provide services like this. The BIS's own gold is still owned by the CBs because they own a proportional share of the BIS.

Say you want to give me a hundred dollars. You go into your bank and deposit a hundred dollar bill. Then you fund your Paypal account and send me $100. Then I send that $100 from my Paypal to my bank and I can walk in and take out that $100 bill. You’ve just sent me a $100 bill but no one actually physically shipped it across the ocean. It was an unallocated deposit in one location and an unallocated withdrawal in another. This is what the BIS does with gold.

Out of practical necessity, privacy and security, most BIS gold activities are with unallocated gold. The main difference between the BIS and private bullion banks being that BIS sight accounts are fully reserved. Being "reserves" is the very definition of CB gold.

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". To fully understand what that really means you must come to terms with this fact. "When you use paper currency you are placing a value using another persons concept of value" You are using a thought as a means of value!


5/5/98 ANOTHER (THOUGHTS!)

Question: **Along these lines, I too believe that currency movements will flow through Europe because the Euro currency will be gold backed. Where does that leave Japan with over $200 billion in dollar reserves, let alone its massive U.S. Treasuries' holding? **

ANOTHER: Perhaps, they be like Korea? Rich in paper until the world says, "this paper, it is not good"!

Question: ***Your associate says that BIS helped China increase its gold holdings. Please tell me what the source of that information is, or is it simply a speculation on his part. ***

ANOTHER: The BIS is the gold broker for all interbank sales / purchases. Bullion Banks are for sales to other entities. I think, at first, China was leverage against the oil producers. Then Arabia was allowed into BIS for Euro.


5/26/98 ANOTHER (THOUGHTS!)

Understand, all value judgments today are as subject to "exchange rate competition"! It is in "this exchange rate valuations" that the private citizen does denominate all net worth! A safe way to hold the wealth for your future, yes? You should ask a Korean or the Indonesian ?

One should grasp that "today, your wealth, is not what your currency say it is"! In this world, paper currency is for trade, only! It is for the buying, selling, earning and paying, not for knowing the value of your family holdings! Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"! Again, I ask, how can we know a true value for our assets, when they are known only in currency that finds it's worth, as in the exchange rate for another currency?


8/10/98 Friend of ANOTHER

Also, as gold begins to rise against the dollar, the local gold reserves are seen as assets of increasing value, backing the local currency. Under these conditions, with a stable currency, citizens will purchase more gold as it is seen as a positive asset. Not unlike a rising stock, everyone wants an increasing investment. Contrast this action against that in Korea, where everyone sold gold as it increased in an unstable currency!

Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold. Michael, you are absolutely correct in that the USA will see a hyper inflation of its currency and a gold price in dollars that reflects it. Unfortunately, for most investors, the gold price rise will be sudden and also hyper fast. as it will occur just after a rapid plunge in dollar based assets including, stocks, debt and the entire banking system. This action will destroy virtually all gold based paper assets as they are also dependent on a functioning economic system.



Looks to me like Korea learned a lesson. BTW and FWIW, the popular name that caught on in Korea for the 97/98 crisis is "The IMF Crisis". If you'd like to learn more about the Korean crisis and the IMF involvement in it, there's a great series of blog posts here, here and here.

Sincerely,
FOFOA

216 comments:

1 – 200 of 216   Newer›   Newest»
Kicker said...

First!


Wejn,

Will gold money send you those small amounts of gold when you want them?

Kicker said...

I understand the excitement about the big players getting into the gold market now. But for freegold to work doesnt gold have to be available in smaller and smaller quantities?

When this is done it looks like there are going to be a few people in the world with a lot of gold (Asians and CB's) and a lot of people in the world with free floating fiat Euros(Everyone else).

After the waterfall event they will try to make gold available in smaller sizes, but people are still going to have to save in fiat in order to buy that little sliver of gold.

Saving in fiat seems to defeat the purpose of Freegold/RPG.

Wejn said...

@Kicker: nope, you can redeem 100g bar at this moment (again, IIRC, it's been a while since I was last @ goldmoney).

FOFOA said...

Hello Kicker,

No, Freegold transition does not require small sizes. They will likely be an after effect. The vast majority of currency is traded for life's necessities and debt service rather than the timeless wealth asset of Kings. Following in the footsteps of giants requires more than pocket change.

The transition to Freegold is all about the big players.

Sincerely,
FOFOA

Motley Fool said...

comments...

Winters said...

Better prepare the Open Forum 1700 post FOFOA!

When reading Another, I came across those comments about Korea and had no idea what he was talking about. I tried a cursory search but your post clears it up a lot!

Winters said...

"had no idea what he was talking about"

actually that goes for a lot of Another/FOA's material but it is slowly sinking in :)

d2thdr said...

The transition to Freegold is all about the big players.

Hey FOFOA,

Thanks for that nugget. Thats what I always belived.

Shrimps can get as much gold as possible now, when it is still priced cheap in USD.

In the Era of RPG, shrimps have no chance unless they chance upon ahidden gold hoard.

An anecdote, one of my patients died due to old age. He never trusted the banking system. He used to bury his 'money' in a national park close to where I work. No one knows where he has hidden it, not family nor his 4 brothers.

Now some time in the future, some one will find his hoard. I know it must be gold. It can not be paper.

Paul I said...

Thanks FOFOA

I hope Korea recovers its pound of flesh, and takes a couple of limbs for good measure...

Long live freegold!!!!

DP said...

Comments

Flore said...

fofoa you nicely connected the dots.. thanks.. I think i'll hit the donate button

Unknown said...

Michael here...(once again unable to get Blogger to recognize me for the decent human being I am) I can sign in sign out and back in again and keep coming up UNKNOWN.
anyway,,,yeah after reading Another 14 years after the fact it was pretty hard to put together all those Korea references. Since I was not paying any attention then...well it does now...thanks

Unknown said...

Michael aka Unknown (ah the indignity of anonymity) With so very little gold available on a per person basis (I'd estimate .5 oz max per person after accounting for that held by CBs etc.) the amount of gold one might need to be wealthy would be quite small. Perhaps 1 OZ might be the result of a producers lifetime (production less consumption). That is why at todays prices one can accumulated the wealth of dozens or hundreds of productive lifetimes. These numbers could even be high if gold stops flowing.

Motley Fool said...

For what it's worth. My estimate is at 1/7th of an ounce per person. :P

Unknown said...

Michael (Unknown)
and we should all know by now there is no guarantee that ANY gold will flow to anyone. The World will not change to the point where everyone will get some gold. Thus once again the argument that you should get some now while the gettin is (relatively) easy.

Robert Mix said...

Thank you FOFOA for writing about Korea's experiences with the crisis and their recent purchase of the 25 tonnes.

If I were Korea's Central Bank, I might very well choose to leave it at the BIS as well. South Korea lives in a bad neighborhood.

I am going to send this link to our Korean bearing suppliers. Maybe they would be interested!

You probably could use some more readers from Korea!

;)

^--- Hey that worked! Learn something new every day!

OC15 said...

Thanks for this FOFOA. When do you estimate hyperinflation to hit the U.S.?

Unknown said...

Michael here
The "here, here and here" links at the end of the article are well worth the read. Nice and simplified language about the way the IMF 'helped' Korea in 1997. Much bitterness but some gain in understanding on both sides. It gave me a better understanding of the way currency defense by a country works.

Jeff said...

Emerging world buys $10 bln in gold as West wobbles

LONDON, Aug 3 (Reuters) - Central banks of emerging market countries such as Korea and Thailand have added more than $10 billion of gold to their reserves this year in a sign of waning faith in the West's benchmark bonds and currencies like the dollar and the euro,

http://www.reuters.com/article/2011/08/03/gold-reserves-idUSL6E7J30EY20110803

The Dork of Cork said...

I think we are very close now -Unicredit is a cesspit by all accounts and it seems in trouble.

A whistleblower working for the bank in Ireland has apperently been silenced for years.
A potential future Irish president has had to step down from his election.
He is gay and made a plea for his lover on senate paper in Isreal - his lover raped a 15 year old kid some years ago , its been leaked.
But he also had made accusations based on the whistleblowers evidence a year or so ago.
I can smell the coruption withen the system.
The Eurosystems CBs are going to hit the red button soon.
Its always been by experience that Ireland is a litmus test for the Eurosystems credit crap games as so much of the real bad shadow bank stuff is located here.
God its close.

enough said...

Kicker,

Somalia issues a .62 gram(recently traded for $26) and some 1/2 gram 24k .9999 fine wildlife series gold coins with elephants on them. Really lovely coins. Keep a saved search on ebay......they do come up for sale semi-regularly

M said...

@ FOFOA

This post put a little doubt into my mind rather then conviction.

It looks to me like if the people are dumb and nationalistic enough, a central bank can get away with anything.

It also looks to me like just because a central bank is buying gold, it isn't a vote of no confidence on the IMFS or the dollar per se. Does a central bank like BOK realize that their purchases could break the commodity price of gold out ? Do BIS members have an obligation to limit their purchases in order to keep a lid on the commodity gold price ?

Freegold looks like an inevitability but it also looks like the CBs can still keep a separation between commodity gold and monetary gold for a good while. Maybe they will give the hard money socialists their gift of 5 or $6000 an oz but that is where they jump on the brakes.

Michael said...

I'd like to update a quote from FOFOA from one year ago:
"My advice: Get as much of this priceless reserve asset as you can while it's still going for $1,240 (make that $1668) at the margin. (still) Seems like a bargain to me."

radix46 said...

DoC,

"I think we are very close now -Unicredit is a cesspit by all accounts and it seems in trouble."

So, they just bail them out and on it trundles. I don't think that the system is as fragile as everyone thinks. A/FOA were convinced it would collapse over a decade ago. It didn't. Since then it has survived one of the biggest banking meltdowns ever, rolling debt crises in Europe, a major natural disaster in a massive economy, debt ceiling shenanigans etc and it still keeps on trucking. Gold hasn't gone parabolically mental, it's just continued its steady uptrend. There seems to be plenty of gold around for people to buy.

How big does a crisis have to be to overwhelm the central planners? I don't see coming anything bigger than what we have already seen. As Europe refines its bailout mechanism, it will become increasingly better at dealing with crises and it has a lot of room for money printing and the perfect system to cope with it.

China has no incentive to pull the plug, it wants as much gold as possible, so it will continue to play the game.

I think that this could go on for a lot longer than many think and that Martin Armstrong's 2015/6 looks much more likely. It doesn't look imminent to me.

burningfiat said...

Quick physical gold availability report from 140 gold shops in Chinatown in Bangkok, Thailand:

No problems whatsoever, the place is swimming in gold available at small premiums above paper spot.

I have trouble imaging that place ever running out of gold...

The Dork of Cork said...

@Radix46
Italy has a BIG bond market.
The ECB could bluff stupid or corrupt core exchequers to pay for Ireland , Portugal & Greece but Italy is different.
Only through base money printing can Italy be saved.
Trichet can talk gibberish again today but no one is buying it - his 2% consumer inflation targeting is no longer crediable.
The ECB is perhaps the most corrupt CB of all (and thats saying something) - completly ignoring their base during the credit inflation phase.
His talk of using interest rates to contol inflation which it does not is no longer even a good fairytale now.
The market is cracking.

radix46 said...

DoC,

I see that the market is cracking. It has been cracking for a long time. I just don't think that it will be a problem any time soon.

They will fudge it, even if it means 'printing' money and changing the structure of the euro bond markets.

I agree with you that there are problems, but I just don't see the fragility, it seems to be fairly robust, considering all that has gone on.

The Dork of Cork said...

@Radix
They will have to take some radical measures in the Eurozone if they want to curb consumer inflation.
If they want to preserve this present contraption they need to produce cash pushing up the price of Gold to unheard of levels.
Example : ECB subtracts peripheral euro sov debt , converting it into euro cash to fund goverment , thus exploding the Euro balance sheet - turning commercial banks in the periphery to all Goverment saving vehicles as we hopefully save the cash to “fund” goverment.
If we “save” this cash by funding goverment there should be no inflation but watch the fiscal defecits go past 200% & property reach its true cash value.
The Italian Bond market is woth 2 trillion alone
If they produce 2 trillion to cover all the PIigs - thats a doubling of their balance sheet !

radix46 said...

DoC,

What if they convert peripheral bonds into euro bonds - essentially creating a transfer union? Sure, the politicians may have a tough time, but what's new?

Why would they have to cover all of the peripheral debt? They do have some receipts.

We have seen throughout all of this mess that authorities have been very good with coming up with fudges that keep the markets happy.

I think that they will continue to do this, surprising many people.

I have shared your view before, but I shared it for too long! I'm not no longer surprised and no longer in a constant state of readiness for imminent collapse.

I think the alternative financial media tends toward hyperbole and it is easy to get caught up in it.

Jeff said...

Radix,

If the bond between fiat, oil, and gold didn't matter, they wouldn't control its' price. This 'walking up' the price, the oil/gold link, the euro architecture, all point to the same conclusion. IMO there isn't only one freegold button, but several. Oil, the europeans, and probably China and Russia all have the capability to cause the waterfall event, not to mention the first Giant who can't get physical gold in size. It's a room full of land mines at this point.

We are just waiting for someone to take a wrong step. Waiting is the hardest thing to do, but oh so rewarding in the end. Have a drink at the All Inn, radix, ans wait.

radix46 said...

Jeff,

I am waiting. Oh yes. I do see the current system dying at some point, I just don't think that it will happen soon.

China and Russia don't want to pull the plug - they want more gold!

There are no indications of gold shortages, so I don't see an imminent Giant Gold Disappointment event.

I think they are walking up the price very nicely and the euro architecture is performing just swimmingly, they are fudging the debt issues very nicely and they are absorbing exogenous shocks (like Fukushima) very nicely.

I simply don't think it's imminent.
I have got my regulars seat at the bar of the All Inn and my stash lies nice and still, but rather than not going outside for fear of wolves, I think I might just take a holiday.

The Dork of Cork said...

@Radix46
Its a transfer union alright but the money always gets transfered to the core holders of capital rather then the core countries.
Heres how Ireland got screwed - begining in the mid 1990s the core reduced their fiscal debt , because fiscal debt just subtracts credit deposits - the deposits in Germany and other strong countries exploded - because of low fiscal German debt levels it could not invest in its own fixed capital , becoming more efficent but much less productive in the long run.
The credit deposits exported blew bubbles on the edge of the eurozone creating unsustainable consumer fixed capital (houses) car buying etc. - further increasing credit leverage - but the core increased "wealth" through this unsustainable interest income and exports.
The non default on shadow bank debt has further concentrated wealth creating a massive socio- economic crisis in Europe.
I have lived through this EMU / Euro mess for over 15 years now - and I have to say the misallocation of capital has been on a epic scale , only the Pigmen will benefit from this.
Europe has imploded - but as FOFOA has clearly said this is all about setting up a new monetory system , Europe is tertiary to these bastards.
Even Germanys long term wealth have been destroyed - Professor Sinn : "Two thirds of the savings, or €1,071 billion, flowed abroad instead. That would have been enough for 357 maglev lines from Munich’s airport into the city"

Its so sad.

JR said...

FOFOA from The View: A Classic Bank Run:

"So you see, these "special full reserve accounts" created a synthetic supply that diverted people from the action they knew they needed to take, delaying that final, inevitable outcome, a bank run. That cash was always going to go to a few "giant" clients in the end. A few that could afford it. The few that got lucky in the end. Because the banks knew all along that it will ultimately be a "giant" that sounds the alarm. The overriding goal has always been to delay the inevitable, not to avoid it, for the last decade at least in my opinion.

And that is how the banks are using this "vaulted cash" to delay the revelation that a bank run is already fully underway. They are slowly buying back those "special accounts" in order to move that cash, a little at a time, into safety deposit boxes for the big customers that are actually "running on the bank." As long as no one runs out of the bank's front door yelling "the bank is out of cash," then the run hasn't reached the panic stage yet. But that doesn't mean it isn't happening...


We cannot know the actual state of the BBs' books from what is visible for analysis. So how fast could all of the physical gold reserves be spoken for? As frightening as it sounds, worst case, they may already be. When I think about Jim Rickards' second-hand account combined with the fact that someone is draining GLD, it seems like we could be in the final stage of "extend and pretend that there is not a run on the bullion bank reserves."

We shrimps should have gold available for purchase until some small or medium-sized Giant is denied allocated bullion. Several people asked after my last post, "What if all the APs won't play ball and redeem your basket?" My answer was, "Well, then it is game over for Bullion Banking!" Gold is going into hiding. 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.

So buyers large and small, get in line to get your gold. Because we have no way of knowing who will be the last in line to get cashed out. What we have here is an explosion in the bullion banks' physical leverage factor, not through an increase in lending this time (the lending is actually declining), but through customer withdrawal of reserves, with no physical backstop. Even a bank with a conservative leverage factor can experience a bank-busting, system-crashing run. Public confidence is the only thing that stands in the way. This is how a classic bank run runs. "

JR said...

FOFOA's reply to Bron in the comments to The View: A Classic Bank Run:

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

"You write: "[Bron]A speculation: maybe the reference to no more leasing in the 1999 and 2004 CBGA statements was a message to the BB to clean up their books. However, around 2008-09 the banks said they will fail without the backstop, need more time to unwind, have increasing physical redemptions, so CBGA drops the leasing reference to enable them to continue the "extend and pretend that there is not a run on the bullion bank reserves."

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

[FOFOA]Yes, this is possible. It would require a cost/benefit analysis at the highest level of international central banking as to how much physical gold to "spend" in order to buy a little more time. And we are talking about supplying physical during a run, not certificates, so this would be a new and different undertaking. And as I have speculated in previous posts, there comes a time when the cost of "more time" rises exponentially.

Also, does that fit within the framework and what is visible as laid out in my post? I don't know. That said, Randy Strauss has also proposed the existence of a plan to delay the inevitable a little bit longer:

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

"[Randy Strauss]The central banks of the world, throughout their long history, have more or less developed the requisite infrastructure and ample experience in the fine art and science of gold storage and allocation transfer. Therefore, not only is an alternative to the dollar available for the store of value role, it is readily available with no significant timeline to accommodate the practice. To be sure, many central banks have already in place the mark-to-market accounting structure to accommodate (and benefit from) the significant upward revaluation of gold reserves as would be expected to occur through the dollar-to-gold transition.

Various policy signs over the past several years had indeed pointed toward 2010 to be the watershed point in the international monetary transition, but the depth of the current commercial banking crisis likely argued strongly for a delay under the thought that calmer waters would facilitate a better transition. As such, the existing infrastructure and policy is largely in place at the present time, so a timeline for this store of value transition can be every bit as short as that for invoicing — essentially, no time needed for flipping the switch.

But in light of the current crisis and some of the policy efforts underway to restore calm to the commercial markets, it looks to me that the new timeline for significant transitions is mid-2013 consistent with the current policy talks driving the permanent European Stability Mechanism to that timeframe, but with that said, it could be set into motion at any given moment between now and then, and between your breakfast one day and breakfast the next.

[JR's emphasizes RS here] Hence, it is best that you work to actively establish your desired gold position without undue delay, and then with peace of mind you can turn your full attention to the business of living your life as it was meant to be. Spending significantly further time obsessing over currencies and investments is a fool’s errand.
""

Cheers, J.R.

The Dork of Cork said...

I think people are missing the grand strategic objectives of the elite.
The Eurosystem has clearly destroyed the EUs wealth whether through much reduced fixed capital spending in Germany or the misalocation of credit to the periphery as the cores ratios fiscal spending was reduced therefore creating these deposits.

The eurosytem was / is all about setting up a new monetory system - the health or wealth of Europe is secondary at best from these Titans perspective.
Remember the First World War was all about transferring European gold to the newly created FED as Sterlings role was diminished (Germany & France had the largest above ground Gold deposits at that time ,with the UK in control of below ground South Africa)
These men are capable of anything - the economic warfare and misallocation of capital we have seen since the mid 1990s has been just another war fought this time mainly on the trading floors but with hidden casualties.
You cannot fight it now - generations of pig men have been bred & selected for this changeover , its horrifying really.
http://www.youtube.com/watch?v=WFGh9ARUI_s

Kicker said...

I guess we will just have to wait to see how the small denominations of gold play out.

If gold doesnt flow down to the little people after freegold. I guess things wont change much for the average person, they will still use/save in fiat, the fiat just wont inflate as fast as it has in years past.

Has anyone thought about how difficult it will be to crash a system like freegold?

It seems like in the past, economic systems would arise and be pleasant at first and then tyrannical at the end. But there was always the hope in knowing that at some point the system would break, corruption would be swept out to some degree, and people would find their God again.

If a system is perpetual and self sustaining, how is the tendency of human nature to become more and more corrupt over time, ever going to be purged from the system, if the system never resets?

I understand that after freegold some regions of the world may be irresponsible with their money and all their gold may flow out of their region leaving them poor or even hyperinflated. But that wont reset the system and purge it of the morally corrupt.

Sure the bankers in that hyperinflated region may get killed for their indiscretions but after a while the country will start to produce again. And the immorality of the society will go on to reach even greater heights.

I know this blog tries to stay on the amoral side of this topic. But where is the joy of being rich in a society that can never reset morally?

victorthecleaner said...

Trying to predict the timing is a fools' game. But it's nevertheless fun.

I think there are two issues that have the potential for triggering a major loss of confidence.

First, the US cannot grow without printing money anymore. Once they stop printing (end of June), it takes a couple of months and, even at the surface and for all to see, the US economy goes down again.

At some point, the Fed will (have to) resume the money printing. This might be seen as the official admission that the US financial architecture is broken.

The second issue is the debt level in Europe. It is pretty clear that neither Italy nor Spain can be bailed out by guarantees from Germany or by injecting fresh capital alone. The ECB would have to monetize a good part of the questionable debt, say 500-1000bn.

This might be seen as the official admission that the Euro has failed because of the internal imbalances.

I think if you are honest you have to admit that basically all euro governments from the bottom up, up to and including France, are insolvent once interest rates reach their typical long term averages. The spread France-Germany has already been creeping up for a while. Let's wait and see when people notice.

Victor

Unknown said...

Kicker
Michael here:
you said: "the fiat just wont inflate as fast as it has in years past"....and then made significant comments...
I do not think just because we have a competing savings tools that we won't see misbehavior by bankers and printers. It will serve to restrain them however and there will be a visible manifestation of their poor performance (an increased price of gold in that currency) when they are naughty. Fiat will be as it always has been, there to be loaned out and used to enrich the state and its friends. Hopefully the future provides the masses a way to see the bad behavior in an obvious way and to save their wealth in spite of said naughtiness.

costata said...

Rumour

Trader Dan made this statement in his latest blog post:

Further intensifying the fear trade was news that a large bank (Bank of New Yokr Mellon) was actually charging customers a fee for putting cash INTO their bank! If that was not revealing, nothing was.

Can anyone confirm whether or not this is true?

If true, this is a significant development.

Aquilus said...

Costata, yes.

http://www.bloomberg.com/news/2011-08-04/money-market-rates-fall-below-zero-as-treasury-bills-retain-haven-demand.html

middle of the article under 'excess reserves'

Jeff said...

BNY Mellon is not a retail bank, their customers are institutional. Not sure what to make of Dan's claim.

Ramon said...

Wouldn't the institutions subject to the $50mm+ negative interest status seek to diversify out of their dollar holdings, effectively herding them into treasuries? Barring that, commodities and other physical assets?

That's assuming BNY Mellon is only the first to start doing this and that others will follow. Could it be a self-protective measure by Mellon?

JR said...

FOFOA from Gold: The Ultimate Un-Bubble

"But the thing about THIS bubble's rise that is so different from any rise in gold is that the price of past issued debt has a natural upper limit. And the "lowering of interest rates scheme" has a physical floor, an inevitable and unavoidable dead end... call it ZERO.

Yes, we have seen a couple ventures into negative interest rate territory lately. But this is simply anathema to the very concept of money, period. It is the ultimate froth, the last breath of air you can blow in before a bubble pops. It is the sure signal that the end is nigh.

When interest rates hit ZERO, they only have one way to go.
And that means that the value of past issued debt, the very kind of TRASH that China is sitting on a land-fill mountain of, only has one way to go... DOWN.
"

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

Ender on Sir Topaz

"...Sir Topaz has been around for years and has thoughly studied the words of Another and his friend, yet, he has a background that gives him a unique point of view from which to build upon.

From his first post: “If we concede there isn't any "value" in money then, let's take a look at "things" from a rather unique perspective ...TIME!

Time plays a key role in the pricing of everything. Everyone gathers things and, with their suplus, puts off the gathering of more things for some TIME – typically holding a currency. Ultimately, they will find a time in the future to cash in that ‘holding’. All the while, there must be trust that what is being held will have the same – or more – value in the future.

In his third post “The $US and $Gold” we see:


"As the "players" quietly exit the "game" , the role of assuager will be taken up by 'ol Buck I feel ...which is in keeping with US T-bill market action of late ie: less "yield" the market demands over the short-term implies an ever-growing desire to hold ONLY $Cash.
...

Now fast forward to the last couple November posts “Say what?? … 3mo gone negative??” and read on. It may be that some investors are thinking there is no TIME left – thus only $US.

Will be worth watching, for if yields say non-existent (or negative) TIME will be forced into the present and the dollar will find support, big time. While, at the same time, to satisfy demand, someone may have to print like there’s not tomorrow to keep up with demand.
"

Cheers, J.R.

JR said...

FOFOA from Big Gap in Understanding Weakens Deflationist Argument

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

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

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

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

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

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

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

Cheers, J.R.

Aaron said...

And here's JR right on queue! Maybe instead of Assistant Trail Guide you should be given a badge of Resident Historian. Either way, Thank You JR. What a great service you provide us all.

--Aaron

costata said...

Thanks JR. Illuminating.

Re: BNY Mellon

This article contains a wealth of information about the possible/probable motives and rationale for this iniative.

http://online.wsj.com/article/SB10001424053111903366504576488123965468018.html?mod=WSJ_hp_LEFTTopStories

Cheers

Aaron said...

Great link Costata. This really pushes home the (wrong) idea that we should consider savings as counter productive to the US economy. From one perspective this is certainly true (for USD) as a hurting market denominated in USD needs room for expansion. Don't save (hoard) US dollars! I would counter with, Don't save US dollars as your wealth reserve! But more to the point, you don't need to insert these dollars into the market when you have the option to exchange them for gold!

"However, banks and economists have speculated that one of the Fed's options is to reduce or even eliminate that interest payment, hoping to push banks to invest their deposits in the private sector."

"Fund the private sector with your savings!" they say.

This notion holds merit in the future, but not today. Today we must hold physical gold. We as individuals cannot save the system. We can only save ourselves.

--Aaron

Aaron said...

Apologies to FOFOA regulars, but each time I watch this video I remind myself it seems to capture the essence of what gold holds in store for international trade more than any compliation of words can present so accessibly.

Gold has so far been forgetten by the masses -- but lucky for us this video captures that loss of memory we will all soon learn throught the passage of time.

Go gold!

And Thank you FOFOA!

--Aaron

Wendy said...

Aaron I voted for that song to be the gold song in FOFOA's poll. Did it win?

Michael said...

Watching the DOW crater today I was expecting gold to drop too as margin calls demanded cash Silver did tank but gold was only down.76%
Now in China and Japan and HK all these down 2 to3% but gold is up!
Are we seeing gold finally taking its place as a safe place to keep your money when the markets tank, a place once reserved exclusively for Treasuries?
I've only been paying attention for a year and a half but this seems different.

M said...

Funny how the gold stock weighted TSX venture was the worst performing out of all, down 5.71%.

FOFOA has sure been right about gold stocks. A few majors now have reported bad earnings due to productions costs. This is very positive news for bullion because it means that inflation is slowing production. Production costs are rising faster then the price of gold. $1650 gold is too cheap.

Kicker said...

Thanks Michael for your gracious response.

Im not trying to troll or get people riled up, Im just curious if anyone has looked at freegold as possibly being a worse system for society than what we currently have.

I know Dork of Cork is on to it.

I mean governments giving up sovereignty to a perpetual economic banking system can not be good. Who's going to govern? Fake puppet gov's put in place by the system?

It seems that there was something written about a world economic system that controls its self, and is not subject to any governments control. And that it wouldnt be a very good system for humans after about 3 1/2 years of operation.

But this was written like 2,000 years ago, so maybe it doesnt apply anymore.

The Dork of Cork said...

Theres also another dynamic........ the Bundesbank.
It has voted against supporting Italy ! or at least thats how it is reported.
The Bundesbank was a post war creation - it had close links to the company.
Is this a action by the US treasuary which maybe has covert operatives inside Germanys CB which always had very lose connections to the German state unlike lets say the BOE which is a more symbotic union.
Something is very fishy - the ECB needs to provide cash to goverments so that the sov debt transmission can flow down to the payment of private debt - otherwise the Eurozones trade & commerce will collapse.
AS FOFOA often says fiat is first and foremost a medium of exchange , not a store of value.
Why can't the Eurozone just change its inflation targets ?

Aaron said...

Hi Wendy-

Great question. I took a look at FOFOA's Freegold in the Proper Perspective post where he originally opened the poll, but I'm not sure if the winner was ever posted. It's probably mentioned somewhere and I'm just missing it. I searched for the word 'results' in that post. No luck. Great song anyway. ;-)

I wonder what the DOW will do today. My bet is on a rally. ;-)

--Aaron

JR said...

Hi Kicker,

Think not of a repition of the seemingly perpetual resets of the existing monetary system that seeks to fuses the monetary functions of transactional currency and store of value.

Instead, think of Another money system built on the separation of monetary functions, a currency medium to exchange, and something else for saving wealth.

Blondie has shared a great bit of his deep knowledge and wisdom in this regard. Maybe he will show up and I have a few comments of his in mind to share.

But lets first start off with a nice base. Please please read FOFOA's Bondage or Freegold? . Here are some tasty excerpts:

Spend Currency, Save Gold

It is the concept of becoming a Super-Producer (producing more than you consume) that creates the need for savings.....

Today, while in our producing years, we transfer our excess value into bonds. That is, someone else's bondage to us. A SPECIFIC SOMEONE! We hold as wealth reserve a contract that says someone SPECIFIC will provide for us later when we can no longer provide for ourselves. These contracts are reputed to be better than gold! But are they?

This system on its surface is clearly a Ponzi scheme, requiring an ever-growing future army of laborers lured into debt in order to service the Super-Producers of yesteryear. But there are bigger problems than just the pyramid structure of the system.

Rather than staying balanced, the globe has divided into hemispheres where one side is producing more and the other is consuming more...

No Reserve? Yin and yang!

Let us now visualize what global trade would be like without a global reserve currency...

Each currency would only circulate between the public within its own zone, importers and exporters, the banks and the currency exchanges. And the exchange rate of all currencies would match the purchasing power parity (PPP) between countries based on the balance of trade! If the PPP got out of whack, then arbitrage would automatically step in to equal it out. How? Through the free trade of GOLD within each currency zone!

You see, with no global reserve currency in play, no single currency zone will have the wherewithal to manage the price of gold. It will float FREELY against all currencies within their own zones! And the only entities that will NOT benefit from this transition are the US Federal Reserve and the US Treasury! Yes, all other "evil powers that be" will benefit along with J6P! This is why there will not be resistance once the dollar goes!

If one country exports more than it imports, a shortage of its currency will develop on the currency exchange. This will drive up the price of that currency, also driving up its purchasing power relative to gold which trades in all currency zones. If exchange rates resist this gold PPP then gold will become underpriced within that surplus zone and the arbitrageurs will swoop in and bid it back up!...

In a Freegold system, the incentive is for the nation state to create an environment where the gold price is continually falling in that local currency. If so, people will want to hold that currency knowing that they will be able to buy MORE gold tomorrow (or in the future). It will setup an environment where the businessman will WANT TO invest in that economy knowing that when the payoff comes - years from now - they will be able to convert it into wealth reserve.

Freegold is beneficial to everyone - except those that can print a currency out of thin air that can be used to buy goods anywhere in the world. You and I CANNOT print money. You and I can only go into debt for currency today (Committing future work for currency today). That going in debt subjects us to the political ramifications of the management of the currency. That may be good or bad depending on how it's managed.

Gold stands separate of this mis-management.


Cheers, J.R.

Joel said...

Kicker,

In my view, govt.s will govern, no differently than they do today, with one exception: no more spending sprees and debt expansions without killing their currency. The economic system doesn't have "sovereignty" over anything except currency value, and the "system" doesn't "put anyone into power." It merely provides a check and balance to unfettered spending that is nonexistent today, especially in the US with it's reserve status and the false demand that it creates for our currency. It forces countries to produce their way out their debt, as opposed to printing their way out, and maybe most importantly, provides a stopgap against the ignorant Marxists and Keynesians that have ruined many a system with profligate spending and bloated governments.

Edwardo said...

Someone please correct me if I'm mistaken, but I don't think FOFOA offered an opinion on how gold stocks were going to perform before Freegold.

And, in any event, I think his view (well, Another's view) of gold stocks is that while some number will come through, they will become victims of windfall taxation where physical will experience little, if any, taxation.

In short, the benefits of the revaluation of gold pertain to physical only.

Edwardo said...

And speaking of physical, I'm pretty sure Sprott's PHYS-which has a redemption feature for actual physical- has been addressed before, but I can't remember what the consensus was?

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

You can redeem from PHYS...in 400 oz bars.

FOFOA explained in detail in 'Who is Draining GLD'.

Edwardo said...

Yes, Jeff, I know that you can redeem in that size. I am wondering if people have confidence in it?

S said...

@Dork of Cork

Good observation on Bund - in view of German gold storage and Weber resignation.

If you believe the comments about Italy wanting out of Libya and a halt to hostilities plus the Wiki info (dis) about Berlusconi (Italy) close ties to Putin/Russia (Eni) then the non help would appear to support your inference.

Take a look at the comments acoming out of Russia this morning surrounding US designs on Syria and Yemen (plus iran). This is all the more timely considering the Palestinean declaration approaching. Check for the new moon (August 28-31, Spet 24+)

http://en.rian.ru/world/20110805/165570384.html

"Russian diplomat pointed out at the fact that the alliance is aiming to interfere only with the regimes "whose views do not coincide with those of the West."

Jeff said...

Edwardo,

"PHYS is not a fraud and neither is GLD. PHYS simply tracks the price of paper gold, not physical, just like GLD. It is not physical gold because it does not have all the unique and discreet properties of physical gold, including infinite divisibility and privacy. It is only divisible down to a 400 oz. chunk in the way that matters come crunch time. If you own 400 ozs. of PHYS, then God bless you and good luck. Will it track the price of infinitely divisible physical gold in a pinch? Not until after you redeem your 400 oz. lot of shares for the real thing, assuming that goes smoothly during crunch time."

Sincerely,
FOFOA

Edwardo said...

Thanks, Jeff.

Unknown said...

Michael here:
Rick Ackerman has a post on ZH
http://www.zerohedge.com/contributed/deflation-returns-thunderclap
it made my head explode. He argue that deflation is coming, it is here, it is going to stay ...and oh yah we will also have hyperinflation as folks discover that their paper currency is no good and gold shoots up...maybe...hmmm maybe I'll read it a third time and see what I missed. He sounded like a deflationist but the gold and hyperinflation comments just seemed to be an 'aside' that refuted his prior arguments.

victorthecleaner said...

DoC,

the Bundesbank. It has voted against supporting Italy [...]

Here is how I understand the situation. The German CB are old-fashioned hard-money people. They don't subscribe to the vendor financing scheme. They don't think that the exporters ought to subsidize the consumers by providing them with (artificially) cheap loans.

They take a long view and know that this scheme will eventually be unsustainable because it is based on an ever increasing debt level of the consumers.

They are prepared to starve the consumers off their credit and even accept a short-term recession, knowing that they will nevertheless be much better off in the very long run.

And Germany used to be very successful with their strategy pre-Euro, even though the old Deutschmark was always overvalued.

Finally, if you are honest and think about how trade would work in a freegold world, you realize that it would be rather similar to the Bundesbank position. The flow of gold from the consumers to the producers (even inside the euro area) would naturally limit the southern deficit spending.

The old-fashioned hard-money Bundesbank is in fact closer to freegold than the soft-money French position of printing money in order to keep increasing debt levels going.

Victor

Unknown said...

Michael here...
again reread the Ackerman article (which now has mysteriously disappeared from ZH). As a rank amateur I hesitate to criticize a well know blogger but it seems he simply does not believe that more money will be printed to buy debt (front lawn drop and all), he also seems to have a strange definition of hyperinflation. Apparently (per Ackerman) the price of gold could sky rocket but everything else will be deflated and the dollar will be super strong...in everything but gold. Is this even possible?

Unknown said...

Michael here...
again reread the Ackerman article (which now has mysteriously disappeared from ZH). As a rank amateur I hesitate to criticize a well know blogger but it seems he simply does not believe that more money will be printed to buy debt (front lawn drop and all), he also seems to have a strange definition of hyperinflation. Apparently (per Ackerman) the price of gold could sky rocket but everything else will be deflated and the dollar will be super strong...in everything but gold. Is this even possible?

victorthecleaner said...

Edwardo,

And, in any event, I think his view (well, Another's view) of gold stocks is that while some number will come through, they will become victims of windfall taxation where physical will experience little, if any, taxation.

You need to take into account that Another and FOA wrote in 1997-2001. At that time, most large gold mining companies were fully-hedged or even over-hedged. A rapid increase in the price of gold (paper or physical doesn't matter) would therefore have bankrupted them because of these derivatives.

I remember Another wrote that he owned stocks of one particular company - I guess it was the only unhedged major producer at that time. Who was it?

Apart from the hedging of the late 1990s, sure, you need to think about the political risks. I think I remember Australian politicians have already stated that they can take the gold in the ground. I have not heard this from the Canadians yet, but you always have to take into account that Canada is very very close to the US.

Victor

The Dork of Cork said...

@Victor the cleaner.
There is no such thing as Hard debt money - thats a fiction given to the German people by the Bundesbank.
They must remain in a fictional mercantile state to peserve this illusion.
This blog I persume is not about hard money vs soft money but what the new reserve currency will be.
When private credit contracts can not be paid due to a lack of bank credit production - only base money printed or given to the fiscal authorties to spend can sustain the debt contracts entered into - theres no other way - you need money to pay bills , debt etc , austerity just transfers consumption elsewhere.
I warn you the Bundesbank is a post war creation of the US treasury through the CIA.
It is not like the French or British CBs.
Its consumption austerity of the oo years was against the interests of both the German & European peoples as it created a unbalanced Eurozone.
I can see the hands of the CIA all over this Euro farce.

Kicker said...

Ok, but it seems like the EU nation state govs are giving up their sovereignty to the ECB at this point.

The nation state governments cant print Euros so they are subject to the ECB system. If the IMF$whore system crashes and burns, and everything (oil) starts to trade for Euros, but Euros free float against gold in a perpetual system controlled by the banks (or bank BIS), how will a banking system of this nature ever be destroyed?

I know, I know, your thinking why would you want to destroy an evolved system that appears to be a meritocracy......but is still managed by secretive bankers that have human natures.

I mean with the IMF$ system at least once we learned how it was set up after 1913, we could have hope that at some point its ponzi nature would collapse and we would get a little creative destruction. Sure people in the world would suffer to a degree but a huge part of the immorality would be purged. And the world could start from a cleaner slate, its been happening this way for thousands of years.


Now we are not going to get a moral reset after the whore goes down, we are going to get something much different it seems.

Motley Fool said...

Kicker

With all due respect.

Your ignorance as regards this is very interesting, and nearly complete it would seem.

I agree with whoever-wrote that you should perhaps peruse the thoughts of Blondie.

Peace

TF

High 5 said...

I have a question for FOFOA or anyone else that can explain their answer.

Would the U.S. experience hyperinflation if the government decided to actually default on the national debt (refuse to pay it back)? How about high inflation?

Personally I believe the result would be deflationary but a respected friend disagrees.

Thank you in advance for your answer(s).

Edwardo said...

You knew it was coming and now there are hints of what form it (QE3) will take.

It's called Operation (twist)ed and has its origins in the 1960s. I'd post the ZH link, but suffice it to say that as per TD at ZH

"it's about a curve patterning exercise in which the Fed would lower long-term rates by changing the average maturity of Fed holdings, in the process removing substantial duration from the markets, once again pushing investors into far more risky assets such as stocks."

Joel said...

@Edwardo,

Yep. So now they're planning on changing their maturities, but guess what? You can put a dress on a pig, but it's still a pig...we are still buying our own BS. And I think anyone who thinks the USG is not going to continue to print is smoking crack. Just as Fofoa has predicted, it will be QE to infinity, in the name of "economic stimulus", with hyperinflation as the end game. With their "not on my watch" mentality in DC, they will take the longer (albeit more painful) route to kick the can as far down the road as possible, printing until the final implosion when one of the big dominoes falls (loss of USD reserve status, refusal of USD for oil, paper gold crash, worldwide fiat crisis, etc...)

victorthecleaner said...

DoC,

There is no such thing as Hard debt money - thats a fiction given to the German people by the Bundesbank.

Well, it is just not that simple. I think you can (in theory) have perfectly hard credit money as long as you control the total volume of credit created in the banking system. In fact, this is how they started out, by telling the banks in quite a detail how much credit to create and whom to allocate it to (small businesses, not consumers, etc). Similarly in Japan. The pre-Euro strength of the Deutschmark and the sound growth of their economy was an indication that this worked very well. Similarly Japan right after WWII.

The modern tragedy of the German saver is that they were lulled into trusting their CB and lulled into saving in credit money (credibility inflation). But at first, both in Germany and in Japan, this was even justified.

The problem is, of course, that eventually someone comes and waters down the rules and allows the banks to create more credit than prudent, and off there goes the long term value of your fiat.

Its consumption austerity of the oo years was against the interests of both the German & European peoples as it created a unbalanced Eurozone.

I can imagine that many Germans take a different view: The French tricked them into the Euro with its huge internal imbalances. This allowed the French (and Italians etc) to scoop off the German excess profits and savings.

This is the main danger for the euro. If the euro keeps cheating the producers for their profits and does not reward their work, the producers will eventually withdraw from the community.

FOA praised the euro for its external trade balance. The price was a tremendous internal imbalance. This is a ticking time bomb. If it goes off too early ... game over.

Victor

Joel said...

Rumblings of S&P going ahead and downgrading us to AA+ or AA. Won't that downgrade cause Treasuries to fall in value as collateral, and subsequently either a)make it necessary for banks to either go out and raise more capital (a long putt in this market): or b)use up their cash they have been hoarding, killing their ability to make the loans, etc...necessary to grow? A bad answer either way, unless of course they simply change the reserve requirement like they did the Fed, lol....

The Dork of Cork said...

@Victor
Yes , you are right - I was being a Dork again , you can control credit aggregates to lets say population growth , have a 2% rule or some such - but that may work best in a full reserve system where the goverment creates all the credit - although its possible I guess that a CB could control its little sisters but very unlikely.
But I was thinking of the present situation where you already have extreme credit malinvestment , fiscal defecit spending which in extreme cases involves increasing the base is needed unless you want to default on deposits and disrupt commerce etc etc.
But the high growth of low credit mercantile states is dependent on more extreme credit creation elsewhere - see the dollar bubble.

And yes the internal eurosystems problems is a microcosm of the worlds great trade imbalances.

Edwardo said...

Credit downgrade? Not so fast.

http://www.zerohedge.com/news/cnn-sp-reconsiders-downgrade-after-white-house-challenge

M said...

@ Joel

Re- US debt rating. I think the US is employing some behavioral economics. They probably want the debt to be lowered so that it lowers the dollar.

@ Edwardo

Stocks are less risky then bonds.

Nick said...

downgrade official. AA+. First of many stops.

Wendy said...

http://www.bloomberg.com/news/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html

Hmmmm Friday after the close of markets.... no suprise there I guess. Monday should be an interesting day.

costata said...

http://www.financialsense.com/contributors/james-quinn/2011/08/05/bread-circuses-spending-cuts

James Quinn writes:
Ernest Hemingway captures what is happening to the American Empire in one brief quote from his novel The Sun Also Rises:

“How did you go bankrupt?” “Two ways, gradually and then suddenly”

Aaron said...

Wow. Interest rates?

Aaron said...

From Costata's link to financialsense.com.

"The entire debt ceiling farce was a circus on an epic scale – The Greatest Show on Earth. The American public was treated to high wire acts of near debt experiences, Senators putting their heads into the mouths of lions, and hundreds of clowns riding tiny bikes with squeaking horns. In the end, American politicians did what they do best - pretended to solve a spending problem without cutting spending."

Aquilus said...

The biggest immediate problem is that without AAA rating the whole shadow banking system (overnight lending) based on no collateral for previously AAA rated US Treasuries might come to a grinding halt for a while without explicit guarantees from someone (hint, hint)...

enough said...

interst rates are not going up in any meaningful way.

Japan is AA, one notch lower than new AA+ USA rating and rates are zero there.

Treasuries are still the risk off vehicle( and now gold).

All these commentators and politicians saying we risked higher rates if we didn't raise the debt ceiling were clueless or crying wolf.

Rates in the USA are lowest they've been since 08 crash.....dont you think political weakness of USA is priced in already.....not really a surprise....

High 5 said...

I asked this earlier. Would an actual, rather than debasement, default by the US be deflationary or inflationary?

Wendy said...

High5,

Because policy allows for printing, that will never happen!

High 5 said...

Wendy,

I agree with you but I also know that the future is unknown, and that many countries have gone the pure default route in the past.

Do you have an opinion on my question? Thank you.

M said...

@ enough

you said-"Treasuries are still the risk off vehicle"

The Fed didn't become the largest holder of these treasuries for no good reason. Obviously there is not enough demand for them. The Fed subsidizes the treasury market to make it appear that it is a safe place to put money. While at every rally, there must be legit participants getting out and staying out.

Even though it was US debt that got downgraded, I bet this stupid stock market will tank and the debt will rally come monday.

M said...

@ High 5

It is inflationary. Look at the Russian Ruble in 1998, Thai baht in 1997, Mexican Peso ect ect ect.

Edwardo said...

"Stocks are less risky then bonds."

Not presently.

High 5 said...

M,

it would be a different situation since the debt is denominated in domestic rather than foreign currency. Big difference since bulk of worlds investments are in Treasuries and that loss of dollars from the world would probably create massive deflation. Everything would be foe sale to cover margins and the collapsing of 500 trillion in derivatives could be very deflationary, no?

Maybe it is unknowable because it might depend on policy decisions afterward but it sure seems like the velocity of USD would come to a screeching halt along with a massive collapse in supply.

victorthecleaner said...

DoC,

you can control credit aggregates to lets say population growth

or nominal GDP growth. Soros gave a couple of lectures in 2009 suggesting that you need to control credit (Central European University??). Even under a freegold system, people will probably find out that the fiat keeps inflating in a useless fashion unless you control credit. If people don't listen to Mises or to to Soros, they will learn it the hard way.

But the high growth of low credit mercantile states is dependent on more extreme credit creation elsewhere - see the dollar bubble.
And yes the internal eurosystems problems is a microcosm of the worlds great trade imbalances.

I agree only with one aspect: Yes, you can view the US and China as a currency union (the notes just get renamed from US$ to Yuan when they cross the ocean). Then the US is to China what southern Europe is to northern Europe. I agree that this applies today to some extent, but I think the 'old Germany' was different.

Since the Deutschmark kept appreciating, the German exports were never drugged by cheap credit. Apparently, they got their trade surplus because they did something better or more efficient than others. Now that the Deutschmark cannot appreciate anymore, the German exports become more and more corrupted by credit growth in the south. Therefore, I would suspect the quality will deteriorate because there is less pressure to focus on quality as long as cheap credit allows them to grow the volume. Germany is probably becoming more and more Chinese under the Euro regime.

Victor

Aaron said...

Hello High 5-

"I agree with you but I also know that the future is unknown"

Perhaps I can put this statement in Another context.

Is it unknown if our world's atmosphere will have oxygen -- tomorrow?

Is it unknown if our sea will contain salt -- for the next 1000 years?

It is unknown if our currency will lose value across the time continuum for as long as we can imagine?

I believe there are some truths we can know -- and the dollar's future is one of them.

From your question:

"Would the U.S. experience hyperinflation if the government decided to actually default?"

Yes. We have already printed many US Treasuries. We are obligated.

--Aaron

M said...

@ High 5

On 13 August 1998, the Russian stock, bond, AND CURRENCY MARKETS collapsed as a result of investor fears(loss of confidence) that the government would devalue the ruble, default on domestic debt, or both.

We are seeing the US government devalue the USD right now. We are also seeing the US potentially default on their debt. This inevitably will cause investors to flee the dollar(loss of confidence) just like they fled the Ruble.

M said...

@ Edwardo

If you held German bonds through the wiemar inflation, ww1 and ww2, you got wiped out 3 times. If you held Siemens stock through the same period, you never got wiped out once.

Wendy said...

M and High5,

I would be interested in working through this thought process:

What if the world today doesn't have any rubles but has lots and lots of bucks! The US decides to stop making payment on their debt (interest).

I read something yesterday that said that there are (??? dont remember the number) bucks in circulation outside the US.

Does an outright default send those bucks home, causing hyperinflation or does it send those bucks down the international toilet creating a hyper deflation in the US?

HELP would be appreciated from our local geniuses ;)

High 5 said...

Aaron,

You are delusional. Seek help.

High 5

Wendy said...

Where the hell is mortymer these days.... one can only spend soooo much time playing with a grandchild!

And while I'm on my soapbox, I thought that martyjn was suppose to deliver the results of his research re: Another:
months ago!

Any word??

holdinmyown said...

Hello High 5

I believe that an answer to your question is in fact unknowable. You have already offered up the deflation argument so I will not repeat it. However it is also entirely possible to have hyperinflation as a result of the US defaulting on its debt. As FOFOA pointed out (JR can tell you where) the conditions for hyperinflation are already present (credibility inflation). Hyperinflation is not inflation on steroids but rather a loss of confidence in the currency. So what hapens to credibility if the US defaults? Does it resume its inflation? ... disinflate? ... deflate? I don't think that we can know for sure but my guess is that foreign holders of USD/FRN would quickly lose confidence in FRN since it is backed by the debt issued by the US Treasury. If this debt was repudiated then how could they have faith in FRN? I suspect that credibility would rapidly deflate outside the US and all that FRN floating around out there would quickly be spent for whatever goods could be purchased (gold, silver, food,etc) thereby flooding back home to US shores. Even if the US tried to enforce currency restrictions I doubt that the flood could be stopped.

High 5 said...

M,

Fear of a quick devaluation would create a panic just as fear of outright default would. The first would make one fear the currency and the second would cause fear of asset deflation. In a default assets will deflate as they are sold off for the only currency available, which would engender more confidence, in the currency, because the need for debasement has just been removed and the currency supply is being decimated through debt destruction.

High

Wendy said...

High5, why did you pose the question if you already had your answer??

M said...

@ victor

"Even under a freegold system, people will probably find out that the fiat keeps inflating in a useless fashion unless you control credit."

Under freegold, long term savings will be in gold, not in government bonds. Fiat will only be a means of facilitating daily transactions. Credit as we know it today will not exist. Credit will only come in the form of venture capital deals where people will sell gold and invest the funds in the equity of a new venture.

High 5 said...

holdinmyown,

Thank you, that makes sense to me. So maybe all the USD would come flooding back into the US to buy up assets at bargain prices, due to the economic collapse, and therefore stabilize asset prices in the US. At the same time the worlds assets would continue to deflate?

Interesting but probably unpredictable due to all the variables and no historical equivalents. It would definitely be epic. I do think the USD will just be debased until collapse but anyone who says they know for sure is nuts, IMO.

High 5 said...

Wendy,

Because I'm not confident my answer is correct. It's just my uneducated opinion and I'm curious what the brainiacs here think. For some reason I th ink it's important to know the arguments for both sides. If it's advantageous for the US it can definitely happen as all is fair in love and war.

I think it might be a good strategy eventually.

Wendy said...

War has always been the stratagy!!

High 5 said...

i'll take your word for it.

M said...

@ Wendy

An outright default would cause a fall in the value of the dollar because the only thing that backs the dollar is the full faith and credit of the the US govt.

A default is the extinguishing of the credit. In the short term defaults historically cause a 40 or 50% crash in the currency.(inflation, hyperinflation)But in the long term a default is good because it eliminates the debt. Once the currency hits rock bottom, it has a fresh start and can rebuild from there.

Just look at all the countries that defaulted and crashed their currencies in Asian financial crisis. They have since rebuilt from rock bottom and are now creditor nations with huge foreign exchange reserves. Thailand and South Korea are buying gold.

Oliver said...

Hello All,

On a different topic, according to kitco, spot gold (US$1661.10) closed at a healthy premium to August futures (US$1648.80). While the futures curve remains in contango, is this the beginnings of backwardation?

Does anyone deem this relevant?

Does anyone have access to Sandeep Jaitly's work at bullionbasis.com to verify this?

Regards,

Oliver

Wendy said...

Thank you for all the input, this little post is about encouraging more............. comments????

costata said...

High 5,

You wrote:
Would an actual, rather than debasement, default by the US be deflationary or inflationary?

Part 1/2

I’m thinking out loud on your question because it is a long time since I gave this outcome any chance of happening (given the political implications), so don’t treat this as my attempt to present a finely honed argument. I would also like to place a caveat on what follows – the default would have to be sudden. No time for anyone to attempt to front run the default and set off a panic.

If it was telegraphed well in advance you could see a catastrophic loss of confidence in the US dollar, and all debt denominated in dollars, that could induce hyper-inflation before the default actually took place. A Greece type situation in the bond markets plus a US “drachma” that would be savaged in the FX market. Worst of all possible worlds.

With that in mind let’s break this down into its components:

1. The USG formally defaults and presents creditors with a take-it-or-else deal to restructure its debts.

2. Any debts, derivatives or other liabilities whose value is tied to a USG security would be devalued as well. So the default would put downward pressure on the price of those paper assets. If the scale of these losses is large enough and sufficiently widespread it could lead to severe recession if not an outright depression.

There are domestic inter-government debts, creditors with formal claims (T bonds etc), informal claims such as USG liabilities for Social Security, foreign holders of debt and so on. For the sake of simplicity let’s assume that all inter-government debts are cancelled and the same deal is offered to all of the other creditors.

Now the USG has a couple of fairly clear options. It could offer cash (say 35 cents on the dollar) which is going to add to the supply of circulating currency. I would argue that the creditors who are accepting cash payouts would want zero maturity paper in exchange for their bonds ie. currency.

Continued/

costata said...

/Continued

Part 2/2

Based on $100 trillion of USG liabilities versus less than a trillion in circulating currency there would be lots of new currency issued but the devaluation of other securities within the financial system could provide some offsets in the overall “money” supply (comprised of currency and bank credit money).

So lots of fresh cash currency within the USA and externally. This is inflationary if you accept the argument that inflation is a monetary phenomenon. In my opinion the FX market would react swiftly and the US dollar would collapse in value. There could be a catastrophic loss of confidence in the US dollar across the board - hyper-inflation. So this doesn’t look like the best option to me.

Instead the USG could offer new debt securities in exchange for existing paper on terms that, say, cut the overall debt in half and extended the maturities. This would defer the issuance of more currency. This strategy would imply an ongoing trend toward high inflation as this paper matures but it would not be a certainty as it would depend on other policy decisions as well.

Would the holders of those new US dollar securities outside the USA want to hold them or would they panic and dump them? Probably yes for private citizens but they are not the big holders of USG paper. Counter-intuitively I think most of the big holders of the debt (CBs and foreign governments) would hold onto the new USG paper.

Any damage to the US dollar would already be done (via the FX market) and the new debt exchanged for old debt would be weighed against a USA economy with a sound balance sheet after the restructuring which still has goods to sell that are in demand eg. soybeans, corn, resources etc. Holders capable of holding to maturity might see better returns by holding the new paper.

The US economy would probably suffer a severe contraction due to the unwillingness of trading partners to finance deficits. A severe recession or outright depression could still occur.

So my gut feeling is that if the default involved issuing new debt, with long maturities, for old debt it would not lead to monetary inflation but it would lead to a severe economic contraction and big losses for the creditors in both the private and the public sector.

Casper said...

I agree with Costata's second option (swaping current treasuries with new). If we subscribe to FOFOA's (and others) view of the emerging monetary system - Freegold, then transition to it would be welcomed. And I think that diminishing importance of USDollars - USTreasuries in the international banking/financial system is just that.

The volume and depth of USTreasury market makes treasuries a perfect (or at least) most suitable collateral for interbank deals and with loss of confidence that role will pass to something else - gold. I believe there's no need for China, Europe, ME,.. to sell treasuries, because USA alone will do that for them, they only need to hold reserves that will absorb any loss in their USTreasuries holdings.


Casper

Kicker said...

Motely Fool,

Your right I dont understand this topic very well. Ive been reading FOFOA, FOA, and Another since around the end of 2008 I believe, and the more I examine their writings the more I see how big this is and how unprepared my mind and spirit are for it.

I am grateful to FOFOA and everyone else for all their posts. I would be really financially screwed right now if I hadnt gone all in back then.

But this is more than economics, this is hugely spiritual. Look how Another and FOA write. Even some of FOFOA's posts have taken on this deep spirituality. If you are only focusing on the economic part of this and how we are all going to get rich, I just think you are missing a huge part of what Another, FOA and even some past central bankers and Euro architects have been trying to convey.

A couple quick examples:

"If one owns real gold, it will be with ease to view the world currency developments. They will be truly of biblical proportions!"

"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."

Phrases like these can be quickly taken as just common idioms of our day or just the lexicon of really smart people. But when you look at the total writings, their writing patterns continually use these types of phrases.

I wont argue with you guys, you see freegold and the Euro the way your world view allows and that is fine. Hopefully, as things continue to unfold you will be able to look at things from other angles as well. If not, well at least your going to be rich for a time, so you got that going for you.

costata said...

Kicker,

There are other dimensions to this new monetary system based on the separation of the dual role of currency as both medium of exchange and store of value.

In future by using fiat solely as a medium of exchange and gold as the ultimate store of value it does offer humanity the opportunity to improve society in some ways while retaining some of the aspects of the present system that many of us would prefer to leave behind. It is a far from perfect system that the Euro Freegold-RPG architects have created.

Randy Strauss discussed one facet of this opportunity to improve society here quoting John Locke’s Second Treatise Of Government. This is part of Randy’s introduction:

At a minimum, you may come away with a clearer sense about gold being the form of property most naturally suited for your use to consolidate your wealth -- to hold onto as a durable savings in amounts commensurate with your ability to do so that is, by its nature regardless of the size of your claim, not questionable as any manner of infringement upon any other man.

He then went on to highlight this passage from Locke’s Treatise:

[Sec. 46] The greatest part of things really useful to the life of man, and such as the necessity of subsisting made the first commoners of the world look after, as it cloth the Americans now, are generally things of short duration; such as, if they are not consumed by use, will decay and perish of themselves: gold, silver and diamonds, are things that fancy or agreement [i.e., in common usage] hath put the value on, more than real [i.e., comsumption] use, and the necessary support of life.

Now of those good things which nature hath provided in common, every one had a right (as hath been said) to as much as he could use, and property in all that he could effect with his labour; all that his industry could extend to, to alter from the state nature had put it in, was his. He that gathered a hundred bushels of acorns or apples, had thereby a property in them, they were his goods as soon as gathered. He was only to look, that he used them before they spoiled, else he took more than his share, and robbed others.

And indeed it was a foolish thing, as well as dishonest, to hoard up more than he could make use of. If he gave away a part to any body else, so that it perished not uselesly in his possession, these he also made use of. And if he also bartered away plums, that would have rotted in a week, for nuts that would last good for his eating a whole year, he did no injury; he wasted not the common stock; destroyed no part of the portion of goods that belonged to others, so long as nothing perished uselesly in his hands.

Again, if he would give his nuts for a piece of metal, pleased with its colour; or exchange his sheep for shells, or wool for a sparkling pebble or a diamond, and keep those by him all his life he invaded not the right of others, he might heap up as much of these durable things as he pleased; the exceeding of the bounds of his just property not lying in the largeness of his possession, but the perishing of any thing uselesly in it.


Cheers

DP said...

Who wouldn't give his nuts for a piece of metal

Edwardo said...

M,

With regard to bonds versus stocks, that is why I wrote, "not presently". It's all about timing and time frames, i.e. the short, medium, and long term.

What you will find is that stocks, generally speaking, in nominal terms, do reasonably well at a certain stage in the evolution of a currency (medium of exchange) dissolution.

Put another way, using an image that is popular around here, stocks outrun bonds at a particular point as both asset classes are being chased by the hyperinflation bear. Eventually, however, both are consumed.

Motley Fool said...

Hi again Kicker

I'm sorry, I did not express my self very clearly.

I was referring to the moral aspect, not the economic aspect.

TF

Jeff said...

rickards on gold:

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/8/6_Jim_Rickards.html

Oliver,

Yes, gold appears to be in backwardation, and has shown that for a few days now. Interesting times!

mortymer said...

Hi Wendy, you can find me here:
http://anotherfreegoldblog.blogspot.com/
or
http://www.neuralnetwriter.cylo42.com.

costata said...

DP,

Fred Scuttle

http://www.youtube.com/watch?v=4G7xTbdepOc

costata said...

More Benny Hill

http://www.youtube.com/watch?v=-NY5HNMCgFg&NR=1

costata said...

DP,

Even More Benny Hill

http://www.youtube.com/watch?v=N8s1fNvMtR0&NR=1&feature=fvwp

costata said...

Mr Bean

http://www.youtube.com/watch?v=O3I7G-w3hTY&NR=1

Joel said...

@Oliver,

Good link to Fekete's student Jaity's writings. He makes an interesting comment on what it means, in his view, if gold does stay backwardated:

"If this state of backwardation remains permanently, then it implies something about the willingness of gold market participants to part with physical gold in order to capture this ‘risk-free’ spread. Namely, that they will not part with physical gold no matter how tempting the ‘risk-free’ return. For sure, they realise that ‘risk-free’ is not strictly true, as they might never get their gold back – or equivalently, it might take an ever increasing amount of time to get the gold back beyond when it was supposed to be delivered."

So maybe permanent backwardation portends the paper gold implosion that Fofoa has described?

costata said...

I'm a big fan of Fekete but this nonsense of trading the "basis" is bullshit.

Jaitly tried to start a fund to do this until Fekete was shown mathemetically that it was impossible.

They dropped it like a hot potato.

Joel said...

Costata,

Agreed, but how do you feel about what gold backwardation portends?

enough said...

Hi M.

you stated:

"The Fed didn't become the largest holder of these treasuries for no good reason. Obviously there is not enough demand for them."

as FoFOA might say...let me finish this sentence for you....."to keep rates this artificially low".

at some "market" rate of interest there would be enough demand for treasuries, 5%, 10%, 20%?

the fed buys treasuries to keep rates at a level these choose. The market would clear treasuries at some rate with no fed participation.

As rates have fallen durni this equity selloff t bills have gone to negetive rates...this has not been fed buying but mkt participants seeking shelter...I stand by my statement that treasuries are still a risk off vehicle

costata said...

Joel,

This was one of my greatst frustrations in the silver open forum. The bullion banks can make the stats appear how they want them to appear.

DP said...

@costata, :)

Australian bum dreams

M said...

@ Edwardo

Quality stocks are always a safer investment then bonds, even now. Stocks share more of the qualities of gold then bonds do. A quality debt free company, with money or gold in the bank, that sells real things to real people is nobodies liability.

Just because mentally challenged investors have been running to bonds these last few years or days does not mean they are actually safer. They are the furthest thing from safe.

M said...

@ Enough

You said
"at some "market" rate of interest there would be enough demand for treasuries, 5%, 10%, 20%?"

So if the ECB decided to buy enough Greek bonds that the yields would fall to 3%, you would consider Greek bonds a "risk off" vehicle ?

As we can see in Greece, the market is clearing Greek debt with minimal CB participation. Look at the yields. US yields would look no different without the Fed being the biggest buyer.

You said-"As rates have fallen durni this equity selloff t bills have gone to negetive rates...this has not been fed buying but mkt participants seeking shelter"

Absent the Fed purchases previous to the equity sell off, there would be no "appearance" of safety in treasuries and there would have been no run to treasuries.

US dollar denominated debt is the worst investment on the planet.

JR said...

Kicker,

You foolishly assert:

"But this is more than economics, this is hugely spiritual."

because you don't understand what economics is in the least bit.

Economics is not about money, making money or getting rich.

Economics is a social science. It is the study of people and how they socially organize themselves in the face of one of the fundamental challenges of the human condition - scarcity.

You tip your hand and reveal your confusion:

But this is more than economics, this is hugely spiritual. Look how Another and FOA write. Even some of FOFOA's posts have taken on this deep spirituality. If you are only focusing on the economic part of this and how we are all going to get rich, I just think you are missing a huge part of what Another, FOA and even some past central bankers and Euro architects have been trying to convey.

Its you who is missing a *huge part of what Another, FOA and even some past central bankers and Euro architects have been trying to convey*, because you are trying to force your worldview on the one being described here.

Only you can choose to leave your biases and prejudices at the door and let your mind open up.

Good luck, the abridged version of life is not all that its cracked up to be. When you open up your mind before deciding something is right or wrong, you might be surprised what you find.

Cheers, J.R.

Mike said...

sounds like a description of freegold to me

As per China today
"International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country."

Was the BIS also behind the US AAA credit downgrade as another step towards the USD losing its reserve status as per the "Sting operation"

Here are few headlines from a few months back you can google.


BIS: reserve currencies will lose

World Bank Predicts Multipolar Global Economy

M said...

@ The little inflation vs deflation debate going on.

There is nothing complicated about this. Under no circumstances will there be deflation(dollar rally)if the US defaults. None. There is no examples of this in history but there is hundreds of examples of inflation following default, Iceland being the most recent. I even disagree with FOFOA on this a little bit. People say that there is not enough capacity in other markets for the US dollar to crash but look how well the Euro has been doing compared to the dollar right now, considering all of its problems.The Euro, the Franc, commodity currencies and gold have been soaking up dollars well for the last decade and there is no reason for it to stop.

JR said...

Visca el Superorganism - "Life in the Ant Farm"

"A superorganism is an organism consisting of many organisms. This is usually meant to be a social unit of eusocial animals, where division of labor is highly specialized and where individuals are not able to survive by themselves for extended periods of time. Ants are the best-known example. The technical definition of a superorganism is "a collection of agents which can act in concert to produce phenomena governed by the collective," phenomena being any activity "the hive wants" such as ants collecting food or bees choosing a new nest site.

Superorganisms exhibit a form of "distributed intelligence," a system in which many individual agents with limited intelligence and information are able to pool resources to accomplish a goal beyond the capabilities of the individuals.

Nineteenth century thinker Herbert Spencer coined the term super-organic to focus on social organization... Similarly, economist Carl Menger expanded upon the evolutionary nature of much social growth, but without ever abandoning methodological individualism. Many social institutions arose, Menger argued, not as "the result of socially teleological causes, but the unintended result of innumerable efforts of economic subjects pursuing 'individual' interests." (Wikipedia: Superorganism)

Methodological individualism does not imply political individualism, although methodological individualists like Friedrich Hayek and Karl Popper were opponents of collectivism. Detaching methodological individualism from political individualism... if a properly-functioning communist regime were to arise, it too would have to be sociologically understood on methodological individualist principles. (Wikipedia: Methodological Individualism)


Hopefully I didn't lose you yet. I know, I'm supposed to be distilling not mixing, but I needed to draw the connection between ants and economics. Did you get it? Ants are dumb little creatures by themselves. But even as dumb as they are, some are more skilled at smelling and finding food while others are better at fighting, and some others are really strong, for carrying food back to the colony for lunch.

And in a wild colony of ants these individuals end up specializing in what they do best which leads to a collective intelligence far greater than the intelligence of any individual ant...


Throughout human history the division of labor, or economic specialization, has brought fantastic growth in total human output and led to the astonishing complexity of modern computers and industrialization. These vast leaps were truly the accomplishment of the distributed intelligence of the human superorganism, with a relative IQ perhaps in the thousands.

And behind each great leap of mankind was a string of important decisions made by methodological individuals. This is true capitalism. In order for the human superorganism to display its "IQ in the thousands", certain specialized individuals must be free to make the most important decision. The individuals I'm talking about are the savers, or as I sometimes call them, the "super-producers"...


cont.

JR said...

cont.

Debt is the most fundamental cause of this Global Financial Crisis (GFC). More specifically, it is the modern method of usury that compels large pools of savings into the service of new debt. Savers must have a way to hoard outside of the economy for the economy to be efficient. It is the selection process of when and how to deploy one's savings that keeps both debt in check, and the economy efficient and productive. And it is the coerced loaning of all savings, with the lenders and borrowers segregated by a "Chinese wall" of bankers interested only in fees and bonuses, that has led to the massive malinvestment and explosive debt of today.

This GFC is the final stretch in the long evolution of money, spanning centuries, that led to a global monetary system in 1944, a purely symbolic fiat system in 1971, an electronic computer-assisted system in the 80's and 90's and today's insurmountably complex system of derivatives. With each step adding new layers of complexity and distancing finance from reality, the savers and the debtors have now become so disconnected from each other that our human superorganism is now literally dumber than the lowest functioning human...

...a monetary and financial system that uses compounded interest cannot afford to compel all savings into the hands of debtors. It must have a means of hoarding wealth outside of the system in order to constrain the exponential growth function, or else the entire system will become retarded and then collapse. In return, this constraining function of "gold the wealth reserve" will restore intelligence to the human superorganism. Intelligence that has been sucked dry by Wall Street's systemic aggression against a free-floating physical gold price.

We are all like ants in an ant farm when we patronize Wall Street. Our contributions to society, should they exceed our day-to-day needs, are deployed by a system that does not care how they are deployed, just that they are deployed ASAP. If you would like to make a real contribution to the future of civilization then please buy physical gold and find a way to keep it close. Hoard your efforts outside of the system and watch as they receive a tremendous power boost just in time for deployment. You will be rewarded with the freedom to choose when and how your saved effort will be deployed and in so doing, you will help shape the future.


Economics - its all about how people socially organize themselves.

Go Go Superorganism!!

Cheers, J.R.

Texan said...

High 5, an actual default of UST would be beyond deflationary. All economic functions would instantly have to switch to barter or trading existing physical FRNs, or maybe silver or even gold to the extent anyone could figure out an exchange value on it.

So no, you wouldn't have to go to work the next day if USTs actually defaulted. Unless you enjoy working for free. All the banks would be closed, checks couldn't be cashed, ATMs shuttered. Etc.

But there will not be a real default, or shouldn't be, ever. A technical default is possible, but the far more likelly event
is, if you read this blog at all, debasement.

M said...

@ Texan

Beyond deflationary meaning hyperinflation.

M said...

Just listened to the Rickards interview. What i find odd is considering he is considered such a so called "expert", why have we not heard a peep about freegold or anything from him. He talks all kinds of random bullshit really..One day he talks about how the SDR will be the new reserve currency, then the next day he talks about a gold backed Yuan. He predicted that Goldman Sachs would go bankrupt when they got in trouble with the regulators. That didn't happen. He predicted that BP would go bankrupt, that didn't happen.

Jim Rickards lacks credibilty.

Edwardo said...

M wrote:

"Quality stocks are always a safer investment then bonds, even now."

Let it be noted that, with the use of the word quality, you have now qualified your original assertion.

In any event, putting aside the putative quality of some unspecified company's operations, legally, holders of senior corporate debt are safer from the loss of all capital then those those holding common shares.

Texan said...

M,

No, I pretty clearly meant deflationary. As in the opposite of the Weimar. Physical green cash will have enormous purchasing power, at least for awhile. Because ther would be no other exchange mechanism. No credit cards, no checks, no access to more physical green cash. So I think it's always a good idea to have a bit of that stuff stashed away, just in case.

If the Fed still exists after a UST default, and that's a big if given that the USG just defaulted (and what would have caused that?), then yes, maybe cash starts getting printed and literally handed out at dispenser centers.

But I suspect at that point we are talking new currency, or even ration books. But some organizing entity will need to be in existence, and it will take some time, so at least initially I think cash will be pretty important.

Again, this whole discussion is pretty hypothetical.

Edwardo, corporate bonds have no inflation protection. That is their flaw. I agree though that picking "winners" 20 years from now is very very difficult. Even Exxon is not a sure bet.

Texan said...

Ah M, just read a few of your posts. I think maybe where we disagree is that you think there will be "markets" the day after a default. I do not. I don't think there will be anything but total sheer pandemonium. I dot know where you live, but in the US all dollars are electronic (for the most part). They are all invested, directly or indirectly, in Treasuries. If Treasuries default, as in DEFAULT, all those dollars get vaporized. All the banks shut. All the supermarkets shut. Everything will stop. No kore food, no more fuel, no more hospitals. Until the organizing entity can get out some acceptable currency.

And what I am saying is that of the USG defaults, the only scenariomi could envision that happening under is if the USG ceases to exist.

M said...

@ Edwardo

"holders of senior corporate debt"

^You just qualified your original statement too. At first you where saying government debt was the safest.

Debt free equity shares more similarity to gold then any debt instrument. I also meant equity in the true sense of the word. Real equity does not ride on debt.

Wendy said...

Thanks costata and others for your thoughts, the idea of a default is very interesting.

Thanks for the links mortymer, I'll add them to my favorites :)

High 5 said...

Texan,

You're brilliant. All transactions would require cash and cash in very limited supply equals major deflation. At least for a couple weeks probably, unless the FED has warehouses full of cash to distribute quickly. But then again, in this hypothetical scenario, transportation routes would likely be bottle necked and fuel hard to find.

I think a good idea would be to have a good supply of paper cash stashed and ready for picking up some bargains of a lifetime, not to mention something to buy food and other essentials with.

I know the odds greatly favor a debasement but these are uncharted waters and a proper lifeboat is in order.

Texan said...

M,

The only issue youmwill find today is that there probably are no companies that are both debt free and sell "must have" stuff. Debt free companies tend to be tech. Must have coanies tend to be heavily levered (they sell commoditized product, so margins are razor thin).

Happy investing!

Texan said...

High 5,

Food and fuel would be crazy expensive, in physical cash terms. Generators, toilet paper, and especially ammo mightn't trade at all. But Gap denim jeans, LCD TVs, and Barbie dolls could be had for a song, I would think. Not sure you had those in mind as bargains......!

M said...

@ Texan

Yes, i do believe there will be markets on this earth after a US default. Money will exit the US in favor of other functioning markets and there is lots of them. And like I just said, the Euro, the commodity currencies and bonds(Canada is the only N American country rated AAA), the Asian economies, the gold market, the silver market, S American markets are soaking up dollars right now. This is digital money, it can jump from market to market in seconds. You have to understand the nature of a market. If the US says its going to default, the first man to sell gets 100 cents on the dollar, he will find a new place to put that money, and the chips fall from there. Even the last guy out will still have something, and he will also have some money to put in another market.

The micro economy within the US will mean nothing. FRN's will buy allot less gas or food in the international markets, even if they are a good barter item within the US.

High 5 said...

Thank you costata for your answer. I'll need to read it a few more times though (slightly over my head). And thank you Aaron, Wendy, M, holdinmyown, and anyone else I missed. I know my answer to Texan sounds like I'm convinced but please don't jump to conclusions. I'm convinced Texan is right if the default is sudden, total, outright, and a surprise.

I'm beginning to see that my original question was too vague and many variables can greatly affect the outcome.

M said...

@ Texan

You where talking about govt bonds being safe. I am not sure if Siemens had any debt, they could have. But after the Weimar inflation and the world wars, the person with Siemens stock, still had money. The person with German govt bonds got wiped out 3 times.

High 5 said...

Texan,

No I was thinking I might get a sweet deal on a soft tail and maybe a few Road Kings!

Texan said...

M,

They will not tell you about a default. And especially about a bank holiday, which is a sort of default. But sure if you think you can get out ahead of it, be my guest. I prefer to hold some physical cash, just in case I can't. Anyway, this is like arguing about how many angels fit on the head of a pin, because a default of UST won't happen.

Also, to be clear, I never ever have argued that any bonds are a good bet, in general. You must be confusing me with another poster. All I said to you about equities was that most basic industry companies are heavily levered. So any drop in sales could wipe them out in favor of the bondholders. See:GM. GE was also a near fatality not long ago due to GECC. Unlevered companies such as Apple are great as long as demand holds for what is purely discretiionary product. So hey, good luck picking the next "Siemens".

Edwardo said...

Texan wrote:

"Edwardo, corporate bonds have no inflation protection. That is their flaw. I agree though that picking "winners" 20 years from now is very very difficult. Even Exxon is not a sure bet.

Regarding my comments on the relative merits of various investments, I believe the key takeaway should be that there is no way to say without various and sundry qualifications, that any one particular investment class is superior to another in all contexts. They all have flaws and vulnerabilities. If this were not the case investing would be easy, which, clearly, in the main, it isn't.

In the meantime, on an entirely different subject, I find it interesting, to say the least, to see that over the last little while Russia (as represented by Vlad Putin) and China-see official denunciations from them today spurred by the S&P downgrade-both seem to have their long knives unabashedly out where the U.S.

Edwardo said...

...is concerned.

Edwardo said...

M wrote:

"You just qualified your original statement too. At first you where saying government debt was the safest"

I never said any such thing.

Texan said...

Edwardo, greet points. Agreed.

On China/Russia, I don't care. They can stop buying UST if they want and let their currencies revalue like mad.

I am much more concerned on the ZH reporting that Germany is backing away from backstopping Italy.

Billy C Vinson said...

Folks,

What do you make of the comments in this Reuters article , particularly this one:

"International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," Xinhua said.

M said...

@ Edwardo

Regardless, now that S&P downgraded US debt to AA+, corporate debt and state debt must be downgraded too because it is all denominated in dollars. S&P is obviously worried about the debt being printed away so all debt issued in dollars is at risk of default through devaluation.

enough said...

M


you think the mkt clearing rate required of US treasury bonds would be of similar yield to greek rates absent fed and ECB intervention?

I'll just leave it at that.......

M said...

@ enough

Take away the biggest buyer(the Fed) and yeah, I don't see how yields on US debt would be any different then yields on Greek debt. If the ECB was buying as much Greek debt as the Fed was buying US debt, then Greek yields would be similar.

The US is not even close to good enough fiscal shape to qualify for membership in the EU.

That should say enough about how "safe" US debt is.

Ryan said...

M

Even removing the Fed buying bonds, yields wouldn't get anywhere close to Greece. Rates would surely change, but getting to Greece's level would mean the rest of the world would be giving up on the trillions in debt we already owe them. I doubt anyone would want that.

Paul I said...

To mangle-quote Churchill

"this is not the beginning,
this is not even the end of the beginning,
but it may be the beginning of the end"

Edwardo said...

I believe these were Winnie's words

"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

holdinmyown said...

For those idiots who question whether or not gold is in a bubble maybe THIS graph will answer your question:
http://yfrog.com/kh9j7hcj

Michael said...

off topic but I need direction:
I am having trouble understanding why hyperinflation must be in CB printed money and not 'credit money'. Maybe I'm just not understanding 'credit money'. Why can I not contribute to HI with my 2014 exp date 500 Trillion dollar limit gold card? If you can give me a reference I'll gladly plow through it on my own...thanks

Michael said...

I hate to be this way but my aunt was a school teacher and is rolling in her grave:
Then and Than
Then is an adverb: usage example: then or now
Than is a conjunction: usage example: better than, worse than
Sorry to be the elitist but I hate 'hearing' smart people 'sound' less than brilliant. Reggie Middleton (ZH) mangles the language too. He confuses their, there and they're in EVERY post. And there it is for all the world to see.

Aaron said...

Some random pictures:

ZIM 500,000

ZIM 100,000,000,000

ZIM 100,000,000,000,000

ZIM from delivering news papers maybe?

ZIM wallpaper

ZIM toilet paper

victorthecleaner said...

M,

Under freegold, long term savings will be in gold, not in government bonds. Fiat will only be a means of facilitating daily transactions. Credit as we know it today will not exist.

Oh, I thought you guys wanted to keep some fiat in addition to gold because the man on the street wants to borrow (in order to buy the house now rather than just before retirement) and because there will be banks that lend the fiat with a fractional reserve and so on. So your comment seems quite inconsistent to me.

If we would return to a classic gold standard, though, I agree that it would only work if you strictly control credit, perhaps even ban fractional reserve lending entirely. I thought this was your main argument against a gold exchange standard, namely that it is incompatible with basically any form of banking.

Oliver,

is this the beginnings of backwardation? [...] Does anyone have access to Sandeep Jaitly's work at bullionbasis.com to verify this?

This is GOFO:

http://www.lbma.org.uk/pages/?page_id=55&title=gold_forwards&show=2011

The gold forward market is still in a healthy contango as of Friday noon. (When you compare the spot price with the COMEX contracts, you need to make sure that you take the prices at the exact same time of the day).

If gold were in backwardation, this would imply a counterparty risk that the gold in a gold for US$ swap might not be returned.

As for price 'discovery', if you are worried that GOFO is fudged, why don't you compare the two nearest COMEX months. They may sell as much paper as they want, but the price data displayed are still genuine.

Victor

victorthecleaner said...

Edwardo and M,

on the question of stocks versus bonds. I expect that stocks will survive (as they have always done in history), but you have to be prepared for a rather frightening roller coaster ride because there will certainly be a serious recession coming up. Of course, there is no reason to think that (industrial) stocks would share the revaluation of gold. At least in the US today, you face the additional problem that stocks are overvalued, and so you can only expect a slightly less than average return. Continental Europe in contrast is already undervalued.

Finally, there is the risk that some governments will try to expropriate shareholders (this has happened in the past, e.g. in France). With shares held through a broker, you cannot hide even if the expropriation law is later repealed. You might need to hide your gold, of course, and this is why you have taken possession of the physical.

Gold mining stocks is a different story because if gold will be money again, in any form, governments are even more likely to seize the mines than to seize industrial companies. Silver mines might be a way out though. If you own any, you probably already understand the risks.

Wendy,

on the question of a default. I think the decision about deflation versus hyperinflation is an entirely political one.

If the US defaults, this will render a huge number of banks around the globe insolvent in less than 24 hours, and the rest of them on the following day. In this case, the deposit insurance schemes will be under water and people will lose the majority of their bank account balances. Money markets will freeze, and within a few weeks, thousands of companies would be unable to pay their bills and have to file for bankruptcy. Not because they are unprofitable, but because they relied on the banking system and that system failed.

If the political leadership decides to do nothing in this case, deflation would be the outcome. A deflation way more serious than the 1930s.

FOFOA's main argument against the deflationists is that politics would be forced to intervene and after the 2007/8 experience probably even quite early on or even preemptively. The main political tool is that the CBs buy the bad debt with fresh base money, and this is the path to inflation by diluting the fiat.

Whether this base money is ledger money or actual printed cash is irrelevant at first. Later on, when prices increase rapidly, people will probably prefer cash though because they can then turn around and still spend it on the same day.

Victor

Aaron said...

Hi Michael-

Credit money is based on base money in reserve. If a bank doesn't have any reserves (because everyone is cashing their checks the moment they receive them) there is no credit. If the cost of bread is rising exponentially I'm not going to bother putting money in to my savings account. I'm simply going to spend it for goods as fast as I can. In this instance banks essentially become nothing more than ATMs. No reserves -- no credit -- no hyperinflation in credit money. Credit cards go *poof*. In the midst of hyperinflation you won't have a 500 Trillion dollar limit credit card. You will be first buying in cash and later in barter.

--Aaron

M said...

@ victor

I said credit "as we know it today", will not exist. A deal between you and a bank will still exist. But that is not the same as the huge interest driven fractional reserved monstrosity of a banking cartel that we have today.

M said...

@ Victor

About inflation vs deflation

There does not need to be any money printing for inflation to take hold in your scenario. Currencies are valued internationally, not within borders. Under your scenario, the frozen US economy would not have a chance in hell at bidding for oil or commodities with dollars. Why would anyone or any country accept anything for a virtual currency that is backed by nothing but a bankrupt economy ?

The US might be able to trade bridges, highways or gold for Canadian or Saudi oil, but no amount of US dollars will be enough for Canada or the Saudis for oil. The US dollar would be truly hyperinflated (hyperdevalued if you understand that better)

Michael said...

Aaron
thanks...so it is not that credit money does not 'work' it is because there is none...got it..

Robert said...

To understand how big the BOK's recent decision was, and how it was such a radical departure from recent policy, consider this Bloomberg article from December 2009:

Bank of Korea Sees ‘Illusion’ in Gold, No Cash Return
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ag2cRG2_O1Jk

"Here’s a slim chance that we will buy gold . . . . The volatility on gold is too big . . . . And once gold is purchased, it’s just kept in a safe and is not put up for sale even if prices rise."

burningfiat said...

How come bankrupt Greece is adding to its gold reserves?

The only explanation I can think of right now is that they are anticipating imminent Freegold revaluation...
What do you guys think?

d2thdr said...

Why is ECB not buying gold in open market, when Italy and Spanish debt is trying to threaten the confidence in Euro?

What is the collective opinion here?

Yes Eurozone does not want to be seen as destroying the $IMFS, but when existential threat is materialising, time might be very short,

tina said...

I think Mr. Sinclair is on the freegold trail.
He said:
12. As long as the good Lord permits me, I will be by your side. My job is not to pontificate but to identify resources for you. Every trade has two events. One is in and the other may be diversification. I dedicate myself to seeing that clearly for you. A virtual reserve currency is coming. You will not be able to own or trade that virtual reserve currency as you have been able with the dollar. Gold will be attached to that virtual reserve currency via a broad measure of world liquidity. It will be something akin to a planetary measure of liquidity as M3 was in the past for the dollar. That linkage, which is not convertibility, will translate into price, but no central bank of any nation will need to add to or delete from their then reserves.
The Goldmans of the world will invent OTC derivatives and maybe even a listed second derivative to speculate on word liquidity via the gold price. There will be no 1980 type collapse in the gold price. Over valuation which occurs in all bull markets might be by 20%. This will result in producing gold mining shares becoming the utilities of 2016  
onward.
 
Respectfully,
Jim Sinclair

DP said...

Check out the highly unusual(! never seen one like it there before today) red banner at www.BullionByPost.co.uk (imagine it'll be gone from 09:30 tomorrow).

Interesting times indeed, Jeff...

JR said...

One of FOFOA's key themes is the separation of monetary functions that is ongoing as our monetary system evolves.

Much of the dollar's value is due to the network effect of it being the world's reserve currency, aka the store of value for central banks/nations. Freegold involves gold stepping into that role as the dollar fails due to Triffen Dilemma/FOFOA's dilemma (conflict between debtors and savers when a single medium is used as both store of value and medium of exchange).

Lots of people get tied up in quantitative analysis, when instead what matters is qualitative analysis. I think their is lots of semantic confusion over deflation and hyperinflation, but one thing we can be absolutely clear on is:

FOA effect:

My above explained why a deflation cannot be in the cards. But if so, foreigners holding even government guaranteed paper debt in a deflating currency is little more than bookkeeping wealth if the actual goods buying power of the currency is compromised.

Yes, our US would continue to print dollars to service its debt, making the accounts look good. But, in such a deflation situation, foreign exchange controls are a 100% guarantee. Foreign held dollar assets would not come home, at least not at the same exchange rate one needs to become financially whole!

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


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

So what happens if the US defaults on its debt, which is what the rest of the world holds as forex reserves?

FOFOA offers some ideas from Dollar Repudiation

"Of course a dollar holds the momentary value that producers and hoarders of real goods and services are willing to surrender for silly paper at any given point in time. The key is that value is determined by producers and hoarders of real stuff (not by printers and hoarders of paper stuff), and that their opinion of paper changes its value over time."

I wonder what their opinion will be if the US defaults?

More:

"During the credit expansion phase of the system there are opposing forces that magically manage the value of a dollar. The first force is that credit creates many new plastic digits that bid on the same stock of real goods and services, putting upward pressure on prices. The second force is that the credit expansion process creates a paper Ponzi profit pyramid which lures producers and hoarders of real stuff into the paper world, putting upward pressure on paper. These opposing forces keep common prices in check. Another see-saw balancing act that makes price and value appear stable when it is most certainly not.

Then in the next phase, as the paper Ponzi profit pyramid pops, we see these forces play out in reverse! A flight from Ponzi paper and at the same time a disappearance of plastic phantom digits bidding on real stuff. More price and value stability! Well I'll be.......


cont.

JR said...

cont.

...So these "judges", these price-makers and value-setters are actually looking at the dollar's "store of value" function. And they are analyzing it relative to their own time horizon for purchases. Presently they cannot count on interest or the paper Ponzi profit pyramid to protect their paper holdings over time. They can only look at their own FUTURE JUDGEMENT as it pertains to and creates either future inflation or future deflation. They must judge the present based on a guess at their own FUTURE JUDGEMENT!

The problem right now is that these "value judges" are seeing the trend AGAINST future goods being offered in exchange for US dollars. Sure, the US will always offer its exports in exchange for dollars. But the main export of the US is paper Ponzi pyramids, which have fallen out of fashion. It is the rest of the world's "real stuff" exports being PRICED EXCLUSIVELY IN DOLLARS that gives this paper any value over time. And on this front, the future looks grim...

So what happens when a currency is repudiated by the world?

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

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

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

To repeat the FOA from above:

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

Cheers, J.R.

JR said...

FOFOA

Sheesh! You know, I've been writing this blog for more than two and a half years now, and survival prep is a subject that comes up very infrequently. But when it does, my position has always been that you should probably have three to six month's cash on hand, with half at home in a shoebox and half in whatever bank you use to pay your bills. That probably means at least $20,000 in cash for most people, and it has nothing to do with deflation. I repeat, cash has nothing to do with an investment decision! Survival advice is kind of ldo as far as this blog is concerned. It's sort of 101 and you can get that education at many other sites....


The few deflationists that think they understand what will happen will tell you to hoard a boatload of cash. This advice will help you for maybe a week to a month. If you stored your emergency supplies like you should have, it won't help you much at all. And if you hoard only cash in lieu of real stockpiles of necessities and gold, then you will have f-ked yourself in the end.


Cheers, J.R.

Edwardo said...

Same thing at AMPEX, DP.

Jeff said...

Thanks for the quotes that focus the discussion, JR.

Though to be fair, FOFOA also said one month of cash might be adequate in Just Another Hyperinflation post Part 2:

I tend to think that the ideal amount of cash you want to be hoarding when the fire starts is about a month's worth of expenses. Maybe a little more. But much more and you may have to juggle your cash back into your bank account as you "wait" for the inevitable, and you will probably end up holding a large stockpile of cash after it becomes worthless. Any less and you may miss out on some bargains during the week to a month that cash values exceed digital money. In any case, it's good to have a little cash under the mattress.

JR said...

Indeed Jeff,

That quote was also cited by FOFOA in the comment I linked above.

Big point being cash is not an investment decision, but "survival" advice.

I repeat, cash has nothing to do with an investment decision!

What is happening, semantics aside, is a process by which dollars lose purchasing power amidst the failure of the system. Cash is not kept to preserve wealth, its to help ensure you can get what you need.

And if you already have a lot of what you need, well then you're in good shape.

The few deflationists that think they understand what will happen will tell you to hoard a boatload of cash. This advice will help you for maybe a week to a month. If you stored your emergency supplies like you should have, it won't help you much at all. And if you hoard only cash in lieu of real stockpiles of necessities and gold, then you will have f-ked yourself in the end.

Cheers, J.R.

Billy C Vinson said...

Folks,

Curiously, the quote I was most interested in from a Reuters article (previous comment) appears to have been edited out in a revision of the piece.

It has reappeared, though, in this CNBC article, so let me offer it up again:

China’s official Xinhua news agency on Saturday called for “international supervision over the issue of U.S. dollars” and the introduction of “a new, stable and secured global reserve currency.”

Supervision over the issue of US dollars? I never contemplated what sort of international scrutiny could be brought to bear to make QE+++ FRN printing politically impossible. But if such pressure were brought to bear in a meaningful way, would that not make the US more likely to default?

In my shrimpish mind, it could.

Cheers,
BCV

Jeff said...

Billy,

No pressure can be put on the printer to not print; that would end TPTB and destroy the system. Printing destroys value, but preserves the system. Instead of worrying about a hypothetical deflationary default, look to history. In the last century the US defaulted twice (1933 and 1971). Did they do it by not printing? Here is FOFOA from Euro Gold:

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

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

sean said...

DP, yesterday the BullionByPost banner was stating that due to the US debt discussions and devaluation they were receiving extremely high demand and would have to stop taking new orders for the rest of the weekend. Not sure why they removed the explanatory notice.

DP said...

Sean, I still see the text on the red banner on my Android, but not on PC. Weird I know, but true. Coding error somewhere I guess(?)

Stel said...

From www.bullionbypost.co.uk : No moore orders for Gold and Silver! Due to unprecedented demand and the US debt downgrade late on friday we will not be able to accept more orders until 9.30 AM on Monday. Thank you for your understanding!

Stel said...

Brave new world here we come! :)

Jeff said...

Some online dealers are accepting orders, but as FOFOA said they may take your money and not deliver, if gold goes into hiding. Buyer beware.

M said...

So far, Zerohedge is reporting that the dollar is falling hard against the CHF and Yen.

I still think this downgrade could be a behavioral economics ploy. Similar to the Fed Bank of NY's idea to charge fees for deposits. The Keynesians want the dollar down. They seem to think that productive industry will just fall out of the sky if the dollar is lower. I guess they forgot the part that productive industry is capital intensive and just when the US needs capital the most, she wont have any. Sad to see what these mental cases are doing to this country.

MatrixView said...

What's happening at the moment?

* G8 emergiency meeting
* APMEX halted all PM orders
* Israeli stock market is crashing

Is this just one of those down-weeks or is something big about to happen?

FOFOA, your thoughts?

Texan said...

JR, I agree on your posts on cash. It's good to have some handy to buy stuff, and maybe if one is nimble they can buy a lot of stuff just post- default. I think the stores won't react quick enough to shut completely, though " credit card system may not be working". Who knows really how long cash will be accepted. But really, there. Is no such thing as "investment" in that scenario. Only survival.

Meanwhile, ECB looks like it's going "all in"! It's a race to the bottom between the two "reserve" currencies. But let's see if the ECB really means it......(we know the Fed does).

Texan said...

Wow. RBS stating now they expect ECB/EFSF to hold up to 850 billion euros of Spanish/Italian debt, but conditional on those countries implemting successful austerity. We shall see.

The Dork of Cork said...

I don't understand the concept of austerity , where does this new energy surplus flow...... ah yes Gold.
But what happens to these energy savings when the energy flowing to your home is shut off due to lack of capital in the electricity comapany ?
There are collective economic agents you know - man is both a individual & a village - he is a nothing without both.

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