Sunday, November 6, 2011

Moneyness


Have you ever wondered what money really is? You'll notice that everyone you read has a strong opinion about what money actually is, but who's right? Is money really just one single thing and then everything else has varying levels of moneyness relative to real money?

Is gold real money? Or is money whatever the government says it is? Or is it whatever the market says it is? Is silver money in any way today? Are US Treasury bonds money? Is real money just the monetary base? Or is it all the credit that refers back to that base for value? Is money supposed to be something tangible, or is it simply a common unit we use to express the relative value of things?

Is money really the actual medium of exchange we use in trade? Or is it the unit of account the various media of exchange (checks, credit cards, PayPal) reference for value? Should the reference point unit itself ever be the medium of exchange? Some of the time? All of the time? Never? Is money a store of value? And if so, for how long? Is money supposed to be the fixed reference point (the benchmark) for changes in the value of everything else? Or is it simply a shared language for expressing those changes?

So many questions, right? And how often have you seen these questions even asked, let alone answered? Is money something that changes over time? Or is money's true essence the same concept that first emerged thousands of years ago? And probably the most important question: Does the correct view of money produce answers that are vastly superior to the blind conjecture prescribed by all other views?

Answers

I wonder if it's even possible to answer all these questions in one post. It's a neat challenge in any case, isn't it? As I said at the top, everyone has a strong opinion about what money actually is. So "everyone" will probably disagree with what I write. But that doesn't mean they are right and I am wrong. I want to challenge you to use your own mind and see for yourself. Take what I say and then take what they say, compare, contrast, analyze and then decide for yourself. The prescription produced by my view is quite simple. And only you can decide if it is vastly superior to their blind conjecture.

The Pure Concept of Money

According to Webster's the word 'money' emerged in the English language sometime during the Medieval period in Europe, maybe around the late 1200s. Wikipedia suggests a possible etymology originating with the Greek word for 'unique' or 'unit'. The Western term for physical coins that emerged sometime around the late 1500s was 'specie' from the Latin phrase for "in kind" or "payment in kind," meaning "payment in the actual or real form." The word 'currency' came a little later from the Latin word for current or flow, and was married to the money concept in 1699 by the philosopher John Locke who described the "circulation of money" as a flow or current of monetary payments made in specie.

Etymology is important, because with money or "the moneyness of things" we are talking about a vital concept that predates the word by thousands of years. And it's only by understanding the pure concept that we can see the ways the word has been bastardized by the two camps over centuries. The meaning we commonly assign to words may change over time, but that never changes the original concept underlying the emergence of the word in the first place.

Case in point: Is 'money' equal to 'wealth'? Is "gathering wealth" the same as "gathering money?" In the 1950s a Seattle engineer named Howard Long was deeply distressed that his beloved King James Version of the Bible just didn't seem to connect with people when sharing the Word of God. Long felt he needed a new translation that captured the truths he loved in the language that his contemporaries spoke.

It took a couple of decades, but Long's passion became the New International Version (NIV), a completely original translation from Hebrew, Aramaic, and Greek texts that was finally released in 1978. The King James Version had been translated into English and released 367 years earlier, in 1611. Here is one verse as it appears in each version:

Proverbs 13:11 (KJV) Wealth gotten by vanity shall be diminished: but he that gathereth by labour shall increase.

Proverbs 13:11 (NIV) Dishonest money dwindles away, but whoever gathers money little by little makes it grow.


I use this only as an example of how we sometimes change words to fit our modern understanding, not as any kind of a criticism of the NIV. To be fair, there are many more verses where the NIV does not remove or replace the word 'wealth'. Here are a few other translations of the same verse, which I think will help to illustrate my point about words and concepts:

Proverbs 13:11 (English Standard Version 2001) Wealth gained hastily [or by fraud] will dwindle, but whoever gathers little by little will increase it.

Proverbs 13:11 (Wycliffe Bible 1395) Hasted chattel, that is, gotten hastily, shall be made less; but that which is gathered little and little with hand, shall be multiplied.

Proverbs 13:11 (Young's Literal Translation 1862) Wealth from vanity becometh little, And whoso is gathering by the hand becometh great.


And, just for fun:

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

The point is, your modern understanding of 'money', and the pure concept of money that emerged long before the word, may be substantially different things. I'll go even further to say that the modern understanding of money is so confused and disputed by the two opposing money camps that the only way we can hope to have a clear view of what is actually happening today is by reverting our understanding to the original concept, before it was corrupted by the two camps.

So now let's go back to the etymology at the top of this section because, while it does not set the pure concept, it does reflect it from a time more proximate and a meaning less corrupted than now. And I should note that etymology is a somewhat subjective and inexact science, kind of like interpreting what you find at an archeological site. So I'm using it only as a tool that helps me share with you a concept, not as proof of the correctness of my concept. There is no proof at this time. There is only the use of your own discerning mind.

If we look at the specific etymology I highlighted, we are pretty close to the pure concept which I will confirm from a couple different angles. 'Money' is a "unique unit" that we use as a kind of language for expressing the relative value of things other than money. The modern example would be "dollar". Not "a dollar," not a physical dollar, but the word "dollar" as it is used to say a can of peas costs a dollar, or my house is worth 100,000 dollars, or you owe me a hundred dollars. If you give me two grams of gold you won't owe me a hundred dollars anymore. You don't have to give me actual dollars. That's just the unit I used to express the amount of value you owed me. That's the pure concept of money.

This is where it gets a little tricky and mind-bending. The actual physical dollar, that physical item we call "a dollar," is not money in and of itself. In other words, it is not intrinsically "money". It is only money because we reference it when expressing the relative value of goods, services and credit. If we stopped referring to it, it would cease to be money even though it would still be a dollar. Can you see the difference? Like I said, it's tricky.

A dollar is just a thing, a tradable item. And it will continue being that same thing even if we stop referring to it when expressing relative values. It will still be a dollar, it just won't be money anymore. Therefore it is not money in and of itself. It is just a thing. Take the old German Reichsbank marks from 1923. Some of them still exist. They are still marks with lots of zeros. But they are no longer money. We can still trade them. I might trade you a few Zimbabwe notes for an original mark, but that obviously doesn't make them money. The same goes for gold. Gold is just a tradable item.

We could be using seashells as money. If we were, then all the seashells available for trade would be the monetary base. That's the base to which I would be referring when I said you owed me one hundred seashells. A single seashell would be the reference point, the unique unit, but the whole of all available seashells would be the base around which money flowed. You could pay your debt to me with either an item that I desired with a value expressed as 100 seashells, or with 100 actual seashells. So if the total amount of seashells available (the monetary base) suddenly doubled making them easier for you to come by, I'd be kinda screwed. Of course I'd only be screwed if the doubling happened unexpectedly between the time I lent you the value of 100 seashells and the time you paid me back.

Getting back to our etymology, the concept behind the term 'specie' meant actual units of the monetary base. In the 1500s, that was the total of all metal coins-of-the-realm available for trade. That was the monetary base of the day and the term 'specie' arose as a way to express payment in the monetary unit itself rather than payment in bulls, or hats, or anything else. But original concept aside, the meaning of the word became married to coins and stuck to this day:

Specie: 1610s, "coin, money in the form of coins" (as opposed to paper money or bullion), from phrase in specie "in the real or actual form" (1550s), from L. in specie "in kind," ablative of species "kind, form, sort"

Notice it says "coins… as opposed to… bullion." That's because while gold coins were referenced in the use of money at the time the word 'specie' emerged, gold bullion was not. "Gold" was not money in and of itself. It was just a thing; a tradable, barterable item. Notice also that it says "money in the form of coins." The coins themselves were also not money in and of themselves. They were only called money because, in that coin form, they were the monetary base that was referenced when expressing the relative value of everything else at that time. Some of those gold coins from the 1500s and 1600s still exist today. Today they are not money, but they are still gold coins. Can you see the difference yet?

Now remember, there's no right or wrong at this point. There's only the usefulness of a perspective in delivering the correct analysis of what's actually happening today and the best prescription for your personal action. But you can't use a perspective until you get it. Then, and only then, you can use your own mind to decide if it is the correct perspective and then act upon it. Later it will be proved correct or incorrect, just as Another said: "time will prove all things."

But in support of this particular view of the money concept, I'd like to direct your attention to Gold Trail Three where FOA went to great length explaining the historical precedents for this view found in the archeological record. Some of this history has been rewritten in hard money text books to fit the modern meaning of words, while the actual historical record—and FOA—tell a different story about the underlying concepts.

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Sidebar Post-within-a-post

FOA on the Concepts of Money and Wealth


Beginning on the third page of The Gold Trail, FOA presents a number of cases in which the hard money camp has corrupted the interpretation of money-related archeological finds in order to make them fit a modern agenda. By projecting modern biases on antiquity, this camp leaves us with estimates of the volume, value and role of ancient gold that may be entirely wrong.

FOA explains "his group's" contentions along with the archeology and sound logic that backs them. And in so doing, he leaves us with an alternative interpretation of the historical record that I think can only be properly viewed by letting go of some of our modern hard money dogma.

For example, the amount of gold that existed in, and made it out of antiquity is probably overestimated. So, if anything, there’s likely less than the current estimates of all gold available today. And gold probably carried a much greater value in antiquity than Hard Money typically assumes. Less gold, circulating as a tradable good (not hoarded, not money) at a really high value relative to everything else. Gold’s primary utility was that you could travel to far-away markets with a great amount of tradable wealth in a small package. It was essentially the trade good that was preferred "on the road," not at home in common everyday trade. It was too valuable for that.

The way gold was used, the way it was valued, the reason why we find more silver, copper, and bronze coins buried at the ancient sites, all this and more has been misinterpreted by our hard money teachers because they project modern thoughts onto the ancients in support of their modern policy prescriptions. FOA said "to understand the value of gold, we must remove ourselves from present time thought and think of gold as the Ancients did." Gaining FOA's ancient perspective is helpful in understanding the ultimate moneyness of gold in Freegold.

I went through GT3 again (for probably the fourth time) just to pull a few tastes and give you the flavor of this masterful piece of conceptual dissemination by FOA:

Gold, that wonderful metal that has all the unique qualities to function as our one and only wealth medium, and we just can't use it without altering its purpose. You know, the Lydians had it right, back around 430 BC. They didn't struggle with the concepts of money, like we do today. They just stamped whatever pieces of gold they found laying around and kept it for trade. There was no need to clarify for certain that their gold money needed properties of "utility", store of value, medium of exchange, etc. etc.. They didn't need to identify these qualities were in gold before they stopped questioning if it was safe to use gold as savings. Gold was owned and the knowledge that people owned it and carried it for trade was alone enough to make it "worth its weight as wealth".

You see, back in antiquity there existed another property that could override our need for modern definitions of tradable wealth. That property was found in the one identifying mark of wealth that transcended all ages; real possession!(smile) This factor and this one factor alone had the ability to activate all the other modern attributes of money properties, even when the knowledge of these attributes was unknown in the ancient era. Come now, Alexander the Great didn't know about "utility" did he? (grin)

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Wealth.

As a means of example; think about art work for a moment? That fine painting that graces your main prominent wall. It's tradable for something, isn't it? Perhaps that Renoir for the acreage down the street. That use would cover some of the medium angle, right? A little bulky, but the large value makes it no more or less cumbersome than five gold bricks.(smile) Utility? Just watch your friends stare at it for hours. Store of value? A Renoir? We don't even need to discuss this.

But, one more thing, is it wealth? Of course it is. You see, it is wealth because you possess it, and the very knowledge that you possess it is held by others.

These paintings command a value, a price, a demand, precisely because every one of them is possessed by an owner. In the world of wealth, worth is enhanced because the supply is lessened by this "possession attribute". And possession is how most people in antiquity understood wealth.

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Many hard money philosophers have pointed their finger at others for the fiat situation we use today. It was the bankers and governments, the kings and cohorts, big business and robber barons or some communist manifesto that forced us to use this type of money. Well, you may not like the process and consider yourself above or apart from it all. You may even declare all of them evil. But, in the end, one fact remains; society may govern itself in many ways over thousands of years, but it has never stopped the evolution that corrupts the use of real money as official money.

Over time and life spans gold has been brought into official use countless times. Only to be bastardized by forces, we as peoples can never control. After every failure and ruination of much wealth, the cries always return to bring gold back as money. Once again to begin the long hard road that leads to the same conclusion. Gold coins, then bank storage, then gold lending, then gold certificate use, then lending of certificates, then certificates are declared paper money, then overprinted, then gold backing removed, then price inflation, then,,,,,, we begin again. But this time it's different the hard money crowd say. Yes, it is. Only the time has changed.

For the better part of human existence, gold alone has served all of the best functions of tradable wealth. But as soon as we call it our money, human nature takes over. Yes, we can call it a stock or a bond, a piece of land or a painting, a car, boat or antique, but just don't label it as money.

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Going back over #56 "The Gold of Troy":

You noticed that I structured that discussion in a way that makes the independent mind wander about. Let's pull those thoughts together and move along.

We found that history had left us with some conclusions that were, it seems, never concluded. Archaeology had never been approached by someone like us, with a different hard money perspective. Yes, all the records were there, but most every paper written on the subject appeared carbon copy. They all projected our modern sense of money into the economic structures as they existed back then. "Of course, we are today more complicated", our history papers said,,,, so,,,,,, allowing for that difference "the ancients still operated back then the same as us now". How neat!

Yes, our teachers "called our perception of money, their money and our perception of goods, their goods" in the same context we can use now. They said "hey, they were using hard money to buy and sell from each other, just like we once did" Again,,,,, how neat"!

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For us, as hard money "Physical Gold Advocates", to understand the value of gold, we must remove ourselves from present time thought and think of gold as the Ancients did. Not as money but as little tradable hunks of metal. Gold for goods, straight up, as the citizens of Troy did!

It's the Physical Gold Advocate's "advantage", because while he is waiting for the real value to emerge, the real value that we know existed in antiquity has never gone away! It just doesn't have a marketplace to show it. It will.

I use the phrase; "our advantage of owning the metal", because buying physical gold for today's currency,,,,,,, is like buying a lifetime wealth option that never expires. The commission one pays for this gold coin position, in the form of what we call today's price,,,,,,, may one day go to almost zero as our paper market structure fails from the discovery of real price.

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So, with the Athens, Macedon, Tarentum and Antiochus to name a few, began the world's first coins. Gold coins? Yes they were, but money as we know it? Our view of how these people viewed and used this gold money is, we believe, far different from what gold scholars teach. And its impact on estimates of existing modern gold supply and use is enormous.


All throughout these early times, prior to BC and into some AD, people didn't see these gold coins as we think of money today. These various gold coins had tremendous value, but they were just gold pieces. They were wealth for trade like everything else was. That's simple logic, I know, but the vessel of oil, for instance was just as tradable as a gold coin. In fact, within most of the medium sized city states of that era, barter of like goods was just as good or better than gold coin. One's life was better if he owned wealth he used.

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More to the point, this logic made these guys spenders of gold, rather than savers! If you had gained gold in trade, for your services or goods supplied, you had no reason to save it. There was no other money that needed to be hedged against value loss.

It's becoming more and more apparent that average people of that time quickly traded (spent) their gold for something useful of value, for both them and their family. They didn't have the excess we know today. In modern nomenclature; this logic dictates that a much smaller amount of gold money circulated and circulated faster than many supposed.

For longer savings, even for those of above average means that had all they wanted, people tended to spend their most valuable gold coins first, while saving the least valuable (bronze, silver, iron) for emergencies and later use. To us, today this sounds strange, but place yourself in that time. It was better to build your most useful and needed store of things while times were good.

Therefore, you traded the gold, which brought the most equal trade, first. If things got so bad that one had to dig up the stash, you were trading for last ditch things anyway. Kind of like wrapping up and burying beef jerky to get you thru a pinch. This use of lower metal is supported. Remember, lots of things served as money objects then. Even much later, AD, it was common in Rome to trade big iron bricks that were forged as a bull. Its use was in trade for "one bull" or something of that animal's value.

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When evaluating lifestyle wealth, back then, many often find themselves comparing things in a relative mode with today's perspective. In this position we think the mark has been far missed for gold worth. It's possible that gold payment, in these early times amounted to a huge premium compared to today. The various goods and lifestyle conditions in existence indicate a much higher relative worth for their goods of daily life. Thereby giving gold a much greater relative worth within one's life also. If a one stater Darius of gold, from Cyrus of Persia was worth a very valuable vessel of oil, why utilize the effort to find gold just to trade for some oil. Better to skip the gold production and make the oil. This was the norm for thinking by people not trading on the road, living "within local" city states. Indeed, outside the need to pay armies, a much smaller amount of gold did the job much better than us modern thinkers thought was necessary. Further, the use of oversea warfare and trade perhaps lost more gold into the ocean than we will ever know.

Consider these possibilities well. In that gold today is in a much lesser existence, compared to modern goods supply and lifestyle enhancements, when comparing it to its value in life in the past. It's true worth as a wealth medium could be a 1,000 times higher! For it to return to its ancient position of true asset wealth, for trade outside the modern currency realm, we can see where its European benefactors have once again placed it "On The Road" to much higher fiat currency prices.

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Back then, there was no other currency. No paper moneys or banks. One had no need to save gold as a hedge or savings account. Your wealth was in the useful things contained in the world around you. Those little hunks of metal were just that, little hunks of gold that everyone knew had trading value. They were not money, not the way we think of money today. They were just a beautiful metal, gold.

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The Lydians, Greeks and Romans all held gold. From Parthia through Rome and on to the Visgoths, Lombards, Normans and Franks, they all held gold as wealth. It was wealth first and traded as what we call money second. Possession identified that gold as real wealth, even if that ownership was for but the moment of a trade.

From the earliest times right into the Old World periods of Europe, gold served as the most valued wealth asset one could use in trade. It was by far the largest unit of tradable wealth in circulation that could be counted on to bring a premium in trade while shopping between cities. It moved, it flowed and it traveled. It was indeed, always "on the road"! Lesser metals and other tradable wealth assets always competed with gold for its trading function, but only gold made the best "on sight" trade. When given the choice of other "almost moneys", gold would always bring an extra slice of meat or fuller basket of cloth.

The irony of gold use over most of its earlier periods was that few average people kept it for long. Hence the seldom discovery of gold coinage where average people lived (see my earlier posts). To be sure, it represented wealth to these commoners, in good form and to the highest degree. Yet, their possession of this wealth usually constituted only a short time period. This short ownership occurred because gold did, would and could trade so much better for the needed things in life. For the worker, service wages paid in gold meant you just got a bonus or raise and the time had come to finally buy what you couldn't afford if paid in other means. If these people saved at all, it was usually in the form of the lesser metals (see my other posts).

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If gold was so valuable back then, there must have been a bunch of it saved and transported into our modern time?

No, not really! We used to try and extrapolate all the gold that was mined and turned into jewelry, bullion or coin. If it was so good for coin and trade, civilizations must have saved every ounce, we thought! But something kept nagging at our conclusions. Something that kept turning up over and over at our digs.

Some of you have seen the Gold of Troy pieces or other fine examples of old gold craftsmanship at other museums. Ever notice how good they were at making gold so long ago? From intricate bracelets to rings, head dress items to fine cups, even the most thin of leaf. Some of it was so small we had to use magnifying glasses to see the work clearly.


This gold in jewelry and art work form was the other major form of traveling wealth. In many of our recent findings we now think that jewelry and coin traded places as easily as getting your check cashed today. Throughout the ancient land, gold centers occupied the trade routes. Any gold that rested for too long was quickly recruited into a form that worked for the next traveler. In fact, evidence now points to all forms of gold ownership, not just coins, being a short term proposition for the average man. Indeed, contrary to what we thought, the fingers of all mankind did, through the ages, touch gold!

Now place yourself in that time. You work for Rome in the army, a fighting man. Not all of you were paid in lesser metals, many of you were relatively better off. You did carry some of your wealth with you in the form of gold coin or jewelry. In the case of a Roman soldier, a gold ring was very probable. When you went into battle, did you leave your few gold items laying in the tent? Or did you wire them back to a Swiss bank for safekeeping until after the battle? (big grin)

What we are finding, in the form of molecular fragments at battle sites, leads us to believe that most wars were fought with most wealth possessions worn or in pockets. Gold included. To make a long story short, we now believe that a great deal of early gold was scattered on trails, in the sea and during every war. In fact, rubbed, scraped and powdered to the four winds.

Because gold was so valuable in long trade, extremely small creations were carried as jewelry. Much smaller and much more able to be lost than other larger units of the lesser metals. The nature of so much of this gold was that it was easy to be lost and dispersed. Especially considering the modes of travel back then. We as museum visitors see all the magnificent pieces displayed. What we don't see are the countless broken, partial and fragmented items that are never offered for viewing.

Knowing what we know now, we believe that a very large portion of gold was lost and scattered on a yearly basis. Add to this the fact that most gold mining brought almost the same return as making many of the goods it purchased and we can see how gold was and is over counted. Where it was once taken as fact that all gold was looted and remelted, we now think that gold stocks were lucky if replaced.

By the time of the great gold coinages in Europe, the gold that flowed into these major commerce centers was all there was left in the world!

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The real issue is our misunderstanding and misuse of the term "sound money". That thought has been bantered around for hundreds of years. Truly it does not exist except in the minds of men.

Money, the term, the idea, perhaps the ideal,,,,,,, is something we dreamed up to apply to one of our chosen units of tradable wealth. Usually gold. We could take almost every item in the world and use it in this same "money fashion". Still, this form of trading real for real is just exchanging wealth. It isn't exchanging money as we understand money.

Gold is no different than anything else you possess as your wealth, it just so happened to be the most perfect type of tradable wealth in the world. So it evolved to be used the most and eventually labeled in the same function of what we consider to be "sound money".

Now, consider that all wealth is represented in and of itself. You cannot reproduce wealth through substitution, like giving someone five pieces of copper for one piece of gold and then have them think they now have five pieces of gold! This is the process we try to perform within the realm of man's money ideals. We have always debased trading wealth by duplicating it into other forms and calling all of it, collectively, "our money".

This duplicating, this replicating, this debasement is the result of taking the concept of a credit / contract function (paying in the future) and combining it with the concept of completing a trade at the moment. Think about that for a moment?

As an example, I'll give you a paper contract to pay you later for some oranges and you give me the basket of oranges. Better said, I just gave you modern man's actual concept of money.

Or I trade you a basket of apples "or gold" for those same oranges and the deal is finished, done! We have been taught to think that this is also the concept of money trade.

The first uses what our currency system has evolved into, what is really money in our mind. Where the second uses no credit form at all and is more comparable to trading real wealth as the ancients traded using gold.

Contemporary thought has always blurred these two notions; saying that these two methods of trading are one in the same and both forms use the same idea of what we think money is.

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This is the road ahead. A fiat no different from the dollar in function, yet a universe away in management. A wealth asset that also stands beside this money, yet has no modern label or official connection as money. In this way modern society can circle the earth, to once again begin where we started. Having learned that the concepts of wealth-money and man's money were never the same.

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They are not trying to Un-money gold! They are going to un-Westernize gold so it performs its historic function of acting as a tradable wealth holding. No longer following the Gold Bugs' view that governments need to control gold so it acts like real money in the fiat sense. Truly, the BIS and ECB are today "Walking In The Footsteps Of Giants"!

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Gold will no longer be able to successfully carry the Western name of Money so as to allow for its political price fixing. A process that, it seems, has been with us for generations. Enslaving millions of hard workers by always officially classifying the terms and value of both their paper currency and their metal savings. Always inflating both items for the good of society's never ending political agenda.

Allowing FreeGold to circulate as a wealth asset would denominate its true worth through the much larger real demand of "Wealth Possession" instead of paper possession. Such a gold scale would measure our world reserve currencies against each other instead of against our Western concept of gold as official money. But, in addition, on a higher level, prevent any one country from subjugating other nation states through fiat dominance. To more fully grasp the impact of "Possession" and why ancient gold was worth so much more as FreeGold; hike again that part of our trail (FOA (04/18/01; 20:20:06MT - usagold.com msg#64) Lombards, Normans and Franks.)

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We were first alerted to the "gold is money" flaw years ago. When considering the many references to gold being money, in ancient texts, several things stood out. We began to suspect that those translations were somewhat slanted. I saw many areas, in old text, where gold was actually more in a context of; his money was in account of gold or; the money account was gold or; traded his money in gold. The more one searches the more one finds that in ancient times gold was simply one item that could account for your money values. To expand the reality of the thought; everything we trade is in account of associated money values; nothing we trade is money!

The original actual term of money was often in a different concept. In those times barter, and their crude accounts of the same, were marked down or remembered as so many pots, furs, corn, tools traded. Gold became the best accepted tradable wealth of the lot and soon many accountings used gold more than other items to denominate those trades. Still, money was the account, the rating system for value, the worth association in your head. Gold, itself, became the main wealth object used in that bookkeeping.

This all worked well for hundreds and perhaps thousands of years as fiat was never so well used or considered. Over time, society became accustomed to speaking of gold in the context of money accounting. Translations became all the more relaxed as gold and money accounting terms were mingled as one in the same. It was a subtle difference, then, but has become a major conflict in the money affairs of modern mankind; as gold receipts became fiat gold and bankers combined fiat money accounting with gold backing.

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To understand gold we must understand money in its purest form; apart from its manmade convoluted function of being something you save. Money in its purest form is a mental association of values in trade; a concept in memory not a real item. In proper vernacular; a 1930s style US gold coin was stamped in the act of applying the money concept to a real piece of tradable wealth. Not the best way to use gold, considering our human nature.

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By accepting and using dollars today, that have no inherent form of value, we are reverting to simple barter by value association. Assigning value to dollar units that can only have a worth in what we can complete a trade for. In effect, refining modern man's sophisticated money thoughts back into the plain money concept as it first began; a value stored in your head! Sound like something that's way over your head of understanding? I'll let you teach yourself.

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You use the currency as a unit to value associate the worth of everything. Not far from rating everything between a value of one to ten; only our currency numbers are infinite. Now, those numbers between one and ten have no value, do they? That's right, the value is in your association abilities. This is the money concept, my friends.

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A fiat trading unit works today because we make it take on the associated value of what we trade it for; it becomes the very money concept that always resided in our brains from the beginnings of time. In this, a controlled fiat unit works as a trading medium; even as it fails miserably as a retainer of wealth the bankers and lenders so want it to be.

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For thirty years fiat use evolved on its own to embrace the non-wealth trading aspects of "the money concept". Leaving in its wake a world of worthless dollar debt as people bought wealth outside the "money concept" anyway. We are, today, in a transition away from that dollar mess and much of our wealth illusion will be passing from our grasp in the process.

In every way, society is trading its way back to where it started. In the process, gold will find a new value from its history in the past:

"A wealth of ages savings for your future of today."


End Sidebar
_________________________________________________________

Well, there you have it! The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things. Money is the referencing of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" Money is not something you save. "Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends."

But what does this have to do with me in 2011? I can almost hear you thinking this question now. Well, I'm going to share a secret with you. The big secret is that the people's money is simply credit. And by "the people's money," I mean our money, the real producing economy's money. The monetary base is only the banks' and governments' money, except for that little bit of cash you keep in your wallet for emergencies. Let me explain.

Today's monetary base is a clearly defined thing. It is all physical currency plus reserves held at the Fed. We the people cannot have electronic base money. We cannot open an account at the Fed. Only banks and the government can. We use commercial bank credit and private credit to keep the economy churning. The reference point of our credit is the base. We reference that base when we transact in "dollars".

Private and commercial bank credit appears and disappears spontaneously all the time, all throughout the real economy. This is what actually lubricates the economic engine; having a base of stable value to which we refer in monetary transactions. Private credit is generally cleared using bank credit. And bank credit is cleared using the monetary base. But all credit denominated in dollars refers to that base and relies on a stable unit value or price stability.

It is the banks' job (both commercial and central banks) to make sure that bank credit (the people's money) and base money (the banks' money) are fungible. That is, they are always freely and equally exchangeable. But of course they are two separate things, credit and base money, with two very different volumes. Under normal conditions, there's a lot more credit money floating around than there is base money. So keeping them fungible can be a juggling act on occasion. But for the most part, we the people choose to hold bank credit as our money rather than cash. And, in fact, it is the limited availability of cash in the system (its relative "hardness") that keeps our money stable in unit value.

Think about it this way: We are free to choose cash at any time. And when we go to the bank to exchange our credits for cash, we put that bank under pressure to come up with cash that is relatively "harder" to come up with (more limited in volume) than credit. Let's say, for example, that "demand deposits" (those that can demand cash on the spot) are ten times larger than the total volume of cash in the system. Is this good for our money? Yes, because it means that the reference point unit we use is in limited supply, which keeps a vital tension on the overall system. The operations the bank must do to come up with our cash (sell off some value) maintain value in our credits.

Say the base volume is one trillion dollars, which is about what it was in October of 2008. That means the base unit reference point for all dollar credit in the world is one one-trillionth of the base volume, all the available above-ground dollars ever mined throughout all of history. Then imagine you doubled that base to two trillion dollars. The unit reference point will have been cut in half, from one one-trillionth to one-half of one one-trillionth of the base volume.

Like this: Remember the "reference kilo" in Reference Point Revolution?


Say you've got a contract or a credit for a kilo of gold. Now obviously the total volume of gold can't be doubled overnight like the dollar base was, so what would be the equivalent effect? Well, it would be like someone cutting that reference kilo in half. Your one kilo contract, since it is denominated in kilos, refers to this unit reference point that has just been cut in half. It has suddenly become twice as easy for your creditor to deliver on his obligation. And, by the way, the volume of the dollar base has more than doubled since Oct. 2008. It's now at 2.7 trillion, which means the unit reference point was actually given a 63% "haircut" in three years, from one one-trillionth to little more than one-third of one-trillionth of the total volume.

Now, before you start arguing your own favorite economic pet theory, let me remind you that there is no right or wrong at this point. There's only the usefulness of a perspective in delivering the correct analysis of what's actually happening today and the best prescription for your personal action. But you can't use a perspective until you get it. Then, and only then, you can use your own mind to decide if it is the correct perspective and then act upon it. Later it will be proved correct or incorrect, just as Another said: "time will prove all things."

Clearly the 63% destruction of the dollar unit reference point over the last three years did not immediately translate into a 170% rise in prices at the grocery store. And I wouldn't expect it to. It never works like that. Henry Hazlitt explained it like this: "The value of the monetary unit, at the beginning of an inflation, commonly does not fall by as much as the increase in the quantity of money, whereas, in the late stage of inflation, the value of the monetary unit falls much faster than the increase in the quantity of money."

If you have a large 401K, IRA or pension fund full of credits for dollars, you may be taking comfort in the fact that the 63% haircut in the very unit your retirement nest egg references has not yet shown up at the stores where you shop. But the fact remains that the dollar has been debased. That's why they call it debasement. The base is diluted by expanding its volume which reduces the value of the unit used for reference relative to the volume of available units.

There are, of course, plenty of economic theories out there that are wholly designed to distract your attention away from this plain and obvious debasement and to tell you why it doesn't matter, and how the presently slow price inflation is proof that it doesn't matter if they debase your money and your life's savings. Some will tell you that the apparent fungibility of credit and cash means they are the same thing. And some will even try to tell you that the base unit reference point derives its value from the volume of credit rather than its own volume, and that the base volume is essentially meaningless. But I think that if you are keeping your wealth in the form of money, sheep being periodically sheared is an image worth keeping in mind.

The Pure Concept of Wealth

Another concept of concern today is that of 'wealth'. As FOA emphasized in the sidebar, the fundamental property of wealth is that of "possession." It is by this property that wealth is identified, and thereby it becomes 'wealth'. "In the world of wealth, worth is enhanced because the supply is lessened by this 'possession attribute'. And possession is how most people in antiquity understood wealth."

Have you ever noticed how the super-rich seem to stay super-rich no matter how much money they spend? Not only that, but they seem to get wealthier the more they spend! They buy amazing super-homes, expensive antique furniture to fill the homes, and priceless artwork to hang on every inch of their fancy walls, yet somehow they retain their wealth.

That's not to say that they don't also participate in the Western tradition of "the something for nothing game" we call the paper markets. They do, but that participation does not constitute their 'wealth'. Yet we, the commoners, are told constantly, by state-approved financial advisors, to put our entire nest egg at risk in this "something for nothing game."

We can't afford that nice furniture and art that the super-wealthy buy, so we buy low-priced crap from China that is worth half what we paid for it the minute we walk out of the store. What is going on? Is it possible to imagine a new monetary system that would put common people on equal footing with the super-rich when it comes to possessing our wealth?

FOA (05/06/01; 20:30:52MT - usagold.com msg#69)
A Tree in the Making

In this world we all need much; blessings from above,,,,, family,,,, home,,, friends and good health. But after all that, one must have currency and an enduring, tradable wealth asset that places our footing in life on equal ground with the giants around us,,,,,, gold! Understanding the events that got us here and how they will unfold before us is what this GoldTrail is all about.


I know I keep repeating myself, but this post is specifically designed to encourage independent thought; to let your mind wander about, freed from the confines of modern dogma. If you were able to wrap your mind around the pure concept of money, you may be starting to sense the danger, at least conceptually, in holding your lifetime's-worth of accumulated wealth as money. Because when they double the base, they are diluting all of “our” money by half, even if “our money” outnumbers the base by 10:1 (bank credit), 100:1 (all credit), 1,000:1 (credit derivatives) or whatever. It is credit's reference point they are abusing to ease their own discomfort, and our money they are debasing. And the more money you are holding when they do this, the greater your share of the loss.

To contrast these two important concepts, money and wealth, notice that, conceptually, money is not the item that is referenced, and the item (e.g., a dollar bill) is not money in and of itself. It only obtains moneyness by the fact that it is referenced in valuing other items. True wealth, on the other hand, is, in fact, the item itself. A wealth item is wealth, in and of itself, by the mere fact that it is possessed.

The easy money camp always wants the savers to store their wealth in money, so they can loot those savings by debasing the referenced unit which eases their discomfort. Meanwhile the hard money camp always wants the debtors' deficit spending to be denominated in real wealth. The problems with this approach are myriad.

So here’s an interesting question: What do you call a monetary system where physical gold wealth (not credits denominated in ounces issued by a commercial bank, but the actual physical stuff) sits on Line 1 of the Eurosystem’s monetary assets? There’s no silver there on line 2, no copper, no oil, no GLD or PHYS, no mining shares, no antique furniture or Renoirs, just 400-ounce bars of physical gold bullion and a few minted gold coins. Official purchases and sales of gold (changes in the volume) are publicly reported every week, and its value is updated every quarter.

What do you call that system? And what do you call the gold in that system? How would you describe gold's moneyness in such a system? And why hasn’t Greece sold its gold yet to end the discomfort? Why do we mainly hear politicians proclaiming "the euro will survive." Why do we rarely if ever see the central bankers sweating "the survival of the euro"? Aren’t they worried about the survival of their reference unit? Or do they simply understand moneyness better than the rest of us?

MMT

If you read my whole sidebar like I hope you did, you saw where FOA described in the broadest terms how we arrived at our latest iteration of easy money. Here it is again:

Gold coins, then bank storage, then gold lending, then gold certificate use, then lending of certificates, then certificates are declared paper money, then overprinted, then gold backing removed…

How's that for covering a lot of years in one sentence?

Depending on which camp you're in, as long as you haven't grasped the pure concepts of 'money' and 'wealth', there's a whole spectrum of descriptions of how "modern money" works with varying degrees of uselessness in practical applicability, both macro and micro. On the hard money side, you'll find lots of criticism of "fractional reserve banking," "thin air money," "borrowed into existence," "credit money is a pyramid scheme" (it's not, the concept of money has always been a credit reference to a base unit), etc., etc… Hard money descriptions of modern money are overwhelmingly critical because, of course, the easy money camp has been in charge for a long time now.

Obviously I think the hard money camp misses the mark in its policy prescriptions, but you've got to understand that they can only address today's issues in the counterfactual subjunctive. In other words, "if A had been true, then B wouldn't have happened or the outcome would have been better." But A isn't true. A being "if only we had hard money today."

But it's over there in the far corners of the easy money camp where you'll find some truly repulsive arrogance by those who unfortunately have the luxury of using true antecedents in their modal logic. Like this: "If it is true today that USG deficit spending is not technically constrained by taxes and borrowing because it issues its own currency, then structural trade deficits are not only sustainable, good and loved by our trading partners, but necessary. 'Austerity', or producing more than we consume at times like these, on the other hand, is a total disaster." That's the logic. Here's the arrogance:

"As a current account deficit nation, the US government can appropriately be thought of as a net currency exporter. This means that we send pieces of paper over to the foreign nations in exchange for goods and services." (Cullen Roche)

"We don’t need China to buy our bonds in order to spend. China gets pieces of paper with old dead white men on them in exchange for real goods and services." (Cullen Roche)


And why doesn’t China just buy other American stuff?

"They have attempted to use their dollars to purchase other USD denominated assets, but the US government has squashed those efforts. So, instead of leaving these pieces of paper to collect dust in vaults, they open what is the equivalent of a savings account with the US government." (Cullen Roche)

"Anyone who uses the term [monetization] in the context of the Fed’s contribution of government spending does not understand how the modern monetary system works." (Cullen Roche)

"This is basic macroeconomics and the debt-deficit-hyperinflation hyperventilating neo-liberal terrorists seem unable to grasp it." (Bill Mitchell)

"The Fed is not printing money. They are merely swapping treasuries for deposits." (Cullen Roche)


Someone should explain to these guys the meaning of the phrase, "never look a gift horse in the mouth." It means that when someone gives you a free horse, you shouldn't inspect it too closely in front of the giver.

Of course this is MMT, or Modern Monetary Theory I'm talking about. Even Paul Krugman noted the arrogance of these theorists in his latest blog post about MMT (my emphasis):

"First of all, yes, I have read various MMT manifestos — this one is fairly clear as they go. I do dislike the style — the claims that fundamental principles of logic lead to a worldview that only fools would fail to understand…"

I bring up MMT not because it is entertaining to make fun of their misguided (and often repulsive) arrogance, but because of the inauspicious rise of their extreme easy money theories right at the tail end of history's grandest easy money experiment. I find it to be a handy platform from which to explain how the ancient concepts of money and wealth are still more relevant to the near-term outcome than a few accounting identities that thrive solely in the monetary plane, and do so with reckless disregard for the real power of the physical plane.

One of the main tenets of MMT is the accounting identity that roughly states the amount the USG deficit spends (government spending in excess of the taxes it takes in) is always equal to private sector net savings plus the trade deficit (exports minus imports, or stated another way, our trading partners' net dollar savings).

This is generally explained with the analogy that the USG spends money into existence and taxes money out of existence. So if the USG (God forbid) taxed as much as it spent (or spent as little as it taxed), there wouldn't be any extra USG money for us mere mortals to save. So by spending more than it takes in, the USG is graciously giving us money for savings. And then, the USG issues Treasuries in an amount equal to that deficit spending (extra money for us to save Woo hoo!) to give us an interest-bearing exchange for our net-production.

To be fair, MMT consistently reminds us it is only describing and not prescribing a monetary system. Fair enough. But the presence of the trade deficit and our trading partners' presumed need for dollar savings should probably set off your alarm bells. If so, MMT wants to calm your worry with these soothing words:

"In a world with global trade we are certain to have trade deficit and trade surplus nations." (Cullen Roche)

In other words, we are simply a trade deficit nation. That's just who we are. Get used to it, and then embrace it! After all, it's pretty cool to get free stuff:

"…the US government can appropriately be thought of as a net currency exporter. This means that we send pieces of paper over to the foreign nations in exchange for goods and services." (Cullen Roche)

It's pretty neat the way accounting identities work. They are always true because, by definition, they must be true. They are like saying, "the amount of widgets sold equals the amount of widgets bought." You can't really dispute them as they are framed. But it is in the static assumptions that go into the careful monetary plane framing that flaws can be found. The physical plane can be much more dynamic than they assume.

For example, what if all the private sector net-producers decided to save in gold instead of USG debt? Since the accounting identity we're talking about includes our foreign trading partners like China, I'm essentially asking what happens if they (and we) stop buying Treasuries. Remember that Cullen says it doesn't matter:

"We don’t need China to buy our bonds in order to spend. China gets pieces of paper with old dead white men on them in exchange for real goods and services." (Cullen Roche)

In other words, if they don't buy our Treasuries (run a capital account deficit), then they'll just stack the Benjamins. In other words, that's just the way it is. See? It's an accounting identity.

But then a reasonable person might point out that the USG still issues Treasuries equal in amount to all its deficit spending. And if we and the Chinese aren't buying them, then the Fed has to, so it makes up a cool name like QE2 to disguise the real purpose of the purchases. Not so fast, MMT says. The Treasury does not need to issue debt in order fund its spending. When it spends, it simply credits private sector accounts with new credit money and the banks with new base money. There is no direct connection between sales of Treasuries and money spent other than a myth in our confused minds.

In fact, during the debt ceiling debate in late 2009, MMT actually advised them to stop issuing Treasuries and just keep spending:

"The anti-deficit mania in Washington is getting crazier by the day. So here is what I propose: let’s support Senator Bayh’s proposal to 'just say no' to raising the debt ceiling. Once the federal debt reaches $12.1 trillion, the Treasury would be prohibited from selling any more bonds. Treasury would continue to spend by crediting bank accounts of recipients, and reserve accounts of their banks. Banks would offer excess reserves in overnight markets, but would find no takers—hence would have to be content holding reserves and earning whatever rate the Fed wants to pay. But as Chairman Bernanke told Congress, this is no problem because the Fed spends simply by crediting bank accounts.

This would allow Senator Bayh and other deficit warriors to stop worrying about Treasury debt and move on to something important like the loss of millions of jobs."
(L. Randall Wray)


I want you to notice a small detail in the above quote that probably slips by most people. Wray writes (my emphasis): "Treasury would continue to spend by crediting bank accounts of recipients, and reserve accounts of their banks."

Out here in the real world of the productive economy, when we spend, only the account of the recipient gets credited. Not the reserve account of their bank. The "reserve account of their bank" is that commercial bank's account at the Federal Reserve Bank. Remember? You and I can't have accounts there. Only the banks and the government can. Our spending is netted out in the system each night and the imbalances between banks are cleared with those substantially smaller reserve accounts.

I imagine there's a good reason Randall Wray was careful to include this small technicality in his piece. That's because raw government-created money through deficit spending is fundamentally different from "our money." Government spending adds one unit of credit money (our money) to the system as well as one unit of base money (their money). The bank receiving the deposit gets a reference point unit asset to match the liability it takes on.

So the volume of the base is expanded when the government spends, and it is likewise contracted when the government taxes and/or sells Treasuries to the private sector (including our trade partners like China). But when the government spends in excess of those two operations (taxing and debt selling), the base volume is simply expanded. And MMT apparently sees no difference between the true concept of money (all that 100s of trillions of credit denominated in a single reference point unit) and the base which it references. Take QE2 for example.

Super easy money camper and activist Ellen Brown writes in IS QE2 THE ROAD TO ZIMBABWE-STYLE HYPERINFLATION? NOT LIKELY:

"Unlike Zimbabwe, which had to have U.S. dollars to pay its debt to the IMF, the U.S. can easily get the currency it needs without being beholden to anyone. It can print the dollars, or borrow from the Fed which prints them.

But wouldn’t that dilute the value of the currency?

No, says Cullen Roche, because swapping dollars for bonds does not change the size of the money supply. A dollar bill and a dollar bond are essentially the same thing."


This is part of the flaw in MMT’s view. Bonds are credit (the economy’s money) denominated in (referencing) the base unit (the dollar). Swapping credit for base units dilutes and debases every single credit dollar in the world, all quadrillion of them if you included derivatives.

When the private sector (plus our foreign free stuff suppliers) buy bonds, the USG is essentially spending credit money rather than expanding the base because "the credit to the reserve account of their banks" that Randall Wray mentioned above is deleted when the private/foreign sector buys a Treasury bond. Spending credit money does not dilute the base and debase the reference unit. But when the people (or banks) that bought those bonds swap them with the Fed for cash, the base is diluted and the reference unit is debased. So Cullen is wrong. A dollar bill and a dollar bond are not essentially the same thing.

Back in June, talking about QE2, I wrote something very similar to what Cullen says. See if you can spot the subtle difference.

Cullen: "There is not 'more firepower' in the market following QE. All that the Fed altered was the duration of the U.S. government’s liabilities. The Fed took on an asset (treasurys) and also accounted for a new liability (the reserves). But this transaction did not change the net financial assets in the system. The point here is that from an operational perspective the Fed is not really altering the money supply."

Me: "The Fed has not created more money, it has simply changed the nature of existing money. Remember, FOA said that '...hyperinflation is the process of saving debt at all costs, even buying it outright for cash.'"

So, just to recap, MMT says that neither selling debt to the Chinese nor QE (selling it to the Fed) is actually necessary to fund government deficit spending. The government spending actually happens first, therefore it is independent of, and not reliant on, either of those financial operations. And to this point, I think we can all agree with MMT's description of the process as it exists in the monetary plane, although it is clearly not the only correct description, and certainly not the whole story.

Here's the thing, the act of government deficit spending without either counterbalancing taxes or Treasury sales to the private/foreign sector, and the act of Fed quantitative easing, both change the nature of the money supply in a way that all other "normal" activities do not. They debase "our money" by expanding "their money" in volume to ease their discomfort. And this kinda gets us to the driving thrust of MMT; that MMT sees little to no danger of this monetary plane debasement spilling out into the physical plane with deadly consequences for the dollar.

There is, however, one area in which the danger is at its all-time peak today. And that is the US trade deficit as viewed from the physical plane. But before we get into that, let's take a look at a couple neat charts that Cullen Roche uses to visualize the monetary plane accounting identity that underlies his theory. Cullen calls them "sectoral balances," meaning the monetary plane balance sheet of three different sectors: the government sector (USG), the domestic private sector, and the foreign sector.

What I'm going to try to do is to help you see the physical plane reality of these charts. They are so neat and balanced in the monetary plane, yet they represent an immense imbalance in the physical plane that, because of the credibility inflation of the last 40 years, leaves the dollar vulnerable to spontaneous hyperinflation. More on that in a moment.

In this first chart, I want you to pay special attention to the dashed blue line. In the monetary plane, that line represents the amount of US paper our foreign trading partners are taking in each year. When they take in dollars, those show up as a current account surplus on their sheet and a current account deficit on ours. Then when they trade them in for Treasuries they show up as a capital account deficit on their sheet and a capital account surplus on ours. But the easiest way to understand this blue line is in the physical plane. It represents the trade deficit; the amount of free stuff we got each year in exchange for nothing but paper. As Cullen says, "the US government can appropriately be thought of as a net currency exporter." So the blue line is our "currency exports."


Here's a link to our Balance of Payments (BOP) from 1960 through 2010:

www.census.gov/foreign-trade/statistics/historical/gands.txt

The first column is our trade balance. A negative number means a trade deficit. I'm sure the MMT folks reading this are getting tired of me calling it "free stuff," but that's what it is, which I'll explain in more detail later. Foreign central banks were literally supporting our trade deficit for their own reasons for the last 30 years. You'll notice we went into deficit in 1971, with the only blips up into surplus since then occurring in '73 and '75.

You've probably heard it said that the US has become a "service economy" as opposed to producing all the real stuff we used to produce. Well, if you look at the second and third columns, the goods column and the services column, you'll see the inflection point of that transition was also in 1971. So all those negative numbers in the first column really do represent real goods, the kind of stuff that gets packed into containers and physically shipped to the US.

In 2010 you'll see that our trade deficit was $500 billion. That number comes from a $645B deficit in goods, and a $145B surplus in services. In 2011 we are on track for a trade deficit of about $565B (monthly data). For the last decade, our trade deficit range has been $400B - $750B per year. The average for the decade is $581B per year, or $48.5B per month.

Now this second chart really shows the monetary plane symmetry that MMT loves. The whole point of the accounting identity is that the balances of the three sectors (government sector, domestic private sector and foreign sector) must net out to zero. One person's savings is another person's debt, or so the story goes. Remember what I said about widgets? "The amount of widgets sold equals the amount of widgets bought." Well the accounting identity behind this chart is essentially just as simple: "the amount of debt sold equals the amount of debt bought." If you're going to save, then I have to deficit spend (create debt notes) for you to hold as your savings. Neat, huh?


On this chart, the bottom is the amount of debt sold and the top is the amount of debt bought. All that red on the bottom is the government sector selling debt. The green on the top is the foreign sector buying that debt. The blue, which seems to jump around, is the domestic US private sector either buying (top) or selling (bottom) debt (think: MBS). What I want to draw your attention to is this last bit of blue at the end:


What this section, roughly encompassing the last three years, apparently shows is that 1. The debt sold by the USG jumped dramatically, 2. The debt purchased by the foreign sector decreased, and 3. The domestic US private sector apparently picked up the slack dropped by the foreign sector. I propose to you that "the domestic US private sector" in this case was mostly Ben Bernanke and the Federal Reserve. I do understand that MMT interprets QE as something other than money printing, but I would like you to read this paragraph from Wikipedia on the specific amounts of quantitative easing:

"The US Federal Reserve held between $700 billion and $800 billion of Treasury notes on its balance sheet before the recession. In late November 2008, the Fed started buying $600 billion in Mortgage-backed securities (MBS). By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy had started to improve, but resumed in August 2010 when the Fed decided the economy wasn't growing robustly. After the halt in June holdings started falling naturally as debt matured and were projected to fall to $1.7 trillion by 2012. The Fed's revised goal became to keep holdings at the $2.054 trillion level. To maintain that level, the Fed bought $30 billion in 2–10 year Treasury notes a month. In November 2010, the Fed announced a second round of quantitative easing, or "QE2", buying $600 billion of Treasury securities by the end of the second quarter of 2011." (Wikipedia)

Now, before we move on, I want to draw your attention to three curiosities to which I will be referring:

1. Using the latest data for the last three years, the dollar monetary base expanded by $1.7T and the US trade deficit (free stuff inflow) was $1.5T over the same time period.

2. For fiscal year 2011, the trade deficit was $540B and "QE2" was $600B over the same time period.

3. For the last year, Chinese Treasury holdings are perfectly flat (same amount held in Aug. 2011 as in Aug. 2010) and Hong Kong holdings are down by $26B.

The Debtor and the Junkie

The USG may be a dealer in the monetary plane, but it is most definitely a sketchy junkie in the physical plane. The USG thinks (and truly believes) that the key to rejuvenating the US economy is trashing the dollar as a short cut to increasing exports (reducing the trade deficit). But what it can't see (nor anyone that focuses solely on the monetary plane for adjustment) is that the huge trade deficit the USG wants to quit is actually its own heroin fix. This is a deadly combo for the US dollar.

MMTers don't think very highly of "hyperinflationists". They call us "hyperventilators" and such, although I shouldn't really bunch myself in with the others. I think my description of hyperinflation is more in line with reality than others I've read. See here, here, here, here and here. But in this post I hope to show you where the MMTers go wrong on hyperinflation, and to show why—and how—dollar hyperinflation is the only possible outcome.

The "debtor" I had in mind for my section title was Weimar Germany in the early '20s, not the USG today. The USG is the junkie. Weimar Germany owed war reparations, a debt resulting from WWI that was essentially denominated in gold. This was a debt in a hard currency (hard as in difficult, not hard as in solid), unlike the USG who owes its debt to others in its own currency. MMT got that part right. The USG cannot be forced into involuntary default on its own currency debt. And because of this property, USG debt is a monetary plane illusion when viewed from the physical plane. It is a great store of nominal value, and a terrible store of real value.

Where MMT derails from the description track and goes careening off the prescription cliff, the message is usually about the admirable goal of full employment. You know, the Fed's other mandate. Indeed, L. Randall Wray's book is titled Understanding Modern Money: The Key to Full Employment and Price Stability. But the bottom line is MMT's untested theory that the USG could pay for full employment (hire anyone who wants to work) through raw monetary base expansion while enjoying the same relatively stable prices of the last 30 years. And their best defense of this shark jump proposition appears to be debunking the hyperventilators.

In Zimbabwe! Weimar Republic! How Modern Money Theory Replies to Hyperinflation Hyperventilators (Part 1) Randall Wray writes:

"MMTers are commonly accused of promoting policy that would recreate the experiences of Zimbabwe or Weimar Republic hyperinflations. These were supposedly caused by governments that resorted to “money printing” to finance burgeoning deficits—increasing the money supply at such a rapid pace that inflation accelerated to truly monumental rates." (Wray)

He goes on to explain how the hyperventilators have it all wrong. He shows how hyperinflation is more about an increase in money velocity than volume; that hyperinflation begins with a loss of confidence, not too much money. Any of this sound familiar? Then he beats a gold bug straw man or two before explaining to us how modern money really works. Here's the most important part to understand:

"You cannot print up Dollars in your basement. Government has to keystroke them into existence before you can pay your taxes or buy Treasuries." (Wray)

Notice he mentions taxes and Treasuries. This is important to understand. Government money, which is the monetary base the economy uses as its reference unit, is expanded when the USG spends, and only contracts when you either 1. pay taxes, or 2. buy Treasuries. He wasn't just throwing those out as two examples of how you might spend your money. Those are the only two checks on base money expansion. But the sneaky thing that MMT does is to marginalize the importance of those two methods of contracting the base. Like this, as if it's no big deal, a mere afterthought:

"Usually the treasury then sells bonds to let banks earn higher interest than they receive on reserves." (Wray)

The basis of MMT is that government spending (base money expansion) is not conditional on 1. taxing or 2. borrowing that money (base money contraction). Expansion is not conditional on contraction. This is obviously true because the base has been expanding. But armed with this epiphany, along with the "obvious fact" that the hyperinflationists don't understand how modern money works, they jump to the conclusion that contracting the monetary base after the government has expanded it is a fool's errand. And so they go to great lengths to marginalize the need for contraction, especially when unemployment is rising and the economy is in recession.

As it stands, our government still operates on the "antiquated" condition that taxes plus borrowing must equal spending. So we periodically raise the debt ceiling and we keep issuing Treasuries to match the entire budget deficit. But QE is the new way to reverse the base money contraction that happens when these Treasuries are sold. The Fed simply buys them from the banks and credits the banks with the base money that was deleted when they were purchased.

From an accounting perspective, this QE operation has the same effect as if the government had spent more than taxes and borrowing combined, or as if the government reduced taxes while keeping debt and spending constant. So armed with this epiphany, MMT is able to marginalize QE as a mere fiscal operation rather than the "helicopter drop" those silly hyperventilators like to talk about. "Fiscal operation" sounds pretty innocuous, doesn't it? But it's not quite that tame.

What I'm going to show you is that there's something quite dangerous to the dollar that is already well underway. From an accounting perspective, there's not much difference between QE and the easy money prescriptions coming from some of the MMTers. And these seemingly innocuous "fiscal operations" are actually born of necessity arising, not in the monetary plane, but from the physical trade deficit.

Unfortunately, the USG/Fed believes that trashing the dollar will help the domestic US economy as a kind of short cut to growing exports and thereby increasing wages and consumption demand. In other words, if we could just make our products cheaper overseas through monetary plane operations, we could sell more real stuff and thereby we'll have more money and all will be peaches and cream.

But the problem is that, net-net, the US consumes everything it produces and then some. This intractable problem cannot be solved in the monetary plane, except through dollar hyperinflation! Here's some more FOA:

"I point out that many, many other countries also have the same "enormous resources; physical, financial, and spiritual" that we have. But the degrading of our economic trading unit, the dollar, places the good use of these attributes in peril. Besides, the issue beyond these items is our current lifestyle. We buy far more than we sell, a trade deficit. Collectively, net / net, using our own attributes and requiring the use of other nation's as well. Not unlike Black Blade's Kalifornians sucking up their neighbors energy supplies (smile). We cannot place [our tremendous resources] up as example of our worth to other nations unless we crash our lifestyle to a level that will allow their export! Something our currency management policy will confront with dollar printing to avert. Also:

NO, "this country will not turn over and simply give in" as you state. But, we will give up on our currency! Come now, let's take reason in grasp. Our American society's worth is not its currency system. Around the world and over decades other fine people states have adopted dollars as their second money, only to see their society and economy improve. Even though we see only their failing first tier money. What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over-valued dollar that we spent without the pain of work."
(FOA)


That was written a decade ago. In the month that was written, the US as a whole (Government sector plus domestic private sector) was living above its means to the tune of $31.3B. That year we were living above our means by $361B. In the decade since that was written, we have maintained an average "excess consumption" of $48.5B per month and $581B per year. But here's the thing—in the most recent third of that decade (2008-2011), the domestic US private sector actually has crashed its lifestyle more or less. The economy is in recession and unemployment is up over 9%. Yet the government sector expanded its "lifestyle" to take up the slack!

Remember these from my 2009 post No Free Lunch?





And for something a little more recent, here are two headlines I saw on Drudge just last month:

DC area tops US income list; average fed employee makes $126,000 a year...
Reid says government jobs must take priority over private-sector jobs...

No wonder we're maintaining that trade deficit!

So I thought I'd come up with my own "physical plane identity" (kinda like an accounting identity in the monetary plane) for "living above our means." Here's the legend:

USG=US Government sector
USP=US Private sector
BOP=Trade balance for both sectors combined

We know how much the USG is living above its means. That's the budget deficit. And we also know how much the USG+USP combined are living above their means. That's the BOP. So the "identity" looks something like this:

USG+USP=BOP

The annual USG budget deficit (how much the USG lives above its means, with means equaling taxes) is about $1.4T. And the BOP is about $565B. So we get this:

USG=$1.4T
BOP=$565B
$1.4T+USP=$565B

Or stated another way:

USP=(-$835B)

So the US private sector is actually living below its means by $835B if we isolate it from the government sector. The government sector, on the other hand, is living way above its means with 60% domestic support and 40% foreign support. Stated another way, the US private sector is providing the USG with $835B in goods and services in excess of taxes, or 60% of USG's "deficit consumption."

Viewed this way, there's only one way to reduce that trade deficit (inflow of free stuff): reduce the size of the USG monstrosity. Unfortunately, the USG is totally incapable of voluntarily shrinking itself, especially because it issues its own currency! The real problem, the heart of the matter, the reason why the dollar will and must hyperinflate, is that the US trade deficit, on the physical plane, is structural to the USG who issues its own currency. Simple as that.

Here's what we get whenever the USG pretends to crash its own lifestyle:





I can almost hear the MMTers screaming at their computer screens, "he doesn't understand how modern money works!" ;)

Of course, MMTers don't think the USG should crash its "lifestyle" at all. They think the USG needs more deficit spending right now. Because deficit spending is not constrained by taxes and/or borrowing and the hyperventilators don't understand how modern money works so currency collapse can be essentially ignored. Are you starting to catch on yet?

MMT is all about how it works from a monetary plane accounting perspective with reckless disregard for why it works and why the dollar monetary plane has stayed connected to the physical plane (no hyperinflation) as long as it has. That last part, of course, is what this blog is all about. MMTers, like most modern economists, think the physical plane services the monetary plane, not the other way around. They think you can fix problems in the real world by simply controlling the monetary world. Why? Because everyone wants money, of course!

But herein lies the problem of what money actually is to the real economy. Money is our shared use of some thing as a reference point for expressing the relative value of all other things. And by expanding the base you don't simply create money, you destroy the moneyness of it. As MMT explains, the base is expanded when the government deficit spends, and it is likewise contracted when the Treasury sells debt to anyone other than the Fed. Those of you who read FOFOA regularly know the story of why the dollar has not yet collapsed, but here's a very brief version for the rest of you.

The US has enjoyed a non-stop inflow of free stuff including oil (a trade deficit) ever since 1975, the last year we ran a trade surplus. In the 1970s, following the Nixon Shock and the OPEC Oil Crisis, the US dollar went into a tailspin. Because the US dollar was the global reserve currency, this was bad news for the global economy. If the dollar had failed then, without a viable replacement currency representing an economy at least as large as the US, international trade would have ground to a standstill.

Europe was already on the road to a single currency, but it still needed time, decades of time. So at the Belgrade IMF meeting in October of 1979, a group of European central bankers confronted the newly-appointed Paul Volcker with a "stern recommendation" that something big had to be done immediately to stop the dollar's fall. Returning to the US on October 6, Volcker called a secret emergency meeting in which he announced a major change in Fed monetary policy.

Meanwhile, the European central bankers made the tough decision to support the US dollar, at significant cost to their own economies, by supporting the US trade deficit by buying US Treasuries for as long as it took to launch the euro. As it turns out, it took 20 years. After the launch of the euro, the Europeans slowly backed off from supporting the dollar. But right about that same time, China stepped up to the plate and started buying Treasuries like they were hotcakes. This may have been related to China's admission into the WTO in 2001.


Then, sometime around 2007 or 2008, the dollar's Credibility Inflation peaked. The growth of the "economy's money" (credit denominated in dollars) hit some kind of a mathematical limit (expanding to the limit was wholly due to FOFOA's dilemma) and began to contract. Since then, China has slowly backed off from supporting the dollar. We now know that China is more interested in using its reserves to purchase technology and resource assets wherever they are for sale than bonds from the US Treasury. China is also expanding the economic zone that uses its monetary base as a reference point in trade settlement to the ASEAN countries.

Meanwhile, the junkie USG has kept the free stuff flowing in by expanding the monetary base. Sure, China still wants to sell her goods to the US, but she's no longer supporting the price stability of the last 30 years by recycling the dollar base expansion back into USG debt. Cullen says:

"We don’t need China to buy our bonds in order to spend. China gets pieces of paper with old dead white men on them in exchange for real goods and services." (Cullen Roche)

While technically true, one has to wonder at the consequences of them not buying our bonds, no?

"They have attempted to use their dollars to purchase other USD denominated assets, but the US government has squashed those efforts. So, instead of leaving these pieces of paper to collect dust in vaults, they open what is the equivalent of a savings account with the US government." (Cullen Roche)

So does that mean they're just stackin' 'em up now to collect dust rather than going after real resources wherever they are for sale in the world?

Okay. So the USG doesn't owe a hard debt like Weimar Germany did in the early '20s. But perhaps she has developed a structural addiction; a need for something that's just as hard as foreign currency—real stuff from the physical plane. Here is L. Randall Wray describing Weimar:

"The typical story about Weimar Germany is that the government began to freely print a fiat money with no gold standing behind it, with no regard for the hyperinflationary consequences. The reality is more complex. First, we must understand that even in the early 20th century, most governments spent by issuing IOUs—albeit many were convertible on demand to sterling or gold. Germany had lost WWI and suffered under the burden of impossibly large reparations payments—that had to be made in gold. To make matters worse, much of its productive capacity had been destroyed or captured, and it had little gold reserves. It was supposed to export to earn the gold needed to make the payments demanded by the victors. (Keynes wrote his first globally famous book arguing that Germany could not possibly pay the debts—note these were external debts denominated essentially in gold.)

The nation’s productive capacity was not even sufficient to satisfy domestic demand, much less to export to pay reparations. Government knew that it was not only economically impossible but also politically impossible to impose taxes at a sufficient level to move resources to the public sector for exports to make the reparations payments. So instead it relied on spending. This meant government competed with domestic demand for a limited supply of output—driving prices up. At the same time, Germany’s domestic producers had to borrow abroad (in foreign currency) to buy needed imports. Rising prices plus foreign borrowing caused depreciation of the domestic currency, which increased necessitous borrowing (since foreign imports cost more in terms of domestic currency) and at the same time increased the cost of the reparations in terms of domestic currency.

While it is often claimed that the central bank contributed to the inflation by purchasing debt from the treasury, actually it operated much like the Fed: it bought government debt from banks—offering them a higher earning asset in exchange for reserves. For the reasons discussed above, budget deficits resulted from the high and then hyper- inflation as tax revenue could not keep pace with rising prices. Finally in 1924 Germany adopted a new currency, and while it was not legal tender, it was designated acceptable for tax payment. The hyperinflation ended."
(Wray)


Let's happily skip over the fact that Wray compares the German central bank during the Weimar hyperinflation to the Fed today when he writes: "actually it [the Reichsbank] operated much like the Fed: it bought government debt from banks." I have a better comparison I want to try. I want to try a little word replacement game with Wray's Weimar description. Let's replace Germany with the USG and the war reparations debt with a trade deficit addiction and see how it looks. Other than these few substitutions, I'll leave Wray's descriptive words alone:

"The USG had endured 30 years of foreign-supported trade deficit and developed an addiction to free stuff. To make matters worse, much of its productive capacity had been shipped overseas during this time period. The US private sector could not possibly support the USG’s addiction to real goods.

The nation’s productive capacity was not even sufficient to satisfy domestic demand, much less to support USG demand. Government knew that it was not only economically impossible but also politically impossible to impose taxes at a sufficient level to move resources to the public sector to satisfy the USG’s insatiable addiction. So instead, it relied on deficit spending through raw base money creation. This meant government competed with global demand for a limited supply of importable goods—driving prices up. At the same time, the US private sector had to pay the same higher prices without the benefit of issuing its own currency to buy needed imports. Rising import prices forced the US economy to consume more of its own domestic goods, which increased USG’s reliance on imports, and since foreign imports cost more in terms of the domestic currency, this increased the cost of the USG’s addiction in terms of domestic currency."
(Me)


Now I want you to think especially hard about that last line, "…this increased the cost of the USG’s addiction in terms of domestic currency." This is the key to understanding why we are headed toward all-out, balls-to-the-wall, in-your-face wheelbarrow hyperinflation. This is it, the point I'm trying to get across to you.

That inflow of free goods that is structural to the status quo operation of the US government is more dangerous to a monopoly currency issuer than the war reparations debt in Weimar Germany. The USG is incapable of reducing that inflow of real goods voluntarily and so the non-hyperinflation of the dollar requires it to flow in for free. And it has been, up until recently.

Today we are debasing our monetary reference point in defense of that inflow of goods from abroad. And, at this point, it is entirely attributable to the USG alone, and not to the US economy at large which has contracted, unlike the government. MMT says that Bernanke's QE is a simple like-kind swap of paper for paper, or money for money. Cullen: "What they’ve essentially done via QE2 is swap 0.25% paper for 2% paper and call it a day." In a sense, it is. But it is removing newly created credit money (debt created by the USG) from the system and replacing it with newly created base money. By increasing the volume of the base which credit references for value, simultaneous with a constant inflow of necessary goods, we are in essence devaluing—or more precisely debasing—the credit money flow that flows in the opposite direction of the goods flow. The fact that this doesn't show up immediately in consumer prices is perfectly normal.

Henry Hazlitt: "What we commonly find, in going through the histories of substantial or prolonged inflations in various countries, is that, in the early stages, prices rise by less than the increase in the quantity of money; that in the middle stages they may rise in rough proportion to the increase in the quantity of money (after making due allowance for changes that may also occur in the supply of goods); but that, when an inflation has been prolonged beyond a certain point, or has shown signs of acceleration, prices rise by more than the increase in the quantity of money. Putting the matter another way, the value of the monetary unit, at the beginning of an inflation, commonly does not fall by as much as the increase in the quantity of money, whereas, in the late stage of inflation, the value of the monetary unit falls much faster than the increase in the quantity of money. As a result, the larger supply of money actually has a smaller total purchasing power than the previous lower supply of money. There are, therefore, paradoxically, complaints of a 'shortage of money.'"

Again, I want you to think about that last line or two, "As a result, the larger supply of money actually has a smaller total purchasing power than the previous lower supply of money. There are, therefore, paradoxically, complaints of a "shortage of money."

So what does the supply of money have to do with the catastrophic loss of confidence that is hyperinflation? Yes, the catastrophic loss of confidence drives prices higher. This makes the present supply of money insufficient to purchase a steady amount of goods (USG junkie fix). True balls-to-the-wall hyperinflation requires a feedback loop of both value and volume. Value drops, so volume expands, so value drops more…. Without the feedback loop, you simply get the Icelandic Krona or the Thai Baht. With the USG in the loop, you get Weimar!

Think about a debtor who owes a hard debt to a loan shark versus a junkie who owes a regular, ongoing, hard fix to himself. Which one is worse off? Which more desperate? As I wrote above, this intractable problem cannot be solved in the monetary plane, except through dollar hyperinflation!

Big Danger in "A Little Inflation"

I just received an advance copy of Jim Rickards' new book, Currency Wars (thank you Steve and Jim). And while I haven't had a chance to read it yet (because I've been working on this post), I have it on good authority that Jim thinks the Fed is actually targeting 5% annual inflation right now while saying 2% or a little more. This sounds credible to me.

So what's the danger in a little inflation?

If the dollar sinks, like they (the USG/Fed) want, sure, our exportable goods will become relatively cheaper abroad (even though their price here won't drop) and their (our trading partners’) exportable goods will become more expensive here. This will appear as good old-fashioned price inflation, since we’ll now have to outbid our own trading partners just to keep our own production, and pay more for theirs. And while the domestic private sector has already crashed its lifestyle somewhat, the currency issuer has increased its "lifestyle" to compensate.

The bottom line is that the USG cannot crash its own lifestyle. And when the dollar starts to "sink", that pile of pennies in the video above will be insufficient (not enough money). Luckily, that pile of pennies represents the budget of the currency issuer himself. So he’ll just increase it, to defend his lifestyle, while scratching his head at why the trade deficit has nominally widened rather than narrowing as he thought it would when he trashed the dollar.

One of the strongest arguments that the USD will not hyperinflate like Weimar or Zimbabwe is that the USG's debt is not denominated in a foreign currency. If it were, this would be a different kind of hyperinflationary feedback loop we were facing. If all the USG debt was in a foreign currency and the dollar started falling on the foreign exchange market, that debt service would lead to hyperinflation. But that is not the case. So it’s not the FX market (monetary plane) that is the big danger to the dollar.

The dollar is the global reserve currency, so it is the physical plane that is the biggest threat to the dollar in the same way the FX market was a threat to the Weimar Mark. And it is not the nominal debt service that is the threat like it was in the Weimar Republic, but it is the structural (physical plane) trade deficit. To the USG, that is the same threat as nominal debt service denominated in a foreign (hard) currency was to Weimar Germany.

As the German Mark fell, there was "not enough money" to pay the debt. And with a little inflation, there is "not enough money" to buy our necessities from abroad.

Not Enough Money

On October 6, the Bank of England released this publication announcing a £75 billion increase in QE. In the press release, they mentioned inflation:

"CPI inflation rose to 4.5% in August. The present elevated rate of inflation primarily reflects the increase in the standard rate of VAT in January and the impact of higher energy and import prices. Inflation is likely to rise to above 5% in the next month or so, boosted by already announced increases in utility prices. But measures of domestically generated inflation remain contained and inflation is likely to fall back sharply next year as the influence of the factors temporarily raising inflation diminishes and downward pressure from unemployment and spare capacity persists." (BOE)

That same day, Mervyn King made headlines saying "the UK was suffering from a 1930s-style shortage of money."

"There is not enough money. That may seem unfamiliar to people." he told Sky News. "But that's because this is the most serious financial crisis at least since the 1930s, if not ever."



It should be obvious from this video that Mervyn King, at least, does not get that expanding the base which debases the economy's money is not the best response to "not enough money." You don't have enough money, so you make what you've got worth less? Perhaps he meant the monetary base is too small for the credit clearing system. He did, after all, reference the 1930s rather than the '20s. But, sadly, that's not the case because he clearly said "we are injecting 75 billion (with emphasis reminiscent of Dr. Evil) pounds directly into the British economy." But in King's defense, he's doing no different than the Fed or the Reichsbank:

"While it is often claimed that the [Weimar] central bank contributed to the inflation by purchasing debt from the treasury, actually it operated much like the Fed: it bought government debt from banks…" (L. Randall Wray)

"In proportion to the need, less money circulates in Germany now than before the war." (Julius Wolfe, 1922)

"However enormous may be the apparent rise in the circulation in 1922, actually the real figures show a decline." (Karl Eister, 1923)



_________________________________________________________
Sidebar Post-within-a-post

FOA on Inflation>>Hyperinflation

I know this post is long. But just remember that no one is forcing you to read it, certainly not me. I give freely of my time to put these together for you… to share deep concepts that I believe are vital to your financial well-being. So enjoy the length, don't despise it. There is no filler here. It is all pure gold. But if you're one who prefers short sound bites, I'm also on Twitter @FOFOA999. ;)



I handpicked some more quotes from FOA that many of you have already read. But perhaps they will have a deeper meaning today, given a new perspective on moneyness. These are all from his last month of regular posting in 2001. And, clearly, dollar price inflation was on his mind that month.

People like to say that A/FOA got it wrong, because the timing didn't seem to play out exactly as they inferred it would. But I would like to proffer another view. Perhaps FOA was unaware of the lengths to which the PBOC was prepared to go in supporting the dollar and the US trade deficit over the next decade.

China was admitted into the World Trade Organization on December 11, 2001, one month after these posts. And it wasn't until 2002, after FOA stopped posting, that China really began to ramp up its trade with the US and to purchase US bonds in size. From '99 to '01 China's Treasury holdings were flat at around $50B, but from 2002 they began a parabolic rise that has now ended and is once again flat.

So if China has backed off from supporting the dollar today, in the same way that the European CBs had backed off right when FOA wrote these posts, well then perhaps they are more relevant today than the day they were written. So with that thought in mind, enjoy!

FOA (10/3/01; 10:21:26MT - usagold.com msg#110)
The makings of a dust storm

For decades hard money thinkers have been looking for "price inflation" to show up at a level that accurately reflects the dollar's "printing inflation". But it never happened! Yes, we got our little 3, 4, 8 or 9% price inflation rates in nice little predictable cycles. We gasped in horror at these numbers, but these rates never came close to reflecting the total dollar expansion if at that moment it could actually be represented in total worldwide dollar debt. That creation of trillions and trillions of dollar equivalents should have, long ago, been reflected in a dollar goods "price inflation" that reached hyper status. But it didn't.

That "price inflation" never showed up because the world had to support its only money system until something could replace it. We as Americans came to think that our dollar, and its illusion of value, represented our special abilities; perhaps more pointedly our military and economic power. We conceived that this wonderful buying power, free of substantial goods price inflation, was our god given right; and the rest of the world could have this life, too, if they could only be as good as us! Oh boy,,,,,, do we have some hard financial learning to do.

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

Over the years, all this dollar creation has stored up a massive "price inflation effect" that would be set free one day. Hard money thinkers proceeded to expect this flood to arrive every few years or so; the decades passed as those expectations always failed. Gold naturally fell into this same cycle of failed expectations, as the dollar never came into its "price inflationary" demise.

A number of years ago, I began to learn from some smart people about the real political game at hand and how that would, one day, produce the final play in our dollar's timeline. Indeed, you are hiking that trail with us today; us meaning Euro / gold / and oil people. All of us Physical Gold Advocates that have an understanding about gold few Americans have ever been exposed to.

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

Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place. Further, nor would our long term dollar currency expansion produce the incredible illusion of paper wealth that built up within our recent internal American landscape.

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

The relatively small "goods price inflation" so many gold bugs looked for will be far surpassed and the "hyper price inflation" I have been saying is coming is now being "structurally" set free to run.

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

Why "structurally", why now?

For years now, "politically", the dollar system has had no support! Once again, for effect, "Politically NO", "Structurally Yes"!
…To this end, I have been calling for a hyper inflation that is being set free to run as a completed Euro system alters Political perceptions and support. That price inflation will be unending and all-encompassing. While others call, once again, for a little bit of 5%, 10%, 15% price inflation, that lasts until the fed can once again get it under control,,,,,,,,, I call for a complete, currency killing, inflation process that runs until the dollar resembles some South American Peso!

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

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

When it came to using fiat money in our modern era, it made little difference what various inflation rates were in countries around the world; 50%, 100% 1,000%,,,,,, they went right on playing with the same pesos. There have been countless third world examples of this dynamic, if only we look around. Mike, look at what happened in Russia after they fell,,,, the Ruble stayed in use and function with 6,000% inflation. My god they still use it now.

… The ensuing domestic price inflation will waste away all buying power of dollars overseas.

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

FOA (10/8/01; 08:04:08MT - usagold.com msg#113)
Gold on the trail.

The US placed its money into this current equation in 1971. Then it failed to accept the internal price inflation that over-printing its money demanded and a remarking of its gold reserves would expose to the world.

… While hard money historians, to the man, clamor for a return to honest government and a dollar backed with gold; they leave out an important step in the process that history says will never be skipped. Once a nation embarks down a road of inflating its currency for local political use, the cast is set for a constant redenominating of the money unit; that is "real bad" price inflation. However, modern economic evolution has presented an even more profound reply. Once a nation embarks down a road of inflating its currency for international political use, the cast is set for the world to find said fiats useful limits, then drop it from use; that is super price inflation as a result of fiat replacement. To this end we come.

… This incredible currency expansion will break out into the open with real price inflation as never before witnessed in the US. In turn, foreign holders of dollar-based assets will, not only, demand price performance of their "paper gold" hedges, even as they are compelled to shift a larger portion of their asset bases into Euro positions.

… As dollar price inflation roars, and physical gold demand soars; the dollar gold markets will completely fail their past hedging purpose as they become locked into a political cash settlement mode. A mode that forces an ever expanding discount against spot physical trading in Europe and the world.

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

FOA (10/9/01; 10:05:48MT - usagold.com msg#117)
PIZZA,,,, Bronco's,,,,,, Tonne of Yellow Metal,,,, and USAGOLD: Ha Ha,,, a gold advocates dream come true (ssssmile)

Dollar hyperinflation and super high gold prices are closer than many think.

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

FOA (10/15/01; 07:49:09MT - usagold.com msg#120)
Continuing from my last talk:

It's no wonder that Alan Greenspan has commented so often on the need to control derivatives yet has no workable plan to counter their function. Truly this dynamic was created to counter his function and few can understand this! In effect, the dollar was placed on a one way street that required it to be inflated into infinity. All as a means of protecting dollar originators; the US banking system. Dollar leverage, that is actually US liabilities, is now built up endlessly. This all points to a nonstop, end time need for an uncontrollable inflationary expansion by our fed.

…Now, we will follow this trend in an accelerated fashion, until all derivative process is exposed as nonfunctional outside a massive hyperinflationary policy.

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

FOA (10/20/01; 08:50:20MT - usagold.com msg#122)
Taking broader steps: heading towards a clearing

Our evolution of thought will find its roots in an inflationary financial crisis that is now beginning to unfold in dollarland. In fact, "all" dollar hedging systems will most likely meet the same fate as the effects of a real, serious price inflation in local US markets escalates.

… Once real inflation begins to demand that these hedges truly spread financial risk with real performance, resulting in a pile up of loses, the political solution used time and again will return as the time honored utility that saves the day:

------change the rules------!

… ECBMBs (European Central Bank Member Banks) never really sent out very much real gold; they just lent their good name to the BBs. That means cash pooling for the loans also. So, when a new currency transition workout proceeds, the members of the ECB are receiving Euro cash in payment for gold loans. In hindsight; it will be seen that they lent the commitment to sell gold only long enough for US inflation to end the dollar's timeline and bust its dollar system.

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

FOA (10/25/01; 09:30:26MT - usagold.com msg#124)
A quick report and comment from my office on the trail.

As the gap between inflation rates and returns on Euros grows, that currency will be seen more and more like a world class money. World class; in that the Central Bank is more driven to keep the money strong and not base its policy on local politics the way the US does.

---- Remember: Unlike the Fed, which has a mandate to boost jobs, the ECB's main task is to combat inflation.------

… Truly, if the dollar IMF system can be the reserve for all internal US banking assets; then the Euro could easily do the same in Europe. Especially as US inflationary money printing eventually drives our price inflation rate to a level that makes dollars and dollar debts, outside the US, valueless assets! Paying back those debts will be like tossing a nickel where one once launched a bill to settle a debt.

… Of course I own dollars and will likely keep using them right thru any super inflation. I never expect the dollar to disappear. Most hard money investors, with extra funds to hold, also have that same view.

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

FOA (10/26/01; 09:01:38MT - usagold.com msg#126)
Still at the Trail House

Somewhere in the middle of all this; real savers will supply Euroland with a solid base of credit wealth that can be borrowed without driving their local price inflation thru the roof. Then: other national economies will have a market that shares realistic price levels for all goods. Then; all economic systems will begin a non-inflationary expansion that centers around Euro use! All of this period will mirror our (US) internal coming inflationary expansion that limits our ability to import or export. Think about it.

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

FOA (10/26/01; 21:21:33MT - usagold.com msg#127)
A few comments on comments!

…Only trouble is that they never understood that fiat inflation using a world reserve currency, like our dollar, is different from other systems. We buy cheap social policy and economic expansion with the blood and sweat of foreign productivity. I bet Old Breuer thinks its ok for a business to buy $1.00 running shoes from asia and sell them in Dollar land for $120.00. Then he would point out that shoe inflation is only running at a few percent because those shoes went up $3.00 last year. Oh well.

The Euroland Germans, and the ECB studied our ways for a long time and now fully understand how to attract other nations into a fair game. The Euro will become a "world standard" more so than a reserve because they want it to be a fair currency that's accepted for its value. For the Euro to gain American financial acceptability later, it will do so because it will be the "last man standing" when this inflation storm resides.

… Can't push that string? Pick it up and heave it in a third world like inflationary pitch. That ball will fly, brother,,,,,, oh will it fly!

… Japan is a different problem. They have been locked into the US dollar economy for so long that they cannot escape. There is simply no way that China will let them into the Euro house. The HK / China central bank system, also known as Big Trader, simply wields too much economic sway between Asia and Europe. In historical precedent, the orient express always headed to Europe and never saw "The Japans".

Actually, Japan doesn't want to go there and has risked a decade of time waiting for some economic change in the US. I have said from way back, that Japan will go down with our (US) inflationary tide. They will waste away their dollar assets following our lead. Those that think that these peoples want to be part of a third world currency block do not know them. I do,,,, but that is another story.

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

FOA (11/2/01; 12:35:27MT - usagold.com msg#128)
Gold,,,,,, Gold,,,,, Who has the Gold?

Now, for the hundredth time they say: "Mises is correct, the markets cannot be faked, so a little deflation will follow this inflation!"

Baloney! The evolution of Political will is now driving the dollar into an end time hyper inflation from where we will not return. That is our call. Bet your wealth on the other theorist's call if you want more of Their last 30 years of hard money success.

… Gold must rise in value many many times just to regain its wealth barter asset value. Perhaps $10,000 to start. Then, it will run with any and all dollar inflation,,,,, even Euro inflation that ECB people openly admit must be a part of a dollar to Euro transition.

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

FOA (11/3/01; 14:39:16MT - usagold.com msg#129)
An "inflationary depression" is in the cards -- a "price deflation" doesn't have a chance!

When a currency system comes to the end of its reserve use, I'm speaking politically, its domestic market will come to a point where it can no longer export "real price inflation" in the format of; "shipping its excess currency outside its borders". This happens because internal money inflation, that is super currency printing, is increased so much that it overwhelms even its export flow. Worse, even that export flow later tumbles as the fiat falls on exchange markets.

The effect is that local "passive inflation", built up over decades and fully reflected in "Sir John's" paper assets, spreads out as "aggressive inflation" and hyper price rises begin…

Remember; in political inflation's, money is printed to save the assets as they are currently priced;

… The politics of wealth today is centered around gold bullion and only gold bullion: that is where the wealth and power will be manifest: this is where the gains will be! To bet on the rest of the hard market is to bet against the coming inflation making your asset whole!


End Sidebar
_________________________________________________________

Conclusion

This post represents about seven weeks of bouncing around Thoughts and ideas, and close to a hundred emails with Costata and JR. Thank you to both of you! A lot of time went into this, and I think I've included everything I wanted to, but I'm sure I'll think of something else as soon as I hit publish. ;)

And so now, let's look back at the questions I set out to answer in one post. Let's see if I hit my target:

1. Is money really just one single thing and then everything else has varying levels of moneyness relative to real money?
2. Is gold real money?
3. Or is money whatever the government says it is?
4. Or is it whatever the market says it is?
5. Is silver money in any way today?
6. Are US Treasury bonds money?
7. Is real money just the monetary base?
8. Or is it all the credit that refers back to that base for value?
9. Is money supposed to be something tangible, or is it simply a common unit we use to express the relative value of things?
10. Is money really the actual medium of exchange we use in trade?
11. Or is it the unit of account the various media of exchange (checks, credit cards, PayPal) reference for value?
12. Should the reference point unit itself ever be the medium of exchange?
13. Some of the time?
14. All of the time?
15. Never?
16. Is money a store of value?
17. And if so, for how long?
18. Is money supposed to be the fixed reference point (the benchmark) for changes in the value of everything else?
19. Or is it simply a shared language for expressing those changes?
20. Is money something that changes over time?
21. Or is money's true essence the same concept that first emerged thousands of years ago?
22. Does the correct view of money produce answers that are vastly superior to the blind conjecture prescribed by all other views?

Alright, well maybe I didn't answer them all as specifically as you thought I would. But what I hope I did do was to provide you with some food for thought and encouragement to use your own mind in answering these questions for yourself. Sure, I could have simply answered them all in a checklist. The post would have been a lot shorter if I had done it that way! But what's that old saying about giving a man a fish, you feed him for a day, but teach him to think for himself in concepts and he might just discover Freegold before it is upon us? It's something like that anyway.

Sincerely,
FOFOA

FOA: My friend, our message and our position is that we are in one of the most exciting times of all the history of gold! We have seen that during times with the most radical transitions, the majority are usually defending the wrong asset. This unfortunate situation need not impact everyone today. If better judgment is the result of a full understanding, then some who read here will be exposed to tools that could help them avoid the mistakes of our Western hard money majority.

For Western Gold Bugs today, their culture, their system and their recent knowledge is all ensconced within the last 30 years of paper wealth. Yet they are using a hard money defense, written by masters preceding our modern era. They struggle to use that logic out of context, as it is thought to apply to this gold market today. These two precedents are leading them to reflect their gold values in some form other than physical ownership in possession. This mistaken detour from gold's true purpose will once again prove, by reality, the value of owning real gold.

Standing aside this group is the Physical Gold Advocate. For them, for us, these times will contain the greatest gain in real wealth ever seen. For those who are falling behind, gold is still within your grasp.

TrailGuide








Funky dollar bill
U.S. dollar bill
Funky dollar bill
U.S. dollar bill

You go to school
To learn the rules
On how to love and live your life
But think about it twice
The pusher push, the fixer fix
The judge acquits
The junkie leads his life
For the dollar bill
For the dollar bill
U.S. dollar bill
Funky dollar bill
U.S. dollar bill

You don't buy a life, you live a life
A father learns much too late
He was a-never home
He worked two jobs, never stayed at home
He had to, 'cause
His love life was gone
For the dollar bill
For the dollar bill
For the dollar bill
U.S. dollar bill

It'll buy a war
It will save a land
It pollutes this air
In the name of wealth
It'll buy new life
But not true life
The kind of life
Where the soul is hard
My name is dollar bill
Funky dollar bill
U.S. dollar bill

542 comments:

1 – 200 of 542   Newer›   Newest»
Michael said...

Been waiting for this one, thanks FOFOA

Motley Fool said...

Holy hell this is long. Lol. Anyhow... comments...

victorthecleaner said...

Gary,

ZH article regarding some huge withdrawals from the Fed last week

http://www.zerohedge.com/contributed/hit-big-withdrawals-fed-sells-assets-borrows-cash

I was not able to verify the numbers claimed in that Zero-Hedge article. There is one situation though in which the Fed would be forced to sell assets. This is when the velocity of money increases too much for their taste. I always assumed that they would decide to protect the treasury bond market and take the inflation hit, but perhaps there are so many buyers of treasury bonds these days that they can afford to unload some. But then why would the velocity increase now? This might get very interesting.

Victor

78Rubies said...

Thanks for the book, FOFOA!

Ramon said...

There goes my Monday :)

d2thdr said...

Subscribing comments.

DP said...

$

DP said...

€!

罗臻 said...

In Costantino Bresciani-Turroni's "The economics of inflation: a study of currency depreciation in post-war Germany", on page 93 he wrote the following:

Doubtless, the burdens imposed on Germany by the Treaty of Versailles contributed to the deficit showing in financial years 1920-1923, but as many be seen from German sources, they were not the only causes and never the most important."

If you follow that link and read from page 93 on, he goes into detail concerning the depreciation of the mark. The war reparations were a small part. Should the U.S. hyperinflate, it would be like blaming it on the Iraq war. A part, but certainly not the whole nor even the main part.

Dr. Peter T said...

Superb!

Mansoor H. Khan said...

Here is how the banker's game works:

1) Get the government to issue some currency (cash -- paper or reserves at the central bank -- reserves are government issued cash central bank deposits). Government issued cash is around 5% of the currency (money) supply. The government issued currency is put into circulation by the government simply spending it.


2) The rest (95%) of the currency is issued by the private banks. Each customer loan is a new bank deposit (i.e., new currency) and increases the currency (money) supply of the economy. Note that this newly created money (currency) is put into circulation by the borrower spending it. Most currency (about 95% America's currency supply) has been borrowed into existence and when bank customer pays the loan back that amount of currency is removed from circulation. The banking system cannot go backwards (fewer net loans) as time moves on because fewer net loans means fewer currency in circulation in the economy.

Accumulation of interest charges on outstanding loans means that the currency supply must constantly increase even if it means giving out lower quality loans. Think of it like a plane flying it must fly at some minimum speed or else the plane (the banking system) will crash (i.e., banking system collapse).


3) The bankers make dam sure that the common public does not understand how the monetary system works meaning that the private banks issue 95% of the currency. This is whole another topic how they do this.


4) The system works until real economic capacity of the economy grows and debts can be serviced and interest charges paid. Most of the time the economy oscillates between boom (growth) and bust (recession) because bust is needed to clear debts and start a new lending cycle.


5) Eventually, one of these cycles goes so deep that currency supply (and demand) falls so low that too many debts become un-serviceable. The recession becomes a depression now.


6) The bankers then have to decide how to "reset" the system. One way to reset the system is to let the depression takes its course. But of course this path is very chaotic because people lose jobs and may become violent. Once most debts are cleared lending can start again and the currency supply is replenished. Wars are a good way to get initial money (currency) into an economy after a depression to get demand going again. This is the great depression scenario.


7) Another way to "reset" the system is to get the government to print too much money and spend and destroy the currency and blame it on the government. This justifies issuance of a totally new currency (note that hyperinflation clears debts) and the lending cycle can start again.


8) The banking system (as is) is setup to maximize the power and influence of the global bankers and NOT for the maximum general well being of people. By the way this is a global game. This is the only system around no matter what country you are in. The global banking cartel makes sure that no competing systems are allowed to exist (so they might be copied and global bankers will lose power).



For more details on this stuff please read the following articles in order listed below:



http://seekingalpha.com/article/209386-modern-monetary-system-there-is-another-way



http://aquinums-razor.blogspot.com/2011/08/what-is-relationship-of-money-to.html



http://aquinums-razor.blogspot.com/2010/07/why-is-deflation-and-depression.html





http://seekingalpha.com/article/210346-should-newly-created-money-be-a-private-or-a-public-asset




http://seekingalpha.com/article/192375-cause-of-today-s-economic-crises-too-much-thrift




http://seekingalpha.com/article/160269-a-radical-solution-for-america-s-insolvent-financial-system




http://seekingalpha.com/article/146658-great-banking-confusion-is-there-a-better-way


Mansoor H. Khan

http://aquinums-razor.blogspot.com/

costata said...

Hi FOFOA,

Just a late night thought...

.. in some ways this may be the most important post you have written.

It resonates with things that thinking others are thinking.

http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10593

Cheers

Michael H said...

comments ...

MnMark said...

I wonder what sorts of governmental actions will occur in the transition phase between hyperinflation and Freegold?

As the government becomes more and more desperate for money, and printing money becomes obviously less and less effective (and I am going to assume our financial leaders are not complete morons and will recognize that they have a hyperinflation on their hands at some point, even if denying it at first), what sorts of things will the government resort to before adopting Freegold?

I'm nervous that when the transition point approaches and it becomes widely obvious that the very best possible asset to hold is physical gold, that the government (representing the interests of the great mass of the population who own no physical gold and are envious) is going to take draconian, Big Brother-like steps to confiscate the gold of citizens in order to "spread the pain" around more evenly.

I have read here the suggestion that governments will encourage their citizens to hold gold, but frankly that seems to me to presume a level of wisdom that I do not see in our elected representatives who are, after all, simply doing what the mass of people want them to do - which seems mostly to be confiscating the wealth of the productive to give it to the moochers.

Why wouldn't an unwise, short-sighted government (like ours) attempt to confiscate privately-held physical gold, or impose a windfall profit tax on it? If we had an Obama/Pelosi/Reid-style government in place, with that whole leftwing "progressive" mentality, I can't see them letting a handful of citizens get insanely wealthy because of their physical gold while the rest of the public labors in poverty in the aftermath of a monetary crisis.

DP said...

MnMark,

The government will want savers in their zone to hoard gold, not cash, because they want the cash to circulate and lubricate commerce. If people aren't spending their cash but hoarding it, other people aren't working but claiming benefits.

They also will not put any barriers in the way of gold selling, because they will need gold to flow from holders within the economic zone in order to settle international trade imbalance. If a reasonable amount of net value cannot be obtained in exchange for your gold, you will hold onto it until it is, or take it somewhere else to sell it, where your custom will be more highly valued.

reefman said...

> If a reasonable amount of net value cannot be obtained in exchange for your gold, you will hold onto it until it is, or take it somewhere else to sell it

That is what I have been thinking too. Also note, there is no sales tax at the moment on buying gold/silver. I am leaning that there will be no capital gains tax when the time comes to "spend" one's gold/silver.

MnMark said...

The government will want savers in their zone to hoard gold, not cash, because they want the cash to circulate and lubricate commerce.

But why wouldn't a short-sighted, "progressive" government prefer that all that privately-held gold be transfered to the government's hands first, from whence it can "circulate and lubricate commerce", except with the "benefit" that it will be "circulated" more fairly by the government than it would by private individuals?

I think you are presuming a degree of wisdom and farsightedness on the part of the people's representatives that does not exist, or we would never have gotten into this situation in the first place.

DP said...

I think you are overlooking that here in Europe (yes, there are people here outside of the US - spooky huh? perhaps you might try to avoid terms like "in our country" in future BTW... just a suggestion. No offence! ;-) ) we already have removed VAT sales tax, and any coins that are deemed "legal tender" in our currency zones are already exempt from Capital Gains Tax too.

So if you guys want to be sure you can sell your gold tax-free in future, you might want to consider buying European coins instead of those local alternatives. At the worst case then, you'll be able to take a European Vacation.

Gary said...

Victor, thanks for your comments, something to keep an eye on!

FOFOA...I've not had time to read the post yet, just scanned it, but I look forward to reading it enormously.

I frequent Cullen's site, posting sometimes on the risks of hyperinflation and the benefits of gold. He often gives me a hard time, but we remain amicable.

I wonder if he will attempt to respond to your post? As you rightly say, MMTers have a degree of certainty about their position which is impressive, but as I often say to Cullen, he'll be right and I'll be wrong in our views about hyperinflation, until one day I am right and he is wrong!!

Look forward to reading this epic later.

KindofBlue said...

Always some new insights, new ways to think about the "moneyness" of, well, money!

Bravo, FOFOA

Xavi said...

Seesh

I wrote a comment thanking FOFOA and everyone else for the great hard work and all I got was this error message: "Input error: Memcache value is null for FormRestoration". So thank you again for such a great long post. I am sure that JR and others will be reminding us passages from it when the time comes and everything will become clear in our minds once again.

I think this Blogger infrastructure is starting to not scale well with such long posts and long lists of comments. I always use the option on my Safari browser to format the layout of the page as a book, so I can read long text more comfortably. FOFOA, have you considered moving to Wordpress or something like that? This Blogger thing is not up to the task of displaying your invaluable content!

Kind regards,

mr pinnion said...

Pure cold logic, writen to sound like sheer bloody poetry.
Thanks again FOFOA.

Regards
Ozzy

victorthecleaner said...

FOFOA,

thanks for your fine rant against MMT.

I suppose many economists in the US will one day make the following discovery. They think that when the external value of the dollar declines, their trade deficit will shrink and the dollar will stabilize. Well, this is true only if the decline of the dollar is slow and the economy is given enough time to adapt to that change, in effect causing the re-industrialization of the US. In other words, this works provided the system is always in equilibrium. Which is what they have been assuming all the time, a fact, however, that they have forgotten.

They will find out that if the dollar declines too rapidly, their trade deficit will actually grow in nominal terms, simply because the economy would need a decade to adjust, but is given only a couple of months.

Victor

Jeff Herron said...

It is posts like this that cause me to view FOFOA's "Donate" button as one of my better investments. Such erudition demands compensation, and encouraging such insight with a little US$ grease certainly bears much fruit in terms of thoughts, ideas, and learning!

I can't follow it all, although I enjoy reading it all immensely. I feel as if I am seeing history unfold right before my eyes.

FOFOA, a true tour de force. I hope that when this all blows over, I can meet you in a pub somewhere and buy you a beer.

Donation coming your way! Thanks for all you do.

Adrian Wrigley said...

It's a great post! But the criticism of MMT seems to really be a criticism of what some of its adherents say as they get worked up about the current situation.

I find MMT is a great starting point for understanding modern money, but is rather incomplete. I'd prefer to see the post framing MMT as a valid description with the example misapplications corrected. The post comes across as rather ad-hominem attacks against "MMTers".

M said...

@ VTC

"They think that when the external value of the dollar declines, their trade deficit will shrink "

The funny thing is, the current account deficit will increase even if the trade deficit is shrinking if interest rates are going up. So they are assuming that capital will continue to flow into the bond market at a static pace,while the dollar goes down. They are dreaming.

But my opinion is that capital flight will hit the US bond market and there will be a fast crash. We see evidence of it today. Right now the Fed and treasury can do no wrong. No matter what they do(get downgraded,openly print, become the largest buyer)the world still shows up to buy the debt. When sentiment changes and reality sets in, the Fed and Treasury can do no right. They can fire Bernanke and reappoint Volker, slash spending, raise rates ect but no matter what, nobody will show up to buy the debt.

costata said...

A few snippets from Doug Noland's latest offering (below the essay I pointed to with an earlier link).

US banks on the hook for $500 billion in credit default swaps on Club Med countries' debt? (My emphasis)

November 1 - Bloomberg (Yalman Onaran): “U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first half of 2011, boosting the risk of payouts in the event of defaults.

Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements. Almost all of those are credit-default swaps, said two people familiar with the numbers, accounting for two-thirds of the total related to the five nations, BIS data show.”


Spain making progress toward a constitutional balanced budget?

November 2 - Bloomberg (Emma Ross-Thomas): “Spanish regions, cited by rating companies as a risk to the nation’s finances, may face the deepest overhaul since their creation three decades ago as the People’s Party pledges to cull bureaucracy and slash spending. The opposition PP, set to win its biggest-ever majority in Nov. 20 elections, will create a ‘new model of administration’ to avoid overlap between local, regional, and central governments…

‘If you don’t solve this, everything else is impossible,’ said Jaime Garcia-Legaz, secretary general of Faes, a research institute… We’ve created regional leviathans’ and ‘you have to do this if you want to get back to balanced budgets.’”


Some relief, in the pipeline, from increases in the cost of food?

November 4 - Bloomberg (Luzi Ann Javier and Jason Scott): “Wheat is heading for the biggest slump in three years as the second-largest harvest on record swells stockpiles, easing shortages that drove global food costs to an all-time high. Prices that plunged 20% to $6.375 a bushel this year…”

http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10593

mortymer said...

Today, live webcast:

Launch of OPEC's publications (WOO 2011 and ASB 2010/2011 edition)
8 November 2011; Vienna, Austria
Start: ca 14.20 hrs local time [Live link will be available as soon as the webcast begins)
Note: Vienna time is one hour ahead of GMT [GMT+1]

http://www.opec.org/opec_web/en/multimedia/349.htm

mortymer said...

Meanwhile I would recommend a bit browsing in this book, quite relevant to latest post:

"...A subcabinet level interagency group, generally known as the "Volcker Group", on which the Treasury, the Council of Economic Advisers, the State Department, and the National Security Adviser were represented, prepared a paper on "Basic Options in International Monetary Affairs." It included a review of the past: "The available financing for our deficits has permitted the United States to carry out heavy overseas military expenditure and to undertake other foreign commitments, and to retain substantial flexibility in domestic economic policy". But it added that an important goal of policy was to "free...foreign policy from constrains imposed by weaknesses in the financial system." It was inappropriate to adjust foreign policy to a particular monetary system..."

[Mrt: I out it up already yesterday, there is much more in it, e.g. about Germany, about IMF, etc. Enjoy!]

http://anotherfreegoldblog.blogspot.com/2011/11/harold-james-international-monetary.html

d2thdr said...

Quote,'The Fed simply buys them from the banks and credits the banks with the base money that was deleted when they were purchased. 'unquote


Have we got any recent proof of this? :)

Robert said...

More interesting etymology: I pulled out my Oxford English Dictionary, which says that the English word "money" came from the Old French word "moneie" (the modern French word is monnaie), which was derived from the Latin word "moneta," which referred to the mint in Rome. The OED also notes that "moneta" was the original epithet of the goddess Juno, in whose temple the mint was housed.

The Wikipedia entry for Moneta has this to say about Juno Moneta:

Juno Moneta, an epithet of Juno, was the protectress of funds. As such, money in ancient Rome was coined in her temple. The word "moneta" is where we get the words "money", or "monetize", used by writers such as Ovid, Martial, Juvenal, and Cicero. In several modern languages including Russian and Italian, moneta is the word for "coin."

As with the goddess Moneta, Juno Moneta's name is derived either from the Latin monēre, since, as protectress of funds, she "warned" of instability or more likely from the Greek "moneres" meaning "alone, unique", an epithet that every mother has.

mortymer said...

@Robert:
http://www.professorfekete.com/articles%5CAEFJunoMoneta.pdf

Robert said...

Here is an interesting source about the purchasing power of gold in and around Thessalonica in the 13th-15th centuries.

http://tinyurl.com/DOAKSpaper

This is a list of commercial transactions, mostly real estate transactions. Most of the entries state the price in hyperpyra nomisma. FYI in the 13th century the hyperpyron nomisma was the standard imperial gold coin. It weighed about 4.4 grams, and it was debased to about 14-15k, so it had about 2.75 grams of pure gold.

It is interesting to scroll through the list . . . a house (probably in Serres) for 14 hyperpyra . . . sale of a house in Serres for 33 hyperpyra . . . sale of 3 houses in Thessalonica for 54 hyperpyra . . . sale of a workshop in Serres for 36 hyperpyra . . . 30 hyperpyra in exchange for a pasture . . . .

Of course we do not know where the houses were, how large they were, or what condition they were in. But a couple of ounces of gold was enough to buy a house.

Let's hope history at least gives us a rhyme.^^

mortymer said...

Some basics:
The Structure and Operation of the World Gold Market, 1991,

http://anotherfreegoldblog.blogspot.com/2011/11/imf-structure-and-operation-of-world.html

mortymer said...

"On Tuesday November 8, 2011 Federal Chancellor Angela Merkel - together with President Dmitry Medvedev and the Prime Ministers of France François Fillon and the Netherlands Mark Rutte and EU Energy Commissioner Günther Oettinger – will formally inaugurate the first of Nord Stream's twin 1,224 kilometre gas pipelines through the Baltic Sea. When fully operational in late 2012, Nord Stream's two lines will have the capacity to transport 55 billion cubic metres of Russian gas a year to the EU for at least 50 years."

http://www.nord-stream.com/press-info/press-releases/chancellor-merkel-and-heads-of-government-of-russia-france-and-the-netherlands-to-inaugurate-the-nord-stream-pipeline-386/

Motley Fool said...

I stand in awe of the Yeti. While I struggle over the next rise, he frolics about. ^^

“...the only way we can hope to have a clear view of what is actually happening today is by reverting our understanding to the original concept, before it was corrupted by the two camps.”

I have to wonder, when did the two camps not exist. ;)

I posit that the Institute of religion and the Divine right of kings are some of the oldest cons that exist; cons created by those with the debtor world-view.

Think on the African tribal kings, ancient Mesopotamian kings, Chinese emperors, Native American chiefs, Egyptian pharaohs, Incan king and high priests, the Vatican, the list goes on and on.

I read the 22 page primer on MMT you linked. Wow. They make some crazy implicit assumptions.

I would wager the flaw that Greenspan found, mentioned in that paper, is the debtors/savers struggle.

“(expanding to the limit was wholly due to FOFOA's dilemma)”

I would like if you would expand upon your rationale here. I see themed paths one could take, but I am curious which you implied.

Brilliant dissertation. There are many learned men that would do well to read this with a open mind.

Bravo.

TF

JMan1959 said...

Just read Krugman's latest attempt to convince everyone that there is no inflation. Posted a response with a request that he visit the blog here and attempt to refute it, hopefully he will show.

JR said...

Hi MF,

Here is an idea from Does Fiat Produce an Endless Sea of Wars?

"Gold standards don't cause wars any more than fiat causes wars. If any flaw in our monetary plane has a causal relationship with war in the physical plane, it is not the ease or hardness of the chosen money. It is the proclivity of our systems, whatever side is running them at the time, to fail to acknowledge and address the needs of two distinct groups, the debtors and the savers. Money is naturally bipolar for this very need. So how strange is it that no one has ever noticed?

FOFOA's dilemma applies to both fiat and gold standards. Here it is:

FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma.

Herein lies your causal relationship with Mish's list of plagues foisted upon the human race: Endless Sea of Wars, Debt, Social Inequality, Economic Bubbles, Rampant Consumerism, Environmental Rape. Perhaps a better subtitle would be: Why Freegold is the Answer.


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

FOFOA's dilemma "leads to a conflict between debtors and savers." As FOFOA explained in in The Return to Honest Money , its a flaw in that people save in the same medium we transact in, and we have a system where the transactional medium is always sacrificed to save the system:

"Today we denominate both transactions and savings in dollars: the dilemma! So the dollar's collapse, today, will wipe out both their savings and their debt...

A Flaw

In Part 2 I explained how the evolution of the money concept over maybe 2,500 years led to what we think of as money today: the three functions all tied into one. And I also explained how the modern bastardization of the money concept led to a fatal flaw in today's system:

This system of lending a purely symbolic monetary CONCEPT instead of lending real wealth requires the perceived value of that CONCEPT to remain relatively stable or else the entire banking system will collapse...

This is the problem with the architecture of the dollar, versus how all non-reserve fiat currencies will work in a free gold environment. The dollar must cheat in order to retain any illusion of stability...

When the dollar became a mere concept in 1971, so did all fiat currencies in the world. Their only value lies in the tradable value associations we give them, based on what can be purchased in the parallel universe of real things. But because we have been encouraged to save these symbolic debt concept units in lieu of anything with real value, a mismatch has grown to epic proportions whereby not even a fraction of these debt units can be traded back into the real economy at anywhere near today's prices.

We have lent, borrowed, saved, sliced, diced, sold, resold and insured so many units of a mere CONCEPT while neglecting to pay attention to the comparative size of the real economy with which the CONCEPT must run in parallel."


cont.

JR said...

cont.

The "transactional medium" will inevitably be sacrificed in a vain attempt to save the system. We have a system where people save in debt denominated in the transactional medium, so debt has to keep expanding to the limit or it collapses. Think exponential growth and rolling debt, much less making new debt available for new savers. The Wall Street system of packaging and selling debt as a savings vehicle requires continuing credit expansion (monetary inflation) or it collapses. This is why it - (credit denominated in dollars) _ was always gonna expand to the limit. More from The Return to Honest Money:

"I went on to explain how the value of the transactional medium of exchange will inevitably be sacrificed in a vain attempt to save the system. And that this is why it is so dangerous to hold your wealth in that same transactional medium today. This is why there are "two monies!"

You see they are now faced with a dilemma they will not discuss publicly. On one side is their product, the conceptual unit of credit account, their currency. And on the other side is their offspring, the financial system, Wall Street. What saves one will kill the other. They can save the present value of their product and kill their offspring through starvation. Or they can save their offspring by delivering what it desperately needs to survive... a constant expansion of credit (aka monetary inflation). But this will, of course, kill the value of their product, the currency.

They can save one or the other, but not both. And it was always known, but has now been proven, that the system will be saved at ANY cost.
(Unfortunately for them, they did not think it through far enough to realized that the cost of saving their offspring will also kill it and a whole lot more. But that line of Thought is straying a little too far from the topic of this post.)

In order to survive, the system, the financial industry, Wall Street NEEDS a constantly increasing supply of CREDIT! If the population won't give their own blood to save this dying Frankenstein monster, then the CB's and governments WILL! It is happening now. Right under our noses. For more than a year now!

This is why it is SO important that we hold only physical gold in our own personal possession in order to escape this tangled mess. Only touchable, graspable physical gold metal under full ownership conveys ALL of the properties that have come to be attributed to this kingly wealth asset. By contrast, financial contracts denominated in gold as facilitated by bullion banks, gold derivatives, gold loans, gold depositories, gold pool accounts, gold ETF's, or known by any other name, are all at their core pure and simple... (wait for it)... CREDIT. And what feeds the monster?? All together now…………………
***CREDIT EXPANSION***!!"


cont.

JR said...

cont.

Euro Gold on the idea that they promote credit expansion, (perhaps even going so far as to buy failing debt outright for cash) to keep the savings system of debt nominally performing.

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.


See the dilemma - if you are gonna save in the debt medium, it has to grow nominally to keep performing. But growing credit expansion debases the value of each unit.

The need to keep debt nominally performing is why FOFOA's dilemma means the debt, an inherently flawed store of value which has a limit to which it can grow before it stops performing, will be expanded to that limit.

Cheers, J.R.


PS - Whoever came up with FOFOA's dilemma is pretty witty :)

Motley Fool said...

Thanks JR

I was simply curious about the implied causality between the mere conflict between debtors and savers, and the growth of credit money reaching a limit.

Yes, in our current system I see why that limit would be reached, but the implied causality means that our arrival at our current system was inevitable due to this tension. That had me curious.

But no worries. Upon writing this much, it is now obvious that our current system is a implied evolutionary step in the simple recognition of the existence of that conflict. So I have the answer I seek.

TF

JR said...

Yeah MF,

Because we save in a flawed medium that is the derivative debt of the currency (aka FOFOA's dilemma)

1) there is a mathematical limit to how large debt can be expanded as a store of value, and
2) because we use debt as a savings medium, debt has to keep expanding nominally (volume expansion), so we will reach that limit.

FOFOA is suggesting it was inevitable that we have huge debt crisis because of FOFOA's dilemma - because we save in derivative debt of the currency, which is a flawed medium, this flaw (it is mathematically constrained in real terms yet it must keep nominally expanding) was gonna reveal itself.

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

Contrast this situation with what happens when we "choose something that both rises in price (rather than expanding in volume) and also something that does not infringe on others or economically impede the capital creation process that feeds value to your savings." Freegold Foundations

Indeed, "Gold is the only super-tank. It can absorb any flow the world throws at it without popping. It is stronger than all the pressure that is possible because of its uniquely large stock to flow ratio. And also the fact that the large stock is held in extremely strong hands that I like to call Giants and CBs. These Giants are the real-world producers and titans of today and yesterday, including a lot of real old-money Giants." Bitcoin Open Forum - Part 3

"Gold's utility is that for thousands of years it has held its value relatively well. And because it is not used for many things other than mere hoarding, the act of hoarding gold is not an infringement on the natural rights of others to enjoy the utility value of "real world" things like BMW's and oil and wheat and pork bellies. If one were to corner, say, the copper market or the chocolate market, there would likely be repercussions as those industries fought back through the power of the collective that likes to consume chocolate and copper. But with gold there is no such worry." The Value of Gold

J said...

Great post FOFOA. I'll be going through it again when I have a bit more time on my hands. I don't think I absorbed it all in my first go round. So much information crammed into one post..well worth the wait.

Some words from Weidmann

"The prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I,” he said."

..

"Such a course “undermines the incentives for sound public finances, creates appetite for ever more of that sweet poison and harms the credibility of the central bank in its quest for price stability,” Weidmann said. "

..

“I am glad that also the German government echoed our resistance to the use of German currency or gold reserves in funding financial assistance to other” euro-area members, he said. “Proposals to involve the Eurosystem in leveraging the EFSF -- be it through a refinancing of the EFSF by the central bank or most recently via the use of currency reserves as collateral for a special purpose vehicle buying government bonds -- would be a clear violation of this prohibition” on monetary financing.

Germany’s Weidmann Says ECB Can’t Bail Out Governments by Printing Money

J said...

"But, one more thing, is it wealth? Of course it is. You see, it is wealth because you possess it, and the very knowledge that you possess it is held by others.

These paintings command a value, a price, a demand, precisely because every one of them is possessed by an owner. In the world of wealth, worth is enhanced because the supply is lessened by this "possession attribute". And possession is how most people in antiquity understood wealth."


Does knowledge of possession win out or will greed and "survival" rule during a wealth revaluation? It makes you wonder whether part of the reason why things have unfolded much slower than A/FOA expected is because a lot of "wealth" is stored under the current economic rulers roof.

"On Tuesday, the daily Financial Times Deutschland examined the speculation on where Germany’s horde of gold is being kept. The country's estimated 3,401 tonnes is the second largest national reserves after that of the United States.

Much of Germany’s gold would appear to be still in America, where it was held during the Cold War to ensure it never would fall prey to invading Soviet forces.

Although the Second World War had left Germany in ruins, the economic miracle of the 1950s which was largely based on exports, quickly built up enormous gold reserves. By 1968 Germany had 4,000 tonnes, the most it has ever held, the paper said.

Yet most of this was never moved to German soil – such a transport would be a logistical nightmare to organize, while insurance cover would be impossible to get. The gold changed hands on the trading floors of New York, London and Paris, while the metal bars themselves never moved."

..

"Having large parts of German gold in New York, London and Paris would be useful in terms of saving on transport costs when it comes to selling. Around 60 central banks are said to have gold reserves in New York. “There are also serious sources which say the Bundesbank often brings small amounts to Germany,” said Schulte.

The reserves currently held in Mainz and Frankfurt are considered to be more than the four percent often cited – the Bundesbank told the FTD “a large share of the gold reserves” are in Germany."

Bundesbank gold location kept secret

J said...

"But, one more thing, is it wealth? Of course it is. You see, it is wealth because you possess it, and the very knowledge that you possess it is held by others.

These paintings command a value, a price, a demand, precisely because every one of them is possessed by an owner. In the world of wealth, worth is enhanced because the supply is lessened by this "possession attribute". And possession is how most people in antiquity understood wealth."


Does knowledge of possession win out or will greed and "survival" rule during a wealth revaluation? It makes you wonder whether part of the reason why things have unfolded much slower than A/FOA expected is because a lot of "wealth" is stored under the current economic rulers roof.

"On Tuesday, the daily Financial Times Deutschland examined the speculation on where Germany’s horde of gold is being kept. The country's estimated 3,401 tonnes is the second largest national reserves after that of the United States.

Much of Germany’s gold would appear to be still in America, where it was held during the Cold War to ensure it never would fall prey to invading Soviet forces.

Although the Second World War had left Germany in ruins, the economic miracle of the 1950s which was largely based on exports, quickly built up enormous gold reserves. By 1968 Germany had 4,000 tonnes, the most it has ever held, the paper said.

Yet most of this was never moved to German soil – such a transport would be a logistical nightmare to organize, while insurance cover would be impossible to get. The gold changed hands on the trading floors of New York, London and Paris, while the metal bars themselves never moved."

..

"Having large parts of German gold in New York, London and Paris would be useful in terms of saving on transport costs when it comes to selling. Around 60 central banks are said to have gold reserves in New York. “There are also serious sources which say the Bundesbank often brings small amounts to Germany,” said Schulte.

The reserves currently held in Mainz and Frankfurt are considered to be more than the four percent often cited – the Bundesbank told the FTD “a large share of the gold reserves” are in Germany."

Bundesbank gold location kept secret

Kyle said...

The question and answer I cannot seem to get through my thick skull is how does the Euro hold strong if Germany ends up leaving and the ECB continues to throw money at the PIIG countries...? I think I understand the aspect of the ECB letting gold float... but what if the USG ended up letting their gold float in value? What happens then? Doesn't matter because their currency is backed a single country? Thanks for any insight. The whole "Freegold" and a strong Euro is hard to wrap your mind around, especially the latter with all the European mess.

Thanks

JR said...

Great find J,

Some words from Weidmann

"The prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I,” he said."


Sounds just like Wim Duisenberg, the first ECB president, quoted in "Euro Gold":

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

Milton Friedman agrees - there is an elephant in the room:

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."


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

The severance of the from any one nation-state “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I.” As FOFOA commented in "Euro Gold":

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.

costata said...

Kyle,

You wrote:
The question and answer I cannot seem to get through my thick skull is how does the Euro hold strong if Germany ends up leaving and the ECB continues to throw money at the PIIG countries...?

If Germany "leaves" the Euro collapses. If the ECB prints Euro excessively and "throws" it at the "PIIG countries" (I loathe that label BTW) then it would cause high inflation in the Eurozone and at some level of debasement it could cause a catastrophic loss of confidence in the Euro - hyperinflation.

The quotes that were provided after you posed your question(s) offer at least three insights:

1. Some influential people in Europe know the answers to your question(s).

2. These influential people do not want to see either of the outcomes you asked about.

3. There is an opposing camp (partly comprising politicians) who want to "solve" their problems through currency debasement.

K said...

And so if the ECB doesn't give the PIIGS bailout money... which eventually causes their debts to be slash in value bc they cannot possibly grow their way out of it... which causes the banks that own that debt to collapse bc their equity is thus wiped out and then the dominoes really start to fall as if the banks are collapsing and the governments financials certainly are... Will the ECB never step in the save them, and in doing so they will have to print money, no? Thus devaluing the Euro?

K said...

Costata,

Cool, so I'm not crazy... :-)

How do you suppose they get out of this mess without devaluing? Slashing debt on Italy, Spain, and Portugal would kill the banks... But without debt reduction the countries could never pay off their debts...

Do you think A/FOA saw this coming when the Euro was created. As in all the Euro countries facing massive debt (just like the US of course). And isn't it inevitable that globally we will see fiat devaluation continue for a long time to come?

Thanks for your insight.

JR said...

Hi K,

I sorta think in a sense, the Euro was built to print. Debt is what the $IMFs system is all about - everybody has debt issue. But as FOFOA explained in Synthesis, the Euro was built to attempt to deal with this issue of debt by being built to be hopefully be able to be devalued *WITHOUT* a concurrent hyperinflationary hell:

"The hyperinflation of the dollar is already a done deal. It has been since the 90's at least. Massive quantities of perceived dollars already exist stored in debt held globally and inside the US. Europe knows this. They have known this was inevitable since at least the mid-90's when they changed plans and went with higher gold reserves for the new ECB. They have always been willing to wait for it to happen naturally, unless the EU itself faces an existential threat from debt brought on by the $IMFS. And in this case, I believe their only option is a targeted hyper-depreciation of the euro.

By "targeted", I mean that the euro devaluation would be targeted to go only into gold. Gold can absorb a devaluation if you do it carefully, and in turn devalue the debt without causing inflationary havoc."


A targeted devaluation into gold.

A comment from Hair of the Dog?

"As you all know, I don't expect the euro to fail. The euro is designed for transition. It is designed for Freegold. And the specific value of a currency doesn't matter in its primary role as a medium of exchange. Only stability matters, and the euro could handle a big one-time devaluation to a more stable level. It will have to devalue at one point or another. Devaluation is inevitable for all fiat currencies today. The European politicians apparently understand less about this than the central bankers do."

cont.

victorthecleaner said...

Kyle,

one issue I keep raising here is the following question. If there are people in the ECB who have the big picture and who are determined to prevent the euro from hyperinflating, then why did these people not prevent the PIGGS credit bubble in the first place? They had all the data and they watched for 10 years how the credit volume in the south grew much faster than GDP. If they had the insight that this is how the US financial system and the dollar would eventually end, then why did they let it happen in Europe. By the way, they *did* have the tools to prevent this.

Second, I expect the ECB to monetize a good deal of the existing debt. If you compare the ECB with the Fed, the ECB inflict a much larger loss on the creditors than the Fed. The Fed in contrast bails out everyone and everywhere. This is the reason why the euro is stronger than the dollar, even after all the political mess.

Finally, will this be enough to prevent hyperinflation of the euro? I don't know. It may depend on when they play the gold card. If they get a revaluation of gold early enough, the ECB may just buy back with gold all the printed euros.

Yes, the US can theoretically do the same. But they have less gold per debt.

Victor

JR said...

cont.

But nonetheless, despite a devaluation, there will be haircut/restructuring/etc. Its really all about expenditure. In Freegold, the flow of physical gold is the brake/spur that regulates consumption, providing a counterweight that keeps international trade balanced. From Once Upon a Time

"The lesson from the monetary changes made in the post-war 20s is that if you want the debtors to ever be able to repay their debts in real terms, you do not sterilize the vital spur and brake function of gold by locking its purchasing power. It is the price mechanism—price changes in goods and services—that transmits the arbitrage signal that causes gold to physically flow to where it has the greatest purchasing power. For a struggling economy to grow and expand to a point at which it can repay its debts, the gold not only needs to flow, but it must be a fertile member of the economic ecosystem so that it can perform its vital function.

[..]

Now imagine you have one country with debts denominated in goods and services. Let's call it Greece. Greece owes Germany X goods and services. Meanwhile Germany is still exporting goods and services while Greece is still importing. This leaves Germany with a structural surplus in its Balance of Payments and Greece with a deficit. But gold can reverse this flow in an instant on the BOP at a high enough price. And once it does, it will begin to exert the brake and spur forces on the two countries until the flow of actual goods and services finally corrects and reverses. Once that flow corrects, the gold flow (which is opposite the flow of goods and services) will reverse and subsequently the brake and spur forces will also reverse.

Gold flows in the opposite direction of goods and services. Remember when ANOTHER said, "gold and oil can never flow in the same direction"? Well it's the same thing with other goods and services. Germany and Greece may both be exporting and importing, but Germany is exporting more, which shows up on the BOP as a Trade Surplus and a Capital Account Deficit. At a high enough price, a small amount of gold can (and will) flow in the other direction, from Greece into Germany, and if its value exceeds the (net) trade difference between Germany and Greece, it will turn Germany's Trade Surplus into a Trade Deficit and a Capital Account Surplus. "


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

A second comment from Hair of the Dog?

Expenditure is the adjustment mechanism in a fixed exchange rate zone like the eurozone. It is Goldman Sachs and the 66-year old $IMFS that has enabled the circumvention of the adjustment mechanism in Europe, not the euro. The same goes for the US states.

The Privateer writes, "The claim is that the obvious message of the European debacle is that a sovereign government must have full control of ALL aspects of monetary and fiscal policy if it is to prevent the type of sovereign debt debacle now engulfing Europe. As yet, no argument has been put forward for the opposite proposition."

Here's one: 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.

If you think austerity riots are bad, you should see hyperinflation riots!"

Max De Niro said...

Costata,

After following your prudent bear link, I read a piece called "Money and the European Credit Crisis", mentioning 'moneyness' quite a lot.

I assume that this came up in one of your many emails to FOFOA and was some kind of influence on this excellent piece, Moneyness?

K said...

JR, VTC

Appreciate for all your insights. I've read much of Aother and FOA's stuff and a lot of FOFOA's (still working through it all).

Do you guys buy (or currently hold) silver at all? FOFOA has stated silver will move but not nearly as much as gold. Do you guys ever play the GSR at all or is it strictly gold only? I have approx a 60-40% mix gold/silver and am looking to switch most over below a 25-30GSR, as I want to get to a 90/10 before the "Big Bang Theory" or better yet "RPG Theory". And yes, I know, it was just down to 32:1... apparently I have a little greed in me... or some discipline... or maybe simply stupidity. Regardless, I missed the window but still believe (hope) it will go below a 30:1 before RPG...?


Cheers,
K

JR said...

Hi K,

Lots of us own silver. An idea is there may be a transition time between the $IMFS and Freegold, when gold goes into hiding in areas and doesn't really trade as the paper markets collapse, when paper currency goes HI and a barter economy grows in significance. Many see utility in having barter goods, such as silver or even airplane bottles of alcohol, in such a time. And holding physical cash as well to bid time until then and be able to grab goods one might need before supplies run low as HI takes hold. Cash and barter goods as a defense to your treasure - your gold. You don't want to spend your gold during the transition, you want to hold your gold till we come thru the other side and the true worth of gold is revealed.

Windmills, Paper Tigers, Straw Men and Fallacious Fallacies

"In fact, my position is that silver will rise just fine against a falling dollar. In fact, it may gain a little additional levitation over other commodities due to the lingering monetary sentimentality put forth by Trace and others. But it will also be limited by the economy. Where it will not follow gold is through the change in both market and function that will deliver a real, non-inflation-adjusted massive one-time return. The Freegold reset as the gold market turns physical and the gold function becomes the monetary store of value par excellence. A free market Giant event being front run by the Central Banks and a few small physical gold advocates."

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

Kicking the Hornets' Nest

"You see, the international monetary and financial system (the IMFS) is in transition today. It is transitioning from the old $IMFS into the new IMFS. And through this transition gold is going to replace dollar assets as the monetary reserve asset, and in so doing, will recapitalize the failing system of today. This is the esoteric part, where you need to put in a little effort to understand why I say this with such confidence. Without that effort you will most likely dismiss my words when I say that gold's value will soar during this transition and deliver a one-time gain to physical gold holders in a sort of "punctuated equilibrium."

This means that one day gold is cruising along with its known relationship/ratio to things like silver, oil and bread, and then the next day (or over a brief, one-time period) it gaps up ~40x and then reestablishes a new equilibrium with the aforementioned commodities. And the gain of this transition is only afforded to the physical quantities of gold in the world, which is why the chain of paper promises (of gold) floating throughout the financial system is so dangerous.

Yes, silver will run with inflation just like all physical assets. But it will not have the additional boost of being the new system's official reserve asset. This probably doesn't seem so significant to the silverbugs, but then again, most of you who have taken the time to understand Freegold now call yourselves ex-silverbugs.

[...]

Yes I still have some physical silver. But I am a seller today and have been for a year now. And I was only a buyer before I discovered the wonderful archives linked above. And for the record, I am not playing the GSR. And I won't sell ALL of my silver. I plan to keep a little bit of it. And if I didn't have any silver, I would probably buy an amount equal in weight to my gold position, as Desperado said in his comment. That means, if I had 100 ounces of gold, I'd also buy 100 ounces of silver. But that's just me (and Desperado).
"

DP said...

Good evening, Victor.

If they had the insight that this is how the US financial system and the dollar would eventually end, then why did they let it happen in Europe.

If you know something you are fighting will break when it hits its limit, you gun the gas and wait for nature to take its course. Well spotted!

Second, I expect the ECB to monetize a good deal of the existing debt.

You're really on a roll in that comment, Victor! :-) Gonna be quite a big barbecue by the time they've finished dumping all this paperwork on the Eurozone's collective front lawn. At least it should stay under control if none of the Eurozone governments are able to keep running up with more of those pesky bottles of wholly unnecessary lighter fluid.

the ECB may just buy back with gold all the printed euros.

Seriously, you're on fire tonight buddy! You might also find you can sell them your gold for a shitload of euros, and clear all your debts easily too.

Max De Niro said...

The thing that I find the most difficult about freegold is not the concept itself, but how the 'new rules' will affect how I think about all other assets, transactions, business decisions etc. I find that when pressure testing freegold by running thought experiments I keep coming up with snagpoints or problems, then realise that the problem wouldn't exist in the new framework.

It is quite a job to be able to re-create a scale model of the world as it will, in one's head, in order to do the thinking.

victorthecleaner said...

Kyle,

will Germany leave the euro zone?

First, we observe that Switzerland has just effectively joined the euro, at least temporarily.

Would it make sense for Germany to leave? I don't know whether it is the Germans who run the show at the ECB, but it definitely makes sense to thinks this through from a German point of view.

Germany imports energy and resources, and they export industrial and consumer goods. They need their export revenues in order to import resources (apart from some thermal coal that is still left). Germany will never be a closed economy. It is a 'flow-through' economy.

Assume for a moment that they had their own currency. Once the dollar collapses and the resource countries no longer support the dollar, Germany has a choice. Either they keep their currency strong and resource imports cheap, but then they would lose their exports and the associated revenue. Alternatively, they can join the race to the bottom and keep their exports going, but then energy and resources would become expensive.

For Germany it makes a lot of sense to find some allies and team up in order to form a larger currency block that try to keep their common currency strong when the dollar collapses. As long as a good deal of the Germany exports go into this currency block, they are safe, and the arrangement is advantageous for Germany.

Then you can ask the same import-export question for the euro zone as a whole. You basically get the same 'flow-through' picture, but with smaller import/export balances relative to GDP.

Finally, concerning silver, I see that silver is traded by the same bullion banks that trade gold, and this is done with the same synthetic supply through unallocated accounts. The key question is which of the two LBMA markets, gold or silver, will blow up first and will have to be switched to physical only settlement. If the answer is silver, this is a very good reason for owning some (in spite of the fact that the CBs have only gold but not silver).

Victor

Motley Fool said...

Max

Isn't that the fun part? :P

I dunno, I read a lot of fantasy when I was younger. I don't find it that big of a deal. ;)

TF

Max De Niro said...

MF,

Sure, it's fun, but sometimes difficult and frustrating, especially when I don't quite understand how things work now!

victorthecleaner said...

DP,

You might also find you can sell them your gold for a shitload of euros, and clear all your debts easily too.

Not interested. I am a saver, not a debtor. But the ECB is a now a debtor. They have given euro base money to people (who are creditor) but they have only PIIGS bonds as an asset. Either they dilute the euro and make everyone share the loss or they sell some gold in order to clear that debt. I cannot see how buying gold by the ECB would improve the situation of the euro (apart from shooting down the bullion banks as a one-time measure - do they have the balls to pull this off?).

Second, JR is saying the ECB might try to prevent hyperinflation if the savers in the euro area switch from currency into gold only, but not stock up on food and energy. I wonder how the ECB has prepared for this?

Hyperinflation would be triggered when the little people take their savings, say one or two months worth of expenditures, and rather than have it sit in a bank account, go shopping immediately and clear out all the grocery stores. How do you prevent this from happening? Perhaps you should
a) educate your people that it is worth saving your surplus and your emergency reserve in gold rather than euros?
b) keep lots of small coins in stock to be sold to the public when the day arrives

All this needs to be set up and ready to go within a few weeks, perhaps days. Does anyone know of any such preparations in Europe?

Victor

JR said...

Victor,

JR is attempting to illustrate FOFOA's point that one way the Euro can deal with a part of the problem is a targeted devaluation of the euro against gold. "Gold can absorb a devaluation if you do it carefully, and in turn devalue the debt without causing inflationary havoc."

How might the Euro try to devalue their currency against gold, and thereby set an example for the savers to follow? Maybe that's it - to "get" savers in the euro area to switch from currency into gold the Euro will set an example for the savers to follow - buying gold.

Perhaps you now sorta see how "buying gold by the ECB would improve the situation of the euro," no?

victorthecleaner said...

Kyle,

concerning silver again. Do you know any fundamental or arbitrage argument that enforces a specific GSR? I don't.

Victor

victorthecleaner said...

JR,

Perhaps you now sorta see how "buying gold by the ECB would improve the situation of the euro," no?

Yes, I do understand what you are trying to say. I just repeat that I have not seen any pro-gold propaganda yet or anything the like by the ECB or others in Europe.

Yes, Europe is a bit more gold-friendly than the US, both in terms of taxation and in terms of availability at the banks. But this is only a gradual difference.

One development that could be 'it' is the discussion about the German gold that the Bundesbank just put into the news. As I understand it, what was attempted by Sarkozy-Cameron-Obama at the G20 meeting was to get hold of the German (and other ECB member bank's) SDR reserves (which do contain a small gold component, correct?). But the way it was apparently dragged into the media was as an attempt to get their hands on the German gold.

If they keep this boiling, will they get more people switch to gold? How about all the banks, investment funds, insurance companies and mainstream investment managers? Are they impressed? Are they switching to gold?

Victor

JR said...

"This nuclear option is A) for the BIS to begin operation of a public "physical only" market for gold to be used by the really giant participants, primarily sovereign entities and billionaires, and B) for the ECB to use the price discovered by the BIS in its quarterly reserve asset "marked to market" adjustments."
Greece is the Word

In effect, to revalue gold and support it with a bid from your own currency.

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

"Now you might be thinking, "How can this secret help us now if it is so secret and under the control of the Central Bankers?" Well here's the beauty of it: All it will take to deploy this "Nuclear Option" and reset the monetary and financial world back to a sustainable basis is one simple announcement, the revelation of the existence of this market, or even a credible leak will do the trick. (You guys are good at leaking stuff, right?) So here we go.

In case you haven't guessed it yet, this secret market I'm talking about is a gold market."

Open Letter to EMU Heads of State

Max De Niro said...

Victor,

How long do you consider that it would be before a hyperinflation really kicked in? I don't mean from now, I mean from when it 'officially' started, to when it really started doing damage to people?

I would have thought that people would have a few months to consider what was going on, while they wouldn't necessarily be having to rush out and spend all they had immediately. This is the Weimar experience. It took a while to really get going. People didn't wake up one morning to find prices with an extra few zeros on the end right from the beginning.

This would also give the ECB time to execute any plan it might have, or even set up some kind of allocated gold savings plan, perhaps done through banks? Who knows, a bit in ingenuity and necessity driven by crisis and the options are endless. The future is always weirder than people think.

DP said...

Not interested. I am a saver, not a debtor.

Sure. When I said "you", I really meant Greece, Italy, Portugal, Spain, Ireland, France, etc. I just meant those unpayable debts these countries owe each other will look pretty payable once the currency has been massively devalued, against the gold they own (which they all understand and is why the gold hasn't been mobilised... yet).

But the ECB is a now a debtor

How so? There is no way they will ever be sitting on the pavement with a dirty old used coffee cup, begging for a euro? Nominal performance in euro terms is, for them of all parties, no problemo. And if they are of a mind to make it so, it's also no problemo for their debtors too.

The ECB issuing new cash to buy a little more gold for €BIGMONEY:

(a) massively increases the value of their own forex warchest gold

(b) provides the gold seller with mucho cash to settle all nominal debts and keep the system performing rather than collapsing

(c) gets the debtors off the nominal hook, but rewards the savers in real terms as the gold migrates towards them

(d) teaches everybody a lesson about how money and debt really works in the real world, and what it means to vote for a profligate government

(e) gives the local economies a rocket boost of international competitiveness - everyone gets a real terms pay cut, even in the face of probable nominal terms rises

Hyperinflation isn't triggered, because the ECB draw a line under existing debts and deal with them. But they call time on doing the same for future debt going forward. Balanced budgets - FTW! Austerity - it's what's for dinner.

Contrast with constant debt ceiling raising in the US, and the lack of a brake on government spending, because there is no smart old uncle to take away the punchbowl of the two-party race for votes. (Similarly, but less importantly, in the UK of course.)

Have a great evening!

JR said...

"I just repeat that I have not seen any pro-gold propaganda yet or anything the like by the ECB or others in Europe."

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

From the comments to Tweet This!:

Here is the Smaghi speech the WSJ blog reference where he made the point that the ECB’s revaluation account (AKA MTM reserves assets like gold) can effectively help absorb losses the ECB faces on the bonds it purchases:

Risk Management in Central Banking Speech by Lorenzo Bini Smaghi, Member of the Executive Board of the ECB,
International Risk Management Conference 2011,
Free University of Amsterdam, 15 June 2011

"...The solvency profile of central banks also differs significantly from that of private financial institutions. The latter need to weight their risks against the financial buffers provided by their explicit capital position. In the case of the Eurosystem, its explicit capital position is determined by consolidated capital and reserves amounting to more than €80 billion, but also by revaluation accounts amounting to more than €300 billion. Although such explicit financial buffers remain a valid and necessary benchmark to assess the leverage and the risk-taking capacity of central banks, their financial strength cannot be fully captured by using capital adequacy metrics such as those applicable to private banks for regulatory purposes, as it has been done in a rather simplistic way by some commentators...

The Eurosystem risk position: common misunderstandings

Let me address en passant two issues that have received attention from some analysts recently.

First, some commentators have stated that, since the ECB’s balance sheet is expanding and is allegedly taking on large risks, the ECB may be turning into a ‘bad bank’. [3] This argument is based on a clear misunderstanding of the type of operations conducted by the Eurosystem and of the risk control measures applied to those operations. The description of the risk control measures and of the specificities of the capital position of the ECB that I just provided should help dispel such misunderstanding. The data have actually confirmed that the Eurosystem’s financial results have proved resilient to the global financial crisis, and its total capital position has even increased. [4] The numbers I have provided in terms of overall capital and reserves of the Eurosystem should help a better understanding of the situation..."

Footnote four is fun:

"[4]From 5 September 2008 to 3 June 2011, Capital and reserves have increased by 13.2% (from €71.7 to €81.2 billion) and revaluation accounts have increased by 100% (from €152.3 to €305.9 billion). Total Eurosystem assets have increased by 31.8% (from €1441 billion to €1899 billion) over the same period."

JR said...

Mortymer comment on the Revaluation Account

"...Given the large exposure that the Eurosystem bears in foreign exchange holdings, particular attention is paid to the issue of prudence. A prudent approach is applied particularly to the different treatments of UNREALISED GAINS and UNREALISED LOSSES for the purpose of recognising income. Thus, REALISED financial GAIN and ALL (realised and unrealised) financial LOSSES are recorded in the profit and loss account; UNREALISED financial GAINS are credited to a REVALUATION ACCOUNT. The mutual claims and liabilities of the Eurosystem central banks are offset against each other so that the consolidated financial statements reflect only the Eurosystem’s position vis-à-vis third parties...

...Since then the ECB’s foreign reserves have fluctuated markedly as a result of transactions and exchange rate and price movements. At the end of 2005, they stood at €41.5 billion. BOTH foreign CURRENCY reserves and GOLD holdings declined in VOLUME terms, reflecting the ECB’s intervention sales in the autumn of 2000 (see Section 3.2.1) and some sales of gold in 2005 and 2006 in conformity with the Central Bank Gold Agreement (see Box 14), respectively. These decreases were FULLY OFFSET by the higher market value of the ECB’s GOLD holdings... "

JR said...

The Revaluation Account dynamic is essentially the same dynamic as depicted in this image from the RPG series, most recently RPG Update #4. As the euro weakens, the reserve account increases as gold in euros goes up.

Max De Niro said...

JR,

I don't think that's quite what Victor was talking about when he mentioned propaganda. Propaganda, by its very nature, is aimed at 'the masses'. I doubt if a single one of 'the masses' knows of that speech or of the revaluation account.

I bet most of them don't even know who Bini Smaghi is!

I think he was talking more about some revered person going on the nightly news and giving gold pep talk speeches and showing his lovely collection of krugerrands.

JR said...

Exactly Max!

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

Victor was responding to my post about the ECB revaluing gold, and commented he hadn't "seen any pro-gold propaganda yet or anything the like by the ECB or others in Europe." So I pointed him to speech were an ECB executive board member gave a speech in which he directly pointed out the ECB's solvency is greater than assumed because of the revaluation account, aka people don't understand the euro MTM's architecture.

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

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

We shrimps should have gold available for purchase until some small or medium-sized Giant is denied allocated bullion. Several people asked after my last post, "What if all the APs won't play ball and redeem your basket?" My answer was, "Well, then it is game over for Bullion Banking!" Gold is going into hiding. When a small Giant runs out of one of the Bullion Bank's front door announcing "the bank is out of gold," as Fekete puts it, all offers to sell gold against irredeemable paper currency will be abruptly and simultaneously withdrawn.
http://fofoa.blogspot.com/2011/02/view-classic-bank-run.html

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

"The prominent presence of gold on the balance sheets of the modern Central Banks is the CBs front running the market! Freegold (or "Reference Point Gold") is an unfolding market force creation. Mish says, "unlike FOFOA I think money is whatever the free market says it is." That's not "unlike" me. It is simply misunderstanding me. Gold IS the market choice. And the real market for this "store of value" is the Giants with "value to store." Luckily we shrimps can tag along for the ride. But we can no more override this market choice than we can crash the Treasury market by dumping our stockpile."
http://fofoa.blogspot.com/2010/12/windmills-paper-tigers-straw-men-and.html

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

"Hi L,

I’m a little buried in email right now, so just kinda stopping by to say Hi! Thanks for the updated pdf.

As far as gold having a lower value because of destruction of wealth, that is not the case. First of all, the fiat “matrix” disappears and leaves the underlying real world intact, just like the real matrix in the movie being turned off. Yes, there can be a depression and whatnot, but gold has this strange ability to stretch its value out into the time dimension rather than just a snapshot of our 3D world. This is a result of the giants having an intergenerational proclivity for the stuff. Has nothing to do with us shrimps, except to the extent that we get to go along for the ride. This post talks about that time dimension. It’s how gold can have a higher gross value than all paper wealth in existence today. And how gold can keep its value even in times of recession: http://fofoa.blogspot.com/2010/06/how-can-we-possibly-calculate-future.html

Sincerely,
FOFOA"

http://fofoa.blogspot.com/2011/06/from-treasure-chest.html

victorthecleaner said...

Max,

How long do you consider that it would be before a hyperinflation really kicked in? I don't mean from now, I mean from when it 'officially' started, to when it really started doing damage to people?

I suppose that is impossible to predict. When you read Adam Fergusson's 'When Money Dies', in 1922/23 it basically happened within 2-3 weeks. After several years of 20%ish consumer price inflation and considerable frustration though. When you read John Hussman's '16 cents' and 'Charles Plosser's 50 percent', you see a rough estimate that an increase of short term market interest rates to 0.5% can already produce 40% annual price inflation in the US. Both are indications that it can happen really quickly. Sure, it is a confidence game.

DP,

When I said "you", I really meant Greece, Italy, Portugal, Spain, Ireland, France, etc.

Well, if the actions of the previous year are any guide, then the ECB will own 25%-50% of the outstanding debt of the PIIGS countries by that time. This is why I said the ECB would need to sell the gold rather than the PIIGS governments.

The ECB issuing new cash to buy a little more gold for €BIGMONEY:

(b) provides the gold seller with mucho cash to settle all nominal debts and keep the system performing rather than collapsing

implies

(f) huge consumer price inflation because it is equivalent to the cash dump on the front lawn. The ECB would pay with fresh base money. That's the point. Whether it would be hyper or not would depend on whether the domestic saver will buy food and energy or whether they will buy gold (or silver?)

JR,

I do know the Bini Smaghi presentation although I have not yet decided whether I think he is just bullshitting or whether he is serious. He says that the resource exporting countries would hold not debt but rather the currency itself. This makes sense only if he thinks the ECB can keep the euro strong and it contradicts what others here think that the ECB would print in order to guarantee the nominal performance of (at least) the existing debt. So what does Smaghi think when he says this?

Finally, the question about HI or not is the question of what the average man on the street does with their shrimp savings. If they start buying food and energy, it can be over rather quickly.

Victor

victorthecleaner said...

Something else the ECB could do in order to encourage saving in gold would be to remove the volatility from the market. You see, if the other side (Fed, BoE, BBs & Co) play foul and create unallocated gold in order to manage the price, why cannot the ECB place buy orders for physical gold to prevent the other side from making paper gold volatile. A king of "if you sell off paper gold and scare my savers, I take so much physical out of the market that you blow up." When I read the Financial Times, they keep claiming that gold is a volatile commodity and is therefore only for short-term traders but not for the average guy.

Victor

victorthecleaner said...

Sell a 'king' and buy a 'kind'.

tsmith183 said...

So at the end of the day I want to position my finances to be an easy money borrower/hard money saver as opposed to an easy money saver/hard money borrower?

M said...

"Without the feedback loop, you simply get the Icelandic Krona or the Thai Baht. With the USG in the loop, you get Weimar!"

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

JR said...

Hi J,

"It makes you wonder whether part of the reason why things have unfolded much slower than A/FOA expected is because a lot of "wealth" is stored under the current economic rulers roof."

Another/FOA timing was about the Euro supporting the dollar and then backing off when the Euro was introduced. Another's gold trail (http://www.usagold.com/goldtrail/archives/another1.html) is from 1997-1998. But after the Eurozone backed off, China stepped up and picked up the slack . But now China has stopped. From above:

"Meanwhile, the European central bankers made the tough decision to support the US dollar, at significant cost to their own economies, by supporting the US trade deficit by buying US Treasuries for as long as it took to launch the euro. As it turns out, it took 20 years. After the launch of the euro, the Europeans slowly backed off from supporting the dollar. But right about that same time, China stepped up to the plate and started buying Treasuries like they were hotcakes. This may have been related to China's admission into the WTO in 2001.

Image showing Euro and China purchasing

Then, sometime around 2007 or 2008, the dollar's Credibility Inflation peaked. The growth of the "economy's money" (credit denominated in dollars) hit some kind of a mathematical limit (expanding to the limit was wholly due to FOFOA's dilemma) and began to contract. Since then, China has slowly backed off from supporting the dollar. We now know that China is more interested in using its reserves to purchase technology and resource assets wherever they are for sale than bonds from the US Treasury. China is also expanding the economic zone that uses its monetary base as a reference point in trade settlement to the ASEAN countries.

JR said...

Hi tsmith183,

"So at the end of the day I want to position my finances to be an easy money borrower/hard money saver as opposed to an easy money saver/hard money borrower?"

That's on the right track for sure. Just be careful about being an easy money debtor, as hyperinflation is no panacea. From Deflation or Hyperinflation?

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

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


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

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

costata said...

Max De Niro,

You wrote:
I assume that this came up in one of your many emails to FOFOA and was some kind of influence on this excellent piece, Moneyness?

Actually FOFOA had been working on this post prior to that article appearing and it always had the working title "Moneyness". I did bring the Doug Noland essay you mentioned to his attention.

At first FOFOA considered changing the name of his post. On reflection we agreed that if the term "moneyness" gained traction it might prompt interest and thought.

We both also agreed that the more people who are discussing these issues the better and Doug Noland appeared to be using the term "moneyness" with the same meaning that FOFOA was/is.

Incidentally you may have seen a post by FOFOA titled "Superorganism". This type of co-incidence happens so often that I no longer consider it remarkable. As my Grandmother used to say: "thoughts have wings".

costata said...

VTC,

I second DP's earlier comment to you.

(VTC) Germany will never be a closed economy. It is a 'flow-through' economy.

When you are hot you are hot.

Max De Niro said...

JR,

From your last post, quoted by Rick Ackerman:

"By the time they get their hands on it they may be struggling to meet other skyrocketing expense like property taxes and, uh, food."

I think that if a loaf of bread is $1billion, then most people would probably forgo eating for a single day in order to pay off their house. Once, I went a day without eating because I forgot!

Costata,

"This type of co-incidence happens so often that I no longer consider it remarkable. As my Grandmother used to say: "thoughts have wings". " Yes, this is the hundred monkeys syndrome isn't it.

It makes sense that thinking people, considering the same subject, will be likely to use similar terms to describe newly important topics.

Max De Niro said...

JR,

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

Oh yes, front run those giants we will!!

With regard to your quote I've picked out here, yes, most shrimps don't have a clue and this is the deciding factor on whether they will buy gold or buy food/energy.

The ECB gives hints for giants, but not for shrimps. It is the shrimps that will cause the hyperinflation.

I, like Victor, have also been perplexed at the public animosity towards gold. Yes, the tax treatment is good and the ease of buying is good, but that is not enough to change peoples' attitudes, it is still way off their radar.

Most shrimps are now vary distrusting of the ECB too. The troika are roundly despised across large swathes of Europe. How is this pariah going to convince shrimps by leading by example into buying an asset that has been largely derided? The choice for most shrimps will be to trust the ECB, who they believe has screwed them many times before and to go buy an asset that is mostly talked about as being in a bubble, or make like the ancients of the past, referred to by FOFOA above, and store the goods that they need for everyday living.

I think that this will be a very hard sell for the ECB if they wait for a crisis to implement their shrimp propaganda plan. This makes me think that there is either no plan, or that the ECB considers HI to be a long way off and that they have time to change the public perception of gold.

costata said...

A Flow Through Economy

In a real sense every federation of states (such as Australia) is a currency bloc. As long as there is confidence in the local currency it is very convenient to have a single currency.

Individual states in Australia can, and have, gone broke (insolvent). When this happened I think people would have been amazed if the newspapers had been screaming "blame the Australian dollar" for a state's downfall.

For the average person I think that would have made about as much sense as blaming the currency because one of the neighbours lost their house in foreclosure. IMO most people would view the boat and the luxury cars in their garage as a more likely proximate cause.

(LOL - of course the MMT folks could solve that problem in a jiffy by having every household print their own currency.)

In most cases an Australian state that went broke sold public assets and cut expenditures to reduce their debts. In a growing economy this is not too painful. In a no-growth economy it can be very painful.

Regardless, if a state has debts that are too high, and it does not have the option of debasing the local currency unit, it must cut costs, raise taxes (revenue) or default. (I concede that the state's first instinct is to raise taxes and the state tends to go to extreme lengths to avoid cutting itself - but, hey, the "tree of liberty" needs a little liquid fertilizer from time to time.)

Now, gee, guess what, in the past when a state in Australia hit a crisis in its finances it's amazing how many cost cuts those insolvent states were able to find without having the state economy grind to a halt.

Oh, and by the way, States in Australia have very limited capacity to impose taxes. Most of those powers were ceded to the federation a hundred years ago. (A desirable outcome? That's a topic for another day.)

costata said...

Hi Max,

Let's talk about shrimps. We use that term fairly loosely around here.

In order to put this in perspective I strongly recommend that you obtain a copy of the World Wealth Report from Societe Generale or search for a good analysis of same.

You may be surprised how little net surplus is required to qualify as part of the wealthiest minority of citizens on this planet and how few people have any surplus at all.

Here's my key point. The size of the "shrimp" (non-giant) audience that needs to be addressed is actually very small. The rest of the world's population that lives from "paycheck to paycheck" will be forced to rely on currency to store their purchasing power for those short periods (hopefully) between paychecks.

Regarding Rick Ackerman's comment about paying off the house. Take a look at this table:

http://www.doctorhousingbubble.com/wp-content/uploads/2011/11/german-hyperinflation.png

Cheers

Max De Niro said...

Costata,

Thanks for that perspective. Savings have always been so important to me that I would manage to set something aside regardless of how poor I have been, and I've been poor. I lived in a tent for 3 months in order to save before (in a warm climate, so it wasn't so bad). I suppose it's not the same for everyone. It's easy to forget that.

With regard to your chart, I can see that the relative spending on food climbed rapidly in aggregate, but I put it to you that at ridiculous prices, it would still be easy to pay off the debt.

For instance:
If your outstanding debt was $200,000 and one loaf of bread was $200,000, you have the choice of forgoing the loaf in order to pay your mortgage. Would you make this choice? I would. Going without a loaf of bread is of absolutely zero consequence, paying off the mortgage is huge.

Motley Fool said...

Max

I would add to costata's comment that sentiment can turn on a dime, as FOFOA has mentioned.

As to your loaf of bread... hyperinflation is a funny thing, it sneaks up and all-of-a-sudden it is balls to the wall.

The choice will likely be between a loaf of bread to feed your family for three days, or the house.

Then the choice will get worse.

I think you may reconsider when you are living it.

Of course, if you are well stocked and prepared, you may be lucky enough to have a extra loaf of bread.

Peace

TF

Max De Niro said...

MF,

I appreciate what you are saying about changing my mind in the heat of the situation, but I still stick to my point. I've been in some life and death situations before, and still been fully able to think and act rationally.

One single loaf of bread, taken in isolation, is never ever ever the difference between life and death.

If it were the only loaf of bread you were ever going to get again, then sure, it's life and death and at that point nothing matters, not even that loaf of bread - it's just kicking the can down the road.

But, assuming you have regular income, even massively devalued income, you can still make that choice.

Looking at hyperinflations, we can see, definitively, that they don't last forever. Hence, it is, without doubt worth sacrificing even three days of food (as long as you are expecting more in three day's time) to secure possession of your house for the long term.

What if a loaf of bread became $1billion and your mortgage was $200,000? What about $10billion? $100billion? These figures are not out of the question in an all out HI. At some point, the amount of cash you are giving up to pay the mortgage is so small, as a percentage, that you would be likely to lose that amount off the back of your cart - blown away by the wind, on the way down to the store!

Motley Fool said...

Perhaps

In which case that sacrifice could be made. Then again perhaps not. We will have to wait and see if such opportunities for sacrifice arise.

TF

costata said...

Max De Niro,

I want to try another tack with you. The USG has spent enough money attempting to "solve" this crisis they could have paid off every housing mortgage in the USA.

Why didn't they do that?

Rick Ackerman needs to explain this as well if he wants to push his "HI will pay off everyones mortgage" argument as well.

Happy to explain in detail, but, not this late at night in my time zone.

mortymer said...

Oldies goldies:

"...Please do not be confused by the volatility of gold price. It is not an indication of the uncertain value of gold. Rather, it is an indication of the uncertain value of the dollar in which the gold price is quoted..."

http://www.youtube.com/watch?v=syaXfvBjpzI

"...Is Gold Money?

This is a semantic issue as the answer depends on how we define money. If you, following North, define money as something Wal-Mart will take in exchange for made-in-China junk then, for you, gold is not money. But if you adopt Carl Menger's more scientific definition according to which money is a commodity for which the spread between the asked and bid price stays small as ever larger quantities are traded, then gold is money. It is not the consumer or the retail market that decides the issue. It is the wholesale market trading as it does unlimited quantities, that is privileged to make that determination..."

"...The final monetary showdown between gold and the dollar may be close at hand. As dollar-holdings of individuals and institutions not subject to the jurisdiction of the United States grow by leaps and bounds in consequence of increasing American trade deficits, the ultimate test of "moneyness" is being applied to the dollar. Are foreigners really willing to hold unlimited amounts of dollar balances indefinitely? Euro-balances as an alternative are not relevant. After all, the euro is just another irredeemable promise to pay. The contest is not between the dollar and the euro. Ultimately, it is between the dollar and gold. When all is said and done, it turns out that at one point owners of dollar balances will cry "enough!" By contrast, history and logic show that there is no such point for gold. This qualifies gold, and disqualifies the dollar, as money..."

http://www.gold-eagle.com/gold_digest_03/fekete090703.html

mortymer said...

@costata:
"The USG has spent enough money attempting to "solve" this crisis they could have paid off every housing mortgage in the USA.
Why didn't they do that?"

- As A.Fekete said in above posted aricle: "Once in default, always in default.

I wander how many times US has to default till people get it.

Max De Niro said...

Costata,

As FOFOA showed above, the money supply must expand in order to bail out the system in nominal terms. Paying off the debts would destroy the credit expansion.

Are you suggesting, then, that governments won't allow mortgage holders to pay off their debts, or that they will allow the banks to apply some kind of deflator to the principal so that the loans perform in real terms?

Motley Fool said...

Max

That has happened in other hyperinflations. Loans automatically increasing along with new issuance of government paper.

Strange things have happened. Which is one of the reasons we here are careful of being easy money debtors.

TF

JR said...

Max.

The point is the G does not bail out the debtors, they bail out the banks. They make sure those they need to continue get paid first.
Hyperinflation is not a panacea for debtors - do you see this?

You appear confused about the point of mortgage example. Lets start big picture - do you understand why its not so simple as "they are going to hyperinflate the dollar, lets load up with debt now so we can pay it back with cheap money later?"

Cheers, J.R.

matrixsentry said...

Our money is bank credit. If the USG provided for payment of all mortgages, wouldn't they need to create base money to do it? They wouldn't be able to get it through taxes or the sale of treasuries. It would have to come via the Fed's balance sheet.

In doing so our dollar would be hugely devalued. The dollars would enter the system as both bank credit and base money. The bank credit would go back to the banks in payment for outstanding mortgage balances. The supply of bank credit (our money) would remain the same as before provided all of the bank credit injected is allocated to mortgage servicing.

Then the bank credit that normally goes back to the banks in the form of mortgage payments would be free to run around the economy purchasing things. Wouldn't this effectively result in a dramatic net increase in bank credit relative to available things in the economy that could be purchased?

Wouldn't this be the trigger for hyperinflation? Do I have this right?

Motley Fool said...

Oooh JR

Me! Me!

I would love to see you quoting to explain 'why its not so simple as "they are going to hyperinflate the dollar, lets load up with debt now so we can pay it back with cheap money later?"'

:D

JR said...

Here are some ideas to start.

Maybe the most important idea is conceiving of the real v nominal divide:

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

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

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


Deflation or Hyperinflation?

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

A comment about CC debt that is not directly relevant, other than fixed loans are really bad in hyperinflation, but the big point is wages lag the hyperinflation - your wages' purchasing power is diminishing:

"The concern I have with leveraging through credit cards is they are not fixed rate loans. So think this through carefully, because it is several steps. But the only way you can ensure that you will pay off those CC debts is to have full payment standing by. And if you have that, then why didn't you just pay in cash. If you do not have it standing by, then you will have to earn it. And as hyperinflation progresses, the carrying cost on the CC debt will skyrocket right along. At the same time, wages will lag hyperinflation."
FOFOA Comment

Motley Fool said...

JR

I would like to play devil's advocate.

What about buying gold with credit cards?

TF

JR said...

You like to gamble? Me too. Got paper price collapsing and a transition period to Freegold?

Another idea is its not just about gold, but also doing other smart stuff like having hard cash, silver, barterable goods, food, water, defensive preparations, etc. Beyond the most important concern keeping yourself and those you care about well - its about shepparding wealth through a transition -to the other side of the Waterfall. Protecting your wealth until "then." Does a leveraged gold play get you there?

Motley Fool said...

JR

Let me counter with : sure, the paper price will collapse, but no-one will be able to get physical at that price. So gold will go into hiding.

However, any gold that comes out of hiding... you would have your pick of brokers to offer it too, they would all vie to give you paper for that coin.

A point underscored by FOFOA.

It's not like you will not be able to sell. It's not like the paper price will have any significance anymore, except for some legal contractual obligations, which is why they may keep it above say $400, when in fact it should be 0.

Furthemore arguing that cc debt will become unpayable is not relevant. Most people have cc debt now, on other things. What will the banks do? confiscate everyone's goods if the cc holders default en masse?

Even if you consider that eventuality, then you could simply sell your revalued gold, or part of it and settle your cc debt.

The ball is in your court. ;)

TF

Max De Niro said...

JR,

You wrote:

"Lets start big picture - do you understand why its not so simple as "they are going to hyperinflate the dollar, lets load up with debt now so we can pay it back with cheap money later?""

I understand that HI isn't simply a case of them printing and printing and this causing the price to rise. There will be a loss of confidence, causing velocity to sky rocket and the printing follows in order to keep pace with demand for cash.

Where I am having trouble is that during a HI, there will still be people with jobs, getting paid in devalued cash. Assuming that these people keep their jobs during a period where HI has got really serious and the numbers are stupid, they are becoming billionaires/trillionaires every new day.

They get paid this money in cash, as the credit system is not functioning, it's been replaced by base money, dumped on the front lawn.

In my mind, they take a miniscule percentage of the cash that they get paid on one of these days, perhaps forgo a very small purchase that they would have made, and pay off the debt to the bank. (assuming the principal isn't revalued along with the HI).

This is where I'm at.

PS I have seen it mentioned here that it would be a good idea to have some physical cash on hand too. Is this just for the first few days, scooping up last minute available supplies at low(ish) prices, during a bank holiday or other such event?

mortymer said...

Updated:

The Structure and Operation of the World Gold Market
Gary O`Callaghan
December 1991

http://anotherfreegoldblog.blogspot.com/2011/11/imf-structure-and-operation-of-world.html

Motley Fool said...

Max

Yes, cash for last minute considerations, to be spent before HI gets serious.

TF

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

MF,

I'm glad you agree. "You like to gamble? Me too."

I might disagree with your inputs, like most notably the focus on "It's not like you will not be able to sell" instead of what you can sell it for, but yeah, its a gamble. We agree :) If the paper price doubles before collapsing and you have good timing your in good shape too, no?

I like to gamble, but not with stuff important to me. To each his own, enjoy your path!

JR said...

Hi Max,

"Where I am having trouble is that during a HI, there will still be people with jobs, getting paid in devalued cash. Assuming that these people keep their jobs during a period where HI has got really serious and the numbers are stupid, they are becoming billionaires/trillionaires every new day. "

In nominal terms they get paid alot, but in real terms not so much - the pie is shrinking but yes, these folks are getting a bigger price of that smaller pie at the expense of the rest of us. You just described the Cantillon effect, or the idea that "Income and wealth are thereby redistributed to those who receive the new money early in the process, at the expense of those who receive the new money later, or those who live on fixed incomes and receive none of the new money." link.

cont.

JR said...

who are these folks with a job? From above:

"The Debtor and the Junkie

The USG may be a dealer in the monetary plane, but it is most definitely a sketchy junkie in the physical plane. The USG thinks (and truly believes) that the key to rejuvenating the US economy is trashing the dollar as a short cut to increasing exports (reducing the trade deficit). But what it can't see (nor anyone that focuses solely on the monetary plane for adjustment) is that the huge trade deficit the USG wants to quit is actually its own heroin fix."

[...]

"But the problem is that, net-net, the US consumes everything it produces and then some. This intractable problem cannot be solved in the monetary plane, except through dollar hyperinflation! Here's some more FOA:

"I point out that many, many other countries also have the same "enormous resources; physical, financial, and spiritual" that we have. But the degrading of our economic trading unit, the dollar, places the good use of these attributes in peril. Besides, the issue beyond these items is our current lifestyle. We buy far more than we sell, a trade deficit. Collectively, net / net, using our own attributes and requiring the use of other nation's as well. Not unlike Black Blade's Kalifornians sucking up their neighbors energy supplies (smile). We cannot place [our tremendous resources] up as example of our worth to other nations unless we crash our lifestyle to a level that will allow their export! Something our currency management policy will confront with dollar printing to avert. Also:

NO, "this country will not turn over and simply give in" as you state. But, we will give up on our currency! Come now, let's take reason in grasp. Our American society's worth is not its currency system. Around the world and over decades other fine people states have adopted dollars as their second money, only to see their society and economy improve. Even though we see only their failing first tier money. What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over-valued dollar that we spent without the pain of work." (FOA)

That was written a decade ago. In the month that was written, the US as a whole (Government sector plus domestic private sector) was living above its means to the tune of $31.3B. That year we were living above our means by $361B. In the decade since that was written, we have maintained an average "excess consumption" of $48.5B per month and $581B per year. But here's the thing—in the most recent third of that decade (2008-2011), the domestic US private sector actually has crashed its lifestyle more or less. The economy is in recession and unemployment is up over 9%. Yet the government sector expanded its "lifestyle" to take up the slack!
"

The USG is the consumption machine!

cont.

JR said...

cont.

See those graphs on G jobs from FOFOA's 2009 post No Free Lunch? How about the more recent headlines he listed:

DC area tops US income list; average fed employee makes $126,000 a year...
Reid says government jobs must take priority over private-sector jobs...

"So the US private sector is actually living below its means by $835B if we isolate it from the government sector. The government sector, on the other hand, is living way above its means with 60% domestic support and 40% foreign support. Stated another way, the US private sector is providing the USG with $835B in goods and services in excess of taxes, or 60% of USG's "deficit consumption."

Viewed this way, there's only one way to reduce that trade deficit (inflow of free stuff): reduce the size of the USG monstrosity. Unfortunately, the USG is totally incapable of voluntarily shrinking itself, especially because it issues its own currency! The real problem, the heart of the matter, the reason why the dollar will and must hyperinflate, is that the US trade deficit, on the physical plane, is structural to the USG who issues its own currency. Simple as that.
"

A junkie - No wonder the USG is maintaining that trade deficit - its their "structural" fix!

Think about a debtor who owes a hard debt to a loan shark versus a junkie who owes a regular, ongoing, hard fix to himself. Which one is worse off? Which more desperate? As I wrote above, this intractable problem cannot be solved in the monetary plane, except through dollar hyperinflation!

How much will it take?

JR said...

So Max,

"Where I am having trouble is that during a HI, there will still be people with jobs, getting paid in devalued cash. Assuming that these people keep their jobs during a period where HI has got really serious and the numbers are stupid, they are becoming billionaires/trillionaires every new day.

They get paid this money in cash, as the credit system is not functioning, it's been replaced by base money, dumped on the front lawn.

In my mind, they take a miniscule percentage of the cash that they get paid on one of these days, perhaps forgo a very small purchase that they would have made, and pay off the debt to the bank. (assuming the principal isn't revalued along with the HI)."


Do you see this - the currency issuer pays those most important to its counting function, so yeah, go work for the Big Banks like JPM or get and important job in the Federal (not state) government of the US.

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

Just Another Hyperinflation Post - Part 2
"Gonzalo correctly points to "palliative printing" as a wheelbarrow-enlarging event, which comes at the very end stage of a hyperinflation. And he presents it as palliative to the people. But this printing is usually most palliative to the government and its expanding rank of stooges. Sure, there will be "welfare" along the way, but for the most part the freshly printed cash will buy the most goods and services for the first hands it touches. And then less for the second. And even less for the third and so on. And this prime purchasing power will be mostly reserved for the government that prints it. "


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

comment to Just Another Hyperinflation Post - Part 3
"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!
"

cont.

JR said...

comment to Just Another Hyperinflation Post - Part 3
"Soldiers don't fight without a paycheck that at least buys an apple. Even the stooges won't show up for work. And I'm talking about buying an apple at the market where apples are actually being sold. Not the government bread-lines for those with inflation protected food stamps, where you can "afford" all the food your family needs except that there's not enough to go around.

What you think of as the big domineering federal government is nothing without public confidence in its currency, the physical dollar. And confidence is one thing it CANNOT force. Confidence is the ONE thing that must be earned. The entire federal government operation from Pelosi to Private Benjamin will stop on a dime the minute it can't pay its stooges in inflation-adjusted terms. "


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

Big Gap in Understanding Weakens Deflationist Argument
"In parts two and three of my September hyperinflation posts I explained how the US government MUST respond to a currency collapse by printing more currency in order to keep its stooges doing its bidding. I explained the mechanism by which the hyperinflation will become a physical cash hyperinflation, not an electronic credit money hyperinflation because bank credit money will devalue faster than the cash. And I explained the mechanism by which million dollar Federal Reserve Notes will find their way into the hands of hungry, impoverished and unemployed people on food stamps. Hint: It's not through credit expansion or rising wages! LOL"

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

There's a lot there above. A LOT.

I'm not here to debate or argue, but to try to share a perspective. And its a big perspective, which is why I think its so interesting and worthy of sharing.

Perhaps we can take the sage advice of Wendy and step back from things. Its a beautiful day where I live, and that's what I enjoy most - living my life. Let things settle in, let our minds get away, and perhaps we can return refreshed. With an newer perspective and an emptier cup. Its sorta like steeping tea - its amazing how things can "sink in" over time, if you let them.

Max De Niro said...

JR,

Thanks for all of the elucidation.

I'm not quite sure that I understand the relevance of all of it to my question, although I think I do understand the individual bits.

The take away that seems most important to me is that you are saying that the only people with jobs in a hyperinflation will be those who work for the government?

I would say that there must be other jobs too, as those people receiving cash from the government will be spending some of it in the private sector - food for sure, hardware shops, clothes, drugs, booze....

I understand that there will be massive unemployment as I don't think people will be buying cars, paying for spa weekends and going on golfing holidays etc, but some will still have jobs.

Here in the UK, the government employs a lot of people, so they will all have cash. I expect that they could expand their employment too, if they are printing, hell, why not print some more and give more people jobs? It would be a good way to placate people and attempt to stem social unrest and keep themselves popular. In for a penny, in for a pound.

Max De Niro said...

JR,

I will go over that a few times and have another think. Perhaps some things will slot into place.

Cheers (as a wise man once said)

DP said...

I expect that they could expand their employment too, if they are printing, hell, why not print some more and give more people jobs? It would be a good way to placate people and attempt to stem social unrest and keep themselves popular. In for a penny, in for a pound.

And with that, he single-handedly explained what the euro's severance from the nation state is all about, and why the Eurozone won't have a balls-to-the-wall, in-your-face HI, while places like the US and UK most certainly will.

Perhaps a nice short film is in order, while you're letting all this brain tea stew for a while...

[DP draws some more figures in the dirt with his stick, while he just goes on figgerin' in silence again.../] :-)

Michael H said...

Max (and VTC as well),

"The ECB gives hints for giants, but not for shrimps. It is the shrimps that will cause the hyperinflation."

Perhaps the shrimps, by themselves, are not able to cause a sustained hyperinflation. Maybe they could panic and clear all store shelves for a week, and maybe they could cause a doubling or tripling of the price level over a short period. But once the shelves are empty, their wages will not have risen and their savings will be spent.

"If your outstanding debt was $200,000 and one loaf of bread was $200,000, you have the choice of forgoing the loaf in order to pay your mortgage. Would you make this choice? I would. Going without a loaf of bread is of absolutely zero consequence, paying off the mortgage is huge."

To get to that point, however, you must keep making your payments. Picture the start of hyperinflation, when prices have risen 3-5x but your wages have not risen at all (or you're unemployed). Now it's about not eating month-to-month to keep up with the payments, not simply skipping a meal.

Indenture said...

How's that Bitcoin Money working?

DP said...

@MichaelH: Quite.

Max De Niro said...

Michael H,

So, what you are saying is that it is likely that they will lose the house (foreclosed by the bank) before the price level reaches the point when a large nominal amount buys little in the real world?

So, if I work for the government, then they will keep paying me, to feed their trade deficit hunger, then at some point, as the price level explodes, I will be able to pay the debt.

If I work in job which supplies necessities to the stooges then I will also reach this level, but maybe slightly behind the stooges, as I'm further down the ladder.

Most people will have no job and will be out of luck.

So, the quicker the HI accelerates, the more people will be able to make the payments in the early stages and be able to take advantage of the fast rate of inflation to pay the debt. So, the slower the HI develops, more people will lose their homes due to inability to meet payments right?

I'm still thinking through JR's quotes, so I haven't quite pieced it all together yet.

Michael H said...

Max,

"So, what you are saying is that it is likely that they will lose the house (foreclosed by the bank) before the price level reaches the point when a large nominal amount buys little in the real world?"

In essence, yes, that is the risk (the gamble, as JR put it).

That is not to say that it is an inevitable outcome. As others mentioned, if you are well supplied with your immediate needs, then a 5x price increase may not begin to affect you for several months.

This discussion reminds me -- I wonder how the "charge silver / crash JPM" crowd is doing?

DP said...

They're still[mouth]breathing, I think.

Max De Niro said...

OK, so I'm having trouble with this:
"We cannot place [our tremendous resources] up as example of our worth to other nations unless we crash our lifestyle to a level that will allow their export! Something our currency management policy will confront with dollar printing to avert."

So US needs to reduce the purchasing power (inflation? depression?) of the US citizens so that they can't buy as much stuff, in order to sort out the trade deficit?

Wouldn't this mean printing, to lower the exchange rate, to reduce purchasing power of foreign goods? But that is what they think they are accomplishing and also helping the nominal performance of the banking system?

Or does he mean have a deflation, strengthen the dollar and have less demand through a credit contraction, even though those with money would be able to buy more foreign goods. Is he presuming that the contraction would offset the rise in the exchange rate? How would he know which way this dynamic would net off?
So, if this is the case, then the only thing that would help the trade deficit is crashing the banking system?

I'm confused.

JR said...

"So, the quicker the HI accelerates, the more people will be able to make the payments in the early stages and be able to take advantage of the fast rate of inflation to pay the debt. So, the slower the HI develops, more people will lose their homes due to inability to meet payments right?"

The quicker the HI, the less people will be able to make payments. The money printing is not the hyperinflation, its the response to hyperinflation. The hyperinflation is the loss of confidence in the currency.

Value drops, so volume expands, so value drops more….

There appears not too much money, but rather paradoxically, complaints of a shortage of money!

"Henry Hazlitt: "What we commonly find, in going through the histories of substantial or prolonged inflations in various countries, is that, in the early stages, prices rise by less than the increase in the quantity of money; that in the middle stages they may rise in rough proportion to the increase in the quantity of money (after making due allowance for changes that may also occur in the supply of goods); but that, when an inflation has been prolonged beyond a certain point, or has shown signs of acceleration, prices rise by more than the increase in the quantity of money. Putting the matter another way, the value of the monetary unit, at the beginning of an inflation, commonly does not fall by as much as the increase in the quantity of money, whereas, in the late stage of inflation, the value of the monetary unit falls much faster than the increase in the quantity of money. As a result, the larger supply of money actually has a smaller total purchasing power than the previous lower supply of money. There are, therefore, paradoxically, complaints of a 'shortage of money.'"

Again, I want you to think about that last line or two, "As a result, the larger supply of money actually has a smaller total purchasing power than the previous lower supply of money. There are, therefore, paradoxically, complaints of a "shortage of money."

So what does the supply of money have to do with the catastrophic loss of confidence that is hyperinflation? Yes, the catastrophic loss of confidence drives prices higher. This makes the present supply of money insufficient to purchase a steady amount of goods (USG junkie fix). True balls-to-the-wall hyperinflation requires a feedback loop of both value and volume. Value drops, so volume expands, so value drops more…. Without the feedback loop, you simply get the Icelandic Krona or the Thai Baht. With the USG in the loop, you get Weimar!"

holdinmyown said...

Stratfor has published a free article that is a worthwhile read:

"With the benefit of hindsight, we know that the 2008 financial crisis initiated the last two events. The first result of the financial crisis was the deep penetration of the state into those financial markets not already under state influence or control. The bailouts, particularly in the United States, created a situation in which decisions by political leaders and central banks had markedly more significance to the financial status of the country than the operation of the market. This was not unprecedented in the United States; the municipal bond crisis of the 1970s, the Third World debt crisis and the savings and loan crisis had similar consequences. The financial crisis, and the resultant economic crisis, hurt the United States, but its regime remained intact even while uneasiness about the elite grew.

But the financial crisis had its greatest impact in Europe, where it is triggering a generational shift. Since 1991, the idea of an integrated Europe has been a driving force of the global economy. As mentioned, it also has been presented as an implicit alternative to the United States as the global center of gravity.

Collectively, Europe’s economy was slightly larger than the U.S. economy. If mobilized, that inherent power made Europe a match for the United States. In the foreign policy arena, the Europeans prided themselves on a different approach to international affairs than the Americans used. This was based on a concept known as “soft power” — which relied on political and economic, as opposed to military, tools — an analog to the manner in which it saw itself managing the European Union. And Europe was a major consumer of goods, particularly Chinese goods. (It imported more of the latter than the United States did.) Taken together, Europe’s strengths and successes would allow it to redefine the international system — and the assumption for the past generation was that it was successful.

In the context of the ongoing European financial crisis, the issue is not simply whether the euro survives or whether Brussels regulators oversee aspects of the Italian economy. The fundamental issue is whether the core concepts of the European Union remain intact. It is obvious that the European Union that existed in 2007 is not the one that exists today. Its formal structure appears the same, but it does not function the same. The issues confronting it are radically different. Moreover, relations among the EU nations have a completely different dynamic. The question of what the European Union might become has been replaced by the question of whether it can survive. Some think of this as a temporary aberration. We see it as a permanent change in Europe, one with global consequences."

And later:

"The German economy was designed to be export-based. (Ed: Shades of DP’s comment about a “flow through economy”?) Its industrial plant outstrips domestic consumption; it must therefore export to prosper. A free trade zone built around the world’s second-largest exporter by definition will create tremendous pressures on emerging economies seeking to grow through their own exports. The European free trade zone thus systematically undermined the ability of the European periphery to develop because of the presence of an export-dependent economy that both penetrated linked economies and prevented their development.

Between 1991 and 2008, all of this was buried under extraordinary prosperity. The first crisis revealed the underlying fault line, however. The U.S. subprime crisis happened to trigger it, but any financial crisis would have revealed the fault line. It was not a crisis about the euro, nor was it even a crisis about economics. It was actually a crisis about nationalism."


Read more: Europe, the International System and a Generational Shift | STRATFOR

http://www.stratfor.com/weekly/20111107-europe-international-system-and-generational-shift

HMO

Max De Niro said...

"So, the quicker the HI accelerates, the more people will be able to make the payments in the early stages and be able to take advantage of the fast rate of inflation to pay the debt."

What I meant here is that the quicker that the prices rise, ie the shorter the space of time before we start to get to really high prices, the fewer mortgage payments will have to be made, as they are paid monthly.

ie, if the HI went totally balls out within a month (the loss of confidence was total and fast) and reached $billions for bread within this time, then the first wage payment from the government would be a large one, hence there would be cash available to pay off the mortgage.

As opposed to a very slow gradual increase in prices, which would drain excess cash away from home owners, making it more likely that they would default before the wage payments from G got high enough to pay off the mortgage.

Although, thinking about it now, I suppose if there hadn't been any payments from G yet, then the currency wouldn't be out there to create the high prices, and there would just be shortages as sellers hoarded their goods.

Hmmmmm. More thinking.

JR said...

Let it simmer - I've been reading various states of "Moneyness" for some time now. I've read the final draft 4 times all the way through and I still pick at leftovers and find myself seeing things more clearly.

I posted links to "Big Gap in Understanding Weakens Deflationist Argument" and also to the 3 part "Just Another Hyperinflation Post" series. Here's some snippets from "Big Gap" that continue on the theme from my last comment:

"First, the question. "Where will the money come from?" is a question of supply. Yet the answer to hyperinflation lies on the demand side of the equation.

[...]

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

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

[...]

Fear is the main emotional motivator in any currency collapse, just like it is in financial market meltdowns. And as we saw even just last night, the herd can stop on a dime and reverse course 180 degrees overnight, from greed to fear, based on a single news item.

The initiating spark of hyperinflation (currency collapse) is the loss of confidence in a currency. This drives the fear of loss of purchasing power which drives people to quickly exchange currency for any economic good they can get their hands on. This drives the prices of economic goods up and empties store shelves, which causes more panic and fear in a vicious feedback loop.

The printing of wheelbarrows full of cash is the government's response to price hyperinflation (currency collapse), not its cause. This uncontrollable (knee-jerk) government response happens in some cases, but not all. Let me repeat: The massive printing that first comes to mind when anyone mentions hyperinflation is not the cause, it is an effect, in the common understanding of hyperinflation which is the collapse of a currency.


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

That's a lot to chew on. And each of those 4 posts is a mouthful. And then there is "Moneyness."

Max, above you write:

"I expect that they could expand their employment too, if they are printing, hell, why not print some more and give more people jobs? It would be a good way to placate people and attempt to stem social unrest and keep themselves popular. In for a penny, in for a pound."

Did you know that's what MMT prescribes? As FOFOA pointed out, "L. Randall Wray's book is titled Understanding Modern Money: The Key to Full Employment and Price Stability."

When you get to it, would you be willing to read thru Moneyness and try to explain to me the argument advanced by FOFOA in response to the MMT idea that we should "print some more and give more people jobs?"

I think if you first try to understand FOFOA in lieu of asking question from the view of your current perspective, you may find that in hiking further down the trail, the view gets clearer!

Cheers, J.R.

JR said...

Max: "then the currency wouldn't be out there to create the high prices"

The "increased currency" doesn't cause the higher price, the increased velocity that results from the loss of confidence is the cause.

They more money results becuase their currency has lost value (it doesn't buy enough, aka prices of goods in the currency have gone up) and doesn't buy enough, so they need more money.

Please read Big Gap:

"The initiating spark of hyperinflation (currency collapse) is the loss of confidence in a currency. This drives the fear of loss of purchasing power which drives people to quickly exchange currency for any economic good they can get their hands on. This drives the prices of economic goods up and empties store shelves, which causes more panic and fear in a vicious feedback loop.

The printing of wheelbarrows full of cash is the government's response to price hyperinflation (currency collapse), not its cause."


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

Max: "there would just be shortages as sellers hoarded their goods."

And maybe there are fewer goods as we see supply disruptions and a run on the existing stock of goods. The increased velocity of the existing stock of money causes a run on the existing real goods available to be bought, which means the supply of available goods is more scarce.

Prices can rise if there is less supply but the same demand, no?

Max De Niro said...

JR,

Yes, I will try to go through and explain my understanding of FOFOA's refutation of MMT in that respect.

When I wrote:
"then the currency wouldn't be out there to create the high prices"

I meant what you said when you corrected me. I meant that before the currency is printed into existence (in response to lower demand for cash), the physical cash simply doesn't exist to go and pay for the goods, hence prices can't rise as fast, as the demand for goods does not exist - can't pay for goods if you don't have the cash.

I commerce could take place through an informal credit network set up by sellers (would that be called vendor financing?), in anticipation of more cash being printed.

If that were the case, then prices could go hyperbolic very quickly indeed.

I need to do much more thinking and reading throug the post again before I come back and do more talking in circles!

Thanks JR.

Jeff said...

FOFOA defines HI:

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."

samix said...

Islam's Free market heritage, a paper by Chris Berg and Andrew kemp

http://www.ipa.org.au/library/59-1_Islam+FreeMarket.pdf

"While an Islamo-capitalism has yet to show its face in the most troubled parts of the Middle East, Muslim history and literature displays a sadly under-recognised liberal free market tradition. Islam is not inherently illiberal, as is sometimes portrayed, and there is a clear strand of Islamic tradition and thought that provides a stable base for a free society."

costata said...

I think we should all pay attention to this:

http://www.reuters.com/article/2011/11/03/china-shipping-idUSL4E7M308I20111103

Global shipping is in a downturn even worse than during the 2008 financial crisis, China's transportation minister said on Thursday....

h/t Mish Shedlock (for the link not for his "analysis").

costata said...

DP,

You picked up on a comment I made recently about Australians learning some harsh lessons about their place in the world.

Here is the first instalment:

The Mining Boom Is Over

http://www.macrobusiness.com.au/2011/11/the-mining-boom-is-over/

As a bonus it includes some observations about private debt as well. So who collected the bulk of the profits from the resource extraction? The "colonial" masters of course.

And that is no lefty whinge. Australia has over $1.2 trillion in pension funds, produces 250 m/t of gold per year etcetera, etcetera. We are net self-sufficient, or in surplus, in food, energy and all of the staples of human existence.

Meanhile we import "capital" every year to offset a near-permanent trade deficit. Increasingly since the early 1970s this "capital" isn't even truly capital it is debt masquerading as capital.

If all of that isn't bad enough we don't even own our own breweries any longer.

Rant over,

Cheers

Max De Niro said...

JR,

In attempting to fulfil my promise to come back and explain FOFOA's MMT refutation, I have had to do some further reading around the subject and a few 'gaps' (chasms, ok canyons, ok grand canyon), in my understanding, previously hiding in darkened crevices, have come to light and reared their ugly heads.

So, it may take me a little while to get back, I estimate a week.

Motley Fool said...

Max

If you are honest enough to admit to yourself you have vast gaps in understanding, you are 50% of the way, admitting it to others freely is another 20%.

Now there is just the pesky business of filling those gaps.

Meanwhile I should work on the canyons in my own understanding. xD

TF

Motley Fool said...

costata

I have empathy for you situation. I feel similarly about SA.

At least we still make our own beer. xD

TF

DP said...

@MF: And your own fuel from all that lovely coal you have. Perhaps it's not such a bad afflication, being a saffer, as it may appear to the rest of us from time to time... :>

@Costata: Sorry about all that. But, sincerely, thanks for all the fish. I look forward to further installments, with a bottle of rather nice Shiraz that originated up the road from your gaff, just itching to be opened and a glass raised to your good health. (Paid for with some of our local masquerade-capital.) Again, my apologies for the worthlessness of that...

Cheers!

Max De Niro said...
This comment has been removed by the author.
Max De Niro said...

I wonder if someone can help me, I appear to have taken a wrong turn on the trail, fallen into a deep dark crevice and my climbing gear seems to be malfunctioning. Perhaps someone can belay down to me and winch me back onto the path?

I imagine there's a good reason Randall Wray was careful to include this small technicality in his piece. That's because raw government-created money through deficit spending is fundamentally different than "our money." Government spending adds one unit of credit money (our money) to the system as well as one unit of base money (their money). The bank receiving the deposit gets a reference point unit asset to match the liability it takes on.”

Me: ‘Our money’, credit money is a leveraged derivative of the base, so when G adds one credit of ‘our’ money and one to the base, ‘their’ money, that, in fact, debases our money. These one for one swaps do not affect the base money in the same proportion as the credit money, thereby affecting the value of the reference point.

So the volume of the base is expanded when the government spends, and it is likewise contracted when the government taxes and/or sells Treasuries to the private sector (including our trade partners like China).”

Me: Base is contracted when G sells Treasuries to private sector – does this mean the banks (as opposed to companies or individuals)? Ie, banks pay out of base money, ‘their’ money at the Fed, in exchange for Treasuries? This base money then goes to money heaven with G? What about China? How are they paying for their Treasuries? With base money at Fed, or with credit money? If credit money, is this the same ‘our’ money? Where is this held before it is recycled into Treasuries?

“When the private sector (plus our foreign free stuff suppliers) buy bonds, the USG is essentially spending credit money rather than expanding the base because "the credit to the reserve account of their banks" that Randall Wray mentioned above is deleted when the private/foreign sector buys a Treasury bond.”

Me: How is private sector spending (on bonds), the same as G spending credit money? Is this just a way of saying ‘credit money is decreasing’? In fact, the above quote makes absolutely no sense to me whatsoever.

Ouch, brain ache.

Any help would be appreciated.

costata said...

MF,

You wrote:
At least we still make our own beer. xD

But that's the problem SAB-Miller just bought Fosters. Now you make our beer too.

Motley Fool said...

Max

I will try.

“I imagine there's a good reason Randall Wray was careful to include this small technicality in his piece. That's because raw government-created money through deficit spending is fundamentally different than "our money." Government spending adds one unit of credit money (our money) to the system as well as one unit of base money (their money). The bank receiving the deposit gets a reference point unit asset to match the liability it takes on.”

Government doesn't simply print money into existence with current deficit spending, if they did that only the base money would increase. They borrow money into existence. In order to make their accounting balance, they, through a complicated series of steps, create one extra base unit, and match that with one extra credit unit ( which can be taxed out of existence according to the MMT view once that credit is repaid).

Now due to the base money being leveraged to create the credit money, there are less base money units in existence than credit money units. So adding one of each, dilutes the base money more than it dilutes the credit money. Of course hereafter the banks (generally) leverages that extra base unit, that only has one associated credit at that moment, and creates more credit units.

Does that make it easier to wrap your mind around?

TF

Motley Fool said...

costata

SAB also bought some Chinese manufacturers. Imagine that.

We really love beer! xD

TF

Motley Fool said...

costata

SAB also bought some Chinese manufacturers. Imagine that.

We really love beer! xD

TF

Max De Niro said...

MF,

I understand what you wrote, but the source of my confusion is due to the difference in where the credits are made, depending on who buys the bonds.

If I buy a treasury, from where do the credits (credit and base?) move from, and where do they move to?

Is this fundamentally different than if I were a bank?

What if I were China?

Plus I still don't understand how private sector spending (on bonds) is the same as G spending credit money?

Max De Niro said...

Also, with regard to the debasing of 'our' credit money, even when G creates a base credit as well as a credit of 'our' money - does this mean that banks are somehow obligated to make more loans in order to maintain the same base to credit ratio?

Or is this (banks not obligated to do anything) the reason why people are complaining that the Fed is QEing, but the loans aren't being made hence credit and 'money' supply is contracting?

Leading on from that:
‘Our money’, credit, can be destroyed or created by banks (lending/not lending), so inflation/deflation (prices) is a function of this and velocity (fear/greed), in the short run.

How does the debasement of the monetary base affect this? Debasement offsets credit contraction, but there is also velocity playing into it, so it’s a moving game of ratios.

Yes, if the base is increased, our reference point is increased, but due to the offsetting of credit contraction and the fear/greed dynamic, how can this transmission mechanism (debasement) ever be quantified, or how can it ever have an effect?

If people don't know that there reference point is changed, and the prices aren't changing due to dynamics of human emotions, then who can say that debasement is a good or a bad thing when its effect can't be measured?

Motley Fool said...

Max

AFAIK other countries have an account with the fed, just like the banks do. A base money account, that they swap into treasuries.

TF

Motley Fool said...

Max

"does this mean that banks are somehow obligated to make more loans in order to maintain the same base to credit ratio?"

Come now, don't be silleh. The tail doesn't wag the dog. :P

"Or is this (banks not obligated to do anything) the reason why people are complaining that the Fed is QEing, but the loans aren't being made hence credit and 'money' supply is contracting?"

Yes! The banks are not stupid. They are building up reserves. What kind of reserves, why base money reserves of course. ;)

"‘Our money’, credit, can be destroyed or created by banks (lending/not lending), so inflation/deflation (prices) is a function of this and velocity (fear/greed), in the short run."

On the surface yes, but truly ( and this is why it takes a while for reality to filter through) our 100 shells is our unit of account, our money.

"Yes, if the base is increased, our reference point is increased, but due to the offsetting of credit contraction and the fear/greed dynamic, how can this transmission mechanism (debasement) ever be quantified, or how can it ever have an effect?"

The effect is compound and complex.

Remember FOFOA is looking here at the results in the case of systemic failure, that specific scenario.

reality always filters through, even through such complexity. ;)

Lol, finally, you are falling into the standard egotistical Keynesian dogma trap. That everything is quantifiable before hand, that results in complex systems can be predicted and manipulated.

Think of it this way. They may not know the exact amount of shells in circulation, however the relative abundance does may it easier to acquire, which means more to spend, which means relative scarcity of goods vs paper, which means adjustments, which means one can then know the amount, with good exactitude....After the fact. ;)

Peace

TF

Motley Fool said...

Max

Addendum : Or something to the effect of an account at the fed.

Like a account at the BIS perhaps? ( since we are talking about international clearing)

Which is composed of SDR's.... which is a direct call option on a number of currencies...actual base currency.

But. As I have stated, I have many canyons to address myself.

What do I know anyhow?

The Fool

Michael H said...

Somewhat off-topic:

While MF Global seems to be a small fish, the poor treatment of MFG customers post-bankruptcy sets a bad precedent.

See:
http://www.businessinsider.com/two-mf-global-clients-share-their-stories-2011-11

"There is law that stipulates customer segregated accounts at futures merchants like MF Global must be released or moved immediately following a bankruptcy...

And so, some customers stayed with MF Global even when it looked like the company was going to crash and burn - because they expected a routine process where their accounts would be moved within days. That's not the case anymore - once news of the missing funds surfaced, the court-appointed trustee handling MF Global's bankruptcy froze all client accounts."


Next time there are rumors of a financial firm going under, there will be a run.

It also won't help the US / dollar financial system:

"Furthermore, the CTA (MR: commodity trading advisor) told Business Insider that three of her European clients have told her they never want to do business in the US markets again because of this fiasco."

mortymer said...

New
Italy -> http://en.wikipedia.org/wiki/Mario_Monti

Greece -> http://en.wikipedia.org/wiki/Lucas_Papademos

"...He has served as Senior Economist at the Federal Reserve Bank of Boston in 1980. He joined the Bank of Greece in 1985 as Chief Economist, rising to Deputy Governor in 1993 and Governor in 1994. During his time as Governor of the national bank, Papademos was involved in Greece's transition from the drachma to the euro as its national currency... After leaving the Bank of Greece in 2002, Papademos became the Vice President to Jean-Claude Trichet at the European Central Bank from 2002 to 2010..."

Michael H said...

Max,

Maybe I can try:

"Plus I still don't understand how private sector spending (on bonds) is the same as G spending credit money?"

Note that the 'private sector' includes you, private banks, and China.

The private sector spends 'our' money -- credit money. So when anyone in the private sector buys treasuries, they give credit money to the G, who can then spend it. Therefore, G sells treasuries to private sectore = G spends credit money they got from the private sector.

The government cannot create credit money by itself, they can only create credit offset by base money. So for G to spend credit money, they either have to sell treasuries to the private sector first, or expand the base.

"Also, with regard to the debasing of 'our' credit money, even when G creates a base credit as well as a credit of 'our' money - does this mean that banks are somehow obligated to make more loans in order to maintain the same base to credit ratio?"

No, if G creates base credit, then the banks are under no obligation to multiply it through lending. This is the 'cart before the horse' of fractional reserve lending -- empirically, loans come first, then the banks search for reserves.

The key to the importance of the expansion of the monetary base is, as FOFOA wrote, that the money is not necessarily being expanded in quantity, but changed in quality:

Credit money can default, but base money is here to stay.

DP said...

@Michael H: Nice. ;-)

Credit money can default, but base money is here to stay.

I would perhaps reword this slightly, to:

Credit money could default, but won't be allowed to because that would collapse the whole system.
Base money is here to stay, and there will only be more of it as it is created to buy failing credit money... to save the system.

I also like to think of it like equity and debt. Base money = equity in the system.

How many shares do you hold in this enterprise?

And will you be diluted out while others take over a bigger and bigger slice of the pie?

High time for a dietary change, me thinks.

dojufitz said...

I've been reading this blog since the start.....now with the Euro about to collapse....how much time before freegold srarts to launch?

Crack said...

Define "collapse".

nickelsaver said...

dojufitz

Freegold does not launch. It just becomes reality when paper = $0

The question now is not if wealth should be in gold, it must. But how to maximize the transfer to gold. For those like me who have come to this late in the game, will there be one last big correction? Or did we just see it?

JR said...

Reuters article

"A German government spokesman said on Thursday that Berlin was not pursuing the idea of a smaller euro zone.

[...]

As the crisis accelerated, European Commission President Jose Manuel Barroso issued a stark warning of the dangers of a split in the European Union.

"There cannot be peace and prosperity in the North or in the West of Europe, if there is no peace and prosperity in the South or in the East," Barroso said in a speech in Berlin.

[...]

The European Central Bank's hardline chief economist told governments not to expect the bank to rescue them with unlimited funds, despite its efforts to stabilize runaway bond markets.

"We are not the lender of last resort and I do not advise European governments to ask the ECB to become lender of last resort," Juergen Stark, who will quit his post in protest at continued bond-buying told a conference in Frankfurt.

"This will mean that the ECB immediately will lose its independence."

It was not clear to what extent he spoke for new ECB President Mario Draghi, but the central bank has so far opposed any role in helping to leverage the euro zone's rescue fund.
"

Tekin said...

I have been intrigued by this Modern Monetary Theory. It looks like state capitalism where government issues money not by issuing debt but by relying on state's productive powers.

I find some parallels with Hitler's economic theory as described in the controversial Red Symphony. See the attached quotation.

It is intriguing to observe that the state capitalistic model in both cases were constructed out of necessity.

There is an important weak link in the current US iteration of state capitalism. That is the trade deficit. However notice how carefully China is denied access to US markets or African markets (AFRICOM) to spend its dollars. US is using its military might to prevent this possibility.

As long as the wages are restrained and China is intimidated by the US gun pointed at China, this situation may take quite a lot of time to resolve itself.

------------------------------------
R. - One is that which I had already mentioned. Hitler, this uneducated and elementary man, has restored thanks to his natural intuition and even against the technical opinion of Schacht, an economic system of a very dangerous kind. Being illiterate in all economic theories and being guided only by necessity he removed, as we had done it in the USSR, the private and international capital. That means that he took over for himself the privilege of manufacturing money, and not only physical moneys, but also financial ones; he took over the untouched machinery of falsification and put it to work for the benefit of the State.

He exceeded us, as we, having abolished it in Russia, replaced it merely by this crude apparatus called State Capitalism; this was a very expensive triumph in view of the necessities of pre-revolutionary demagogy ... Here I give you two real facts for comparison. I shall even say that Hitler had been lucky; he had almost no gold and for that reason he was not tempted to create a gold reserve. Insofar as he only possessed a full monetary guarantee of technical equipment and colossal working capacity of the Germans, his "old reserve" was technical capacity and work ..., something so completely counter-revolutionary that, as you already see, he has by means of magic, as it were, radically eliminated unemployment among more than seven million technicians and workers.

G. - Thanks to increased re-armament.

R. - What does your re-armament give? If Hitler reached this despite all the bourgeois economists who surround him, then he was quite capable, in the absence of the danger of war, of applying his system also to peaceful production ... Are you capable of imagining what would have come of this system if it had infected a number of other States and brought about the creation of a period of autarky ... For example the Commonwealth. If you can, then imagine its counter-revolutionary functions ... The danger is not yet inevitable, as we have had luck in that Hitler restored his system not according to some previous theory, but empirically, and he did not make any formulation of a scientific kind.

This means that insofar as he did not think in the light of a deductive process based on intelligence, he has no scientific terms or a formulated doctrine; yet there is a hidden danger as at any moment there can appear, as the consequence of deduction, a formula. This is very serious. Much more so that all the external and cruel factors in National-Socialism. We do not attack it in our propaganda as it could happen that through theoretical polemics we would ourselves provoke a formulation and systematization of this so decisive economic doctrine.There is only one solution - war.

http://www.bibliotecapleyades.net/sociopolitica/red_symphony.htm

victorthecleaner said...

Max,

your question about their money/our money is the key to understanding what is the 'correct' definition of money supply. Let me try, too.

A company X plans to purchase a machine and wants to borrow money. They propose to sell a bond. Max is a saver (cash under the mattress). Max buys that bond with his savings. No credit money is created. No base money is created.

Company X wants to take out another loan. Max has learnt that nominal US$ assets should be avoided. So the company goes to their bank. The merchant bank lends them the money. The bank balance sheet grows:

assets: receivables: loan to X: 1m US$

liabilities: customer accounts: X: 1m US$

Credit money is created, but no base money.

The government notices a shortfall of their tax revenues and needs to borrow money. They sell a new bond. If Max would buy the bond with his savings, no credit money would be created and no base money would be created. But Max doesn't.

The government could turn directly to a merchant bank, just as our company X did. If I remember correctly, this was done indeed in Japan and Germany shortly after WW II, but it has largely gone out of fashion.

The way in which the government bond finds its way into the merchant bank is more intricate:

The merchant bank has some equity (=cash) they can invest for their own account. The bank buys the bond. Here the bank is a saver, and no credit money is created and no base money is created either.

If the merchant bank prefers more cash, however, they can now turn to the central bank and borrow cash from the central bank. As collateral for this borrowing from the central bank, the merchant bank, posts the government bond. The CB accepts that bond at face value (risk free asset). This is a repurchase agreement. The merchant bank sells the government bond to the CB for cash and agrees to repurchase that bond later for cash plus interest (repo rate).

In this transaction, no credit money is created. On the balance sheet of the merchant bank, the government bond is removed from the assets side and is replaced by cash (or, more commonly, by a reserve balance at the CB).

But the balance sheet of the CB grows, and so base money is created.

assets: government securities related to monetary policy operations: main refinancing operations: 1bn US$

liabilities: liabilities to credit institutions related to monetary policy operations: 1bn US$

Now let us assume that the merchant bank also owns a bond of company X, but unfortunately X is a real estate developer that is just about to going bust. Writing off that bond would render our merchant bank insolvent, an event that the CB wants to avoid.

Now the CB bails out the merchant bank. The merchant bank can sell the bond in the open market, but luckily just at the same moment, the CB is there to buy that bond.

In this transaction, no credit money is created. On the bank balance sheet, the bond is replaced by cash (or a reserve with the CB). But again, the balance sheet of the CB expands:

assets: government securities: 1m US$

liabilities: liabilities to credit institutions related to monetary policy operations: 1m US$

The CB balance sheet can also shrink, for example, if the bond is paid back in full at maturity, when the CB sells the bond in the open market (perhaps at a profit or a loss) or when the CB sells other reserves (gold). In all cases, the CB receives cash which they can cancel.

What's interesting is which of these types of money can contribute to consumer prices. If it is true that the government mainly consumes rather than invests, then it turns out that any way in which a government bond leads to an expansion of the balance sheet of a merchant bank or of the CB, contributes to consumer price inflation.

Victor

Crack said...

"Deficits don't matter [today]"

JR said...

CNNMoney article

"The European Central Bank is under pressure to step up its bond-buying program as borrowing costs for Italy rise to dangerously high levels.

But experts say the ECB, which has already bought billions of euros worth of government debt, remains reluctant to ride to the rescue.

[...]

"We've come at the end of what we can do, it's now up to the governments," said Dutch Central Bank president Klaas Knot, according to reports.

ECB officials have said repeatedly that the bond-buying program is a temporary measure to ensure that its monetary policies are effective in an environment where markets are dysfunctional.

Mario Draghi, the former Italian central banker who became ECB president earlier this month, has questioned the reasoning of an open-ended commitment to buy government bonds.

"What makes you think becoming the lender of last resort for governments is actually the thing you need to keep the eurozone together?" Draghi said cryptically in a press conference last week.

[...]

The lack of solutions has put the ECB in the uncomfortable position of being seen as a potential lender of last resort for nations that cannot borrow from the private sector.

But many observers say the leadership in Frankfurt remains opposed to expanding the bank's balance sheet with risky sovereign debt.

"I can't imagine that they will step up and say they'll be the lender of last resort," said Natascha Gewaltig, director of European economics for Action Economics

[...]

"If, and only if, Italy decides to help itself through a swift move towards comprehensive reforms would core Europe and the ECB be more likely to sufficiently flank this process," wrote Frank Engels, analyst at Barclays Capital, in a client note.

In the meantime, the only possible replacement for the ECB remains a work in progress.

The European Financial Stability Facility has the power to intervene in sovereign debt markets, but it needs additional firepower to handle Italy's financing needs.

EU leaders have come up with two plans to leverage the €440 billion fund up to €1 trillion."

costata said...

Commodities customers of brokerages in the USA not covered by insurance fund?

http://www.reuters.com/article/2011/11/09/us-mfglobal-customers-idUSTRE7A77S420111109?feedType=RSS&feedName=topNews&rpc=71&google_editors_picks=true

costata said...

Bill Bonner highlights a potential flashpoint - youth unemployment.

http://dailyreckoning.com/printing-money-to-combat-a-global-depression/

The unemployment rate for males between 25 and 34 years old with high-school diplomas is 14.4% — up from 6.1% before the downturn four years ago and far above today’s 9% national rate. The picture is even more bleak for slightly younger men: 22.4% for high-school graduates 20 to 24 years old. That’s up from 10.4% four years ago.

....“We’re at risk of having a generation of young males who aren’t well-connected to the labor market and who don’t feel strong ownership of community or society because they haven’t benefited from it,” says Ralph Catalano, a professor of public health at the University of California, Berkeley.

.....They are not sure whether the world has failed them…or whether they have failed. Surely someone will come along to straighten them out…explaining how it was not their fault…and telling them what to do about it.

costata said...

More On Gold Stocks Not Leveraging The Price Of Bullion

On the previous thread I highlighted a post from Bron Suchecki that provided some analysis on gold mining stocks. The two analysts papers that were linked in the post identified stock issuance as one of the reasons for stock prices lagging behind the rising price of bullion. As opposed to providing leverage to bullion as gold mining stocks have done in the past.

Today in the comments at Bron’s blog I read this interesting exchange between Kid Dynamite and the author of one of the pieces of analysis – John Paul Koning and Pollitt and Co.

I posed a question to JPK that occurred to me as I was reading his reply to KD:

JPK writes (my emphasis):
My guess is that if you could add up the market caps of all the seniors, juniors, and explorers in Australia, US, Canada etc., including all the new entrants over the last few years, you'd see a combined market cap that appreciated nicely along with the gold price - but only because of new capital flowing into the space, not price rises. But computing that market cap would require a heroic effort and will have to remain just a hypothesis.

Me: A hypothesis or something known to the largest Bullion Banks and Central Banks? Perhaps this is yet another example of information asymmetry.

I think access to the data and the ability to perform this type of number crunching would be well wthin the capabilities of a diversified, multi-national bullion bank.

M said...

@ DP

"Credit money can default, but base money is here to stay."

What about publicly traded credit ? (mortgage backed securities, govt bonds, car loans ect..)

If a bond get sold, it turns into base money. As the price goes down, less turns into base money but some still escapes into base money...I thought anyway.

M said...

@ Costata

According to estimates by Shayne McGuire in his new book, Hard Money; Taking Gold to a Higher Investment Level, the typical pension fund holds about 0.15% of its assets in gold. He estimates another 0.15% is devoted to gold mining stocks, giving us a total of 0.30% – that is, less than one third of one percent of assets committed to the gold sector.

Shayne is head of global research at the Teacher Retirement System of Texas. He bases his estimate on the fact that commodities represent about 3% of the total assets in the average pension fund. And of that 3%, about 5% is devoted to gold. It is, by any account, a negligible portion of a fund’s asset allocation.

Let’s say fund managers as a group realize that bonds, equities, and real estate have become poor or risky investments and so decide to increase their allocation to the gold market. If they doubled their exposure to gold and gold stocks – which would still represent only 0.6% of their total assets – it would amount to $93.3 billion in new purchases.

How much is that? The assets of GLD total $55.2 billion, so this amount of money is 1.7 times bigger than the largest gold ETF. The market cap of the entire sector of gold stocks (producers only) is about $234 billion. The gold industry would see a 40% increase in new money to the sector. Its market cap would double if pension institutions allocated just 1.2% of their assets to it. If these funds allocate just 5% of their assets to gold – which would amount to $1.5 trillion – it would overwhelm the system and rocket prices skyward.

And let’s not forget that this is only one class of institution. Insurance companies have about $18.7 trillion in assets. Hedge funds manage approximately $1.7 trillion. Sovereign wealth funds control $3.8 trillion. Then there are mutual funds, ETFs, private equity funds, and private wealth funds. Throw in millions of retail investors like you and me and Joe Sixpack and Jiao Sixpack, and we’re looking in the rear view mirror at $100 trillion.

The gold bugs are assuming that a bubble will form in the gold sector. Its a good thought but its not working. Consider that the housing bubble basically started the day after the Nasdaq bubble popped. Its been 3 years of ZIRP and still there is no bubble in sight. Nothing of the sort. I will admit that I am one of them but I have been liquidating stocks to buy bullion. Last year was good but all stocks where good last year.

JMan1959 said...

Gentlemen,

I am trying to figure out what can/will start the fear and increased velocity. It seems like a chicken or egg analogy. Given that the credit markets/digital money will be drying up, and the cash base is only 5% of our money supply, how does this much smaller quantity of money create enough inflation that would create enough fear to take it to a hyperinflation scenario? I see how once the fear sets in that the cash shortage forces the printing, but I'm having trouble seeing how a severely contracted money supply can start the inflation fire that ignites the fear in the first place.

costata said...

More On Gold Stocks

Part 1/2

Hi M,

I take your point about the small allocation to gold stocks in most portfolios. It's undeniable that even a small reweighting of institutional portfolios toward gold stocks would provide a massive influx of capital. I'm not treating the analysis referenced in my comments on this topic as a prediction for the future.

The reason this analysis grabbed my attention is because the underperformance of gold stocks has been discussed for so long but IMO no one has come up with a credible explanation for that underperformance until I read the analysis Bron showcased. Conventional history (minus A/FOA/FOFOA) tells us that the stocks should have outperformed gold bullion and provided leverage to the price - not – underperformed it.

IMO the important point from the analysis which Bron posted is that the gold miners can issue stock to absorb fresh capital seeking to invest in gold mining stocks. The effect on the existing shareholders of the dilution from share issues is twofold. Firstly it could negate some, or all, of the upward pressure from increasing demand on the price of their stockholdings.

Secondly, new stock issues reduce the gold in-the-ground ratio per share if the miner is not adding to reserves. So it should put the spotlight on reserves, mine life and the cost of replacing reserves in the valuation of gold mining stocks.

The analysis by Pollitt & Co and the other analyst suggests the miners have been using their stock like currency. "Printing" it to meet demand. This is similar to debasing a currency rather than allowing the existing pool of stock/currency to appreciate. They have been degrading the "moneyness" of their stock so this discussion is also relevant to this post.

Continued/

costata said...

/Continued

Part 2/2

Many of the goldbugs and their favourite analysts have been focusing on stock-price-to-bullion-ratios that were giving a false picture of undervaluation in the stocks. (I concede the stocks could still be undervalued.) I haven’t seen any of the high profile analysts connect the dots on this topic.

Now bear in mind that some institutions are not permitted to own physical gold when you read the rest of this paragraph. With some institutions demand for paper gold may well be a proxy for demand for physical gold. An increase in the gold mining stock on issue could surreptitiously create the perception of flat investment demand for exposure to gold from these institutions because their demand is not reflected in the price of the gold stocks.

Jim Sinclair and Trader Dan have been putting the underperformance of many gold stocks down to shorting. If the miners were issuing stock with gay abandon then these short plays make a lot more sense. If you know the existing shares are going to be diluted then shorting them is a sensible, and potentially lucrative, play eg. short mining stocks and long in the paper “equivalent “ of physical gold.

The other key point I was trying to make in my latest comment on this topic is that the BBs may have a clear picture of the stocks and flows in the issued stock of the miners. This could give them yet another information advantage over other players in the market.

nickelsaver said...

A picture says it all. http://t.co/nE90w2Nx

M said...

@ Costata

I'm just not sure that it is any different for other industries with respect to issuing stock.

Jesse Americain is big into the theroy that mining stocks get taken down with the comex too. Just on his site today-"A bear raid today ran the stops, and a few miners were selectively taken out and severely beaten down."

When gold had its huge run in August, the senior miners actually went along for the ride. Eldorado gold was up 8 to 15% the first week. Silver didn't go for the ride though.

People really think they have this bubble thing figured out so allot of the lag is attributed to that. Gold is up so people think the stocks are too hot. Other then a few gold bugs, nobody owns these stocks. Even John Paulson lightened up on them recently.

Some sovereigns are showing interest in gold mining assets now. Maybe that will get them going.

DP said...

Hi M,

Nice question. :-) [cli-click] [choccie]

Only the USG/Fed are able to create base money. Everybody else is just moving around credit money - temporarily using the base money they have been temporarily granted the right to use in completing their transactions.

A bond (to me all those things you listed are essentially types of bond, so I'm just lumping them all under that umbrella term here) is just another derivative of "credit money" - a promise to one day in the future deliver X amount of base money, and to pay Y amount of interest along the way to compensate the bondholder for waiting.

When a bond trades down for less money with each pair of hands it trades through, this is credit money deflating out of the system. This leads to a "shortage of money" (really, a "shortage of credit" - base money isn't in shorter supply, but your ability to temporarily use it to complete transactions, is constricted). Clearly, this is less problematic than when the bond completely fails in default, but it's still a potentially significant problem if bonds drop too much, and/or too quickly, in value.

Eventually this leaking of credit money out of the system would cause a fatal blow-out of confidence in the whole system of holding debts (credit money) as savings/reserves - AKA "$IMFS". A deflationary depression, as it steadily dawns on everyone that there really is a shortage of money and its velocity slows, pushing up its value (the relative value of other goods is driven down). That can't be tolerated by the USG/Fed, who are the primary beneficiaries of this (inflationary) system. Without the benefit of this system, the USG is in deep do-do.

So they dilute "their money" (base money: cash + obligations to provide cash if required - reserves@Fed) to replace the credit money that was going to money heaven otherwise. They swap debt (credit) for equity (base money). They rather opaquely give this the fancy name "Quantitative Easing", because they really are changing the quantity of money. But only base money. Since just about everyone considers the supply of money to be all the base money + credit money in the system, and the new base money is only replacing the lost credit money... Bernanke is technically correct when he says they're "not creating more money".

They're not changing the overall quantity of "money" in the system, they're only changing the quality of some of that money (from debt into equity). Hence I suggest a more honest name would have been Qualitative Easing for the process being undertaken. They're changing the quality of some part of the broad money supply. I don't think I really need to go on into the realm of now discussing the qualitative differences between base and credit money, and I try to say as little as possible to ensure I don't confuse things. So I'll reign myself in here.

Thanks for bringing out some nice brain tea that we can all stew on together. Cheers! ;-)

BTW you quoted MichaelH rather than me, I think - I was merely quoting him. I don't want to take credit for his great comment that your quote forms only a small fraction of.

Crack said...

JMan1959,

Think DP just answered your question with that comment too?

Max De Niro said...

MF, VTC, Michael H,

Thank you. I will now go back and re-read to see if anything more has sunk in on this iteration.

DP said...

Perhaps "almost", Crack? I think The JMan might also be afflicted with the deadly "HI is just inflation on steroids" virus? All up to date with your jabs?

Of course, we who are up to date on our jabs already know that 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."

Woah now! Get your damn money away from my precious apple!

Michael H said...

DP,

"I think The JMan might also be afflicted with the deadly "HI is just inflation on steroids" virus?"

Maybe, maybe not, but we'll see what his reply is.

My interpretation of his question,

"Given that the credit markets/digital money will be drying up, and the cash base is only 5% of our money supply, how does this much smaller quantity of money create enough inflation that would create enough fear to take it to a hyperinflation scenario?"

is the following: if credit money goes 'poof', that leaves only base money, and if base money is only 5% of credit money, then how can this small amount of money ignite a HI, no matter how much fear there is?

To which I might answer:
1. Perhaps at the start of a HI, credit money still trades at or near par with base money, so the amount of money doesn't drop quite so much.

2. The selection of goods to be chased to start a HI is a subset of all the goods in the economy. Only real goods have to be 'chased' -- food, fuel, etc. Bonds, stocks, even housing can collapse at the start of HI. So the 5% wouldn't have to do the work of the former 100%.

3. The proportion of base money has bee rising. What if HI starts in a few years, and base money at that point represents 20% of all money in the system?

Max De Niro said...

Michael H,

You wrote:
The government cannot create credit money by itself, they can only create credit offset by base money. So for G to spend credit money, they either have to sell treasuries to the private sector first, or expand the base.

But from above in his section on MMT, FOFOA wrote:

But then a reasonable person might point out that the USG still issues Treasuries equal in amount to all its deficit spending. And if we and the Chinese aren't buying them, then the Fed has to, so it makes up a cool name like QE2 to disguise the real purpose of the purchases. Not so fast, MMT says. The Treasury does not need to issue debt in order fund its spending. When it spends, it simply credits private sector accounts with new credit money and the banks with new base money. There is no direct connection between sales of Treasuries and money spent other than a myth in our confused minds.

How would the Treasury credit private sector accounts with credit money? It isn’t a commercial bank, it doesn’t provide banking services. How would this take place?

Isn’t this a contradiction, or is there something I’m missing?

Max De Niro said...
This comment has been removed by the author.
JR said...

Yeah Michael H,

I sorta think JMan might benefit from re-read big gap?

"Given that the credit markets/digital money will be drying up, and the cash base is only 5% of our money supply, how does this much smaller quantity of money create enough inflation that would create enough fear to take it to a hyperinflation scenario?"

Hyperinflation not a too much supply of money phenomena, its a falling demand for a currency phenomena. Too much money is the policy response to the loss in confidence, which manifests itself as a lack of demand for the currency as a a store of wealth. Jman writes:

I am trying to figure out what can/will start the fear and increased velocity.

How about fear that the dollar won't hold value? Its not fear of rising prices. Fear the dollar won't hold value manifests itself as less demand to hold dollars - people get dollars and think more like "better get some goods while I can" as opposed to "lemme hold onto these dollars so i can buy x in the future." A collapsing of the store of value on the time continuum scale.

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

Big Gap in Understanding Weakens Deflationist Argument:

"First, the question. "Where will the money come from?" is a question of supply. Yet the answer to hyperinflation lies on the demand side of the equation. This is Rick Ackerman's big gap in understanding. Let me explain.

[..]

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

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

So it is the receiver of currency—not the giver—that determines its value.

[..]

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

So a falling demand = a rising velocity.

[...]

You see, monetary supply and demand can act as exact substitutes for each other.

[...]

Fear is the main emotional motivator in any currency collapse, just like it is in financial market meltdowns. And as we saw even just last night, the herd can stop on a dime and reverse course 180 degrees overnight, from greed to fear, based on a single news item.

The initiating spark of hyperinflation (currency collapse) is the loss of confidence in a currency. This drives the fear of loss of purchasing power which drives people to quickly exchange currency for any economic good they can get their hands on. This drives the prices of economic goods up and empties store shelves, which causes more panic and fear in a vicious feedback loop.

The printing of wheelbarrows full of cash is the government's response to price hyperinflation (currency collapse), not its cause. This uncontrollable (knee-jerk) government response happens in some cases, but not all. Let me repeat: The massive printing that first comes to mind when anyone mentions hyperinflation is not the cause, it is an effect, in the common understanding of hyperinflation which is the collapse of a currency."


Cheers, J.R.

Max De Niro said...

Michael H,

Let me just clarify my question:

It is my understanding that a commercial bank can create balances out of thin air - credit money, but that the UST cannot do this. It must sell bonds in order to do this. After all, it does not have a base money account with the Fed, which would create that tension which keeps the credit money supply in check. Or does it?

Michael H said...

Max,

I think your question gets to the heart of MMT. Right now, you are correct, the treasury sells bonds and the fed creates base money. I think what MMT'ers are trying to say is that this arrangement is not necessary, and the treasury should just issue base money directly.

Great idea -- what could possibly go wrong?

But I haven't studied MMT so take my interpretation with a grain of salt.

JR said...

Max,

When the government spends, the recipient gets a credit to his account and the bank gets a credit to the reserve account.

The government can't create credit money, as Michael H said"

“The government cannot create credit money by itself, they can only create credit offset by base money. So for G to spend credit money, they either have to sell treasuries to the private sector first, or expand the base.”

The government can't create credit money. To fund spend the government have to either borrow credit money from the private sector or tax credit money from the private sector. The G needs to get credit money from the private sector to in essence "fund" their spending. Remember, credit money is what gets spent in the "real world" of economic transactions.

If the G can't get credit money from the private sector via Taxes or via bond sales, they can create base money to fund their purchase.

The causation is a little off because in reality, when the government, it spends both credit and base money, and if it taxes or sells bonds, it then reduces the base money.

A base unit is destroyed and a credit unit flowed through to the USG when they sell bonds to the private sector. But when the FED QEs, their is no base money destroyed, there is based money created.

“The government cannot create credit money by itself, they can only create credit offset by base money. So for G to spend credit money, they either have to sell treasuries to the private sector first, or expand the base.”

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

In case I airballed and you were really literally asking "How would the Treasury credit private sector accounts with credit money?," the answer is the same way you would credit a private sector account with credit money when you spend.

But unlike you, who has to get the credit money from somewhere to fund your spending of credit money, the government is not so constrained. Sure they could tax or sell bonds to get the credit money, but they can also create base money to fund the credit money they spend.

JR said...

"It is my understanding that a commercial bank can create balances out of thin air - credit money, but that the UST cannot do this. It must sell bonds in order to do this. After all, it does not have a base money account with the Fed, which would create that tension which keeps the credit money supply in check. Or does it?"

The Government can't create credit money out of thin air to fund their credit money spending, so if they want to fund their credit money spending with credit money, they tax or sell bonds.

But they can also just fund their credit money spending by creating new base money.

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

The Treasury and the Fed are both parts of the same Government, so if you issue is technical, yeah, they work together.

Max De Niro said...

OK so the UST (ie, specifically that department of G) can't actually create base money, but it, G (UST + Fed) can create base money at will, through the bond issuance/QE process. Correct?

And UST can only spend credit money, ie credit private sector accounts with credit money (not base money) if they have previously got it through tax or sold bonds.

Max De Niro said...

JR,

One more. You wrote:
"Sure they could tax or sell bonds to get the credit money, but they can also create base money to fund the credit money they spend. "

Which mechanism are you referring to, when you say that they can also create base money to fund the credit money they spend? Are you referring to QE?

DP said...

MH: “The government cannot create credit money by itself, they can only create credit offset by base money."

Max: How would the Treasury credit private sector accounts with credit money? It isn’t a commercial bank, it doesn’t provide banking services. How would this take place?

You're right - the G can't create credit money at all.

They can ask the Fed to create base money and provide the G with an offsetting amount of credit money that it can spend into the economy, in exchange for a Tbond (promise to repay the credit money with base money they will have taxed from someone later). They can alternatively find someone in the market prepared to accept their Tbond in exchange for some credit money that already exists in the system.

The former expands the base money component of the broad money supply to a larger percentage of the whole. The latter expands the proportion of the credit money component (by the face value of the Tbond).

For decades the USG had no trouble achieving the latter, but lately they have to resort to the former. That is why you never heard of QE until the last few years. It wasn't needed. It's also why the amount of credit money already in the system dwarfs the amount of base money. The fuel to fire the HI. The "inflated credibility" of The Dollar System, that is waiting to collapse into disrepute.

The dollar (and the pound) are already well on the road to HI. QE is their attempt to slow it down. But the link of the currency to the nation state means that they are unable to stop the pols (themselves, in other words) from attempting to keep the inflation game going. "QE to infinity". They are the dealer hooked on their own junk, in FOFOA's analogy.

This is what is meant by the severing of the euro from the nation state - the pols in the Eurozone don't get to decide whether the volume of base money is expanded or not, only the ECB decides this. This is why FOFOA maintains the euro will not uncontrollably hyperinflate, while the dollar (etc) does. And why I agree with him. The ECB don't have to buy the votes of the public. They can give them the Nicorette patches they need, rather than the heroine shots they ask for.

The euro will deflate in value, but its fall will be caught by the ECB. Via the tool of both a bid and an offer in the market for gold, at a floating market-decided, €price.

What was that I was saying earlier, about striving to reign myself in and keep my comments and posts short and focused, so they don't confuse matters?

I'd better shut up. :-|

JMan1959 said...

Thanks DP, Michael H., great explanations. No, I don't have the HI is I on steroids virus, I understand it is the loss of confidence in the currency. I am just trying to understand how that loss of confidence might get started. Michael, your number two above really got me thinking, as it is a much smaller supply of goods ( to quote Fofoa, "everything you need") that has to see the price run to ignite the fear. So, following the trail, it (fear) could be ignited by: creeping inflation and the accompanying bond deflation, deteriorating balance sheets from falling tax revenues(recession), continued QE and other Keynesian attempts to plug the dike, etc... So while HI is not inflation on steroids, rising inflation could definitely be a catalyst candidate, correct?

DP said...

@MichaelH: Are you suggesting prices of some 'assets' might be supported by somebody, in a final bid to keep the wheels on? :)



Agreed. The 'real world plane' pyramid, below Exter's inverted pyramid of 'the monetary plane', is massively the smaller of the two. The remaining credit money in the upper pyramid desperately flows down, through the base money chokepoint, into the real world plane below.

There is a highly asymetric effect on prices. The prices of stuff in the bottom pyramid are well bid, while prices of the stuff in the top pyramid progress exponentially towards no bid.

I recall someone already having a diagram of Exter's pyramid, where the upper pyramid was significantly larger than the lower one. But I don't recall where it was I saw it now.

Max De Niro said...

DP,

Please don't rein in your prolix tendencies. It was good to see some context, to see how these monetary mechanisms fit into the big picture.

I need big picture, as without it I get lost in details.

Thanks.

JR said...

Yay DP.

Max,

Don't get lost in the technicalities. The USG includes both the FED and the Treasury. I know people can get all conspiritard about the FED is a private institution, but the Congress gave the FED the power it has in the Federal Reserve Act of 1913. Yeah, Congress has the power, and they delegate it to the FED. So yeah, congress, aka the government, controls the money creation power. It even says Congress has that power in the Constitution :)

JR said...

Yay Jman,

"So while HI is not inflation on steroids, rising inflation could definitely be a catalyst candidate, correct?"

From above:

Big Danger in "A Little Inflation"

I just received an advance copy of Jim Rickards' new book, Currency Wars (thank you Steve and Jim). And while I haven't had a chance to read it yet (because I've been working on this post), I have it on good authority that Jim thinks the Fed is actually targeting 5% annual inflation right now while saying 2% or a little more. This sounds credible to me.

So what's the danger in a little inflation?

If the dollar sinks, like they (the USG/Fed) want, sure, our exportable goods will become relatively cheaper abroad (even though their price here won't drop) and their (our trading partners’) exportable goods will become more expensive here. This will appear as good old-fashioned price inflation, since we’ll now have to outbid our own trading partners just to keep our own production, and pay more for theirs. And while the domestic private sector has already crashed its lifestyle somewhat, the currency issuer has increased its "lifestyle" to compensate.

The bottom line is that the USG cannot crash its own lifestyle. And when the dollar starts to "sink", that pile of pennies in the video above will be insufficient (not enough money). Luckily, that pile of pennies represents the budget of the currency issuer himself. So he’ll just increase it, to defend his lifestyle, while scratching his head at why the trade deficit has nominally widened rather than narrowing as he thought it would when he trashed the dollar.

One of the strongest arguments that the USD will not hyperinflate like Weimar or Zimbabwe is that the USG's debt is not denominated in a foreign currency. If it were, this would be a different kind of hyperinflationary feedback loop we were facing. If all the USG debt was in a foreign currency and the dollar started falling on the foreign exchange market, that debt service would lead to hyperinflation. But that is not the case. So it’s not the FX market (monetary plane) that is the big danger to the dollar.

The dollar is the global reserve currency, so it is the physical plane that is the biggest threat to the dollar in the same way the FX market was a threat to the Weimar Mark. And it is not the nominal debt service that is the threat like it was in the Weimar Republic, but it is the structural (physical plane) trade deficit. To the USG, that is the same threat as nominal debt service denominated in a foreign (hard) currency was to Weimar Germany.

As the German Mark fell, there was "not enough money" to pay the debt. And with a little inflation, there is "not enough money" to buy our necessities from abroad.

Max De Niro said...

DP,

"The dollar (and the pound) are already well on the road to HI. QE is their attempt to slow it down. But the link of the currency to the nation state means that they are unable to stop the pols (themselves, in other words) from attempting to keep the inflation game going. "QE to infinity". They are the dealer hooked on their own junk, in FOFOA's analogy."


This idea of G being hooked on their own junk was a subject that I was going to ask some questions about when I got around to it, but this seems an opportune moment.

Is this referring to the fact that the G must keep spending in order to make its citizens perceive it as useful, that it fills the gap that a shrinking private sector creates?

The other thought that I had was that it was somehow related to the problem of the trade deficit and it was a technical factor involving one of the accounting identities, meaning that the trade deficit couldn't fall, so G had to keep exporting currency.

That's a bit of a wooly question, as I haven't worked the logic through to that part of FOFOA's post yet.

Max De Niro said...

JR,

When I'm learning something, I do tend to get lost in technicalities at the beginning, as my aim is to understand it in its entirety, so that I can build a visual model of exactly what's happening and how all the bits fit together.

That then allows me to analyse new situations that arise, that are related to the structure.

Michael H said...

JR,

Your quote from above,

"... it is the physical plane that is the biggest threat to the dollar in the same way the FX market was a threat to the Weimar Mark. And it is not the nominal debt service that is the threat like it was in the Weimar Republic, but it is the structural (physical plane) trade deficit. To the USG, that is the same threat as nominal debt service denominated in a foreign (hard) currency was to Weimar Germany."

is an excellent point by FOFOA.

Constant importation of real goods from abroad for government operations = government debt service in foreign currency

Max De Niro said...

Michael H,

When you say:
"Constant importation of real goods from abroad for government operations = government debt service in foreign currency"

When you are referring to government operations, are you referring to the goods, trinkets and widgets, pieces of plastic from China, that are available for purchase by the US consumer, trinkets that keep them happy and hence the USG in power?

Is that the reason why they are hooked on their own junk?

Michael H said...

Max,

"Is this referring to the fact that the G must keep spending in order to make its citizens perceive it as useful, that it fills the gap that a shrinking private sector creates?"

On the latter point yes, but think about why: the shrinking private sector means shrinking private credit, which means imploding banks and a dying monetary system.

They are filling the gap, but not for the benefit of average citizens or to be 'seen as useful' -- they are filling the gap to keep the system afloat, for the benefit of those who profit from said current system.

"When you are referring to government operations, are you referring to the goods, trinkets and widgets, pieces of plastic from China, that are available for purchase by the US consumer, trinkets that keep them happy and hence the USG in power?"

No, I am referring to the raw materials, petroleum, and manufactured goods that make possible the governing of the USA and the projection of US power around the globe.

'Power' is not about trinkets. It's about bread, circuses, and jackboots.

DP said...

Takes a world of natural resources to run a gummint as, like, way awesome as the USG, Max!

If they tried to do this kinda shit using only the resources of North America, why there'd be nothing left for those pov North Americans in the private sector!

Amerrrrica - FUCK YEAH!
Coming over there
to save the
muthafuckin day YEAH!

...

So whatcha gunna do
when when we come for
you YEAH!

...

So suck, on, ma, balls.

Max De Niro said...

Michael H, DP,

Got it! So, if the private sector managed to grow, there wouldn't be a problem, the QE wouldn't be necessary, as the debt load could be serviced.

However, the USG has to create 'growth' in order to create GDP to pay the debt, but it is doing this by qualitatively easing, changing the nature of the money supply, debasing the reference point, feeding through the system, expressing itself as inflation, then a loss of confidence and HI.

Hence, a further recession would mean increased QE and paradoxically (given the recession), incresed inflation. This little bit of inflation, in this QE scenario eventually leads to HI inevitably, but the speed of move to HI could be increased by a large bank failure or other such catastrophe requiring further large doses of QE.

DP said...

And, lest anyone might forget, we Brits are clearly friggin awesome too!

So suck, on, ma ...err... fish & chips...

Michael H said...

Max,

I disagree slightly on one point:

Even with additional QE we may not see 'a little bit of inflation'. We could switch from deflation/stagnation of consumer prices to HI, withi no inbetween.

That is the meaning of "HI does not equal inflation on steroids".

Max De Niro said...

Michael H,

Here in the UK, we have inflation, so I was referring to FOFOA's quote above about 'a little inflation' leading to HI through the trade deficit mechanism, but I get your point.

Thanks all.

I will read through Moneyness again now, I think, but I'll leave it for later in the weekend - enough brain action for now.

DP said...

So, if the private sector managed to grow, there wouldn't be a problem, the QE wouldn't be necessary, as the debt load could be serviced.

Or if RoW (80s-90s Europe, 00's China, 10's... err... anyone?) were still prepared to accept the idea of buying UST's (and UK Gilts of course) to sock away in their reserves.

$IMFS - game over. QE is just trying to hide the fact it's already happened.

Have you tried our new game, Euro-Freegold-RPG?

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