Wednesday, October 5, 2011

RPG Update #4


On New Year's Eve I dubbed 2011 "Year of the RPG" in deference to Robert Zoellick's recent editorial in which he described gold as "a key reference point to allow people to assess the relations between different currencies." This description was so close to Freegold that Zoellick's FT editorial led us to an additional name, "Reference Point Gold" or Freegold-RPG.

Throughout the year I posted "RPG Updates" every time the ECB published its quarterly Consolidated Financial Statement for the Eurosystem in which it revalues the system's reserves to market value denominated in its own currency, the euro. Such "marked to market" (MTM) revaluation is an important first step in allowing gold to be "a key reference point to allow people to assess the relations between different currencies." Here are the links to my first three updates:

Update #1
Update #2
Update #3

There has been some confusion about the details and the relevance of this quarterly, system-wide or consolidated revaluation of reserves and the ECB's role as the system's aggregator. In the beginning, each participating country had to "buy in" to the system with a specified, euro-denominated value of foreign currency/gold reserves.

On April 18, 1998, eight months before the launch of the euro, ANOTHER explained that the idea of any gold being part of the initial buy-in had been a recent development. He wrote that it was initially discussed that gold would be only 5% of the buy-in, but that the BIS had decided that making gold 15% to 30% would render a euro that was stronger in oil. Less than three months later, on July 8, 1998 at a press conference, Willem Duisenberg, President of the ECB, announced the final decision:

Ladies and gentlemen, the Vice-President and I are here today to report on the outcome of the second meeting of the Governing Council of the European Central Bank held yesterday.

…The Governing Council decided on the size and form of the initial transfer of foreign reserve assets to the European Central Bank from the national central banks participating in the euro area. This transfer is to take place on the first day of 1999. It has been decided that the initial transfer will be to the maximum allowed amount of EUR 50 billion, adjusted downwards by deducting the shares in the ECB's capital subscription key of the EU central banks which will not participate in the euro area at the outset. The transfer will thus be equal to 78.9153% of EUR 50 billion, i.e. approximately EUR 39.46 billion.

The Governing Council furthermore agreed that this initial transfer should be in gold in an amount equivalent to 15% of the sum I have just mentioned, with the remaining 85% being transferred in foreign currency assets. I should stress that the decision on the percentage of gold to be transferred to the ECB will have no implications for the consolidated gold holdings of the ESCB.

The precise modalities of the initial transfer will be finalised before the end of the year.

Before the end of the current year the Governing Council will also have to adopt an ECB Guideline pursuant to Article 31.3 of the Statute of the ESCB, which will subject all operations in foreign reserve assets remaining with the national central banks -including gold - to approval by the ECB.

In connection with the setting-up of common market standards, the Governing Council also reached agreement on a number of issues related to the quotation and publication of reference exchange rates for the euro. Specifically, it was agreed to recommend to market participants the "certain" method for quoting the exchange rates for the euro (i.e. 1 euro = X foreign currency units) and to have daily reference exchange rates for the euro computed and published by the ECB.


It should be noted that this initial transfer was not a surrender of assets to a third party central bank, but instead it was a buy-in, a purchase of equity in the system itself. So while a country might have contributed 8% of the ECB's gold, that country now owned 8% of the interest in the system. And being part of a system, that country also agreed to all operations in foreign reserve assets, not just those transferred to the ECB, being centrally coordinated by the system aggregator, the ECB.

So all this early talk about "gold backing" and various percentages—5% or 15% or 30%—turned out to be quite confusing in the beginning. Soon after the very first quarterly revaluation one astute reader asked FOA about it:

Goldfly (5/8/99; 22:04:55MDT - Msg ID:5787)
FOA - 15% backing?
http://www.ecb.int/press/pdf/wfs/1999/fs990430en.pdf

Actually, it looks like they're at 30%

From the Eurosystem Weekly Financial........

Asset 1 Gold: 105,323

Liability 1
Banknotes in Circulation: 332,280

Asset 1/Liability 1 = 31.69

$1000 gold would equal 100% backing(!?!?!)

GF


FOA (5/8/99; 22:24:54MDT - Msg ID:5790)
Reply
Goldfly (5/8/99; 22:04:55MDT - Msg ID:5787)
FOA - 15% backing?

Goldfly,
Hello again. Truly the ECB percentage as a number does not mean much at this time. It's the concept that is 180 degrees against the IMF / dollar system. For anyone to measure the value of Euro backing at present, is like looking at gold at today's price. It's out of context.

The beauty of the ECB ploy, is that it doesn't lock them into a rigid gold exchange standard. With gold trading in the open, all currencies are free to be exchanged for gold at any given point in time. The old IMF / dollar manipulation of gold, used from the early 70s gained nothing and cost the world dearly for the benefit of the fictional US living standard it created. Had they just allowed gold to rise from the beginning, commerce would have been much more balanced, nation to nation.

Prior to the Euro, Europe had to play the IMF game. The same game that has now backfired on the US today. They truly don't need the IMF and may pull out later. FOA


Now there is an interesting note in this exchange to which I would like to draw your attention. Goldfly was erroneously looking at the consolidated value of Eurosystem Central Bank gold versus the total number of euro bank notes. This is not what we look at, and it is not even particularly relevant since they aren't running a "rigid" (as FOA called it) Bretton Woods-style gold standard, but what Goldfly observed at 31% in 1999, has today grown to 50%.

We don’t look at the gold on the asset side of the balance sheet versus the euros on the liability side. And we also don't look at the present value of only the subscription fee to the system, the reserves held by the ECB itself. We look at the aggregate reserves for the Eurosystem as a whole (lines 1 and 2 on the asset side only) and how the proportion of gold in those reserves has evolved over time.

On a CB balance sheet there is a distinction we can make between assets in general and those assets that qualify as reserve assets. At the central banking level such as the ECB, its institutional liabilities largely take the form of issuance of currency banknotes and deposits held on behalf of commercial banking institutions (such as those being held to meet a commercial bank's reserve requirements, and to facilitate check-clearing between institutions) which are denominated in its own domestic monetary unit (i.e., the euro.)

The requisite assets to balance against these liabilities are largely in form of euro-denominated claims on commercial credit/banking institutions. As these claims are often collateralized by government bonds, at the very end of the rope it is fair to say a large portion of assets held by the central bank take the form of government bonds even though they were (largely) acquired indirectly through typical financing operations to extend credit to the commercial institutions.

These euro-denominated claims (assets) are suitable for offsetting euro-denominated liabilities, but they do nothing in regard to your rare "rainy day" when it is found necessary to defend the euro's stature against its foreign peers. For that purpose a central bank needs to have either gold (which is a universal asset) and/or a position in foreign currency claims against non-resident (foreign) institutions. It is this combination of gold assets and foreign currency assets that constitute the official "reserves" of a central bank.

The proportion of RESERVE assets among the central bank's TOTAL assets is normally a judgment call. Generally, the more unstable or insecure a central bank deems its national government and economy to be on the world stage, the larger the proportion of assets it will hold in the form of reserves. (Recall the expansion of reserves among Asian countries following the 1997 Asian Contagion crisis.)

And regarding the make-up of the reserve assets specifically, it is ultimately a central bank's own internal management decision that determines what proportion of reserves are in the form of gold versus foreign currency. At launch, January 1, 1999, the make-up of the Eurosystem's reserves was 30% gold and 70% foreign currency claims on non-euro area residents (mostly dollars, in fact, probably mostly US Treasuries left over from supporting the US trade deficit for 20 years to buy the time necessary to launch the euro).

In addition to the distinction I just explained, another key definitional aspect of CB reserves is that they are "readily available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes… the concept of reserve assets should encompass those assets over which authorities exercise direct and effective control." (my emphasis, quote from the IMF BOP Manual)

So aside from being either gold or foreign currency-denominated claims on non-residents, the two main criteria for assets to qualify as reserve assets for central banks are availability and control. This official definition ought to translate loud and clear into an institutional preference for in-house physical gold holdings over the alternatives. (After all, try to truly consider and assess the concept of "control" insofar as it applies to an asset defined as a mere "claim" on a foreign entity denominated in a foreign monetary unit! Does anyone remember Nixon?) That we have not yet fully attained this operational reality despite the logical preference for it is what our long-winded discussions regarding the slow evolution from dollar-centric toward Freegold tries to explain in a rational political context.

There is one other nuance in CB reserve reporting standards that I should mention. The reason the ECB makes its "net position in foreign currency" (claims minus liabilities regardless of residence) so prominent in the commentary portion of its ConFinStats is explained in Chapter III of the ECB's Statistical Treatment (Oct. 2000):

"Since the monetary crises which took place in most of the Asian countries in the late 1990s, international organisations have gradually become more concerned with the availability of reliable information on the capacity of a country to contend with potential financial crises. Consequently, the IMF ... requires additional details on international reserves and other foreign currency claims and drains from those presented so far in international standards, addressing, for the first time, the compilation of figures on reserve-related liabilities."

In other words, taking the liability side into account for the "net position in foreign currency" came into vogue thanks especially to the experiences of the Asian contagion crisis wherein it was shown how quickly and easily a nation could be stressed by its liabilities denominated in foreign currency. So the net position in foreign currency is now a fundamental part of any CB's overall Health-O-Meter. And so with this view in mind, it is clear that a value shift away from foreign currency reserves toward gold, the universal reserve asset, is also a shift in the overall quality of a portfolio.

But the strict definition of reserve assets within the Eurosystem is simply the GROSS total of the qualifying asset items and foreign-denominated claims on non-residents of the euro area as summed from the asset side of the balance sheet, without any further adjustment for items on the liabilities side. In other words, the official reserves are calculated through the simple addition of asset items #1 plus #2, which is what I use in these updates.

The De Facto Ascent of Gold

It is a common misconception that any retreat from dollar-denominated CB reserve assets would, in itself, destroy the value of the CB's portfolio of reserves. This canard is often used by the anti-gold financial media to explain the dollar's apparent strength, claiming that the world is trapped in perpetual dollar use by the existence of its humongous dollar reserves. Here is Randy Strauss from my post Gold: The Ultimate Hedge Fund:

[article] ...Even in light of all of this shifting by central banks into other currencies, the dollar still comprises 2/3 of global reserves and attempts to shift away from the dollar would destroy the value of central banks’ portfolios.

Randy's Comment: Although I should be well used to it by now, it still amazes me every time I see comments like the final remark here regarding any significant shift from dollars will lead to the destruction of central banks’ portfolios. It’s almost as if the commentator is trying to help indoctrinate a paralyzing fear as a means to prevent any such attempt on the part of the CBs, and to also create enough grass-roots doubt against such an attempt ever being made that we the people won’t perceive any benefit in trying to front-run with our own flight out of dollars and into gold...

It is an error in thought or judgment, however, to believe that a “destruction” of the dollar portion of the portfolio would therefore proportionately destroy the portfolio as a whole. That would only be the case if all other things remained unchanged, but life seldom works out so neatly as that. Sometimes an action can set forth an immediate chain reaction that literally changes EVERYTHING you thought you knew about the situation!...

In the world of the “new normal,” it is indeed possible (and someday soon desirable) to let the fuse be lit and allow the CB store of dollars be consumed. And to be sure, it is singularly the latent potential energy of the gold component that allows us to make this analogy with gunpowder. The natural chain reaction in the tiny open market for physical gold would immediately bring to bear massive “heat” and “pressure” upon its price… **POW** thus swelling the “volume” of its value relative to all other things. So even without radical changes to the quantity of physical holdings, a simple expansion in golden value will more than compensate the average portfolio of the central banks against the destruction of the dollar component.

Still can’t wrap your head around it? Bear in mind that the gold price is not a simple one-to-one inverse relationship with the dollar. There is a great leverage lurking in there, but it has been largely masked by the artificial abundance of paper gold which weighs down upon the equilibrium price. And even so, since 2002 the dollar value has decline by just 20% on a trade-weighted basis, whereas the gold price has responded with a 300% gain. And the moreso that the public and private parties of the world rightly gravitate toward physical gold instead of the illusion of paper derivative gold as the solid foundation of their savings and diversifications, the moreso you will see this price leverage grow in favor of larger multiples of gold price gains against modest dollar losses....

Central bankers will increasingly prefer gold reserves over the paper reserves created by other countries. Not only for the reasons of reliability/trust as cited in this article, but moreso because in choosing predominantly gold over foreign paper for central banking reserves will give those various national monetary officials an improved degree of latitude in their pursuit of an independent monetary policy.

WITH gold reserves, a central banker in a vibrant national economy can choose to enjoy a strong currency relative to gold, but, importantly, it can still alternatively choose to exercise loose monetary policy (for economic or political reasons) in which its currency is made weak as measured relative to gold. But regardless of choice for the relative strength or weakness of the national currency, the abiding benefit of choosing gold reserves is the superior stability — the systemic strength against procyclicality — that gold offers to the asset side central banking balance sheet.

WITHOUT gold reserves, pursuit of a national currency policy that is (according to their preference) generally strong OR generally weak is made less expedient either way because the health of the central bank’s balance sheet is subordinated to the quality of its foreign paper reserves which are themselves subordinated to the particular monetary policies being pursued by those foreign governments. Generally this structure of foreign paper reserves offers only the option for national monetary weakness built upon other international weaknesses, and worst of all it exposes the national monetary balance sheet to procyclical systemic failure — a domino whose fate is written largely in the hand of its neighbors.

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.


R.


From my post Your Own, Personal, Freegold, here's how the leverage in gold as a reserve asset behaves. This is what the Eurosystem's quarterly MTM parties reveal, and it can work on an individual level the same as it does for central banks, thus the title of my post. BTW, the pivot point in these illustrations is the physical plane of real goods, real services and real world capital:



Whoop There It Is

And now let's have a quick look at the results of the latest MTM party:

In the week ending 30 September 2011 the increase of EUR 56.8 billion in gold and gold receivables (asset item 1) reflected quarterly revaluation adjustments.

The net position of the Eurosystem in foreign currency (asset items 2 and 3 minus liability items 7, 8 and 9) increased by EUR 13.2 billion to EUR 191.1 billion. This change was due to the effects of the quarterly revaluation of assets and liabilities, the customer and portfolio transactions carried out by Eurosystem central banks during the period under review and US dollar liquidity-providing operations.

Quarter-end revaluation of the Eurosystem’s assets and liabilities

In line with the Eurosystem’s harmonised accounting rules, gold, foreign exchange, securities holdings and financial instruments of the Eurosystem are revalued at market rates and prices as at the end of each quarter. The net impact of the revaluation on each balance sheet item as at 30 September 2011 is shown in the additional column “Difference compared with last week due to quarter-end adjustments”. The gold price and the principal exchange rates used for the revaluation of balances were as follows:

Gold: EUR 1,206.399 per fine oz.

USD: 1.3503 per EUR

JPY: 103.79 per EUR

Special drawing rights: EUR 1.1564 per SDR



In other words, the decade-long trend continues, even in the face of all that "dollar strength." Last quarter gold made up 62.7% of the Eurosystem's reserves. This quarter it rose to 65% of the reserves. This is especially remarkable given not only the dollar's recent "strength" which accounted for most of the rise in currency reserves, but also the dramatic price plunge in gold just a week before the party.

You'll find much more on the Euro-MTM/Freegold-RPG model in the earlier "Updates" listed at the top as well as the other posts I linked including this one: Gold: The Ultimate Wealth Consolidator.

Conclusion

Don't make the mistake of assuming central bankers are stupid, or anti-gold, or that they are not fully aware of the concepts and principles I am writing about. When I write about the "logical preference" for gold, or the "de facto ascent of gold" to global IMFS reserve asset par excellence status, or gold as "the de facto solution to the international reserve question," these are logical, de facto realities of which central bankers are acutely aware. So when you hear them talking about complex solutions requiring massive[ly unlikely] global cooperation, new international treaties and enabling legislation, realize that they are talking about ditching the dollar in the most diplomatic terms they can, and then recall Randy's words:

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.


And after you think about it for a while, maybe you'll start to understand why gold was the asset chosen to occupy the #1 spot on the Consolidated Financial Statement of the Eurosystem, and why this is a key driving force (along with impartiality and systemic stability) behind the evolution to a 90+% gold proportion of reserves in the new international "Freegold-RPG" monetary system. And then, as Randy suggested above, you might want to front-run the CBs with your own flight out of dollars and into gold. Randy ended with this, and so will I:

"Again, on average the central banks have 10% gold. The ones who have less are scrambling. How about you? Do you have enough gold to put a suitable *BANG!* in your portfolio?"

Sincerely,
FOFOA

455 comments:

«Oldest   ‹Older   201 – 400 of 455   Newer›   Newest»
costata said...

RLP,

It will make a change from the bat shit flu coming out of the MSM.

Cheers

Gary said...

'Tricky' Trichet trying to ensure the Eurozone issues are sorted out at a national level, without involving the ECB or its golden prodigy the Euro. Good man.

http://uk.reuters.com/article/2011/10/11/uk-ecb-trichet-idUKTRE79A1Q320111011

eugenioca said...

Fofoa,
my compliments for you last post, very interesting. I have no problem buying your argument of the solidity of the Euro project, but I have several questions about the future developements of it.
1) Is it possible to track the rate of growth of the EFSF (European Financial Stability Facility) against the rate of growth of the gold ECB reserves, quarterly marked to market? Isn’t the efsf growing too fast?
2) In your opinion, what could prevent any country leaving UE, specially countries like Italy that has high gold reserves, and implement a currency on their own (a currency with the same gold mark to market mechanism)?
3) In an event of currency nuclear option deployment could the ECB balance sheet found itself in a better shape than that of Fed, but with a liquidity issue, tied to the gold goes into hiding phenomenon, forecasted by Another?
4) Given the peculiarity of the euro currency, could we see in the near term the euro/gold cross surpass the dollar/gold cross?

And now some questions about gold and the private investor:
5) In order to have some phys gold abroad and far from an anti-freegold government hands, someone could choose an instrument like goldmoney. But what about custodian fees. Could that fees skyrocket before and more than the POG and eat up all gold value appreciation?
6) What can be done in order to deal with the liquidity problem of a phys gold investment, given that as Another said, gold price will go for some time into hiding?
7) Some people talk about silver in term of a phys gold otm call without an expiry date. Without being so optimistic, could you give an hint to gold silver ratio in the next years?

Tnx very much for your work

burningfiat said...

Hi all,

Interesting article about dutch citizens not being able to be invested in GoldMoney:

http://www.zerohedge.com/news/guest-post-how-bankrupt-governments-will-confiscate-your-gold

I'm not necessarily agreeing with all the conclusions of this article, but it seem like the Dutch regulators are going after gold investment generally. Remember the dutch also outlawed the dutch glassblowers pension funds (or something like that) investment in gold earlier this year?

When I first started investing in gold I also started with a third-party storage solution (BullionVault). Then my local bank went bankrupt, and I had some trouble selling the gold, and getting the money (I had too little gold to take delivery). For instance I couldn't just change my attached bank account at Bullionvault because of anti-terrorism legislation.

Now I'm all in physical at my own property. Thanks FOFOA, your advice of just having the physical stuff in your hand seem to make more and more sense as we go along.

Hmm... guess I'm just trying to warn about the dangers of having third party companies and regulators between you and your gold.

/Burning

Max De Niro said...

burningfiat,

So, the Dutch don't want their citizens to have their gold in an unallocated account, in a remote location, with alterable redeeming fees? Goldmoney customers must get their gold (if they want to redeem it) through a third party dealer. What if there is no physical available come the time when they want to redeem?

I wonder what they think that these customers will buy now that Goldmoney has been disallowed?

I would imagine that at least some of those customers will now buy physical, which is more out of the reach of authorities. They would know this.

If you were going to confiscate gold, companies like goldmoney would be the easiest to confiscate from, no? All in one location, in nice big bars - much easier than collecting from multiple angry individuals.

Will this stop anyone from buying gold?

They haven't confiscated anything.
If they ever were planning on confiscation, then this kind of thing might telegraph it and drive the gold away from their reach, no?

Seems to me that on balance, Dutch customers are likely to get safer gold as a result.

burningfiat said...

Max,

I agree obviously, that the take-home lesson for each individual investor should be: Physical gold in hand is the only way to go.

Whether the Dutch authorities have a clue? I don't know, and I really don't care a whole lot. But I'm not convinced they have a clue. Remember the pension fund that wasn't allowed to invest more than 3% in physical gold in the spring? Why? As I recall it, it the authorities argued that gold was too volatile/risky...

See for instance:

http://www.efinancialnews.com/story/2011-02-11/dutch-pension-fund-gold-regulator

Or:

http://www.zerohedge.com/article/here-comes-executive-order-6102-qe-generation-dutch-central-bank-orders-pension-fund-sell-it

Again, I don't agree with the zerohedge-hive-mind that this is equivalent to confiscation, but I still need to be convinced that european authorities (outside ECB) have a clue regarding gold, and the upcoming freegold revaluation.

/Burning

Max De Niro said...

burningfiat,



I don't know about you, but I'm just a Mr. Joe Shmoe.

If you, and I, Mr. Joe Shmoe, can find out about freegold, why can't they?

burningfiat said...

Hey Max,

I'm with you.
Long live the Joe Schmoes of the world :-)

Can't tell if the Dutch national bank is with us though. Can only judge them on their actions as regulator, and that doesn't look good so far.

Maybe someone should start pushing fofoa.blogspot.com to clueless central banks / regulators of the world? Just to get them up to Mr. Schmoe knowledge-level... :-)

/Burning

Michael said...

eugenioca
Simon Black of Sovereign Man in his Confidential service has an arrangement with a company that uses ViaMat to deliver to Switzerland, your physical gold from the USA. It is at a discount but the undiscounted price was about $3,000. If you have a significant amount to move this could be an alternative. I did not check on where the storage was to occur. I have been told by one bank they were not interested in servicing Americans.
I was recently in Hong Kong and had no luck with private storage. HSBC does have boxes for customers but they were not available while I was there. They suggested checking 'other branches' 'next week'. This was not going to happen on my trip so I dropped it and made no further effort.
If you are just getting started buying gold then plan to buy and store it abroad. For those with gold in hand...good luck, please let me know if you find a safe, cheap way to personally (as opposed to a $50k trust) to get and store gold abroad.

Michael said...

The bank not interested in Americans was the Zurich Canton bank that sells the gold and silver ETFs (ZBK).

JR said...

Did you know the Netherlands aka Holland aka where almost awesome enough dutch footballers like Nigel de Jong and Wesley Sneijder are from was a member of the London Gold Pool, is a big part of the BIS, and is not just a member of the Eurosystem but one of the "inner six founding member states of the European Communities"?

Indenture said...

"So, the Dutch don't want their citizens to have their gold in an unallocated account, in a remote location."

Seems to me they want to keep their citizens gold within their borders. Remember, all gold within a zone, whether held by government or citizens, counts towards that zones total. (JR has the quote:) Could be they are preparing for the transition.

costata said...

RIP Exponential Growth

Part 1/2

Jean-Claude Juncker, who is also prime minister of Luxembourg, was quoted late Monday by Austrian state broadcaster ORF as saying that eurozone countries are "talking about more" than a 50 to 60 percent haircut for Greece. (Link)

If you cannot pay up and you cannot print then you default. The banksters obviously understand this but ignored it in their risk assessments of EMU sovereign debt. They can argue that the BIS etc mandated accepting investment grade sovereign debt as a risk free asset but that doesn’t alter reality - they took a risk. The Euro architecture closes off the inflation option unless the ECB is prepared to risk a catastrophic loss of confidence in the Euro and the hyper-inflation that would follow.

So are Euro bonds a solution? The sheer size of the sovereign debt numbers should provoke some reservations about the Euro bond concept. Also if you stack the "credit cards" of 17 people on top of each other how does that collectively improve the sum of their individual capacities to pay and their overall credit worthiness?

Answering my own question, from the lenders perspective it may improve their overall creditworthiness to some degree if the performance of the borrowers is uncorrelated. This is clearly not the case in the EU trading bloc.

At present the sovereign debt of each nation in the EMU is basically an unsecured loan against their individual economic performance. Collectivizing these debts doesn’t resolve the correlation issue. The performance of one economy must be correlated, to some degree, to the performance of other economies in the EU.

It also doesn’t matter whether the correlation between any two members of the union is negative or positive. Overall the EU trade with the rest of the world is more or less balanced (It has a small trade surplus.) This may as well be a closed system in terms of the revenue available for internal transfers.

Attempting to address the EU debt problem with transfers from the BRICS is also a ludicrous idea. Michael Pettis recently produced this post on that notion. As Pettis points out tirelessly balance sheets must, er, balance. (BTW Pettis is no fan of the Euro. Apparently he favours currency devaluation as a solution to excessive debt.)

Continued/

costata said...

/Continued

Part 2/2

Michael Pettis:
Any net increase in foreign purchases of euro-denominated local government bonds has an impact far beyond the short term funding impact. It also affects the trade environment.
This impact is an automatic consequence of the way the balance of payments works. Today Europe runs a current account surplus. By definition this means that far from being starved of capital, European savings exceed European investment, and it exports the excess to the rest of the world.

In fact the very idea that capital-rich Europe needs help from capital-poor BRIC nations to fund itself verges on the absurd. European governments are unable to fund themselves not because Europe needs foreign capital. It has plenty. They are unable to fund themselves because they have unsustainable amounts of debt, a rigid currency system that will not allow them to adjust and grow, and the concomitant lack credibility.

Foreign money does not solve the credibility problem. What’s worse, what would happen if there were a significant increase in the amount of official foreign capital directed at purchasing the bonds of struggling European governments? Without countervailing outflows, the inevitable consequence would be a contraction of the European trade surplus. In fact if Europe began to import capital rather than export it, the automatic corollary would be that its current account surplus would vanish and become a current account deficit.


So where is this leading? In my opinion to some form of “steady state” economy for Europe. Wikipedia provides a fairly good introduction to these economic theories here.

Extract:
Economists use gross domestic product or GDP to measure the size of an economy in dollars or some other monetary unit. Real GDP – that is, GDP adjusted for inflation – in a steady state economy remains reasonably stable, neither growing nor contracting from year to year. Herman Daly, one of the founders of the field of ecological economics and a leading critic of neoclassical economics,[1] defines a steady state economy as

“...an economy with constant stocks of people and artifacts, maintained at some desired, sufficient levels by low rates of maintenance "throughput", that is, by the lowest feasible flows of matter and energy from the first stage of production to the last stage of consumption."[2]

A steady state economy, therefore, aims for stable or mildly fluctuating levels in population and consumption of energy and materials. Birth rates equal death rates, and saving/investment equals depreciation.

Robert LeRoy Parker said...

Steady state as defined in physics is a well suited metaphor to freegold:

A stable condition that does not change over time or in which change in one direction is continually balanced by change in another.

or

A condition of a physical system or device that does not change over time, or in which any one change is continually balanced by another, such as the stable condition of a system in equilibrium.

Punctuated equilibrium is chaos. The superorganism is chaos's living tribunal.

Jesse McL said...

Op-ed piece from NZ arguing for increase in RBNZ gold reserves (from zero!):

http://www.interest.co.nz/opinion/56161/opinion-our-currency-being-debased-because-it-does-not-have-sufficient-backing-gold-sa

Quote:

However, New Zealand has one huge advantage: NZ is small and can achieve this transformation relatively easily. China which has been accumulating gold for over 10 years is still a long way from converting their foreign reserves to gold, but its efforts which include buying all local gold supply (it helps being the largest world producer), creating gold and silver exchanges, and introducing gold ATMs are intensifying – but they are too large to make a sudden leap into gold for the gold price would go nuclear. And if they did, New Zealand would be the last in line at the gold window and left holding an empty fiat bag.


Cheers.

costata said...

Jesse McL,

Thank you very much for that link.

FOFOA,

That post Jesse linked is a must read IMO. Forget that it is about NZ. The methodology of the author* for valuing the gold reserves "backing" FX reserves may be a breakthrough if not connceptually then at least in terms of presentation of the concept.

Here's an extract:

This means that for every US dollar that the RBNZ sells for gold, the RBNZ exchanges $0.10 of indirect gold for $1 of direct gold. This is not an illusion. Because the world is willing to let the US gold backing be only 10%, New Zealand can arbitrage the difference and get gold at 10% of its cost in terms of gold that it gives up when it gives up foreign exchange.

*Post Author:
Philip O'Connor is a senior lecturer in Finance at the Department of Accounting and Finance of the University of Auckland.

mortymer said...

Fresh:
http://www.ecb.int/press/key/date/2011/html/sp111012.en.html

"...Economic shocks are a fact of life and countries should be prepared to deal with them. This is all the more the case in a monetary union, where the nominal exchange rate is no longer available as an instrument of adjustment. The challenges that some euro area countries currently face underline the critical importance of strong adjustment mechanisms and the need to avoid macroeconomic imbalances and unsustainable fiscal policies. This all underlines the responsibility of national economic policy-makers. Stability begins at home. Strong economic adjustment mechanisms not only help to absorb adverse shocks, but they are also essential to reap the benefits of the euro..."

And some music:
http://www.youtube.com/watch?v=3dvbLfVRmhE

J said...

"Since we generated these numbers (in September) we have further information about official sector purchases," he told a news conference. "I would not be surprised if we see official sector purchases this year closer to 500 than 340 tonnes."

Total net gold purchase from the official sector in 2010 was just 77 tonnes, and jumped to 216 tonnes in the first half of 2011, GFMS data showed.

GFMS ups 2011 central bank gold buys to 500 T

costata said...

J,

I sugggest you read the article linked by Jesse McL.

Cheers

mortymer said...

By REUTERS

Published: Oct 5, 2011 22:41 Updated: Oct 5, 2011 22:41

ISTANBUL: Imports of gold to Turkey were expected to exceed 70 tons both this year and next, marking a rise of more than 63 percent over 2010 levels, but remain held back by high prices and a weaker lira, Istanbul Gold Exchange Chairman Osman Sarac told Reuters.

http://www.turkishnews.com/en/content/2011/10/06/turkish-gold-imports-expected-to-exceed-70-tons/

JR said...

From the above RPG Update #4

"...Now there is an interesting note in this exchange to which I would like to draw your attention. Goldfly was erroneously looking at the consolidated value of Eurosystem Central Bank gold versus the total number of euro bank notes. This is not what we look at, and it is not even particularly relevant since they aren't running a "rigid" (as FOA called it) Bretton Woods-style gold standard, but what Goldfly observed at 31% in 1999, has today grown to 50%.

We don’t look at the gold on the asset side of the balance sheet versus the euros on the liability side....

On a CB balance sheet there is a distinction we can make between assets in general and those assets that qualify as reserve assets. At the central banking level such as the ECB, its institutional liabilities largely take the form of issuance of currency banknotes and deposits held on behalf of commercial banking institutions (such as those being held to meet a commercial bank's reserve requirements, and to facilitate check-clearing between institutions) which are denominated in its own domestic monetary unit (i.e., the euro.)

The requisite assets to balance against these liabilities are largely in form of euro-denominated claims on commercial credit/banking institutions...

These euro-denominated claims (assets) are suitable for offsetting euro-denominated liabilities, but they do nothing in regard to your rare "rainy day" when it is found necessary to defend the euro's stature against its foreign peers. For that purpose a central bank needs to have either gold (which is a universal asset) and/or a position in foreign currency claims against non-resident (foreign) institutions...

But the strict definition of reserve assets within the Eurosystem is simply the GROSS total of the qualifying asset items and foreign-denominated claims on non-residents of the euro area as summed from the asset side of the balance sheet, without any further adjustment for items on the liabilities side. In other words, the official reserves are calculated through the simple addition of asset items #1 plus #2, which is what I use in these updates."

JR said...

"6/14/98 ANOTHER (THOUGHTS!)

From Sam: For whatever percent backing by gold, will the Euro be convertible to physical gold, and by whom (i.e. all or limited)?


ANOTHER: Your question of Euro gold backing? The Euro will not be backed or fixed in gold. It will be the first "modern currency" to hold true "exchange reserves" in gold. It is important to understand that "exchange reserves" of gold are much more powerful a tool for currency defense than gold backing!

==========================

8/10/98 Friend of ANOTHER

The Euro will not replace gold, it will evolve into a gold transactional currency.

Forum 1600

JR said...

"As my regular readers know, any gold inside a currency zone, public or private, is a viable reserve."
Go Go South Korea

"gold reserves are any physical gold inside your currency zone, no matter who owns it. It's not just CB gold that counts, but all gold inside a zone."
FOFOA comment to Reference Point: Gold - Update 2

cont.

JR said...

cont.

"The fact of the matter is that my statement at the top is true whether anyone understands it or not. Kind of like gravity exists whether or not you understand why. That's why I prefixed it with "in reality." It is true in Freegold, it is true today, and it was true back in the 80s and 90s when the dishoarding of private Western physical gold (in favor of paper gold) lent credence to the "oil-backed dollar" of the time. In Freegold, large centralized gold reserves like you'll find in CB vaults will be somewhat superfluous to the real reserves that are in private hands within any currency zone. The total reserves in any currency zone should be viewed as Centralized Reserves + Private Reserves, of which you'll never, ever know the exact count.

This not-knowing will drive Westerner's like you crazy, because they like to know (and have grown used to knowing) exactly who has all the "wealth" (for various and sometimes nefarious reasons) and to obsessively publish those names on fancy lists like those found in Forbes and the World Gold Council. In Freegold you'll know where the real wealth is in the same way we know where black holes are. We cannot see them directly, but we can see the gravitational pull they exert on everything around them, which is how we know they're there. The existence of invisible, privately-owned gold (which often dwarfs official gold) acts in much the same way; with a sort of "gravitational pull."

While one may be forgiven for thinking it was the paper gold market in the 90s that made the dollar strong, it was actually the out-flow of private physical that lent it the credence it needed amongst those who really counted; those that held the power to cast the judgment of value upon the dollar. And you'll also notice that the official physical reserves lay very still during this period, imagined conspiritard theories notwithstanding.

To use your words, currencies are mostly "backed by/redeemable" [for] goods and services… in the private sector. And in the process, they (the private-sector currency transactions) generate savings for those who produce more real goods and services than they consume. So what is most important for a currency's credibility among "super-producers" (those with the greatest power to pass judgment) is that those accumulated extra currency units are also "backed by/redeemable" [in] something other than goods and services, for the purpose of storing value.

Cont..."

JR said...

"p.2

Now I ask, and this will take some thought on your part: Do you think those "super-producers" would rather redeem those extra currency units from the private sector, or at an official government "window" from the centralized reserves? Now this gets a little complicated as we consider all the possible variables. We have the possible variable of a "fixed gold backing" like we had during the Bretton Woods system. This not only limits the redeemability to central banks only, but it also keeps those "savings" fixed in value to a currency that is all-the-while depreciating against goods and services, rather than allowing savings to properly float against currency, goods and services. And it also creates a one-way, asymmetric flow of gold, which, while it serves certain special interests, is ultimately unsustainable.

Or we could have a "dirty float gold backing" where redeemability is available to anyone anywhere through the private sector. But the float is made "dirty" by the public sector enabling and assisting a confidence trick to keep physical flowing in one direction (similar to the fixed system), this asymmetric flow being key to certain unpublicized agendas, but likewise ultimately unsustainable and untrue to the value of savings.

Lastly, we could have a completely free floating gold backing. In this case there is no need for a government-run "gold window" because the price will be such that gold is available anywhere in the private sector. And gold being gold, there is no difference between official gold or private gold. If you accept my currency units in the trade of goods and services and you are the one (of the two of us) that ends up with extra units (because you produce more goods and services than you consume), then you can trade those extra units for gold on any major corner, in any city.

Now let's think about how the flow of gold will be different in this last, free floating gold backing scenario, than in the asymmetric one-way flows (West to East) of the first two options. We'll start small and local and then we'll expand our view to see a larger portion of the fractal pattern that emerges. And hopefully you'll start to see that the REAL currency reserves are in private ownership inside each currency zone.

Let's first think about the gold trade inside any currency zone. We'll think in broad-enough concepts that they would apply whether the zone is the US, China, the Eurozone or the Middle East. Doesn't matter which one. At the most basic level you have some people in a currency zone that are buying (physical) gold, and some that are selling. There are many reasons for them doing these two acts, but it will be helpful to us right now to simplify it down to "savers" (or economic net-producers) that are buying, and dishoarders or dis-savers (perhaps the elderly, retirees or ex-net producers) that are selling.

These basic transactions are net-neutral to the local economy, the value of its currency and the price of gold. As the young net-producer takes the gold and leaves some of his widgets on the table for the old-guy to consume, he hands the old-guy his excess currency with which to buy those widgets left on the table. Equal supply and demand—no net effect on the price of gold or the currency. But what if a zone has more savers than dishoarders, perhaps a zone with a growing, younger economy? Or vice versa, what if we have more dishoarders than savers as with an aging population, an older contracting economy?

If we have more savers than dishoarders the price of gold will rise until new dishoarders are created. These new dishoarders are people that are willing to dishoard as they see the price of gold (in that currency zone) rise, but they will also have competition from two other sources: 1. the local Central Bank currency manager, and 2. potential dishoarders from other, external currency zones.

Cont...

JR said...

"p.3

So in a growing, young, vibrant economy with more young savers than retiring dishoarders, the price of gold will tend to rise—which means the price of the currency is falling. But this will be met internally by new dishoarders especially if the (privately-owned) gold reserves are plentiful in that zone, which will keep the price of gold from rising too far or the currency from falling too far, which makes perfect sense in a vibrant economy.

If (the private) gold (reserve) is not so plentiful in that zone, the currency will continue to fall until gold is either supplied by the local CB (because it wants to strengthen the currency and keep it from falling further) or by the arb that develops to import some more gold to meet the rising demand (inflow of gold into this vibrant zone), which again makes perfect sense, and keeps the currency from falling too far.

So if you have a vibrant, growing economy, gold already within the zone will tend to accumulate in private hands rather than public reserves, and the net flow of gold across the border will be INTO the zone, rather than an exodus of gold out of the zone. A CB, in this case, that wants a strong currency to go with its vibrant economy, will sell public gold to its own people (perhaps through an official mint program). Or one that wants to keep its currency value suppressed will join its citizens in buying gold, increasing the physical inflow until it ultimately stops because the CB issued too much currency.

But what if we have more sellers of (physical) gold than buyers inside this currency zone? We will now have pressure from the supply side that will drive down the price of gold while driving up the strength of the currency, which as we all know from our $IMFS overlords, is bad for exports. In this case, the price of gold will fall until new savers are created. That is, until it reaches a price low enough that someone decides it is going to be profitable to become a net-producer by simply consuming less and buying gold instead.

But what if the economy is so dead that the price of gold would have to fall very far to create new savers from within that contracting economy? So far, in fact, that it would destroy the economy further by completely disabling any remaining economic competitiveness through the exploding value of the currency (remember, currency exchange value rises as gold price falls).

This scenario will be met, once again, by one of two (or both) forces. Either 1. the local CB will print currency to buy up some of that extra gold supply (already within the zone) and take it into the "official reserves" weakening that currency that is rising too fast by bidding up the price of gold with currency from thin air, or 2. foreign buyers will show up for the arb that develops to export that low-priced gold from the dishoarders inside the zone to savers outside the zone. Either (or both) of these forces will keep the currency from rising too far. And a net-outflow of gold from a currency zone with a contracting local economy, once again, makes perfect sense. Likewise, inside the zone, any gold that stays within the zone tending to flow from private into collective ownership also makes sense within a shrinking economy.

In an economy that consumes more than it produces, gold will tend to exit the currency zone in aggregate. And any gold that remains within the zone will, in the end, be mostly in public (collective) ownership. As the ability for the collective in this zone to tax its own contracting economy dwindles, and the dishoarding of the citizens finally subsides (because they simply ran out of gold to sell), the currency will start to collapse and any remaining collectively-owned gold will ultimately have to be deployed (mobilized) in defense of the fatally free-falling currency.

Cont... "

JR said...

"p.4

Now if the people within this fatally-contracting currency zone are truly of the elderly, retiring and dying variety, this final collective dishoarding may be enough to carry them and their dwindling needs gently into that good night. But if they are not all 65 and over, if there is something more sinister at play in this zone, like youthful laziness/poor education, or decades of malinvestment funded through debt-financed consumption, or a compulsively expansionary collectivist government parasitically attached to its contracting host, then we will most-definitely observe a different outcome when this dire gold scenario is finally reached.

So Joel, it doesn't matter what you or anybody else says, writes, purports, knows, believes or understands. The reality is, and always has been, that the real reserves behind any currency are primarily the physical gold held in private ownership within that currency zone's physical boundaries, and secondarily the collective reserves held on public display. Those collectively-owned (official) reserves are only for the management (or mismanagement) of the currency until and unless they are finally used in defense of a full-blown collapse of the currency, the ultimate end of a mismanagement timeline, or in times of all-out war when gold becomes the ultimate (and only) transactional currency among distrusting neighbors.

Viewed this way, we can now see clearly how the US confiscation of gold by FDR in 1933 was the ultimate "Hard Money Socialist" act. Attempting to bring the entirety of a great nation's REAL reserves into collective ownership and then spewing them off in the most reckless currency mismanagement possible. Then came Bretton Woods, more Hard Money Socialism. The US then spewed off nearly 65% of its total reserves over 20 years while disallowing its own citizens to accumulate new real reserves.

We are truly arriving at the very end of the dollar's long and storied timeline.

You wrote:

"I am having a hard time understanding how gold in private hands lends credence to a currency if it is not backed by/redeemable for that gold in some form or fashion."

Then later you surmised:

"Maybe FOFOA's comments about private gold being counted as reserves were related to a post Freegold environment; prior to a gold-backed currency environment though, I still don't see how gold held in private hands would ever lend additional credence to a currency."

If I have done my job; if I have painted the picture that I set out to paint, then these statements should seem a little silly to you now. The first one is the complaint of someone trained by that great Hard Money Socialist FDR. "How on Earth could gold in private hands be more important to our trading partners than gold available at the great American gold window?"

And the second one, that perhaps I was only referring to that small window of time between the collapse of today's paper gold market and the next great Hard Money Socialism experiment by the great US government to which the world always bows in monetary allegiance… should seem likewise silly. I hope that I have illustrated through my clumsy paintbrush of words that I was speaking universally when I wrote what you questioned:

"In reality, gold reserves are any physical gold inside your currency zone, no matter who owns it. It's not just CB gold that counts, but all gold inside a zone."

If not, well then I have failed. But still I'll push onward. And luckily, as I wrote, "it doesn't matter what you or anybody else says, writes, purports, knows, believes or understands. The reality [simply] is.""

JR said...

Link for ^^^^^ starts with this comment to Reference Point: Gold - Update #2

J said...

Costata,
I read that earlier and it is an interesting way to look at reserves. It only makes sense to buy gold because as FOFOA said All Paper is STILL a Short Position on Gold

That is the post that led me to FOFOA btw

I'm not a fan of Buffet but I remember him saying that it is much easier for people of small wealth to make winning investments than it is for him. Giants move markets. As the article states it is much easier for NZ to fill up their reserves with gold than it is for China.
-----------------------------------
LA PAZ, Oct 11 (Reuters) - Bolivia's central bank will be able to buy gold from thousands of small local miners to boost its reserves, according to a bill that leftist President Evo Morales signed into law on Tuesday.

The amount the central bank intends to purchase was not made public, although sources at Bolivia's mining cooperatives have said the measure could initially involve about 2 tonnes of gold per year.

Bolivia -- a South American country rich in natural gas and mineral resources -- produces between 6.5 and 7.0 tonnes of gold per year, almost all for export. Official data shows about half the country's output comes from small cooperatives and firms.

The new law stipulates the central bank will pay global prices to local miners.

"With this law we'll kill several birds with one stone: we'll be able to buy our gold ... we will increase our foreign reserves, and the nation's coffers will get a boost from the taxes on this operation," central bank chief Marcelo Zabalaga said during the bill-signing ceremony.

Bolivia added 7 more tonnes of gold to its reserves in August, mirroring similar moves by Thailand and Russia, according to International Monetary Fund data.

The poor, landlocked nation has a total of roughly $11.7 billion in foreign reserves.

Bolivia cenbank will buy local gold to up reserves

J said...

On the topic of private gold buying

India's gold demand may hit a record 1,000 tons this financial year>

and one for Costata

Dubai Gold Buyers Switching from Jewelry to Bullion

"Earlier while women would buy gold in the form of jewelry, now one can see men, finding themselves with a bit of spare cash, go into a jewelry shop and buying ten-tola bars," he says. A ten-tola bar, called TT bar in the trade, is a traditional Indian measure of weight that equals 3.75 ounces.

"it could suggest that demand for gold in Dubai is becoming more speculative, local jewelers said, since buyers appear more willing to sell their bars and coins into any rise in the price. Buyers of jewelry, in contrast, are less likely to sell for cash as women prefer to exchange it for a newer design or pass it on from one generation to the next."

ampmfix said...

Hello all,

JR, what do you make of India, whose CB has no significant gold, but its private ownership is around 18,000t? what does this mean for the INR? why don't we know the private ownership of gold of western countries, as we know the indian one? I would love to know what is the private ownership of Germany, the US, France, etc..., any reliable sources?

We SHOULD have an exact breakdown of the 174,000 tonnes ww, not only the purported 30,000t of the CBs...

victorthecleaner said...

ampmfix,

I know I am not JR, but I nevertheless have some reply.

The statistics by CPM or GFMS contain data obtained from the refiners, and so they have good estimates of how much jewelry was sold to India every year and how much came back to the refiners for melting down.

They probably also know how much retail gold (coins, small bars) are sold to the various countries every year. For Germany, for example, you could set the total amount to approx nought after WW2 and start counting around 1973. For France, this wouldn't work because they must have hidden quite some gold through WW2. Finally, in both cases, this does not tell you how much London LGD or Zurich gold their citizens own, just because that amount is just purchased inside the banking system and never passes through the refiners.

Finally, for the US, you could assume nought in 1973 and then add up all the retail coins and bars. Still, you would not find out how much LGD or NY gold is owned by the American citizens.

Another idea for the US is to keep track of mine supply and then go by the import/export statistics of the Dept of Commerce. I remember someone was claiming on the grounds of these DoC statistics, there was an unexplained outflow of bullion, but I never managed to verify this claim.

You see, your question is a lot more difficult than the question of how many TV sets and how many smartphones are within the US.

Victor

ampmfix said...

Hi Victor,

Thanks a lot for your help.
I know it is a very difficult question and a crucial one I think (consumer electronics is easy, believe me, I work there). The difficulty with gold is the fact that mining statistics hundreds of years old are not easily available (could research the archives of the indies (in Spain) and other historical docs, but that is too cumbersome). Mistery surrounds gold through the ages, kings, pirates and so on.
I would love to get my hands on the 2011 CPM book but I hear it is very expensive.
What really puzzles me is the alledged 18,000t in Indian private hands. If India has so much, what about (private families hoarding for centuries in) the West? The way I would go about all this is taking the total stock and start subtracting known stashes, including the 1-3% claimed as "lost" until we get a clearer picture. This calculation always bugged me, and after reading JR's post about the importance of private ownership vs. CBs, for a specific currency evaluation, I am even more intrigued. Just trying to ascertain which is the safest currency till Freegold.

A very sage friend always retorts to my golden arguments: future price will depend on total re-discovered stock, so what if it is 10x what we think?

Thanks again, I enjoy your posts often.

Winters said...

thank you for that repost JR. I never really understood why the gold in a zone and not in just the CB was important. Helped immensely!

Texan said...

Ampmfix,

I heard a gold analyst on bloomberg radio recently. If I recall correctly, he said that 80% of the world's gold had been mined after 1900, and 50% since 1950.

I don't know if this correct, but if it is, i would think total tonnage would be more or less correct.

Aquilus said...

Here's a questions for the collective mind on this blog that a friend of mine interested in "midnight gardening" asked:

Are the metal detectors of today tuned to distinguish gold's signature from other metals (say iron, copper, etc), and to about what depth do the best detectors reach?

Motley Fool said...

Hi Aquilus

Yes, and about hmm 4 feet I think.

I have been wondering lately, how a strong permanent magnet buried along with some gold would affect a metal detector.

TF

Motley Fool said...

Aquilus

Fwiw, my thoughts on midnight gardening are :

If a thief knows you have gold you have a problem. He can simply provide you with a gun and shovel and coerce you to dig.

The simplest rule is do not tell anyone.

I do however like the idea of burying gold.

But.

I would bury most of my gold at least say 1000km's from where I live in the middle of nowhere (perhaps a national park), and only keep a small amount on me.

Just my two cents.

TF

mortymer said...

http://unqualified-reservations.blogspot.com/2011/10/professor-krugman-on-maturity.html

mr pinnion said...

Aquilus

A very usefull link with lots of tips.

http://www.youtube.com/user/RainstormGB?gl=US&hl=en#p/u/117/C35J7etQr8c

Also , the bees knees of metal detectors £3000 and about 2-3 foot limit.

http://www.uk-metal-detectors.co.uk/golden_king_deep_processor_radar.htm

Regards
Ozzy

Motley Fool said...

Ozzy

From that site you linked : "With a size of 100X60 cm, the deep detection head will allow you to get results from as deep as 8 meters"

That would be about 16 feet.

TF

mr pinnion said...

Cheers MF
I will have to pay more attention to my own links.
Cannot see much use for that.Who goes metal detecting with a JCB ?
Regards
Ozzy

mr pinnion said...

Then again ,after freegold it might be worth the investment.

costata said...

Uncommon good sense! My emphasis

As the Euro was plummeting towards 1.18 versus the U.S. dollar in 2010, we became outspoken ‘euro bulls’, arguing that issues in the Eurozone should primarily be reflected in the spreads in the bond market; the Euro was sold – in our view – mostly because of its great liquidity: it’s easier to sell the Euro rather than short peripheral country bonds. Indeed, the Euro since recovered substantially, while periphery nation spreads have widened.

http://www.financialsense.com/contributors/axel-merk/2011/10/12/the-euro-is-dead-long-live-the-euro

costata said...

Thailand would serve as a good case study of the manner in which the US$ reserve currency system exports the fiscal and monetary policy of the USA to the rest of the world.

http://www.zerohedge.com/news/guest-post-thailand-not-letting-good-crisis-go-waste

Thailand’s central bank is sitting on roughly $212 billion in net foreign reserves right now. That’s up 37% from last year and nearly 80% from 2009.....

.... Thailand’s central bank has aggressively fought the baht’s appreciation. Taking a page from Bernanke’s playbook, the bank has suppressed interest rates below the rate of inflation while simultaneously creating billions of new currency units with which to buy all the new US dollars flowing into the country.

This is how the bank ended up with an 80% surge in foreign reserves from 2009– it simply printed new baht to purchase the newly printed dollars.


Take a look at the geography of the region around Thailand. Consider also the porous borders in SE Asia.

If Thailand opts for inflation how can other countries in the region prevent that policy from influencing their economies and economic policies?

Under the government’s new plan, local farmers will receive the equivalent of roughly 40% more than the market price for rice.

Given the crop losses in Thailand from the recent floods wouldn't it be amazing if they had a bumper harvest (of imported rice)?

JoyOfLearning said...

So very happy to get you read your thoughts! Thank you everybody!
Big thanks to JR & Motley Fool for answering my question. So if I understood right you're saying that even now there are small enough physical gold sizes on sale so that even after a revaluation the little person will still be able to save, not being forced to stick just to fiat. That's a huge relief!

Edwardo said...

Not to beat this one to death, but if anything, the interview with Martin Armstrong at the link solidifies one's sense that MA does know about freegold.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/10/2_Martin_Armstrong_files/Martin%20Armstrong%2010%3A2%3A2011.mp3

Jeff said...

If someone is digging up your property with a metal detector, things have gone badly wrong already. Nevertheless, most house grounds have metal pipes and things which can provide background noise for objects near them. Theoretically.

ampmfix said...

Texan, thanks for your comment.

Aquilus, I have seen detectors that claim to reach 6m (20feet) and deeper, but if you are going to dig that deep you might as well bury the stash in reinforced concrete, or inside a wall inside a metal pipe, close to other real metal pipes. My choice would lean towards "plain view hiding", in a garage near dirty tools and paint cans, etc, but always close to or inside metal.
On another topic, there is an awesome machine that analyzes in seconds the metals in any object, I wanted to buy it but backed off when saw its price, around 28,000$ US.

Here: http://www.niton.com/video.aspx?sflang=en

This the machine of choice for miners and large bullion dealers.

Aquilus said...

Thanks for all the feedback everyone.

I do not however want to highjack the thread with this topic, we're talking mini-shrimp amounts in this case.

I did recommend he store it in multiple places, I just did not know what to tell him about the specifics of detectors that can zero in on gold only.

Panelproli said...

You can find slightly outdated information at www.freecommonlaw.us/images/HIDING.pdf

It is google's first result on how to hide anything.

Although that piece is a bit old, I find useful information in it.

Robert said...

I wonder how many tons of gold are out there buried by owners who hid their gold too well for anyone to ever find it after they died. How many cans of paint or flower pots full of gold coins got thrown out? Seriously, if you are going to hide a little gold around the house, you should hide it somewhere where someone will eventually find it. The only thing that makes me cringe more than the idea of a thief finding a stash is the idea of someone throwing the stash out with the trash.

Edwardo said...

My last post should have read "the interview with Martin Armstrong at the link solidifies one's sense that MA does not know about or he simply doesn't subscribe to freegold. "

Robert said...

For someone who believes that Freegold is coming soon, what is the best way to prepare? Obviously it is good to front run and accumulate as much physical gold as possible while prices are low. But as FOFOA realized, we still need an income in the fiat money world to continue to pay the expenses while we "defend the precious." There is high risk and high opportunity cost to stop working, forego all income, and sit back and wait for Freegold. FOFOA relies on donations from the blog as he ponders and writes. But what about the rest of us mortals? What can we do if we really want to cash in on this?

What about becoming a bullion dealer and using leverage to hold and control more physical that we would ordinarily purchase for our personal savings? Think about it. If the day comes when the physical market really and truly freezes up, the immediate windfall beneficiaries are going to the bullion dealers, the jewelry shops in India, and any other business with gold sitting in inventory. In a game of musical chairs, the bullion dealers will be in a position to grab more than their shares of the chairs, especially if the triggering event happens over a weekend with a long banking holiday. Meanwhile, you can continue to generate a small fiat income on the side until the music stops. And the best thing about this is that it is a business you can run on the side.

costata said...

Interesting analysis of the US dollar's charts by Trader Dan.

http://traderdannorcini.blogspot.com/2011/10/us-dollar-getting-hit-hard-as-safe.html

This might be a good time to seriously consider taking action for both non-dollar holders and US dollar holders who are still building toward their target level of physical gold.

I'm not suggesting that gold will not retest support at lower prices. If trying to pick the precise bottom is your thing best of luck.

FWIW we have a little currency exposure to hedge and we will be "pushing the button" on some gold this week if the Aussie dollar continues to be "perky".

As always, newbies do your own research and consider your personal circumstances in making your decisions.

Cheers

ampmfix said...

On a funny note, how about dropping some maples or eagles into this bag to go thru airport x-rays?

http://www.goldkenn.com/product/item/chocolats/gold-cash-milk-chocolate-coins-1/?tx_displaycontroller%5BcollUid%5D=3&cHash=d32bb655b55183129c9858d97fbd0c16

Warren James said...

Hey Robert - the 'throwing the stash out with the trash' scenario actually happened here in Australia a few months ago ... certainly cringe-inspiring. I kept the newspaper article for posterity [link].

Putting solid thought into safeguarding your golden treasure is also a good investment, and the solution will vary from individual to individual according to their risk profile.

victorthecleaner said...

From Bloomberg:
The European Central Bank advised Belgium not to backstop Dexia SA's interbank deposits and to avoid providing guarantees on debt maturing within three months because it risks interfering with the central bank's monetary policy.

The ECB also said the planned debt guarantees for Dexia may last as long as 20 years, which is inconsistent with European Union guidelines for national support measures to be temporary in nature, according to a statement published on the Frankfurt based central bank's website and dated Oct. 13. Belgium sought the ECB's opinion on draft legislation that would grant state guarantees on Dexia loans.

Guarantees on interbank deposits "could entail substantial distortion in the various national segments of the euro-area money market by potentially increasing short-term debt issuance activity across member states," the ECB said in the statement. "It could also affect the transmission of monetary policy decisions."


Victor

Robert LeRoy Parker said...

Victor,

Make anything of this:

It has come to our attention that, owing to a system fault, the GOFO and LIBOR rates posted on our website for the 22nd August 2011 were incorrect. These data have now been corrected.

From Lbma current statistics

The corrected gofo shows little change from the previous day and the anomaly in the 12 month rate is gone.

Robert LeRoy Parker said...

I found the old info from your comment in Three!

22-Aug-11 0.48250 0.43000 0.35000 0.25000 0.08750

Newly corrected version:

22-Aug-11 0.40600 0.40750 0.43000 0.48600 0.53000

Perhaps the fault in the system was showing a single bullion banks numbers as opposed to the collected average.

M said...

FOFOA wrote...

"When a country sterilized gold imports, it precluded the gold flow from increasing the domestic price level and from mitigating the deflationary tendency in the rest of the world."

I am a confused with this statement. Is it implying that deflation is bad...?

or mitigate as in lessen the price deflation potential of the rest of the world ?

Blondie said...

In a properly functioning monetary system in which the flow and the valuation of elemental gold is uninhibited, deflation is neither good nor bad, it just is. In such a system both inflation and deflation have a role, as the brake and the spur. As the value in gold of the local currency changes, so the users of that currency adjust their efforts accordingly. And the result is an equilibrium, a self-correcting system, a natural symbiosis between the producers and the consumers where one is naturally encouraged to become the other.

To sterilize gold is to neuter such a system, to resist what would otherwise naturally be.

We can talk about such a system in terms of economics, but it is really an organic process, a natural law that is part of all natural systems. Or we could perhaps say that this is nature’s economic system. If you look closely, it is visible in all processes, at all scales. Give and take. Symbiosis.

The exception is our current monetary system, which is why its demise is inevitable. What we witness in the world around us are the results of this current sterilized system, a system where the consumers have artificially removed the brake on their consumption and the spur for them to produce.

None of us like what we see ourselves doing, both individually and collectively, to each other and to our environment, do we? We remain involuntary participants though, seemingly powerless to opt out. The positive change we can make in this regard is to store our own surplus value in gold, to make it fertile again. When enough physical gold is being treated in this fashion either by those who understand gold’s function or by those who store their value there in self interest (and both groups who can do this are by definition net producers) then the current system collapses and net consumers find they are newly motivated via an objective unit of value measurement.

Because value can then be assigned correctly, the effects of any activity can be accurately factored into the resulting product, and much of what we see today in the way of negative impacts would be immediately disincentivized. People are then able to value themselves objectively too, and thus the way they feel about themselves becomes much more positive as a result.

If you are not currently in a position to produce a surplus, don’t worry about it. The benefits of this change will flow to all, producer and consumer alike, and capital gain will appear very small cheese indeed in comparison. Everything will be recalibrated, and everything will become ridiculously straightforward.

Motley Fool said...

Well stated Blondie.

Always nice when you take the time to post.

TF

Jesse McL said...

Would be handy if blogger would let you link directly to particular posts!

Then I would just link people to posts like that from Blondie and save myself a lot of scrambling around in the dark for my own words.

Agree with MF, nicely put.

Indenture said...

From someone else when I asked:

The solution is that you copy the URL of the comment you want to reference, as usual. At the end of the URL you can see the #commentID. If you get the URL of the page that actually does display this comment (eg: ?commentpage=3 or whatever) and then append the #commentid to it, then it'll work as you intended. As I say, obvious once it's been said (if you know anything about HTML anchors).

Indenture said...

I just looked at the calendar!

Would anyone like to tell potential repeat visitors the significance of the 15th?

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

Got it, thanks.

So places like Japan and Germany that are dead set on producing and saving no matter what, will not be vendor financing their excess but driving up the price of gold. And their market share of production will be cut back as it forces consumers to produce and save.

whiteelefant said...

ampmfix
Gold reserves in Germany (private):
http://www.steinbeis-research.de/pdf/20101102_Goldstudie_RFS-Steinbeis_Kurzfassung.pdf

Every 4th German 18 years or older has physical gold
Total physical held in private hands 7500 metric tons.

I would love to see such a report on Switzerland, does anyone have something as detailed?

Joel said...

Jim Rogers came out the other day and stated that the growing US money supply statistics (did not say which ones) clearly showed that the Fed was "lying to us and is in the markets already", implying unannounced printing is occurring. Any guesses as to what he is referring to? If true, it would be very gold positive.

Jesse McL said...

Blondie,

Would you consider making your recent post re: "a properly functioning monetary system" into a mini-post on your blog?

IMHO it's worthy of the status, and besides then I could actually link to it... :)

Gary said...

I get John Maudlin's weekly news letter.

This week's is all about why he thinks the US will never hyperinflate.

Here's a link, but it doesn't give you the full letter, you'd have to subscribe (he always does an interesting letter, so worth having in my opinion).

http://www.johnmauldin.com/frontlinethoughts/can-it-happen-here

His argument is that an independent central bank will not go too far.

Also, he feels that the way the way Fed board is made up of regional presidents will keep them grounded, and that they already have 3 dissenters.

He does also point out that US deficits as a percentage of current expenditure is getting close to danger levels.

I'd be interested in other views on his points, sorry I can't link the whole newsletter. Maybe I will copy and paste it?

Gary said...

Here is his argument (2 parts):

What Causes Hyperinflation?

We spent a whole chapter writing about inflation and hyperinflation in Endgame, which I think highlights the topic rather well ( http://www.amazon.com/endgame). Let me quote a few paragraphs.

"We know that the world is drowning in too much debt, and it is unlikely that households and governments everywhere will be able to pay down that debt. Doing so in some cases is impossible, and in other cases it will condemn people to many hard years of labor in order to be debt-free. Inflation, by comparison, appears to be the easy way out for many policy makers.

"Companies and households typically deal with excessive debt by defaulting; countries overwhelmingly usually deal with excessive debt by inflating it away. While debt is fixed, prices and wages can go up, making the total debt burden smaller. People can't increase prices and wages through inflation, but governments can create inflation and they've been pretty good at it over the years. Inflation, debt monetization and currency debasement are not new. They have been used for the past few thousand years as means to get rid of debt. In fact, they work pretty well.

"The average person thinks that inflation comes from 'money printing.' There is some truth to this, and indeed the most vivid images of hyperinflation are of printed German Reichmarks being burnt for heat in the 1920s or Hungarian Pengos being swept up in the streets in 1945.

"You don't even have to go that far back to see hyperinflation and how brilliantly it works at eliminating debt. Let's look at the example of Brazil, which is one of the world's most recent examples of hyperinflation. This happened within our lifetimes. In the late 1980s and 1990s it very successfully got rid of most of its debt.

"Today Brazil has very little debt as it has all been inflated away. Its economy is booming, people trust the central bank and the country is a success story. Much like the United States had high inflation in the 1970s and then got a diligent central banker like Paul Volcker, in Brazil a new government came in, beat inflation, produced strong real GDP growth and set the stage for one of the greatest economic success stories of the past two decades. Indeed the same could be said of other countries like Turkey that had hyperinflation, devaluation, and then found monetary and fiscal rectitude.


"In 1993 Brazilian inflation was roughly 2,000%. Only four years later, in 1997 it was 7%. Almost as if by magic, the debt disappeared. Imagine if the US increased its money supply which is currently $900 billion by a factor of 10,000 times as Brazil's did between 1991 and 1996. We would have 9 quadrillion USD on the Fed's balance sheet. That is a lot of zeros. It would also mean that our current debt of thirteen trillion would be chump change. A critic of this strategy for getting rid of our debt could point out that no one would lend to us again if we did that. Hardly. Investors, sadly, have very short memories. Markets always forgive default and inflation. Just look at Brazil, Bolivia, and Russia today. Foreigners are delighted to invest in these countries.

"The endgame is not complicated under inflation/hyperinflation. Deflation is not inevitable. Money printing and monetization of government debt works when real growth fails. It has worked in countless emerging market economies (Zimbabwe, Ukraine, Tajikistan, Taiwan, Brazil, etc.). We could even use it in the US to get rid of all our debts. It would take a few years, and then we could get a new central banker like Volker to kill inflation. We could then be a real success story like Brazil.

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

For Jesse McL.

Indenture said...

Jesse: "The solution is that you copy the URL of the comment you want to reference, as usual. At the end of the URL you can see the #commentID. If you get the URL of the page that actually does display this comment (eg: ?commentpage=3 or whatever) and then append the #commentid to it, then it'll work as you intended. As I say, obvious once it's been said (if you know anything about HTML anchors)."
I think this is from DP

Gary said...

(part 2)...

Honestly, recommending hyperinflation is tongue in cheek. But now even serious economists are recommending inflation as a solution. Given the powerful deflationary forces in the world, inflation will stay low in the near term. This gives some comfort to mainstream economists who think we can create inflation to solve the debt problem in the short run. The International Monetary Fund's top economist, Olivier Blanchard, has argued that central banks should target a higher inflation rate than they do at present in order to avoid the possibility of deflation. Economists like Paul Krugman, a Nobel Prize winner, and Olivier Blanchard argue that central banks should raise their inflation targets to as high as 4%. Paul McCulley argues that central banks should be 'responsibly irresponsible.'

"Peter Bernholz wrote the bible on inflation and hyperinflation, called Monetary Regimes and Inflation: History, Economic and Political Relationships. He writes about 29 periods of hyperinflation. What causes such a spectacular increase in prices? Bernholz has explained the process very elegantly.

"Bernholz argues that governments have a bias towards inflation. The evidence doesn't disagree with him. The only thing that limits a government's desire for inflation is an independent central bank. After looking at inflation across all countries and analyzing all hyperinflationary episodes, the lessons are the following:

1. Metallic standards like gold or silver standard show no, or a much smaller, inflationary tendency than discretionary paper money standards

2. Paper money standards with central banks independent of political authorities are less inflation-based than those with dependent central banks.

3. Currencies based on discretionary paper standards and bound by a regime of a fixed exchange rate to currencies, which either enjoy a metallic standard or, with a discretionary paper money standard, an independent central bank, show also a smaller tendency towards inflation, whether their central banks are independent or not.

"Bernholz examined twelve of the twenty-nine hyperinflationary episodes where significant data existed. Every hyperinflation looked the same. 'Hyperinflations are always caused by public budget deficits which are largely financed by money creation.' But even more interestingly, Bernholz identified the level at which hyperinflations can start. He concluded that 'the figures demonstrate clearly that deficits amounting to 40 percent or more of expenditures cannot be maintained. They lead to high inflation and hyperinflations….' Interestingly, even lower levels of government deficits can cause inflation. For example, 20% deficits were behind all but four cases of hyperinflation.

"Stay with us here, because this is an important point. Most analysts quote government deficits as a percentage of GDP. They'll say, 'The US has a government deficit of 10% of GDP.' While this measure makes some sense, it doesn't tell you how big the deficit is relative to expenditures. The deficit may be 10% the size of the US economy, but currently the US deficit is over 30% of all government spending. That is a big difference."
A Very Frank Idea

I am confronted all the time on the road by investors who want to know my basis for stating that we will not see hyperinflation in the US. I am good friends with many who believe it is the only way the US can end up, given the size of the current off-balance-sheet debacle. "End of America" Porter Stansberry, Doug Casey and David Galland (see below), Peter Schiff, Bill Bonner, and a host of gold bugs see no other way out. They look at history as written by Bernholz and see the proverbial writing on the wall. It is totally decipherable by them. I remain very unconvinced.

Gary said...

(part 3)....

The US Federal Reserve system is different from most central banks, whether it is independent or not. It is composed of 12 separate regional banks, each of which has its own board, which appoints its regional president. The regions each get a certain number of rotating votes in the FOMC meetings, along with the appointed Fed governors. But they all get to participate in FOMC meetings and offer opinions. And the presidents certainly talk with each other. The last two meetings have seen the unusual circumstance of three dissenting votes.

These regional boards comprise local business leaders, some academics, and community leaders. They have to go back and work and live in their communities. They don't get to retire to an ivory tower and tenure, like many Fed governors. They see the real world, or at least their parts of it, and the boards have become very diverse over time.

Hyperinflation requires a central bank to willingly commit economic suicide. Typically, that happens at the behest of an authoritarian government. Under our current system, I can't see that happening. The hue and cry would be very loud and long and early. If you think Fisher et al. are vocal today, think about their response to really aggressive printing. I am not talking about something on the order of QE2, a BB gun as compared to a bazooka. I am talking about real printing.

It is not just a few vocal regional Fed presidents, of whom Fisher is the most eloquent. Even Bernanke has been talking about the limits of monetary policy and the need for the fiscal house to be put in order.

If Bernanke and his fellow Keynesians could whip up 4-5% inflation for a few years, would they do it? I think so, although they would publicly demur. But that is a far cry from 10% and even further from the 50% that would be needed to really ignite hyperinflation. I doubt they have the stomach for that, even in the face of a serious recession. The memories of the '70s are still part of our genetic make-up.

But could they print a whole lot more than one can imagine now, without unleashing the inflation demon? The simple answer is yes, and for that rationale we go back to the '30s and Irving Fisher, who gave us the classic equation of the link between money supply and inflation and the velocity of money (how fast money moves through an economy).

Inflation is a combination of the money supply AND the velocity of money. In short, if the velocity of money is falling, the Fed can print a great deal of money (expanding its balance sheet) without bringing about inflation. Remember the above instance, where workers wanted to get paid twice a day? That was a case of both rising money supply and rising velocity of money, a deadly combination. I have written several e-letters about the velocity of money, if you want more in-depth analysis. If this is something you do not understand, I suggest you take the time; otherwise you will not get the background of the argument. Here are a couple links to letters where I explain the velocity of money:

http://www.johnmauldin.com/frontlinethoughts/the-implications-of-velocity-mwo031210

http://www.johnmauldin.com/frontlinethoughts/the-velocity-factor-mwo120508

Gary said...

(part 4)...

When do we see a seriously falling velocity of money? At the end of debt supercycles, where deleveraging is the order of the day. Which is where we are today in the US. Look at the graph below (from my friend Lacy Hunt at Hoisington Asset Management). Notice that the late '70s saw a rising money supply and rising velocity of money. And voila, we got inflation in the US. Notice that now velocity is falling and, as Lacy points out, the velocity is mean reverting over very long periods of time, so we can expect it to go lower. Also remember that the US government (at the federal level) has yet to really begin to get its fiscal house in order. (Although state and local government have combined to cut deficits $200 billion a year through a combination of spending cuts and tax increases, or over 1% of GDP, which has been a serious headwind with more cuts and tax increases to come.)

What could change my mind? If the (how to say this politely?) ill-conceived (stronger words come to mind) proposal by Financial Services Committee ranking member Barney Frank (D-Mass) were to see the light of day, I would get very concerned. According to Bloomberg and The Hill, Frank plans to submit a bill that would remove the votes of the five regional Federal Reserve presidents from the 12-member Federal Open Markets Committee (FOMC), which sets interest rates, and replace them with five appointees that would be nominated by the President and confirmed by the Senate.

Frank says "he is concerned that the process is undemocratic because the regional Fed presidents are not elected or appointed by elected representatives, and he believes that regional Fed presidents are overly likely to focus on guarding against inflation at the expense of more adequately tackling the country's unemployment crisis." (US News and World Report)

Basically, he wants the Fed to be subservient to the politicians. Under his proposal, the FOMC could lose what independence it has in a short time. This is part of a strain of thought that suggests that the decisions that affect all of us should be made by a few elite people who purport to understand what is going on, which coincidentally are government insiders and the academics who foster their agendas.

How did Weimar and other hyperinflation incidents occur? When power was in the hands of a few well-intentioned elites who did not understand the long-term consequences, or were acting in self-interest without transparency or any check on their decisions. The Fed is designed to be a system of checks and balances, with no one president getting to appoint all the governors (they have 14-year terms), in order to try to remove the process as much as possible from political interference. That does not mean they will make the right decisions, but in this I agree with the alarmists: history suggests that without some constraint (gold standards as an example) hyperinflations may occur.

A repeat of the '70s? That is within the realm of possibility, but it's certainly not a base-case scenario. Hyperinflation under our current system? I just don't see it.

Gary said...

(phew...part 5...)....final part...

But What About the $70 trillion in Off-Balance-Sheet Debt?

I am asked that question all the time. My answer is that it illustrates the power of "It Won't Happen." As in "if it can't happen it won't happen." That number will never be paid, either in terms of current buying power or actual numbers or actual benefits. It can't be. The money is not and will not be there.

The far more interesting question is what will happen when we reach the point of "won't happen." Will that be something we recognize before it happens and act proactively to avoid a cataclysmic event? Will we wait until the bond market jerks our chain about the fiscal crisis, which is massively stagflationary? Yes, the Fed can print to some degree, but not dealing with the crisis will ultimately force a huge restructuring of spending and taxes which, if not caught early enough, will propel us into a certain Second Great Depression. Which is why I think we will deal with it proactively in 2013, because to not do so would be folly of the worst sort. The consequences are unimaginable for the US and for the world. Think Greece, and then go downhill. All over the world.

I think more and more political leaders are beginning to understand that point. They are not happy about it. But I remain hopeful that in 2013 we can actually deal with the deficit and the debt in an orderly manner. If we do not, God help us all.

Motley Fool said...

Hi gary

Five parts...lotsa words...simple answer.

Hyperinflation is NOT inflation on steroids.

TF

Gary said...

Hello MF,

But do you agree with his arguments about the Fed boards? In my view that is the crux of whether or not the US does hyperinflate.

Will they go too far, or will they maintain confidence?

My view is that they will go too far, but John Maudlin's view is not without reason.

Jesse McL said...

Thanks Blondie.

Motley Fool said...

The question of reasonability in a unreasonable time is irrelevant.

When the chips are down these monkeys will print.

MnMark said...

I don't see how it matters how independent the Fed boards are. If the government keeps spending more than it takes in, it has to borrow the difference. If the Fed wants to keep interest rates low, it has to buy that debt with printed money (because there's not enough private sector money for the government to borrow that much at those low rates). If the Fed were to get sensible and refuse to step in and buy the large new quantities of government debt, interest rates would have to rise, further increasing the deficit and choking off economic activity. The government would have to borrow more and more money, driving up the rates even more, requiring them to borrow even more money and choking off even more economic activity, lowering tax revenues, and requiring them to borrow even more money.

The question is: will the Fed refuse to buy whatever government debt is necessary to keep that viscious cycle from happening? I don't think so. At any given moment of decision it is going to be easier to do "just a little more money printing" than it will be to bite the bullet and cause the viscious cycle to kick in.

They'll keep doing that (just as Europe is now) until the point where no one will buy government debt except the Fed. Then, *poof* the faith in the currency evaporates and the government is forced to Freegold-style restoration of faith in the currency.

Jeff said...

Gary: hyperinflation isn't the printing.

FOFOA on hyperinflation:

As I have said, hyperinflation starts before the first new dollar is even printed. It is a nasty little collapse of confidence in the currency (and its banking system) that begins in the hidden little corners you never even considered.

Hyperinflation is from the loss of confidence that starts prices rising rapidly. This happens WHILE credit is contracting. This happens WHILE asset prices are collapsing. This happens WHILE everything looks like deflation. Even housing prices collapse in real terms during hyperinflation!

The big money printing is THE RESPONSE to the rapidly rising prices. All you deflationist guys say it can't happen because the big money printing won't happen. You are looking at it the wrong way. IT HAS ALREADY HAPPENED!...The money that's already out there (without any more printing) can hyperinflate prices through velocity. Velocity can have the same exact effect as printing.

How is this for a definition?

Hyperinflation is initiated when the physical plane stops bidding on the monetary plane with physical goods. Not when the monetary plane bids up the physical plane with lots of paper. The latter is the necessary reaction to the former.

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

When confidence in your currency collapses you must inflate it just to keep functioning yourself (i.e. the USG!) If you have a reserve, you will revert back to that reserve because THAT is what the EXTERNALS want and it will give you more purchasing power to inflate that reserve, if it is inflatable. This is why when faith in the dollar dies the Fed will print cash like crazy. Finally cashing in on the miracle scheme of the inflatable global reserve!

costata said...

Hi Gary,

Thanks for the Mauldin piece. IMO his whole thesis pivots on the key points in this paragraph:

Hyperinflation requires a central bank to willingly commit economic suicide. Typically, that happens at the behest of an authoritarian government.....

...think about their response (Ed: regional Fed dissenters on policy) to really aggressive printing. I am not talking about something on the order of QE2, a BB gun as compared to a bazooka. I am talking about real printing.


As MF pointed out HI is not inflation on steroids. If that is true then Mauldin's arguments have no foundation. But just for the sake of argument let's assume that HI is caused by printing huge amounts of currency.

In that case then I think this is the crucial question:

If the US Treasury presents the Fed with a debt instrument Treasury has created can the Fed refuse to exchange it for FRNs?

If the Fed cannot refuse then the power to ignite HI is in the hands of the USG not a "suicidal" central bank. BTW that is also a dubious claim by Mauldin. Gideon Gono retained his position as Governor of the CB in Zimbabwe after their HI. How many zeros does it take to get a CB governor fired?

Cheers

Jeff said...

Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government's reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat.

All quotes from FOFOA posts.

ampmfix said...

Thank you white elefant, very good document.

victorthecleaner said...

John Mauldin initially cites Art Cashin (on Germany 1920-23):

When things began to disintegrate, no one dared to take away the punchbowl. They feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all communism. So, realizing that what they were doing was destructive, they kept doing it out of fear that stopping would be even more destructive.

This is the key to understanding why it is so dangerous. When the asset price deflation and credit collapse get unbearable, reckless inflation (i.e. dilution of the money) may well be the less painful choice, at least in the short run.

Then Mauldin:

Given the powerful deflationary forces in the world, inflation will stay low in the near term.

Is Mauldin even right? Official US CPI is now at an increase of 3.8% annually. If all these deflationists were right, we should have falling consumer prices. But we don't. Why is that? I think it is because of QE Lite and QE 2, basically outright monetization of the running budget deficit. Bernanke has always been right. He can stop deflation (of the general price level) whenever he pleases, and right now, he is demonstrating to us that it works. Why don't people believe him? I wonder what Mauldin thinks is the reason for these 3.8% anually?

I don't have any very good estimate as to how long the effect of QE 2 will last. Just comparing it to the UK (who did their QE more than a year earlier), I thought it would last until the end of this year. Bernanke indicated that he won't do anything beyond Operation Twist until April 2012. Perhaps he has better figures and he knows the inflation he boosted lasts that long.

Mauldin again (on Bernholz' book Monetary Regimes and Inflation: History, Economic and Political Relationships):

Bernholz identified the level at which hyperinflations can start. He concluded that ‘the figures demonstrate clearly that deficits amounting to 40 percent or more of expenditures cannot be maintained. They lead to high inflation and hyperinflations….' Interestingly, even lower levels of government deficits can cause inflation. For example, 20% deficits were behind all but four cases of hyperinflation.

"Stay with us here, because this is an important point. Most analysts quote government deficits as a percentage of GDP. They'll say, ‘The US has a government deficit of 10% of GDP.' While this measure makes some sense, it doesn't tell you how big the deficit is relative to expenditures. The deficit may be 10% the size of the US economy, but currently the US deficit is over 30% of all government spending. That is a big difference."


Fantastic, Mauldin does get the numbers right. The US are already in the danger zone. Voila.

Then his remarks on the velocity of money. He just overlooks the scarier part of the figures. John Hussman has the empirical data and shows that a rise in short term interest rates would either force the Fed to dump half of its balance sheet into the market (meaning instantly US=Greece) or get an annual inflation rate of 40%. Yes, it is true, even the 'moderate' money printing that has already happened, has made the system unstable:

http://www.hussman.net/wmc/wmc110124.htm
http://www.hussman.net/wmc/wmc110411.htm

Having read Hussman, I would be looking for a hick-up in the market for short government bonds, some sort of 'Greek moment' for the US. When that happens, the Fed has the choice to either (1) sell of a good chunk of its monetized bonds and thereby amplify the bond market downturn or (2) sit tight or even purchase more bonds and see CPI inflation go beyond 30$ annually. When is this going to happen? No idea.

Victor

victorthecleaner said...

Wanted to write 30% not 30$ of course.

Robert LeRoy Parker said...

New half article from itulip:

Gold in an Era of Global Monetary System Regime Change

Some snipbits:

He tells me, “I might invest in gold if anyone can tell me what it is.”

It wasn’t the time or place for me to launch into my idea of the meaning of gold in our time, that gold is a stand-by alternative currency for international contract settlement if and when the U.S. Treasury dollar system finishes breaking down.


Or the Euro architects idea of the meaning of gold, but seems like Janszen is on top of things despite trying to sell his service.

More:

To the true believers gold is at once a symbol of righteousness and honesty, a beacon of light to lead a lost people from the badlands of government-made money, a solid moral anchor for a errant relativist culture, and a personal financial life raft to float the family homestead in a tsunami tide of economic destruction when the inevitable Day of Reckoning arrives.

The true believers have a name. They are called gold bugs.


...

Discussion of gold as an investment has become a crazed team sport divided between passionate fanatics and equally ardent detractors, with an irritable audience of mainstream investors in the stands scratching their heads, wondering what all of the fuss is about.

...

Who but a Dodger’s fan can site each player’s record of assists, double plays, and errors, and who but a gold bug can cite the last time gold prices previously spiked and fell on a percentage basis as much as between August 1 to September 30, 2011 and why?

Perversely this credibility gap means that the less you know about gold, the more trusted you are as a dispassionate source. In fact, in order to qualify as a true gold expert you need to know nothing about it whatsoever.


Sums it up pretty well imo. Too bad for Janszen Fofoa is free. I wonder if he happened to be reading Another's thoughts in 1998 when he decided to delve into his investigation of gold.

Joel said...

Mauldin also doesn't address the fact that the masses will demand that those "independent" Fed heads print when there isn't enough cash to go around once credit is destroyed. They will have problems "retiring in their communities" if they DON'T give the masses their money. Remember, as Fofoa has said, the printing is the response to the loss off confidence(hyperinflation), not the cause.

Jeff said...

FOFOA on Fed independence:

Imagine confidence in the dollar has collapsed. Prices are hyperinflating with what's already out there. We are in July 1922 of the Weimar experience. The government will need inflation-adjusted funding to keep governing, as frequently as inflation is adjusted, which is quite frequent in hyperinflation.

What do you think Congress will do if the Fed refuses to monetize Congress' $10 Trillion debt issuance just to keep G functioning? Do you think they'll just give up, shut down the federal government, go home and say "to hell with it"? Or do you think Congress might vote the power of money creation back to the Treasury instead of shutting down the federal government? This is the sudden death suicide the Fed will face if it doesn't print for the federal government. And if it doesn't, the Treasury will anyway, so better the Fed do it, Bernanke will think.

And then, to quell his dissonance on the matter, Bernanke may consider how Gideon Gono's career survived hyperinflation and that he is still Zimbabwe's CB governor today. Perhaps, he might think, Bernanke and the dollar can survive a monumental devaluation! After all, it's only a transactional currency and specific value doesn't even matter in a transactional currency!

It's certainly a better course of action than the sudden death suicide act of refusing to fund Congress with $10T for another month of stooge payroll, he'll think. And then he may look in the mirror, pound his chest, and say out loud to himself, "they don't call me Helicopter Ben for nothing!"

And then imagine that! All of a sudden, all the debt accumulated in 200 years of governing is reduced to one month's stooge payroll. Quite a sight it will be to behold. I wonder what all those creditors holding 200 years worth of US debt will do once it is only worth one month of governing. I bet they won't be buying any new US debt! Only the Fed will be buying US debt at that point!

Jeff said...

RLP,

Itulip views are different from FOFOA views. Itulip sees the eurozone fracturing and the euro becoming a currency tied to the nation/state. They also see the korean gold situation opposite what Another said.

Itulip: Sixty-five years later, in the depths of the Asian Currency Crisis in 1998, without force of law millions of Koreans scraped together more than a billion dollars worth of gold jewelry, coins and other personal items to give to the government voluntarily to be melted down to shore up the central bank's reserves...The populace rallied in the nation’s time of need, turning in gold to shore up the system for the greater good.

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!

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 doubt itulip knows A/FOA.

DP said...

The Undiscovered Jew@Moldbug's: Those who have nourished it in its early beginning, and have watched over its progress to perfection, are quickly wiped out of the memory of men. This is not a result flattering to vanity, and they are few who devote themselves to that which confers so little on their love of self.

He's talking about the French Revolution in his thought-provoking comments, but I'm pretty sure a few of you will join me in thinking the parallels are striking as we watch the Freegold future unfold today. A Jew Worth Discovering, if you didn't already, IMO.

The main post itself is also interesting, although not so obviously Freegold-related.

Michael said...

"You need physical gold.” He explained that when the next crisis struck, the gold futures market was likely to seize up, as there were more outstanding futures contracts than available gold. People who thought they owned gold would find they owned pieces of paper instead. He opened his desk drawer, hauled out a giant gold brick, and dropped it on the desk. “We’ve bought a lot of this stuff.” At this point, I was giggling nervously and glancing toward the door.

this quote is from a Zero Hedge article this AM by Michael Lewis ...an interview with Kyle Bass

http://www.zerohedge.com/news/some-words-advice-kyle-bass#comment-1779026

sounded vaguely familiar...

Michael said...

Oh FOFOA
Kyle Bass was in Dallas...an FOA candidate?

KindofBlue said...

A interesting missive about the history of debt and interest by economist Michael Hudson from 2001:

"What makes today’s debt problem so intractable is the degree to which debt and savings are linked. In earlier ages most people saved by accumulating gold and silver coinage or bullion, but most savings today (and money itself) take the form of assets that represent the liabilities of other parties, enterprises or public agencies. Such debts represent the savings of everyday people, bank depositors, pensioners and governments, making it politically harder to let debts be wiped out by a financial crash or debt moratorium. Even if debts are wiped out by bankruptcy, savers are bailed out by the government, increasing public debt proportionally."

http://michael-hudson.com/2001/04/the-mathematical-economics-of-compound-rates-of-interest-a-four-thousand-year-overview-part-ii/

Jeff said...

Jim Rickards continues:

Eric, I think there are oceans of money that would like to come in [to gold], but the question is the market impact of their own actions....“So I would describe it more as a tide than a tsunami. A tide can be a larger volume of water than a tsunami, but of course it comes in very gradually, almost imperceptibly, whereas a tsunami comes in all at once.


The problem with a tsunami in the gold market is that the market is too small. The impact of that kind of buying would be enormous and it would be very detrimental to the people trying to buy the gold. So what you see is [entities] coming in a little bit at a time, coming in secretly, covertly.


So is the money coming in? Absolutely, the short answer is there is a steady move of central banks and sovereign funds into the gold market, but nobody wants to move too far too fast because of the market impact.”

http://tinyurl.com/3q4wa5v

also audio:

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/10/16_Jim_Rickards.html

Jeff said...

The audio interview is very good. 'Oil in the ground is just like money in the bank'. Where have I heard that before? Oh yeah:

ANOTHER (THOUGHTS!) ID#60253: If you owned a commodity in the ground that had to be sold for paper currency in order to realize value what would do?...There must be a way to convert the true wealth of oil into the outright wealth of gold. We know that oil is a consumed wealth of a momentary value that is lost in the heat of fire...Gold on the other hand is not a commodity as many assume, as it is truly "the wealth of nations " meant to last thru the ages! A wise oil nation can strike a deal with the paper printers and in doing so come out on top...You don't care what the current commodity price of gold is, your future generations will keep it as real wealth to replace the oil that is lost. Before the future arrives gold will be, once again valued as money and can be truly counted on to appropriately represent all oil wealth!

There is only one oil state that counts! Only one! They have made it very clear how important gold is to them...You see, gold is not a commodity. The CBs have used every weapon to keep it's price low . Understand me, Gold is now, today, a devalued currency being used in world trade!

Texan said...

DP,

Loved the Krugman post on MM. Very funny guy.

Aquilus said...

For your enjoyment, here's the Federal Reserve making the case for further trashing the dollar (quite a lot further looks like) in the October 2011 report: The International Role of the Dollar:Does It Matter if This Changes?

Robert LeRoy Parker said...

I'm not so sure Jeff.

If anyone seriously looked into gold back in 1998 it would have been hard not to come across kitco I think. There is a commenter on that itulip thread discussing Another as well.

Also, I wouldn't be surprised if a lot of the other gold permabulls (Sinclair et al) were religious readers of Another's thoughts back in the day.

It seems to me that nobody would want to acknowledge that the supreme thesis on gold was revealed by an anonymous blogger though. That would undermine their sales pitch.

As far as Janszen's differences of opinion on the future of the Euro, I find it somewhat irrelevant. The important part to me is that he basically describes freegold minus the specificity of a floating exchange with the statement that gold is a stand-by alternative currency for international contract settlement if and when the U.S. Treasury dollar system finishes breaking down. By saying this he is emphasizing the true importance of owning gold and reinforcing its status as the wealth reserve par excellence to his readers.

As for the other stuff, I'm really uninterested in all of the Euro/PIIGS sensationalism these days. Whether Greece defaults or is thrown out of the monetary union has little bearing on freegold's inevitability as far as I can tell.

I see the Eurobond idea the same way. If control of the Euro is co-opted by stupid politicians and its merits stripped away then Europe will hyperinflate along with the US. Oh well.

J said...

Oct. 17 (Bloomberg) -- Hong Kong’s Chinese Gold & Silver Exchange Society, a century-old bullion bourse, started trading gold quoted in yuan, boosting the city’s status as an offshore hub for the currency.

The contract may generate as much as HK$6 billion ($770 million) in trades a day, exchange President Haywood Cheung said in an Oct. 14 interview. Daily bullion trading volume at the society, which has 171 active members, has jumped to HK$136 billion this year from last year’s HK$31 billion on appetite for gold as a haven from stock declines, he said.

“There’s triple demand for this yuan product,” said Cheung on Oct. 14. “Investors can enjoy the bull market in gold, the yuan’s appreciation and hedge gold denominated in other currencies against the yuan.”

..

‘Right Timing’

“It’s still the right timing,” Cheung said. “With the depreciation of the dollar and problems in the Eurozone, investors realize they want some other currencies that are safer like the renminbi. Gold can be a way for people to bet on the yuan, even it’s not yet fully convertible.”

..

The society, started in 1910, will consider trading silver in the Chinese currency later, Cheung said, declining to identify the timeframe. The society has imposed a daily ceiling of 300 kilos for physical delivery of gold denominated in yuan to avoid depleting the currency pool in Hong Kong, he said.

“The sudden influx into gold bars may take away half of the yuan liquidity in Hong Kong,” Cheung said. “The uncertainties in the global economy are supporting gold.”

http://www.businessweek.com/news/2011-10-16/hong-kong-starts-trading-gold-in-yuan-to-tap-triple-demand-.html

ampmfix said...

Saudis say not interested now in gold: http://www.kippreport.com/2011/10/indifferent-saudi-is-not-interested-in-distressed-assets-gold-governor/

Saw a TV doc yesterday where Saudis were looking into owning farmland abroad (their water reserves are non-renewable, so cannot continue their already successful effort of growing wheat in the desert).

Crack said...

Jeff: How is this for a definition?

Its great for a definition. Thanx!


ECB to the Fed/USG (note symbolism on The Edge's guitar)

DP said...

@Crack, they can live With Or Without them.

JR said...

Just putting this out there for a little color on EJ's views - from "What do I think of the World Bank President's call for discussion of a new gold standard? "

""The world's largest economies should consider gold as an indicator to help set foreign exchange rates, the head of the World Bank said on Monday in a proposal that threw open the acrimonious currency debate just before a summit of G20 nations."

Writing in the Financial Times, World Bank President Robert Zoellick called for a new monetary system to replace the floating rates adopted in 1971 known as Bretton Woods II.

AntiSpin: On January 3, 2006 I started a site called The Fourth Currency where I asserted:

A return to the Bretton Woods international gold standard created in 1944 is inevitable

Thirty-seven years ago the world’s economies started on the circular track back to Bretton Woods. We will sooner or later be back where we started, with international transactions guided by a fixed gold price.

So there's your answer. It was inevitable to me in 2006. Still is.
America's free ride is almost over. Thank the leaders of both parties who built the FIRE Economy on the foundation of the Dollar Cartel since 1971.
"

=================================

from EJ's site "The Fourth Currency: Gold"

"The euro (€), the US dollar ($), and the Japanese yen (¥) comprise the three currencies used in international trade today. The relative value of these currencies is influenced by global foreign exchange markets, the supply and demand for bonds and other securities denominated in them, and demand for currency used to settle trade in goods and services between countries. Currency values are also influenced by the monetary policies of governments.

A global financial crisis that started in 2007 in the US and evolved into an economic crisis in 2008 will develop into a currency crisis over the coming years. A fourth currency, one that is not so politically vulnerable as the three primary currencies in use today, survives as a reserve asset in the central banks of every country: gold. Gold is available to act as a fall-back currency for international trade should the floating exchange rate and government bond-backed currency system fail. This site is devoted to the discussion of this possible development and how it will impact investors throughout the world.

A return to the Bretton Woods international gold standard created in 1944 is inevitable

Thirty-seven years ago the world’s economies started on the circular track back to Bretton Woods. We will sooner or later be back where we started, with international transactions guided by a fixed gold price....
"

cont.

JR said...

FOA via FOFOA's "I Can Feel It Coming"

"FOA (10/5/01; 10:55:19 MT - usagold.com msg#112)
Discussing the World with Michael Kosares

Hello MK

I wanted to come back to your last stop here on the GoldTrail to address your points and expose myself to the world. (smile)

I bet you and many hikers think I am tagging all Americans and gold thinkers with this "Hard Money Socialist" label. Ha,,,,, let me slowly turn around so everyone can take a good look what a HMS looks like. Yes, that's right,,,,, I fit the definition completely.

[FOFOA: Hard Money Socialist was a term FOA used for those he viewed as typical Western "gold bugs". It referred to people who both promoted the return of gold into the transactional currency realm and also supported the status quo by investing in "leveraged" paper gold and mining stock.]

Most of my life I thought gold should be locked into any official currency system to act as a gauge and controlling factor against socialist tendencies in governments.


...

My typical hard money long-held belief, back then, was always:

----"Gold is the only official money of the world and will return to these roots one day"-------- and -----" some world wide financial dislocation will drive all governments back to this position"-----!!!!

It wasn't going to happen, no matter what, short of nuclear war. All we had to do was look around and see how people the world over were attached to using fiat currencies. The economic system itself was morphing into new ground as world trade learned to function very efficiently with fiat digital settlement. And that's something the 70s crowd said could never happen. That was how many years ago?

...

No,,,,,,, my guys are dead-on-the-money with respect to the political dynamic that's playing out. The world is heading towards a huge financial/currency crack up, but it won't work out with gold coming back into the money game. This very long term transition is playing on a move away from dollar domination with Europe preparing to suffer less than us by pulling in as many other political trading blocks as they can.

...

Mind you, this is all happening while Western style "Hard Money Socialists" are defending their stance by saying the Euro is just another fiat. Ha!"


Cheers, J.R.

JR said...

If one had read Another/FOA/FOFOA, is it possible one could advance this conclusion:

Euro Zone Fracture is a new concept for us. It develops the theory that weaker countries that have always been a poor fit within the euro zone structure will be thrown off, like children from a Merry-go-Round when it spins too fast to allow the weaker players to keep their grip, but the system will hold together overall with the euro re-enforced to be more of a true currency rather than a super currency peg.

==================================

IMO that reflects a lack of understanding of what the Euro is (for starters, Germany has the most to lose if the Euro fails). More to point, if you talk Euro collapse but don't talk its fundamental feature (MTM gold), then you are just like every other silly hard money socialist who think the euro is juts another fiat. As FOA said, HA!

The Euro may fail, but you can't credibly talk about why its gonna fail if you don't first understand how it intends to try to succeed.

Börjesson said...

I'm following the ongoing discussion with much interest (and thank you for all the responses to my earlier question on the first page of these comments), while simultaneously doing some (rather erratic) reading of old FOFOA posts to try to get a grasp of these complex issues.

I have one question to JR concerning your latest comment: In what way does the fact that the euro features MTM gold help it to avoid collapsing from the huge saver-debtor rift within the euro zone? Seems to me that the MTM gold thingy only helps in relation to other currencies, and not "domestically".

DP said...

LEAP2020's GEAB No. 58:

[...] Whether it be, for example, Bank of America (23), CitiGroup or Morgan Stanley (24) in the United States, RBS (25) or Lloyds in the United Kingdom (26), Société Générale in France, Deutsche Bank (27) in Germany, or UBS (28) in Switzerland (29), some very large institutions "too big to fail" will fail. They will be accompanied by a whole swathe of medium or small banks such as Max Bank which has just filed for bankruptcy in Denmark (30).

Faced with this "decimation", States’ resources will be quickly overrun, especially in these times of austerity, low tax revenues and the political unpopularity of the bank bailout (31). Political leaders will, therefore, have to focus on protecting the interests of savers (32) and employees (two areas full of electoral promise) instead of safeguarding the interests of bank executives and shareholders (two areas full of electoral pitfalls, whose precedent in 2008 demonstrated its economic futility (33)). This will result in a new collapse in financial stock prices (including insurance, considered very "close" the banking situation) and increase hedge funds, pension funds (34) and other players’ turmoil traditionally closely intertwined with the Western banking sector. No doubt this will only strengthen the general recessionary environment by limiting loans to the economy just as much (35). [...]


Well, well, well.

Max De Niro said...

Three holes in the ground.

DP said...

All six feet deep?

No need for activism. They've done it to themselves. :-)

M said...

@ TF

I answered your question about why Asia didn't print in 1997, with a follow-up post.

http://freegoldobserver.blogspot.com/2011/10/asian-crisis-follow-up.html

DP said...

Borjesson: Seems to me that the MTM gold thingy only helps in relation to other currencies, and not "domestically".

It only helps in relation to gold. This is the ECB telling anyone that wants to know "this (with a bid/offer spread, natch) is the price that the market is currently comfortable exchanging euros and gold at". Gold is pricing euros, by being exchanged for euros at this price.

Crack said...

DP,

So what does gold say about the dollar when it's in freefall then?

DP said...

@Crack: Thank you very much, perhaps?

Motley Fool said...

I would like to say a thank you to everyone who posts interesting links here. It would be inefficient to thank everyone by name, but...

Thanks. :)

Robert said...

@ampmfix <>

Interesting article. Makes me question (i) whether the Saudis were ever really interested in gold, (ii) whether the actions of the central bank are really representative of the Saudi royal family's view of gold, and (iii) whether the corruption of the Saudi family over the last three decades has changed the view expressed by the finance minister in the 1970s. No easy answers I suppose.

Gary said...

@Robert.

Just made me think they are playing their cards close to the chest. Based on my developing understanding of 'the game' being played, they are all just biding their time, and I'd bet they are still snaffling up gold for their oil.

A link to a gold piece from Paul Krugman here:

http://krugman.blogs.nytimes.com/2011/09/06/treasuries-tips-and-gold-wonkish/

It seems fairly basic stuff, linking gold prices to real interest rates. Of more interest to me was the views of the majority of the commenters that gold is in a real esate like bubble, maybe half way through.

To think, he's a Nobel laureate too, yet his observations aren't a patch on FOFOA's.

DP said...

Maybe they don't put all their assets on the books at the boring old CB.

http://www.swfinstitute.org/swf-news/saudi-arabia-sets-up-new-sovereign-wealth-fund-to-invest-in-foreign-stocks

Texan said...

Bitcoin down to $3 and change......check out marginal revolution.com

Joel said...

"The creation of the new fund is a departure in strategy by Saudi Arabia, which has previously channeled most of its overseas assets through its central bank the Saudi Arabian Monetary Agency, or SAMA. The authority is thought to control assets worth around $500 billion mostly in treasuries."

$500 billion, mostly in treasuries? Talk about putting all your eggs in one basket. That poor fund manager is probably going to beheaded when the SHTF, lol...

costata said...

Chuck Butler comments (indirectly) on Operation Twist (my emphasis):

http://www.kitco.com/ind/Butler/oct172011.html

As I looked over the markets before beginning to write this morning, I noticed that the 10-year Treasury continues to lose ground, with the yield going to 2.28% this morning. Remember as the yield on a bond goes up, the price goes down.

I saw 2.28%, and thought… that’s real proof in the pudding that the risk aversion campers have crawled back into the woodwork, and all the “fringe” players, that shuffle from risk taker to risk aversion, are selling their Treasuries and going back into risk assets.

But there’s more to this story than that… And a story on the Bloomberg caught my eye… “The Federal Reserve said its holdings of U.S. Government debt on behalf of central bankers and institutional investors outside America has plunged $76.5 Billion in the last seven weeks, the most since 2007…

The writer then went on to try and explain this plunge on Central Banks needing funds to intervene in the currency markets, and getting those funds by selling their Treasuries… Ok… maybe some of this is that… but the majority here is the fact that while things in Europe aren’t better yet, at least they’re on the road to correction, and the U.S. hasn’t even found the road yet!

mr pinnion said...

I find it hard to believe that the Saudi royal family's not compleatly controlled by the US PTB.Dont they just do as they are told? Puppets, the lot of em.Lest they go the Libyan way.

Regards
Ozzy

Robert LeRoy Parker said...

If one had read Another/FOA/FOFOA, is it possible one could advance this conclusion:

Euro Zone Fracture is a new concept for us. It develops the theory that weaker countries that have always been a poor fit within the euro zone structure will be thrown off, like children from a Merry-go-Round when it spins too fast to allow the weaker players to keep their grip, but the system will hold together overall with the euro re-enforced to be more of a true currency rather than a super currency peg.


Yes I think so. Seeing as Janszen apparently prefers a fixed gold standard to reference point gold, I would think that conclusion would be very possible.

People like Art, Rui, others I'm sure, have read Fo/fo/a and are not beholden to the freegold vision. I think reference point gold is clearly superior system to bretton woods, but it's not as if every person who has read this forum is utterly convinced by freegold.

I still think Janszen's statement that gold is a stand-by alternative currency for international contract settlement if and when the U.S. Treasury dollar system finishes breaking down reeks of Another. The timing of his "investigation" beginning in 1998 smells the same.

Fo/fo/a have said that a second bretton woods would result in the gold being drained nearly immediately. Why must it be that way? Say the fixed exchange is set at 100 grand. With 260 million ounces at the treasuries disposal, that valuation would nearly double the United States outstanding debt. With reform to the unfunded liabilities, how would all of the gold be drained?

I think it is more plausible that Janzsen along with many other "cigas" have and do read Fo/fo/a, but simply can't make money by telling people to buy and hold physical gold in your own possession. We know that Mish reads Fofoa and we know that Janszen probably reads Mish given their arguments. Ned Neyland reads Fofoa, but for some reason can't bring himself to mention him by name in interviews with James Turk. Jim Sinclair talks about Giants and on and on. Bron is the only "official" person I can think of that doesn't go out of his way to avoid acknowledging Fofoa's existence. And seeing as Bron is primarily (to my knowledge) in the business of selling in hand physical bullion rather than funds, miners, allocated/unallocated storage, that makes sense.

And although Another and Foa explained the intent of the Euro's architecture, perhaps it is possible, as Victor once mentioned, that none of the original architects are still alive/participating at the round table. Another talked as if he were very old so I wouldn't find that hard to believe.

Say Greece is kicked out of the monetary union. How does that change the Euro's mtm gold accounting and preparedness for an era of RPG? It would suck for Greece, but perhaps the German's don't feel like continuously bailing them out in the current monetary system and will give them the big FU by taking away their Euroshield before the demise of the dollar.

Robert LeRoy Parker said...

To rephrase my question about bretton woods 2. Clearly a second bretton woods would eventually run into the same problems of the first bretton woods, but why couldn't it last for some time at least, (say a decade?), if the fixed exchange rate were set very high?

I believe I recall Fofoa writing that back in 70 the treasury could have revalued gold to $200 and the system might have continued for another 30 years. (perhaps i'm misremembering)

Robert LeRoy Parker said...

If all it takes to keep a fixed gold standard going is to revalue gold's exchange rate higher when reserves start to become depleted, a path to freegold emerges from a bretton woods style system.

If each revaluation yields a shorter and shorter period of stability, eventually you reach a point of continuous revaluation, or reference point gold.

JR said...

Focal Point: Gold

"...I also hope that my readers come to understand how and why a new gold standard with a fixed price of gold, no matter how high, will simply not work anymore.

The full explanation of why it will not work is quite involved, and I'm not going to do it here. But the short answer is that the very act of defending a fixed price of gold in your currency ensures the failure of your currency. And it won't take 30 or 40 years this time. It'll happen fast. It wouldn't matter if Ben decided to defend a price of $5,000 per ounce, $50,000 per ounce or $5 million per ounce. It is the act of defending your currency against gold that kills your currency.

You can defend your currency against other currencies… using gold! Yes! This is the very essence of Freegold. But you cannot defend it against gold. You will fail. Your currency will fail. Slowly in the past, quickly today. If you set the price too high you will first hyperinflate your currency buying gold, but you won't get much real gold in exchange for collapsing the global confidence in your currency, and then you will have to empty your gold vaults selling gold (to defend your price) as your currency heads to zero. And do you think the world trusts the US to ever empty its vaults? Nope. Fool me once…

If you set the price too low, like, say, $5,000/ounce, you will first expose your own currency folly with such an act and have little opportunity to buy any of the real stuff as the world quickly understands what has gone wrong and empties your gold vaults with all those easy dollars floating around. You will sell, sell, sell trying to defend your price, but in the end, the price will be higher and you'll be out of gold. Either that, or you'll close the gold window (once again), sigh, and finally admit that Freegold it is."

JR said...

Börjesson,

"In what way does the fact that the euro features MTM gold help it to avoid collapsing from the huge saver-debtor rift within the euro zone? "

I think that is primarily the separation of the currency from any particular nation state. The FED is part of the USG - the will print to support itself/the USG, or the USG will just take the power itself - the Euro is different.

"The euro was special in two ways. And by special, I mean special on an astronomical time scale. It was the first man-made circulating medium to separate itself from the nation-state, from the very ones who always crush a currency to zero. ..."
comment to Hair of the Dog

=================================

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

But the dollar, on the other hand, is nominally on the hook not only for the debt mistakes of the past, but for all future dollar-denominated liabilities, obligations, entitlements and promises of the biggest debtor in all of history, on top of a debt mountain that is probably another $100T in size depending on your measurement criteria....

Back Across the Pond

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

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

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

Euro Gold

Robert LeRoy Parker said...

So where is the full explanation?

Too high, too low, what about the middle?

JR said...

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

Robert LeRoy Parker said...

I'm not convinced the failure would be very quick.

JR said...

I often wonder why I can't fly? But it doesn't change the fact I can't.

=================================

"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.

In this way, humans are similar to ants! A normal IQ distribution among humans ranges from 60 to 140. To me as an average human this seems like a very wide distribution. The dumb seem very dumb, and the smart seem really smart. But in the big scheme of things the human intelligence distribution is not so far off from the ant "intelligence" distribution. In other words, the smartest ant in existence doesn't even come close to the "distributed intelligence" of a wild colony. And the same goes for humans!

But when we put ants into a two-dimensional, controlled environment, the distributed intelligence of the superorganism is stifled and nearly snuffed out. As a confined group they end up no smarter than an 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".

They are the people whose contribution to society exceeds their own daily needs, creating an excess of wealth. And the most important decision for the human superorganism is the savers' choice between hoarding their wealth, or deploying it into the economy!

It is this decision process, made millions of times at the individual level, that lends the superorganism its superior IQ. There is no single human that possesses an intelligence high enough to compete with the human superorganism, just as there is no single ant that is smart enough to make better decisions for the colony than the colony itself."

Life in the Ant Farm

Robert LeRoy Parker said...

Sticks and stones J.R.

JR said...

"...Rather than closing the gold window, the U.S. could have, for example, raised the price of gold to $200 and kept the system going for another 30 or 40 years. A move like this would have been the mathematical equivalent of increasing the Treasury's physical stockpile 5X to double what it was at the height of the Bretton Woods experiment.

But while that would have satiated the monetary transgressions of the past, it would have done little for the future. It would not have substantially changed the system to one of easy money. It would only have extended the old system of hard money.

It was reasoned at that time that more than just the ridiculous price of gold being broken, the system itself was broken, and needed a global finance structural change. So the international consensus was to let the U.S. default outright on its gold obligations rather than lobbying for a revaluation of its gold at a new fixed rate. But then continue using the dollar anyway, as long as relatively cheap oil could be gotten for dollars.

And with this decision, the stage was set for a renewed global (Western?) economic growth spurt, much like after the end of WWII. Only this time, the value lost through the non-delivery of U.S. Treasury gold would be more than replaced by the value oil brought to the new world economy, especially with first-of-a-kind products like Pong, released for the Christmas season in 1975.

...

In early 1980, Volcker's new Fed policy began to bite. As interest rates rose, the Dollar first slowed its descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold were lured back into paper by this huge rise in interest rates – and by the prospect of a higher U.S. Dollar.

Many facets went into this change in investment attitude, but one concrete change in the U.S. financial system was the most telling. Way back in March 1971, four months before Nixon closed the Gold window, the "permanent" U.S. debt ceiling had been frozen at $400 Billion. By late 1982, U.S. funded debt had tripled to about $1.25 TRILLION. But the "permanent" debt ceiling still stood at $400 Billion. All the debt ceiling rises since 1971 had been officially designated as "temporary!" In late 1982, realizing that this charade could not be continued, The U.S. Treasury eliminated the "difference" between the "temporary" and the "permanent" debt ceiling.

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

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

Credibility Inflation

So we left hard money and had the biggest explosion of debt ever in an unprecedented fiat currency reserve system ( the $IMFS). This is ending.

Robert LeRoy Parker said...

The lbma conference powerpoint that suggested the US should make a two way market in gold at $20,000.

How could this be implemented without "first hyperinflat[ing] the currency buying gold?"

The first move would be for the fed or treasury to buy gold (right?). The difference would be that they would not have to 'defend' the price because it isn't fixed at $20,000. And the next (maybe simultaneous) move would be to put a standing sell offer at $20,000 or at market prices? How does the treasury ensure the market is two way? Will the market simply adjust on the buy side to the treasurie's offered selling point because open movement by the biggest giant allows for smaller giants to move in the open as well. Or would this move simply collapse the lbma (assuming it's a physical only offer) by creating a run on physical, thus revealing that $20,000 is likely too low a price.

The mechanics of the nuclear option are unclear to me as well i'm realizing. But my concern is that if the buy side of the market does not adjust to the treasury's move then massive inflation would be induced.

Motley Fool said...

Hmm RLP

I think yours is a valid question.

So.

I assume we can agree there is a free-market objective price for gold in any role.

If it were simply a industrial metal, then close to it's current extraction value.

As a backing in gold standard, a higher value, dependent on whether it is for domestic or international use.

And lastly a very much higher value under FG.

FOFOA has estimated these values as $500, $5000, $11000 and $60,000, respectively.

I presume you are thinking of gold in the role as gold backing and also in the role of international backing, like what we had prior to 1971.

In that case we are looking at the $11,000 value.

Let us consider both 11k and 100k.

I'm sure you agree that if they were to implement a gold backed currency today then there would not be a lot of international trust today, so they would have to defend that value.

At 11k China would simply swop their treasuries for gold. Game over. Of course the USA would not allow this, which gets us back to a closed gold window.

So what about 100k.

Well that would make their gold stash worth about $25 trillion.

But. If America were to overvalue gold, they would need to defend that price. So gold would start flowing in to America, and the only way they would be able to pay for it would be printing. So they would devalue the dollar, and real productive assets would be bought 'cheaply' while they do so.

Now from 11k to 100k is a lot of devaluation. The local populace would see super inflation ( assuming no HI).

If they survive this, then we get back to our initial example. A gold run starts again, and eventually they have to close the window.

Whenever a government sets a price, either too high or too low, the people suffer the consequences.

TF

mortymer said...

http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwise/sprott-makes-a-bet-on-a-different-kind-of-bank/article2204088/

JR said...

FOFOA comment to One Tin Soldier ..In my mind, it would be infinitely better for the USG to acknowledge Freegold, declare a starting price of, say, $10,000/ounce, and then open the vaults and let the price float. They buy and sell at the market price through the banks, starting at $10K.

The price would soon stabilize, much higher than $10K of course, but the two-way market would be in effect. The gold would not be gone. The currency would be stable once again..."


===============================

Aleksanda comment

"POG is arbitrary. even at 10k per oz everything will function just fine. As opposed to oil that, if price increases faster than people's incomes, will slow down the economy. Thats why gold is not a commodity.

Opening up a physical window with a starting price of 10k per ounce does not mean that "the government would set the price at 10,000$". The opening bid is 10k, afterwards the price will go where it will go...

The above is actually the nuclear option that BIS has and that FOFOA writes about. It will probably happen after the situation has become untenable and the $ collapse is out of control. After all, the BIS does not want to be viewed as a $ destroyer. "


=================================

FOFOA comment

"Thank you Alek...

But to "crash the paper market" as you say, opening a physical-only gold market with opening bid/offer at $10K would do that just fine...

You say, "I am not sure what a government sponsored gold window would achieve".

This is a two way gold market, buy and sell, not one way like the old US Treasury gold window of 1971 and earlier. What keeps it stable is the physical-only price.

JR said...

"But my concern is that if the buy side of the market does not adjust to the treasury's move then massive inflation would be induced."

Not if its a two way, physical only market where they let the price float. Do you see?

Robert LeRoy Parker said...

I see.

The giants would have to come out and play.

victorthecleaner said...

JR,

for starters, Germany has the most to lose if the Euro fails

I am not so sure about this. A good picture of what is the problem with the euro area is to compare it with the worldwide trade imbalances.

Effectively, China and the US have a currency union (the US Fed makes the decisions, and as soon as the dollars cross the Pacific ocean, the PBoC monetizes them and issues Yuan instead, effectively renaming the currency as soon as it enters their shores - this is pretty much a currency union). Inside the currency union between China and the US, there is a huge trade imbalance. China delivers tangible products to the US and the US pay with paper dollars. This works as long as China accepts these dollars and keeps them as a store of value. Unfortunately, in the very long run, this is unsustainable. One day, they will hit a wall. If you imagine that the US care more about the tangible goods and not so much about where their paper ends up, the US have no interest in getting out of this arrangement. It it the Chinese who ought to have such an interest. Unfortunately, once the Chinese try to unwind their position, they may already trigger the crash of the dollar and just hit the inevitable wall immediately. So the Chinese will probably play for time as long as it does not hurt too badly.

Now the sad part of the story about the euro is that you can replace China with Germany (and Netherlands, Finland, Austria, ...), replace the US with Greece (and Portugal, Spain, ...), replace dollars with PIGS countries' government bonds and Yuan with euros, and you get pretty much the same picture. The German and French banks made sure that their trade surplus with the southern countries was invested in government bonds of the debtor countries and these bonds were kept as a store of value. Just as the PBoC monetized dollars and issued Yuan, the German and French commercial banks monetized the PIGS government bonds. Yes, they actually repo'd them with the ECB who gave them euro cash instead. The ECB knew it and played along. Again, this scheme is unsustainable in the long run. One day, they will hit a wall. Just as the dollar will crash one day in the China-US pair, the PIGS bonds will crash one day.

Wait a second. This actually happened more than a year ago. So the main difference compared with the China-US pair is that the Europeans have already started hitting the wall. A controlled unwinding, even if it were possible, is no option anymore, simply because the market has already started taking apart the euro area debt.

You might think the following is a key difference between China-US and the euro area. When the China-US arrangement ends, the dollar will collapse, but when the European imbalances crash, it is the PIGS government bonds that collapse rather than the euro. Well, this idea assumes a specific policy response: When the Chinese sell their US government bonds, will the Fed (1) watch the government bond market crash, watch the banking system that holds these bonds crash, and the US government go bankrupt or (2) monetize the debt and put all the burden on the dollar?

...

victorthecleaner said...

...

Börjesson,

"In what way does the fact that the euro features MTM gold help it to avoid collapsing from the huge saver-debtor rift within the euro zone?"

I think that is primarily the separation of the currency from any particular nation state. The FED is part of the USG - the will print to support itself/the USG, or the USG will just take the power itself - the Euro is different.

The ECB will face the exact same question: When not only Greek, Irish and Portuguese government bonds crash, but also the next dominoes fall, say Italy and Spain, will the ECB (1) watch the government bonds crash, watch the banking systems crash, and various governments go bankrupt or (2) monetize the debt and put all the burden on the euro? The problems because of the imbalance of the China-US pair and because of the euro area internal imbalances are not that different after all. Once the excessive debt collapses, in both cases, they are headed for a depression comparable to or worse than the 1930s.

Will the ECB sit tight as Greece, Portugal, Italy, Spain go bankrupt and their retirees and their government employees who are suddenly without pension and salary, riot in the streets? Perhaps it was a good idea to base the ECB in Frankfurt after all ... Will they have the balls to let everything around them collapse? Or will they, eventually, once even German government bonds crash, nevertheless decide to print in order to support the running government deficits?

For quite some time, I have had the suspicion that the ECB was hoping for the dollar to collapse a lot earlier. In this case, gold would have already been revalued and the ECB would have used a part of their gold in order to neutralize the excessive debt. A good part of the gold would be gone (to those that used to hold the debt, luckily mainly still in Europe), but they would have avoided hyperinflation with ease. Now that the dollar is still limping on, gold is still traded in dollars and in London, and the European debt is almost as excessive as the US debt, I am not so sure anymore.

The remaining question is whether and when the first of the CBs will make use of their gold. Bernanke knows very well that it was the gold revaluation that was the key in getting out of the Great Depression. If we believe Another/FOA, the ECB leaders also know what the gold is good for. Who in the euro area will want to use the gold? The Greeks in order to pay off their debt without hurting the idiots who bought this debt as a store of value? No, I don't think so. Why would they? Germany and France in order to recapitalize their banking system and get over with their stupidity of storing their surplus wealth in Greek debt? Yes, much more likely so. How about China-US? Will Bernanke use the gold? Not as long as he can create domestic inflation and lower the value of the dollar, thereby putting all the stress on China. Do the Chinese have enough gold to unilaterally trigger the revaluation and cut their ties with the US for good? Most people would probably say not yet, at least not for another 5-10 years. So all eyes are on the ECB, I suppose.

Victor

victorthecleaner said...

RLP,

the physical gold open market operations can be done in various ways:
1) Set the price in such a way that the net flow is zero. This is just price discovery.
2) Aim for a specific amount (weight) of gold to flow in. This creates dollar inflation.
3) Aim for a specific amount of gold to flow out. This creates dollar deflation.

Of course, this works only if all the big participants come out and trade. As long as the Saudis or the Canadians are still intimidated and voluntarily submissive, your won't discover any price that way.

Just in order to crash the London market, it would probably suffice to place a single buy order for 1000 tonnes with limit at 10000$ per ounce (about $320bn - that's sort of pocket change these days)

Victor

Börjesson said...

Thanks, victor! The parallel between the euro zone and US-China is a useful one.

But if I understand the FOFOA quote that JR came up with (thanks!) at October 17, 2011 8:49 PM, then FOFOA thinks that the ECB will print, just like the Fed. The difference is that this won't cause hyperinflation, because the euro has severed its link to the nation state. And this, I'm afraid, is still completely unintelligible for me.

For starters, in what way has the nation state link been severed? Isn't the euro zone for all intents and purposes a nation in this context? Sure, it's a nation with a very poor system of government, that takes an endless time to make decisions; but eventually, the politicians from the 17 member states will agree on something. That that something will be to print seems easily within the stretch of probability. And when they do, what's the difference between that and the US situation? I just don't get it.

mortymer said...

Maybe you will find this info relevant to the present discussion:

http://www.banque-france.fr/gb/instit/discours/first-anniversary-of-banque-de-france-s-reserve-management-facility-11-10-2011.htm

"Allow me now to offer you a French and central banker point of view of the current situation...."

JoyOfLearning said...

@mortymer
"Allow me now to offer you a French and central banker point of view of the current situation...."
Wow! brilliant find! Seems to me to be confirming a lot of Fofoa's hypotheses! I believe it's him that I felt arguing that from the start Europe/the old banking has been setting itself up for this exact future, to set up the bridge between the newly rising forces and the old way of things. I also was very much impressed by his acknowledgement of their willingness to put up with short term pains in the interest of long term gains, realizing the importance of credibility for this long term plan. I'm moved by the undertone of seeing a virtue in the painful fight against inflation. He even uses phrases like "stores of value"

Oh, and one comment, in his acknowledgement of the slowness of a european reaction it made me think of this pet thought I've been having recently: being aware of the many bad things governments can do under short term political pressure, what if, the architects of the euro (as it has been suggested here might have been wise minds) actually banked on this... what if the only way to actually stop those incentive miss alignments is to actually bank on the democratic process, making it not a weakness like it's often portrayed in the press but a strength...

One thing I didn't get from his speech was his mention of "the real vulnerability is their dependence on dollar funding"... more exactly I didn't understand what they're doing about it. And my question to the knowledgeable minds here is: is what they're doing positive or negative towards for example increasing velocity of circulation of dollars or some such thing that might send some $ home to roost?

Börjesson said...

Interesting link, thanks mortymer! But my initial take is that what M. Redouin said is not at all in line with FOFOA. Firstly, he says basically that the ECB won't print, whereas FOFOA seems to think that they will. And secondly, M. Redouin seems to want to build up the euro itself as the preferred store of value in the future, and thus direct all efforts to keeping it stable and non-inflating. This again is not in line with FOFOA and Freegold, where of course gold is the stable store of value and the currency is supposed to float and fluctuate.

(Isn't there a FOFOA quote somewhere about how the powers that be will preserve the system rather than the currency value every time? Thus they may make the right noises beforehand, but once pressure starts to pile up, they will always fold and crank up the printing press.)

J said...

Börjesson - Here you go

"Don't expect austerity or a deflationary collapse. Don't expect them "to do the right thing" and let the bad debt fail. There is simply too much of it out there. It is our entire global monetary system, not just the bond investors. There is no political will anywhere in the world to let the people's wealth simply vanish in order to maintain the value of a silly little physical dollar. This **THIS** is the big Catch-22!

In order to save the people's "money" it will be destroyed!"

Greece is the word

mortymer said...

@JoL:
4UR: "...Oh, and one comment, in his acknowledgement of the slowness of a european reaction it made me think of this pet thought I've been having recently: being aware of the many bad things governments can do under short term political pressure,..."

[Mrt: IMO Yes and NO, it depends, its hard to generalize I suppose.]

Offer me this view:

http://www.bis.org/review/r111014a.pdf?ql=1

"...This is also the moment of maximum peril for Europe’s most important political and economic project and if this were to fail, it would have the gravest consequences for Europe, never mind the rest of the world?
->
All advanced economies are being X-rayed by the present crisis and revealing their skeletons and the weaknesses in their skeletons. It’s true for all of us – for Japan, for the US, for Europeans. Europe’s skeleton of Europe is weak because the institutional framework is weak.
I would confirm that is a major challenge and that it puts into question the strategy of all major advanced economies, including Europe and its institutional framework. At the same time, I could say, that it has positive aspects, now what are our major weaknesses..."

"...Can we carry on with a situation where every country has to sign up to the slightest change and we can be held hostage, if you like, by a country like Slovakia?
->
I think that the complexity of the European decision-making process in a crisis situation that requires for major decisions 17 democratic decisions is obviously one of the weaknesses of the present institutional framework..."

Börjesson said...

Thanks, J! But that wasn't the quote I had in mind. I found it, it was hiding in Euro Gold.

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

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

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

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

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

Hah! So now I can be part of the club, pasting big chunks of FOFOA scripture because I don't understand this stuff enough to be able to explain it myself. :)

DP said...

That quote of J's is taken out of context IMO - it's about the dollar system, the system of using debts (sovereign bonds) as reserve assets, being caught in a Catch-22. Not the euro/RPG system that will pick up the pieces and allow the world to carry on trading.

FOFOA, earlier in that post: If it weren't for the hard fixed currency zone of the euro, Greece would be headed toward currency collapse and hyperinflation right now, just like in 1944, and just like Iceland, Argentina, Brazil, Zimbabwe, Weimar Germany, Bulgaria, Hungary, Peru, Bolivia, Ukraine, Yugoslavia and so many more.

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


The ECB will be on the hook to soak up past debts, sufficient to ensure the savers are made whole and don't turn their backs on the entire banking system. But they will clearly distance themselves from the position of picking up the future debts by monetising that part of deficits that are not taken up by the market from here on out.

They'll do whatever it takes to preserve their currency and banking system, but not whatever it takes to preserve the dollar system of debt reserve accumulation. The US (and UK) are taking a different line: the line depicted in J's comment. Preservation of the dollar system. QE to infinity - and beyond!

DP said...

Did I understand this stuff enough to be able to not only quote FOFOA, but explain what he meant in such a way that even you can now understand it?

What is it with the attitude so many people show up here with? It's so unnecessary. :-\ I often wonder why we bother.

mortymer said...

From BundesBank pages:

*Currency blocs in the 21st century*

http://anotherfreegoldblog.blogspot.com/2011/10/bb-currency-blocs-in-21st-century.html

"Based on a classification of countries and territories according to their regime and anchor currency choice, the study considers the two major currency blocs of the present world. A nested logit regression suggests that long-term structural economic variables determine a given country’s currency bloc affiliation. The dollar bloc differs from the euro bloc in that there exists a group of countries that peg temporarily to the US dollar without having close economic affinities with the bloc..."

[Mrt: And as DP notes, that is not the only difference between those 2 currency blocks.]

Börjesson said...

DP: If I showed up with an attitude, then I apologize. That was not my intent. But I think you may have received more than was sent out. All I aimed for was a bit of levity (hence the smiley). Maybe I used the wrong words somewhere - English is after all not my first language.

mortymer said...

...cont... 2/2

[Mrt: putting it as a separate quote cos its significance]

"...6.2.2 Oil-exporting countries stop using the US dollar as invoice currency
Currently, the US dollar is used as the invoice currency for oil exports. In recent years, there have been discussions in some countries about whether this could or should be changed. Until now, a majority of OPEC countries have rejected the idea (cf Eichengreen, 2011, p 123). Nevertheless, Khan (2009) reports for the Middle East,
where many countries peg their currencies to the dollar and, at the same time, are net oil exporters, that “there is considerable discussion in the region about reducing the dominance of the dollar and increasing the relative importance of the euro” (p 139). In an analysis of this issue, Louis et al (2010) find that an anchor to a currency basket may be superior to a dollar peg for the countries of the Gulf Cooperation Council. It may therefore be of interest to investigate the repercussions of a counterfactual in which oilexporting countries stop using the dollar as the invoice currency. Technically, this has been done, first, by setting the parameters of the percentage of oil in total exports and its variances and covariances to zero and, then, re-computing the new currency bloc equilibrium.
Since the significance of the net oil export parameters in the baseline estimates is weak at best, it might be expected that the counterfactual arrives at virtually the same equilibrium as the baseline scenario. Such a conjecture is supported by the results for the pooled estimates, where the switch in invoice currency simply raises Azerbaijan’s estimated utility gain of de-pegging its currency from the dollar to significant levels. Moreover, Chad has chosen to float its currency instead of pegging it to the US dollar in the new counterfactual equilibrium. When the 2008 data estimates are used, the repercussions of a change in the oil trade invoice currency are more severe. The new counterfactual equilibrium differs from the baseline equilibrium by the fact that not only Azerbaijan has chosen to de-peg its currency from the dollar and let it float but also Ecuador, Kazakhstan and Saudi Arabia. Angola is computed to switch directly from the US dollar to the euro bloc...."

DP said...

I don't know why, but here is some extra free bonus material for you.

Börjesson: This again is not in line with FOFOA and Freegold, where of course gold is the stable store of value and the currency is supposed to float and fluctuate.

Correct. But what you've missed so far in your journey, is that it'll be in the self-interest of the CB to keep the value of their currency stable, right alongside gold. They'll have a choice in the matter, but this is what will be in their own best interests ultimately.

Bonne journée...

JoyOfLearning said...

@Mortymer:
I can understand why Jean-Claude Trichet would say that, and like many cry for more centralized power, but the point of my hypothesis was on the lines of a certain level of slowness might function in the same direction in which the American founding fathers meant to design checks and balances. I've been wondering for a while if there might not be a parallel: the european countries at this moment have a similar (healthy?) distrust of each other and centralized power as I understood from some books states in the US once did.

In terms of what Jean-Paul REDOUIN was saying: yes, I agree he's trying to imbue the euro with actual store of value, and I do suspect in the long term it like all paper currencies will go the way of the dodo, but right now I think it's still young and they may have the willpower needed, at least because like a man in his youth they can hope to be richly rewarded for this pain a little later.

The other possibility of course is that as US inflates they will too, at the very least not to fall into the spotlight, which is what I understand from the quotes everybody is thinking? Still, with the gold at the core things do change to some extent, right? So do you expect say $ inflating x100 and euro only inflating x50, thus even though it's holders get cheated too, on a relative term it gains in value?

Crack said...

Joel, what if the Saudi SWF and CB only ever see the paper side of the incoming payments for oil, and the royal family themselves get the sneaky gold on the side? Just an idea.

JR said...

Victor

When i write "for starters, Germany has the most to lose if the Euro fails," I mean Germany has the most to lose form the breakup of the Euro. The meme of "the weaker nations cast aside" misses the whole point - the Euro is a trade Union, and the most productive members, those with the most real capital/real wealth, the most productive capacity/capital infrastructure/current successful operations etc., have the most to lose if the Euro trade union fails. Indeed Germany was a driving force in the creation of the Euro for this reason. As FOA wrote

The world is heading towards a huge financial / currency crack up, but it won't work out with gold coming back into the money game. This very long term transition is playing on a move away from dollar domination with Europe preparing to suffer less than us by pulling in as many other political trading blocks as they can.

They are trying to suffer less as the reserve currency used for international clearing fails, to keep trade alive and prevent the "burning of all paper" - as a very productive nation they have much to lose if there is international trade breakdown because of a destruction of the the money concept as we go back to hard gold trading - do you see?

=================================

5/22/98 ANOTHER (THOUGHTS!)

If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will hoard all gold and buy any offered if this new European currency does not work" and "debt currencies fail". If this does come, no paper asset of world economic system will survive, nothing! Not a good thought, no? Thank You



Do you see this view?

JR said...

Börjesson and J,

DP is spot on.

The euro has severed the direct link to the nation state. In the US, the FED is a creation of Congress - the people who deficit spend like 1.4 trillion.

Euro is not beholden to any government. Look at the quote you posted from euro gold Börjesson - here are two preceding paragraphs:

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

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


Do you see the import of "cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion. That link is severed"?

AS DP wrote, the ECB will print to keep the euro system nominally working, and there will be defaults/haircuts/restructuring and probably a devaluation, but they have severed the link to the nation-state, the euro is "the first man-made circulating medium to separate itself from the nation-state, from the very ones who always crush a currency to zero. ..."

From euro gold, do you see the difference between the FED/USG and the Euro from the fairy tale expanded?

They FED is on the hook for the USG, which must keep spending to support its standard of living. The FED is already monetizing the USG's current consumption.

Motley Fool said...

Hi Borjesson

Being a simple fool and understanding nothing, I will simply direct you to a post. (Seems I can't even do the scripture quotes)

Euro Gold

You may want to pay particular attention when FOFOA mentions fair.

I have this vague feeling that it has something to do with severed links, or perhaps it's simply severed legs and I'm being foolish.

TF

JR said...

Euro Gold

From the "Fairy Tale Expanded," here is the contrast of the FED/USG operated fair:

"...Back Across the Pond

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

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

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

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

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

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


....

JR said...

Do you see the ^_contrasts_^ pointed out by FOFOA?

The link is not severed at the FED/USG's fair - unlike the Euro, who only runs the fair, the FED/USG runs the fair and shops there too.

Not only that, the FED/USG is the biggest debtor this or any other fair has ever seen. And its printing its own money to keep up its deficit consumption. The ECB is not a debtor, it is not linked to any nation state.

And its worse because the FED/USG not only shop at its own fair, it also shops at other fairs around the world, fueling its huge consumption needs by consuming goods from those other fairs with more of its new script. The ECB doesn't shop at home, much less abroad.

And the tents at the FED/USG fair didn't put up gold because the fair operator took it and hid it - and these tents like California have some huge debts too - but unlike the ECB, who can focus on maintaining the nominal performance of its system by working with its debtor tents, the FED/USG has its own debt issues, so it really is sorta preoccupied.

Motley Fool said...

And now for something different.

Defending the precious

This is especially directed at newer readers, who feel they have gained some valuable knowledge here, but it is a reminder to old hands too. :P

TF

Motley Fool said...
This comment has been removed by the author.
2000 Flushes said...

A month old, but an interesting argument that a reintroduction of the Deutschmark may be imminent: http://www.pippamalmgren.com/77.html

DP said...

"They have already ordered the new currency and asked that the printers hurry up."

Yeah, and the ink is now fully dry, so I really hope they will come and take them out of my garage soon and I can finally put my car away. :-\ I also need them to pay the invoice so I can buy a a replacement for my worn-out HP Deskjet too.

Joel said...

@Crack,

As Another pointed out, the Saudi's have been accumulating tons of gold (no pun intended) for years. But they still own $500 Billion of soon to be worthless (or at the very least, worth much less) treasuries in that fund. That, my friend, is a lot of Budweiser (my second store of wealth, lol...)

Mad Numismatist said...

FOFOA, et al: Do you think Gordon Brownsa sales of gold to ubuy euros is realted to this in anywat? i am thinking "Browns Bottoem" could be renamed Browns Hedge?

JR said...

Jeff comment:

Before the BOE gold sale announcement:

Date: Sat Apr 25 1998 23:35
ANOTHER (THOUGHTS!) ID#60253:

Gold will rise in dollar terms, many thousands even if treasury inflates currency no more. This rise in price will cost London much! You have seen the Bank of England report of gold that does not come home?

Date: Tue Apr 28 1998 16:59
ANOTHER (THOUGHTS!) ID#60253:

Also, the Bank of England does prepare it's public for this new gold market! A market that will deny the repayment of gold loaned, at US$ prices that will keep Bullion Banks alive!

after the announcement:

FOA (5/7/99; 8:09:11MDT - Msg ID:5699)
BOE gold sale!!
ALL:
A quick post, then I must go.
The decision by the UK Treasury to sell gold, points strongly towards the severe political pressures upon the IMF / Dollar Reserve factions! The "dollar reserve system" is truly in trouble. With the IMF gold sales in doubt, or delayed. And the EURO / BIS factions blocking any new gold. New gold cannot be found to maintain the backing of collateral for existing paper shorts and the massive liquidity they provide. The UK is directly in the middle of this as the LBMA would all but "disappear" if world dollar liquidity were to shrink from a higher gold price!


=========================

Blondie expounds:

The physical was used to bail out the LBMA, but was initially leased for this purpose, and when it could not be returned the lease became a sale.

So the leases were of real physical, and the sale was a book-keeping entry, and this is what I meant by saying that they are the same thing... the physical moved at a different stage of the process than is indicated by a “sale” normally, but the physical moved for the same reason regardless of exactly when. So it is only a single transaction, with payment only required when the nature of the transaction changed due to circumstance (BB inability to repay lease.)

mortymer said...

Speaking of which:

LBMA - A Guide to the London Precious Metals Markets

http://www.lppm.com/OTCguide.pdf

mortymer said...

hen we sould also be examining:

http://www.lpmcl.com/

I would suggest to check the general info and un/allocated documentation.

Enjoy!

JR said...

Börjesson,

Do you know see how:

But if I understand the FOFOA quote that JR came up with (thanks!) at October 17, 2011 8:49 PM, then FOFOA thinks that the ECB will print, just like the Fed.

and

But my initial take is that what M. Redouin said is not at all in line with FOFOA. Firstly, he says basically that the ECB won't print, whereas FOFOA seems to think that they will.

are painted to broadly and leave a bit to be desired in terms of nuance/subtlety ?

AS DP wrote, the ECB will print to keep the euro system nominally working, but there will also be lots of defaults/haircuts/restructuring and probably a devaluation.

Unlike the Euro/ECB, the FED will not default/haircut/restructure, the FED will not limit printing to ensuring nominal performance.

The FED is a part of the USG, and the USG must keep deficit spending (A1.4T trillion last year) to support its standard of living. The FED is already enabling this deviance consumption by essentially monetizing the USG's current deficient spending/current consumption based economy - the Fed is printing script so the USG can keep itself afloat and cotnue to buy stuff from its own fair (the US economy) and from other fairs (China, Euro area, etc).

Do you see how ECB is not nor will not print like the FED, they have severed the link to the nation-state, the euro is "the first man-made circulating medium to separate itself from the nation-state, from the very ones who always crush a currency to zero. ..."

+++++++++++++++++++++++++++++

As Randy S has noted in distinguishing the Euro from the dollar on the GoldTrail, on of the big Euro features is:

More importantly, it does have a single independent authority steering monetary policy down the middle of the road so as to be neutrally suitable for a wide coalition of interests

The fed is more singularly beholden to the USG's interests, no?

Aiionwatha's Nation said...

Unallocated account = unsecured creditor. Very nice.

Looks like these counter parties are getting "allocated" into the FDIC guarantee pool.

I'd like to see a non TBTF bank try this maneuver.

http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html

Börjesson said...

Thanks a lot, JR! This last comment of yours was very helpful. Now I think I understand what you and the others meant.

That doesn't mean I entirely agree, though. I think the independence of the ECB is a bit fictional. If the eurozone politicians agree on printing and lean heavily enough on the ECB, then it will print. The link to the nation-state hasn't been severed, it has just been replaced with a link to a group of nation-states (en route to becoming a nation eventually, if the euro-imperialists get their way). In that regard, the disunity of the 17 member states is the ECB's strongest protection from political pressure. Maybe this lack of supranational financial control over the eurozone was even done deliberately, just for such a time as this? Cleverly done, if so!

Also, I don't really think the Fed is more inclined to print than the ECB. They will both print when they have to, but avoid it if they can. Or at least, that's how I interpret Ben's not printing most recently, but just doing a bit of twisting instead.

Maybe the real difference between the old world and the new is instead the level of debt? When all added together, the state of the eurozone finances isn't all that terrible, even if the internal distribution is very lopsided. That gives them other options to explore. The US, on the other hand, has to borrow massively just to keep the day to day business going. They really have no choice but to print.

I guess at the end of the day, it all amounts to the same thing, whether the difference is specific or just a difference of degree. Either way, the euro may yet make it without hyperinflating, but the dollar probably won't.

JR said...

Börjesson,

Well done:

"The link to the nation-state hasn't been severed, it has just been replaced with a link to a group of nation-states (en route to becoming a nation eventually, if the euro-imperialists get their way). In that regard, the disunity of the 17 member states is the ECB's strongest protection from political pressure. Maybe this lack of supranational financial control over the eurozone was even done deliberately, just for such a time as this? Cleverly done, if so!"

clever indeed. Here is a little more:

================================

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

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

Euro Gold

================================

Ok, so most people miss the "elephant in the room;" the Euro's unprecedented development - the severance from a nation state. So what?

"It was the first man-made circulating medium to separate itself from the nation-state, from the very ones who always crush a currency to zero."
FOFOA comment

It is a nation state that always hyperinflates a currency - as FOA has written:

"Just as in many other historic examples and present examples around the world, nation states always choose hyperinflation when no other way out is offered. No nation on earth has ever cascaded themselves into deflation once they are off the gold money system."
FOA on Hyperinflation

Indeed:

"Under the $IMFSystem when relatively small currency zones have control of "ALL aspects of monetary and fiscal policy," hyperinflations are relatively common. Hyperinflation is the adjustment mechanism in floating exchange rate zones under the $IMFS. This is exactly why the euro severed its link to the nation-state... Because a) we are still living under the $IMFS and b) Europe has a living memory of hyperinflation."
FOFOA comment

So hyperinflation are a relatively common adjustment mechanism under the $IMFs where the link between the currency and nation-state is not severed.

cont.

JR said...

So what does it mean to be severed from the nation-state? It means no single state controls the currency, and thus has the seigniorage power:

"The nation-state steals from the masses through seigniorage. It is the net revenue derived from the issuing of currency. The Euro has no single nation-state that can do this.

Dr. Willem F. Duisenberg, first President of the ECB, said...

"The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state."

Here is a good quote. I will put the context of the quote in a separate comment...

"The euro is trying not to make [the dollar's] mistake. It wants the marketplace to form a stable network of pricing and contracts without false pretenses with respect to Gold. If it succeeds, it will be the world's first fully fledged Money -- in the most Proper use of the word!

The euro could in fact be called honest money, if you like. That is, as honest and as trustworthy as the Rule of Law that stands in the background to enforce contracts."
"

FOFOA comment

================================

As you note Börjesson, "Maybe this lack of supranational financial control over the eurozone was even done deliberately, just for such a time as this? Cleverly done, if so!"

Yes clever - Costata has observed

"Differentiating the risk of the EMU member states debt is not a threat to the Euro itself. It is an intentional part of the architecture of the Euro in line with the ECB and Eurosystem CBs mandate – currency stability. Under the present structure of the single currency the risk is confined to default on debt not a political decision by an individual nation-state to debase the currency in order to engineer a de facto default on its debts."

cont.

JR said...

"Why is not the Eurozone comparable to a nation state?"

Organisation and operation of the European Central Bank

Article 108 of the Treaty establishing the European Community (EC) and Article 7 of the Statute establish the principle of independence of the European System of Central Banks (ESCB). Neither the European Central Bank (ECB), nor a national central bank (NCB), nor any member of their decision-making bodies may seek or take instructions from Community institutions or bodies, governments of the Member States or any other body. The institutional independence of the ECB is strengthened by its financial independence: the ECB has its own budget.

The ESCB is governed by the decision-making bodies of the ECB, these being the Governing Council and the Executive Board. Given that certain Member States have a derogation, the Statute provides, in the transitional arrangements set out in Chapter IX, for the establishment of a General Council of the ECB as the third decision-making body.

link

FOFOA comment

=========================

As Börjesson noted:

"In that regard, the disunity of the 17 member states is the ECB's strongest protection from political pressure."

As Randy S has noted in distinguishing the Euro from the dollar on the GoldTrail, one of the big Euro features is:

More importantly, it does have a single independent authority steering monetary policy down the middle of the road so as to be neutrally suitable for a wide coalition of interests

The fed is more singularly beholden to the USG's interests, no?

cont.

JR said...

"Basically, this is the direction the entire non-dollar world is heading. This new system is not being built on the foundation of any single nation-state or economy. In the future, any one fiat or its attached economy can fail completely without bringing down the whole system. This is what stability is all about. It is the separation of the money concept from both gold, the tangible, tradable physical wealth reserve, and from the albatross of the hungry nation-state."
The New Global Reserve

==================================

Lets compare the $ - it hasn't severed the link to the nation-state:

"The Fed/USG is not only the fair operator, but also a participant, just like Sy Sperling. At this fair, the link is not severed.

Here are a few more differences. The fair operator is not only a participant, but he is also the biggest debtor this fair or any other throughout all of human history has ever seen. He is literally printing up scrip to buy things from the fair. He is not only funding his ongoing (perpetual) trade deficit by printing and spending scrip, but he is also paying the interest on his past debt by printing scrip...

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

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

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

Euro Gold

Cheers, J.R.

JR said...

Think about the Eurozone, which while it has internal trade imbalances, it well balanced against the outside world. Contrast this with the dollar, which lacks such external balance.

Think about Randy's comment about the Euro:

"More importantly, it does have a single independent authority steering monetary policy down the middle of the road so as to be neutrally suitable for a wide coalition of interests"

No one country has currency control, and as it is externally balanced, the currency management is an internal issue amongst existing currency members - both debtors and savers. A currency not severed from the nation-state is not so "neutrally managed."

+++++++++++++++++++++++++++++++

"Spend some quality time with the Eurosystem's balance of payments and marvel at how remarkably balanced Europe is with the rest of the world. Then compare that with the US balance of payments. As just a quick example, in April (one month) the Eurozone imported only €4.1 billion more goods than it exported. The US, on the other hand, imported $58 billion more goods than it exported, and April was the lowest month yet this year for the US. Of course that's just goods. For services, the US exported $14.5 billion more services than it imported. How much of that do you think was "Wall Street financial services"? Europe also exported more services than it imported, but only €2.8 billion.

So for goods and services combined, the Eurosystem ran a trade deficit of €1.3 billion in April, while the US ran only a $43.5 billion deficit (down from its previous normal $50 billion, but back up in May). Looking back at 2010 (just to get a full year's picture) the US ran a $500 billion goods and services deficit for the year. The Eurosystem (even with those lazy PIIGS) actually ran a trade surplus for the year, exporting more goods and services than it took in! So how can that be? As a currency representing a community of more than 300 million people, the euro is quite healthy compared to the dollar!

Of course there is a huge imbalance inside Europe between the states running a large surplus and those running a large deficit. But with a shared currency the adjustment pressure for such an imbalance is foisted elsewhere, not on the currency. It lands squarely on the politicians, who, like Costata said, couldn't be a more deserving bunch of Aholes. For the dollar, the structural deficit and debt of the US places a massive devaluation pressure directly on the dollar. But for Europe the currency is balanced with no (or very little) adjustment pressure.

The economic flow of goods and services within Europe will of course have to contract as the imbalance retreats. If the euro weakens on the global currency stage Europe will start running an overall trade surplus again, like China, which will soften the blow of a contracting internal economy. If the euro strengthens, things like cheaper oil will help soften the contraction. Internally the politicians have their hands full. No doubt! Externally, the euro is just fine. To the euro, just like FOA said, the politics of the PIIGS and Germany are little more than a sideshow."

FOFOA comment

DP said...

Anyone still thinking JR copy and pastes because he doesn't understand? Or buying that horseshit of his about Google Search doing all the thinking for him? :)

Blondie said...

A little lateral thinking on international balance of payments: gold, until relatively recently, always flowed as arbiter of this balance. Have you stopped to consider how much and where to?

For an insight into the early modern era's flow, pages 46-48 of this book are enlightening.

"...where all the money in the Universe is unloaded as if into an abyss."

sean said...

This article on the CFTC's recent introduction of position limits on commodity speculation may interest some people here. I guess it will (eventually) help to reduce volatility in futures markets, but wont affect the ability of CBs to manipulate gold price via swaps, or have any direct influence on the total size of ETF trading. It may, however, have "interesting" short-term effects on markets in which firms are caught flat-footed with excessively large positions they have to exit before the limits come into effect!

DP said...

Blondie,

To the super-productive among us!

mortymer said...

Monetary versus fiscal

A return to the convertibility principle? Monetary and fiscal regimes in historical perspective. The international evidence

"...In the past, a monetary regime based on the commitment to convertibility of the domestic currency into specie, the 'convertibility principle', was the prevailing pattern in the world economy. According to this principle, the fiscal regime is subordinated to the monetary regime. The major exception to this pattern occurred during major wars and their immediate aftermath when fiscal demands determined monetary policy. Since the mid 1960s and especially after the breakdown of the Bretton Woods system in the period 1971-73, monetary policy has abandoned the 'convertibility principle' and in many countries has been geared towards domestic stabilization goals, especially that of full employment..."

http://anotherfreegoldblog.blogspot.com/2011/10/eu-return-to-convertibility-principle.html

Winters said...

@DP
What is it with the attitude so many people show up here with?

I think you misread Borjesson's intent with his prior comment. He didn't mean JR et al don't understand what they quote, he was humbly saying he still didn't understand it - but that was the quote he was specifically after.

and no. I never bought JR's modest brush off how google does all the hard work :)

mortymer said...

@Blondie:
http://www.lbma.org.uk/assets/The_Shanghai_Gold_Exchange.pdf

part: Market features + The next step

mortymer said...

Currency Asymmetry, Global Imbalance, and Reform of International Monetary System
Prof. FAN, Gang,
National Economic Research Institute, Beijing, China
April, 2006

http://ec.europa.eu/economy_finance/events/2006/bxlforum/fan_gang_paper_en.pdf

Crack said...

A Physical Gold Advocate beats the bear to the last bar at the LBMA.

Good call!

mortymer said...

The Physical Side of the Precious
Metals Investment Boom
By Wolfgang Wrzesniok-Rossbach, Head of Sales and Marketing, Heraeus Metallhandelsgesellschaft mbH

http://www.lbma.org.uk/assets/Alch6106Wrzesniokrossbach.pdf

[Mrt: with the last words ending the article]

"...Do physical metals have a future? Would you like to have just an account statement or would you prefer something very shiny and also worth a lot, like some nice bars or coins?"

Aaron said...

test

Aaron said...

It was interesting to see the CFTC vote. Change in policy or perception management (MOPE)?

Pamplona Trader said...
This comment has been removed by the author.
Pamplona said...
This comment has been removed by the author.
Pamplona said...

I am wondering how likely it is that the US govt was positioning itself to buy European gold reserves. Geithner seems adamant about assisting the EU. I don't understand why PIIGS aren't being forced to sell their gold to service their debt. US/IMF could buy sovereign gold reserves (PIIGS + IMF, Germany and France total $635 Billion). Dilution would be offset by the acquisition of gold. It seems like a zero sum game, but it would allow business as usual for EU, at least temporarily.
.
If I recall correctly, something like 20% of American corp earnings are from Europe, so wouldn't that help the US economy grow and stem unemployment? This would help tax revenues, and if politicians are serious about shrinking government, help along our efforts to reduce the deficit (along with the Fed's current policy to inflate our way out of it). Of course the central banks would have to continue printing, I don't see any short-term way around that. Eventually, inflation will have to run its course but just as the USD hits rock bottom and Gold prices are about to hit the moon, the US can start selling gold again while demand is at a high - effectively putting a floor on the dollar.
.
I know this only perpetuates the problem but setting aside my ideologies, the purpose of this query is to try and define the governments intentions with regard to their insisting on intervening in Europe.
.
If I seem a bit ignorant with my suggestions, it's because I am new to the story. FOFOA plays a large part in my education so thanks in advance for anyone offering clarity.

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