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:

«Oldest   ‹Older   401 – 542 of 542
mortymer said...

Trail Guide (8/26/2000; 19:16:31MT - usagold.com msg#: 35569)
Couldn't post this on the Gold Trail? Something Wrong?

"...The Washington Agreement has placed us "on the road" to one of the most exciting changes for our current physical gold market in it's short 25 year history. This part of the world reserve currency system was about to radically evolve with respect to the world dollar gold values. To date, the ongoing dramatic fall off of LBMA trading from it's (also) short public life is leading to an eventual official evaporation of dollar based paper gold banking.

Someone in Another's group pointed to that spike in paper trading long before most had ever heard of LBMA,,,, and did so by saying that a drop below $360 would cause it. That ensuing round of massive paper playing was but a backstop to maintain the dollar reputation with low paper prices prior to Euro presentation.

I point this out because many new watchers of our gold wars have no knowledge of this important play on the political currency chess board.

This paper game got out of hand before the Euro was born and the BIS was ready to hold the gold line at $280 if needed. But, the Euro was born and is now a functioning currency. Today our paper gold game has come full circle and most of the players that know anything are shaking at the prospect of a pure physical market that will stand next to the Euro. Forget the gross volumes of derivatives on the books of majors, they don't mean a thing. They can keep writing contracts all they want but with trading volume falling away, eventually there will be no market to value these assets.

If this process is allowed to mature fully, major pain is coming to paper hard money investors worldwide. They have hitched their wagon to assets that require an operating paper system to sell into. Outside the private markets for existing and circulating bullion and coins, the entire industry will shutter to a halt as the mess is worked out. Investors will be kicking themselves as bullion soars
while an extended workout phase brings their asset values to almost zero. Sure, something will give,,,, maybe? Maybe we are at the paper price lows now?

But most "regular" hard money people that read these Thoughts are in the game for asset preservation during a world currency crisis and or inflation. Ten ounces of French gold coins and $60,000 in mining stocks and derivatives will make them sick during such a paper work out. Other proud hard paper asset holders proclaim they have millions in the industry and are not the least worried. They also said the Euro would never happen, oil will never see $30 without $600 gold and $280 gold would mean a major US depression! Well,,,, Don't check this one off yet. It's still playing out..."

http://www.usagold.com/goldtrail/archives/auxiliarytrail.html

Jeff said...

GEAB N°59 is available! Global systemic crisis: 30,000 billion US dollars in ghost assets will disappear by early 2013 / The crisis enters a phase of widespread discounting of Western public debt

http://tinyurl.com/bw44w49

mortymer said...

http://www.usagold.com/goldtrail/archives/another2.html

"Mr. Kuston,
Please understand, that wealth will move into all forms of real assets as the destruction of our debt/ digitial currency system continues. When the currencies move to a final resolution, it will be the "marketplace for precious metals" that will die first! It is well known that gold will hold it's value above everything. All other metals could lose much of the value they gained prior to this meltdown! Remember, "when the currencies go to nuclear war, all paper and paper markets will burn"! Many hard assets will lose in the public mind as confusion will rule. In the thoughts of many, gold will perform!"

Motley Fool said...

Max

I wrote something applicable to the nuclear option not too long ago.

Check my blog, it is on FOFOA's list of links.

TF

Motley Fool said...

Max

I wrote something applicable to the nuclear option not too long ago.

Check my blog, it is on FOFOA's list of links.

TF

Indenture said...

mortymer: I don't remember the allegory with the boat on the sea comparing anchor and compass. Could you please refresh?

Michael H said...

victor,

"In the long run, the banks will end up under the bus. Take a look at the revenue of the financial sector as a share of GDP, or at the total balance sheet of the financial sector as a share of GDP, from WW2 to today. There is a huge anomaly, and the financial sector is too large by a factor of 2 or 3. In the long run, this will (have to) be reversed. The question is in which order."

Agreed that the banking sector must shrink bank into proper proportion with the real economy. If the European PTB are willing to take on the banking sector to hasten this process along, then that is a radical difference between them and the American PTB.

Max,

"What will it take to break the paper gold markets I wonder?"

I wonder how much MF Global may play a role. So far things seem relatively calm, but, see for example Denninger writing about Barnhardt Capital Management shuttering operations:

http://market-ticker.org/akcs-www?post=197702

Wouldn't it be interesting if the paper gold markets stopped functioning as part of a system-wide commodity market freeze-up?

Max De Niro said...

Michael H,

"Wouldn't it be interesting if the paper gold markets stopped functioning as part of a system-wide commodity market freeze-up? "

You always took the words from the tips of my dancing fingers!

Yes, what great cover a smash up in the futures markets would be for a decades-long paper manipulation game. Never let a good crisis go to waste!

JMan1959 said...

Max,

Systemic banking contagion may just do the trick, if combined with a continued, market driven (no ECB or EFSF intervention) devaluation of European bonds.

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

Hey Max,

You wrote "Could somebody give me an idea of what is the biggest driver of a contraction in the base money supply? Would this be if a bank, or other entity with a reserve account at the Fed, buys Treasuries? "

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

When the USG spending is less than taxes + debt sales, the base decreases.

When the USG spending is more than taxes + debt sales, the base increases.

When the USG spends it spends both base and credit money (creates base money), and when it taxes or sells debt it takes in base money and credit money (destroys base money). USG spending increases base money supply and USG taxes and debt sales to the private sector decrease the base money supply.

So even deficit spending funded by treasury sales to the private sector is base money neutral, as they 'cancel' each other out.

But when Ben QEs (buys bonds), there is no 'canceling' out. Ben basically undoes the good of initial purchase by the bank. So deficit spending with QE = increasing base money supply.



To Recap

G spending increases the base money supply and taxes and debt sales to the private sector decrease the base money supply.

Base money would decrease if the USG spent less than it taxed and borrowed.

Make sense?

JR said...

Keep in mind this comment from Michael H

"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."


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

When Michael H says "base money is here to stay," he means the USG is not gonna run a surplus to taxes + debt sales anytime soon, so base money is not going to decrease. In fact, base money is going to hyperinfalte. As FOFOA explained above:

"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."

Michael H said...

JR,

"When Michael H says "base money is here to stay," he means the USG is not gonna run a surplus to taxes + debt sales anytime soon, so base money is not going to decrease. In fact, base money is going to hyperinfalte."

That reminds me of the John Hussman posts about liquidity preference that victor has sent links to.

The Fed will face a choice between high inflation and reducing the size of their balance sheet, but as you (and victor) point out, the Fed won't reduce the size of their balance sheet any time soon.

Max De Niro said...

JR,

Thanks, that does answer my question, and indeed the next question I was going to ask!

The next question that I was going to ask, was "Has the base money supply contracted since 2009?"

The reason why I was going to ask this is that I seem to remember seeing a graph of base money (I can't find the thing now) that had some dips in it since 2009.

From our discussions earlier in this thread, and the one that you quoted from Michael H, I had worked out that your explanation here:
"G spending increases the base money supply and taxes and debt sales to the private sector decrease the base money supply.

Base money would decrease if the USG spent less than it taxed and borrowed."

was the case.

However, it didn't make sense when I thought of seeing graphs of the base money supply with downturns in them.

Can it be the case that a base money supply graph could dip simply because of a mismatch in timing between selling debt and gathering taxes, but then return to increasing when the next tranch of debt is sold?

So, basically, without a signficant growth revolution in the US, the base money supply is now on an irreversible upward path?

Michael H said...

Max,

The Base money graph does indeed show a significant dip at the start of 2010. Part of it is probably, as you say, due to mismatch in the time that taxes are collected to the time debt is issued.

But another possible source of declining base money at that time is MBS pre-pays, which were later stopped by QE-Lite.

(thought I'm having trouble finding exactly when QE lite started)

Max De Niro said...

Here is the chart that I saw


I know that the trend is obviously up, but there are dips, so I was wondering how these dips occured.

DP said...

Just a crazy thought, but perhaps USG is from time to time, temporarily, during those potholes in the road, the inflation expressway, issuing a little less base money than it's managing to take in at that moment from tax revenues & selling bonds to the private sector - taking in base money and retiring it at the Fed. Then going back to needing more fresh base money from the Fed than it's taking in again.


ClydeFrog: Not only do deficits not matter, they are required for the continuance of the system. No deficit means deflation.

I would just add that a mild deflation of the base (like that would ever happen when you live in the candy store, but in Theoryland...) would be tolerable if the credit money supply were still expanding; if the economy was making good progress and everyone was happy to leave their "money" in the bank as banker credit. Anyway, it seems clear that in an ideal world you would have a stable base - no deficit and no surplus, over the medium term. I wonder if anywhere in the world is ever likely to get to that most enviable position, of balanced budgets..?


JR: When Michael H says "base money is here to stay," he means the USG is not gonna run a surplus to taxes + debt sales anytime soon, so base money is not going to decrease. In fact, base money is going to hyperinfalte.


FOFOA: 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.

Cream

Cherry

DP said...

... and a few sprinkles for Jeff.

JR said...

Hi Max,

Good graph. Here is the same info on a shorter time horizon so we can match it to Brian Sack's speech below. Brian Sack runs the SOMA at the NYFRB. In other words, he is in charge of making the open market purchases on behalf of the FED.

The balance sheet shows fairly constant slight up trend until November 2008, when the FED pumps money and jacks the base. But after this jolt, we start to see the base shrink again so the FED pumps more cash in March of 2009. What you can see on your graph and not mine is the fall and the stability when the FED decided in the late summer of 2010 to hold their protfolio flat at just over 2 trillion.


Sack speech from October 4, 2010:

"Decision to Reinvest Maturing Asset Holdings
The initial decisions by the FOMC to expand the Federal Reserve’s holdings of securities came at the height of the financial crisis. Before that time, the Federal Reserve maintained a relatively simple portfolio of between $700 billion and $800 billion of Treasury securities—an amount largely determined by the volume of dollar currency that was in circulation. In late November 2008, in the face of tightening financial conditions and a deep downturn in economic activity, the Federal Reserve announced that it would purchase up to $600 billion of agency debt and agency mortgage-backed securities (MBS). In March 2009, it expanded the program to include cumulative purchases of up to $1.75 trillion of agency debt, agency MBS, and longer-term Treasury securities. The use of the balance sheet in this manner was spurred in part by the inability to ease further using the traditional policy instrument, as the federal funds rate effectively reached the zero lower bound in late 2008.

The asset purchases were carried out from December 2008 through March 2010 by the Trading Desk (the Desk) at the Federal Reserve Bank of New York, resulting in a significant expansion of the Federal Reserve’s portfolio. As the settlement of those purchases progressed, the amount of domestic securities held in the System Open Market Account (SOMA) reached a peak of $2.1 trillion in June 2010. From that point, the portfolio began to shrink because the agency debt and agency MBS held in the SOMA were being allowed to run off without reinvestment as they matured or were prepaid.

Against that backdrop, an important policy decision regarding the Federal Reserve’s portfolio was made at the August FOMC meeting, when the Committee decided to halt this run-off and instead hold the size of the SOMA portfolio steady. To achieve this, the FOMC directed the Desk to purchase longer-term Treasury securities as needed to offset any principal payments realized on our holdings of agency debt and agency MBS.

That was not just a symbolic policy decision, but instead involved a meaningful shift in the path of the balance sheet. At the time of the meeting, the Desk was projecting that about $340 billion of the Federal Reserve’s MBS holdings would be paid down from that time to the end of 2011. In addition, another $55 billion of agency debt holdings would mature over that period. Thus, the total portfolio was expected to shrink by nearly $400 billion by the end of 2011. The reinvestment decision therefore amounted to a sizable program to purchase longer-term Treasury securities."

JR said...

"What is the objective of the Federal Reserve’s reinvestment of principal payments from agency debt and agency mortgage-backed securities (agency MBS) in longer-term Treasury securities?

The goal of reinvestments is to keep constant the face value of domestic securities held in the Federal Reserve’s System Open Market Account (SOMA). SOMA holdings of domestic securities totaled about $2.054 trillion as of August 4, 2010, and this policy will ensure that these holdings remain near this level.

NYFRB FAQ

JR said...

And then we had QE2 announced last fall, which took the monetary base up another 600 billion to nearly 2.7 trillion.

"In November 2010, the FOMC decided to expand its holdings of securities and announced that it intended to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. This expansion was completed as scheduled, on June 20, 2011."
Fed website: "The Federal Reserve's response to the crisis"

Here is a graph showing the Adjusted Monetary Base over past year

JR said...

FT article - Draghi turns tables on eurozone leaders

"Eurozone conflicts over the escalating debt crisis intensified after the European Central Bank demanded that governments implement rescue measures and warned of severe economic and social costs if its own credibility was put at risk.

The blunt comments by Mario Draghi, the new ECB president, were an attempt to turn the tables on eurozone governments at the end of a week in which he has come under intense pressure to step up dramatically ECB bond market intervention.

[...]

Mr Draghi said ECB credibility in controlling inflation was “the major contribution we can make” to support growth, jobs and financial stability. But “losing credibility can happen quickly – and history shows that regaining it has huge economic and social costs.”

[...]

Mr Draghi’s reluctance to expand ECB bond purchases was backed by Martin Blessing, chief executive of Commerzbank. While US economists urged breaking rules in emergencies, “this would be equivalent to temporarily suspending the freedom of the press and speech – to avoid uncertainty in the markets”."

Börjesson said...

Please correct me if I'm wrong, but when the shenanigans in Europe terrify investors, and the whole herd of them comes stampeding across the pond to buy US Treasuries, "the ultimate safe-haven" - doesn't that cause a contraction in base money? This flight into US Treasuries is happening right now, according to the Telegraph.

Michael H said...

Börjesson,

Whether to expand or contract the base money wrt treasuries is strictly a function of what the US Treasury and FED decide to do.

These investors who are buying treasuries as safe havens are buying them from somebody. It is just moving credit money around, UNLESS the Fed sells some treasuries from its balance sheet into this demand. So far we haven't seen evidence of that.

JR said...

Börjesson,

It can depending on liquidity conditions (they FED may have to sell if its real tight) but the effect in the big picture is largely marginal/de minimis in light of the 2.7 trillion in base money.

From the beginning of this month - Hit With Big Withdrawals, Fed Sells Assets, Borrows Cash:

"The Fed was hit with withdrawals of $83.3 billion last Wednesday, the largest withdrawals from its deposit accounts that were not associated with quarterly tax payments since February of 2009. $7 billion of that was the net cash transferred to the US Treasury from its note and bond sales less outlays. The Fed still had to meet the other $76 billion. These transactions were revealed in the Fed's weekly H.4.1 report.

The Fed was apparently forced to take extraordinary measures to fund these withdrawals. These included the outright sale of nearly $24 billion in its Treasury note and bond holdings from the System Open Market Account. As a result, the Fed's System Open Market Account (SOMA) fell to $2.611 trillion, some $43 billion below the Fed's stated target of $2.654 trillion. Prior to this week, it had not strayed from by more than $7 billion since June. The Fed's action was not only a direct contradiction of its stated policy, but it was done without warning or explanation. It ran counter to Bernanke's penchant for telegraphing every important move the Fed makes so that the banking/speculating organizations can front-run it."


See also this article.

Terry said...

I know that not everyone will agree with the subject matter but, here is a link to the first of 13 videos by David R Hudson, patent holder on the platinum group monatomic metals. He is lecturing a group after being out of sight for the last 12 years, talking about the scientific basis of his discoveries of white powder gold. Hudson has spent the last 12 years in Asia building them a processing plant and further studying WPG. If what he says comes true, I think the current price of gold could go out of sight rather quickly. How much is 1.5 grams per everyone in the world?
http://www.youtube.com/watch?v=54OEjpojSE4&feature=related

Max De Niro said...

JR,

So, is the only way that the Fed can reduce the money supply/its balance sheet, selling Treasuries or other securities it holds?

If this is the case, then shrinking the money supply significantly would only be possible if there was a large demand for Treasuries, as doing so in other circumstances would raise interest rates. Of course, a situation of large demand for Treasuries would likely not be a situation in which the Fed would want to decrease liquidity, so that would put them in quite a bind wouldn't it? Are they now trapped?

Wandee said...

@2000 flushes:
thanks for the reply
"Wandee: It's not so much that the USG will shut it all down, as it will just stop functioning, like an engine that has run out of oil."

That’s certainly possible and I truly hope it happens that way. I also hope Ron Paul gets elected.
But I don't see either happening. If the $ is no good they can issue ration cards for food, medical whatever and the more connected you are the more “credits” you get. Or they'll issue a new scrip w/ the ration cards just for domestic use.
Just like the good old USSR.

The military/political vacuum that would be created if the US military came home would wreak havoc around the world-which is the reason it hasn't happened.
Will the gulf Arabs stop selling us oil and give up their US military umbrella?
I think not. The dollar is backed by the full faith and POWER of the USG. If they don’t take dollars for oil we’ll just take the oil. But it won’t come to that because the people running these countries- SA, Kuwait etc. owe their position to US power. No US military and those govts. fall!
While gold can fill the void left by the collapse of the dollar what fills the void left by the end of the US military presence around the world? China? Russia? Iran? Good bye SK and Taiwan, good bye Kuwait and Iraq. What would stand between Iran and Israel? and that's just for openers!
No the world will keep the dollar alive if only barely just so it can have the protection the US military provides. Did anyone catch Obama’s glowing speech and warm reception in Australia about stationing 2500 US troops and air force there? No way the US military folds up over a little thing like worthless currency. What would a wounded, cornered animal do?
BTW I’ve read some Army general’s comments that say the army would never allow the gold in Fort Knox to be sold as they consider it a strategic asset they may need to employ in case of war to obtain the goods needed to wage war. AND Who controls Fort Knox? It wouldn’t surprise me if there is more gold than alleged there.

Personally I just don't see a total collapse of the dollar at least not for a long time. Devalue by 75% against many commodities-sure. Even $50k gold. But total worthlessness, everyone go home and don't bother turning out the lights-I don't think so.

A totalitarian state can function for a long time by exercising total control over it’s subjects. The gestapo and KGB were nothing compared to US homeland security. Resistance is futile. The masses are sheep and easily manipulated and maybe gold can only be sold to authorized dealers if at all with taxes collected at the point of sale.
Maybe gold can go to $10k/oz (on it's way to 50K) while prices in general rise by only 2 times?

Edwardo said...

Michael H wrote:

"I wonder how much MF Global may play a role. So far things seem relatively calm, but, see for example Denninger writing about Barnhardt Capital Management shuttering operations."

Here's a link to Bruce Krasting's comments regarding this issue.

http://brucekrasting.blogspot.com/2011/11/bet-for-bullard.html#comment-form

JR said...

The FED could also let the assets it holds on its balance sheet "mature" and then just eat the proceeds as opposed to re-investing it. But that is problematic too for a USG with a consumption need it must feed.

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

Another primer on the fed balance sheet and base money - Research Piece from St. Louis FED

"The monetary base is the narrowest measure of money used by economists. It consists of deposits held at the Federal Reserve by depository financial institutions (including commercial banks, savings banks and credit unions), plus all coin and currency held by households and businesses (including the depository institutions). These financial assets are used for "final" settlement of transactions in the economy—currency for hand-to-hand payment among persons and businesses, and deposits at the Fed for bank-to-bank settlement that is irrevocable (including check clearing and wire payments)—hence, the label of "base" (that is, basic) money.

In normal times, the monetary base increases and decreases roughly dollar-for-dollar with changes in the amount of assets held by the Fed. When the Fed buys an asset, such as a Treasury security, it writes a check drawn on itself. The recipient deposits the check at his or her bank, which sends the check to the Fed so that the check's amount may be credited to its Federal Reserve account. The funds at the Fed are valuable because they may be used to pay debts due, on behalf of customers, to other banks."

victorthecleaner said...

Max,

Could somebody give me an idea of what is the biggest driver of a contraction in the base money supply?

Two transactions that reduce the monetary base:

1) A commercial bank has borrowed money from the central bank and has posted a government bond as collateral (repurchase agreement). If that repo expires, the commercial bank returns the base money to the CB and receives the bond in turn. The CB then cancels that base money from its balance sheet. What the commercial bank later does with that bond, does not matter.

This is how the difference in interest rates on government bonds and the repo rate regulate the reserves of the commercial banks and the amount of government debt monetized in the banking system.

2) The central bank sells a reserve asset in the market (for example gold or one of the bonds they have bought). They receive either cash or credit money for it. If they receive credit money, the commercial bank or broker whose customer buys the reserve asset, will pay using base money (reserve held at the central bank). The central bank takes this cash or base money and cancels it.

mortymer,

Can we look to the breakup of operations at the London Bullion exchange as the next signpost along the trail?

How about this: The Fed knows that the dollar will eventually collapse. How about making sure this happens as quickly as possible? So why don't they force the LBMA banks to cover their unallocated liabilities with physical gold, force them to purchase that gold in the open market driving the price as high as necessary, and then bail out the LBMA banks by money printing?

As for the functioning of the London market, my impression is that a lot of physical has been made available in the market and is still being sold. Still, financial institutions lease their gold in order to get hold of eurodollars (which are short these days).

Victor

2000 Flushes said...

Wandee: Will farmers accept ration cards for payment? If I'm a food producer, I certainly don't want to take paper. It's worthless to me and it's worthless to my suppliers. Give me hard assets -- preferably gold. You can steal my land, but whoever takes it over is going to want hard assets -- preferably gold -- too. Ration cards and the like only work under full-tilt totalitarian communism, which I think would be a stretch for the USA under any circumstances, although one should never underestimate the stupidity of USG and its people.

What is the power of the USG when its currency is worth 0.00001% of its current value? Who will work for no pay to maintain the power of the mighty USG? Who will supply its military with bombs and fighter jets in exchange for worthless currency units? Who will pay its soldiers to fight? From where will DHS buy computers for its high-tech gestapo databases when Asia won't accept dollars for payment? Who will sit at the desk and run the queries? ("SELECT address FROM citizen WHERE terrorist = 1"...)

Who will collect taxes on gold? IRS agents? What are they making in salary again? Are they even showing up for work anymore? How does the IRS office keep the heat on, and the electricity flowing to its computers?

All "things that make you go hmm."

The dollar has already collapsed since delinking from gold and the descent is accelerating. The question is at what point the log chart goes vertical and the USD hyperinflates all the way down to its value as toilet paper, wallpaper, furnace fuel, etc. There is no way to know, but as far as the USD losing "only 75% of its value" from here and then magically holding it somehow - yeah, right.

Here is the key:

Where you say: "The dollar is backed by the full faith and POWER of the USG."

I say: The full POWER of the USG is backed by the dollar, which itself is backed by faith.

Dante_Eu said...

@Terry:

This guy really appreciate David Hudson's "Orbitally Rearranged Monoatomic Elements", ORMEs or ORMUS:
http://youtu.be/u22tg8Lnag8

I wonder if ORMUS has any effect on enlarging of one's *you know what*? If I only could add 2 - 4 inches...THAT would rock more than Freegold my friend! :-)

Wandee said...

@2200 flushes:
“Will farmers accept ration cards for payment?”
Maybe if that’s the only way they can buy gas or get medical care.
But think about who are the food producers in the US. It’s a handful of large govt. crony companies that control 80% of the food industry. They are virtually extra governmental entities.
Same for energy, medicine, banking almost the entire economy is controlled by the govt. and the crony corporations. It’s a fascist, socialist behemoth already more than halfway to total control. Most anything you want to do today you can only do with the govt’s permission and for that you will have to accept their scrip and be a part of the "greater good" collective.
The USG is all about world domination and we are in the home stretch with no strong determined challengers. We are going from "deficits don't matter" to "currencies don't matter". all that will matter is force and the power to back it up.
Maybe that won't happen but it sure looks like that's the way things are headed.

This from Mike Kreiger:
http://www.zerohedge.com/news/mike-krieger-exposes-three-card-monti

"Just like the con (confidence) game Three Card Monte through which people have been swindled out of their hard earned money in alleyways and street corners all over the world for half a millennium, the previously sovereign nations of Greece and Italy have now officially been placed into the receivership of “technocratic governments” and are now in the final phase of their looting. It truly is sad to watch these proud nations whose histories form the very core of Western civilization be taken down one by one but what is even more nauseating is watching the corporate media pundits, Wall Street analysts and financial experts cheer the news because it is ostensibly “good for markets.” First of all, it doesn’t take a genius to see that the people that screw up the most get promoted and advanced in the Western world’s current political/economic structure. The primary reason for this is that there is a very serious agenda of TPTB and that consists on using crisis to consolidate power in a one-world government, headed by a global central bank that issues a global fiat currency. People have been saying this on the fringe for decades and have been called conspiracy theorists the whole time but if you look at how things are progressing today you’d have to be asleep to not notice that the guys in charge are completely and totally determined to bring this sick, twisted dream into place. That is why the agenda moves forward despite the repeated, desperate cries of the citizenry for them to stop."

maybe you don't like Mike but he raises some points that warrant serious thought.

Jeff said...

Mortymer is right; everything old is new again. From the very first ANOTHER post, on the question of dollar/military strength:

You see oil flow is the key to gold flow. It is the movement of gold in the hidden background that has kept oil at these low prices. Not military might, not a strong US dollar, not political pressure, no it was real gold. In very large amounts.

ANOTHER (THOUGHTS!) ID#60253:

Do you really think the US is the only country that will stand a military in the oil fields? What if they told the US, NO, we want someone else to defend us? You think there are no other takers? The truth is, everyone is lined up to offer defense. The price of "oil backing the defenders currency" is worth almost anything! All the deficit spending you want, goes to the defender! Even Russia, if you can believe it! As my friend would say, "you think long and hard on this"!

The deal: you may stand your army for us, in return, " oil will back the dollar, if the dollar is made strong by gold" "in as much as our people may replace the lost value of oil with gold" "in as much as we will produce oil in amounts to equate a gold/oil/dollar ratio close to that which existed at out previous agreement in the 70's"

JR said...

Here is WSJ article on the FED's balance sheet as of August, 2011 A Look Inside the Fed’s Balance Sheet that discusses some of the factors:

"Assets on the Fed’s balance sheet sit at around $2.85 trillion as of last Wednesday. The level has held pretty stable since June, when the central bank ended it bond-buying program, commonly known as QE2.

The balance sheet is up from less than $1 trillion prior to the recession. During the downturn the Fed expanded its balance sheet through several programs aimed at keeping markets functioning. As markets stabilized the Fed shifted out of emergency programs and into purchases of U.S. Treasurys, mortgage-backed securities and agency debt securities to drive down interest rates and encourage more borrowing and growth in two separate rounds of what is known as quantitative easing.

Though the overall size of the balance sheet is continuing to increase, the makeup is moving back toward the long-term trend. The MBS and agency debt holdings, which were part of the first round of quantitative easing, have steadily declined as loans are paid off or mature. The Fed still holds nearly $1 trillion in MBS and more than $1 trillion in agency debt, but now owns more Treasurys — over $1.5 trillion. The Treasurys holdings are likely to continue to rise, as the central bank purchases bonds with money reinvested from its shrinking MBS portfolio. If economic growth accelerates this year, as the Fed hopes, ending the reinvestment of maturing MBS is likely to be the first step toward eventually raising rates and paring down the central bank’s balance sheet. But as recession fears have flared and stocks have plunged, the Fed could also declare its willingness to keep reinvesting in Treasurys for an extended period.

Meanwhile, other assets tied to emergency programs are disappearing. The Term Asset-Backed Securities Loan Facility, or TALF, ended in March 2010, and continues to fall due primarily to voluntary prepayments as the market improves and other financing options become more attractive. Liquidity swaps with foreign central banks have fallen back to zero after jumping last spring in response to European sovereign debt concerns and have remained at zero despite the recent flare up of concerns over Greece. Direct-bank lending has fallen to the tens of millions of dollars. The Fed still holds some $50 billion in assets related to the rescue of Bear Stearns and AIG, though that level dropped substantially earlier this year when AIG closed its recapitalization plan and repaid credit extended to it and has continued to decline as the Fed has slowly been selling assets tied to the Bear Stearns rescue."


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

Also, check out this Interactive Graph of the components of the FED's balance sheet over time. This is a good way to visualize the initial emergency lending programs and then see how they were faded out and replaced with additional asset purchases.

Jeff said...

Because really we haven't been paying for oil with dollars, but with gold. And paying a lot.

FOFOA: What past transgressions will we be paying for? We've OVER-paid for Saudi oil for 30 years now, with low priced Western gold.

and FOA: At the right time the Euro Zone will withdraw from the IMF, leaving the US and its factions as the only support for dollar credit assets held overseas. Then the evolution of SDR use our guide knows so well will be complete. This will leave the SDR interpretation open to only one avenue to finding support: its basket currency function dissolved, gold will have to flow from American based [gold stockpiles]. With most of the present official credit gold leverage built upon IMF protocols, the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates.

Wandee said...

thank you Jeff. I knew this issue must've been addressed somewhere in FOFOA. I'll go back and read that and any other writngs on the subject anyone can direct me to.
My initial response would be to refer to the book "Empires Of Trust" by Thomas F.Madden, which postulates very convincingly that countries uniquely let the US protect them because they trust us not to interfere in their internal affairs.

Why do yo think the Saudi's got so upset when we turned on Mubarak?

Thanks for the help. I'm exploring possibilities here. I like the freegold fairytale ending and I'm very much setup for it but I have this nagging nightmare all day long that it's going to go the other way.

2000 Flushes said...

@Wandee: First of all, thanks for the extra 200 flushes. Looks like even I can't escape inflation.

I hear you loud and clear. I am just trying to think through the mechanics of how total USG domination would work, post-dollar-collapse. It seems to me that USG power should be at is max when USD utilization is at its max, which seems to have been the story since Bretton Woods. When the USD's value and global utilization finally cliff-dives, the USG should collapse. (Collapse of course always happens faster than ascent, much like falling out of a tree happens faster than climbing it.) I don't understand how the USG suddenly becomes global super-leviathan once Emperor USD is revealed to be naked. Seems to me it currently IS global super-leviathan and what goes up must come down. All of the USG's power and force is predicated upon the pure-fiat USD as reserve currency -- a decadent luxury which is poised to end soon.

>> "Will farmers accept ration cards for payment?"
> "Maybe if that’s the only way they can buy gas or get medical care."

Who is selling the gas and providing the medical care in exchange for, presumably, some other kind of IOU paper device? Yes, the USG currently orchestrates and/or dominates many industries. But it does so with the USD. Could it do so without the USD and without gold? Domestically maybe, but no one else would trade with it and it would become an isolated, oil-starved pariah. Is that possible? Never underestimate political stupidity. But it's not one of the more likely outcomes, IMO.

sean said...

Wandee said: "countries uniquely let the US protect them because they trust us not to interfere in their internal affairs"

Well, that's certainly an interesting way of looking at it.

Wandee said...

Thank you Sean, not sure how you meant it.
Think W. Europe vs. Eastern during the cold war. Think how indignant Eurpeans get when the US tries to tell them what do. Or south Koreans. Now try being Putins ally and not doing as he wants.
Anyway this is from "empires of trust"

M said...

@ MaxDN

"and yet the markets are still functioning."

I agree. This is boring.

That Texas teachers fund bought billions worth of physical, Hugo Chaves repatriated all of his gold yet nothing gives.

It looked like something changed after the US debt downgrade when gold had its huge run. But priced in dollars, that amounted to nothing.

Michael H said...

Wandee,

"But think about who are the food producers in the US. It’s a handful of large govt. crony companies that control 80% of the food industry."

Half of your statement is correct. While a handful of corporations control the food system, these corporations are in the distribution business -- the cargills, etc. They don't necessarily produce the food themselves.

"countries uniquely let the US protect them because they trust us not to interfere in their internal affairs."

Ha ha, as long as said country's "internal affairs" are already approved by the American PTB. Saudi Arabia -- check. Iraq -- well, we'll get back to you on that one.

M said...

@ Wandee

"I think not. The dollar is backed by the full faith and POWER of the USG."

So was the Soviet Union.

What you are forgetting is that the American people are suffering from the support that the world gives to the dollar in exchange for military security. Look at the food stamp usage and unemployment numbers in the US since 2008. Look at the occupy wallstreet protests. As the status quo continues, it gets worse for the American people. Something has to give.

M said...

Im not sure if this made it here...

BRITAIN will soon be forced to scrap the pound and join the euro, one of Germany’s most senior figures said yesterday.

In a chilling threat to UK sovereignty, German finance minister Wolfgang Schauble predicted that all Europe would one day use the single currency. “It will happen perhaps faster than some in the British Isles currently believe,” he said.

His sinister warning followed the emergence of a secret German plan to build a powerful new economic government for the eurozone and block an EU referendum in Britain.

A leaked German foreign ministry memo detailed plans for a new European Monetary Fund. It also claimed the EU’s treaty could be altered to centralise more power without triggering a vote.

In a further sign of growing German supremacy within the EU, David Cameron was yesterday rebuffed by Chancellor Angela Merkel in talks over how to tackle the euro crisis.

Last night British opponents of the EU were horrified by the bellicose threat to Britain’s economic independence.
Tory MP Peter Bone said: “I would be happy to have a bet with the German finance minister that the euro will disappear before the pound. It is a completely absurd suggestion that will never happen.”

Fellow Tory backbencher Douglas Carswell said: “It is a tragedy that a continent of millions of hard-working people is run by clowns like this.”

And UK Independence Party leader Nigel Farage said: “This German bullying is deeply unpleasant and the sooner we leave the EU the better.”

d2thdr said...

British politicians an most commoners live under the imagination that they still have an empire. You have to live in the UK to know the bubble these people live in.

Though politicians make grand stateents they still do jot accept the diminiwhed and insignificant role Britain has in this world.

d2thdr said...

Also being an American lackey and side kick has kind of emasculated the politicians.

DP said...

I agree, it never ceases to amaze me how important some of my countrymen seem to believe we are on the world stage. A megadelusion.

Apart from me of course. You all need to know I am frickin awesome and not at all a clueless pillock.

Apologies, dear readers. Nigel Farage grabbed my keyboard and wrote that last bit. :-/ It won't happen again, because I intend to Roshambo him. Also Ed "biggest c*nt ever" Balls. Not that it will really affect anything outside Little England.

Jeff said...

rickards:

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/11/19_Jim_Rickards.html

Edwardo said...

d2thdr wrote:

"British politicians an most commoners live under the imagination that they still have an empire. You have to live in the UK to know the bubble these people live in."

I'd amend that to just English politicians. I am less sure of the attitude of, for example, Scot pols, and Scots in general.

DP said...

Yes, Scots in general suffer with a healthy inferiority complex, in my experience.

Unlike the Sassenachs in Westmonster.

Max De Niro said...

All,

I heard something very interesting today:

I was in Oxford, England, standing outside of one of the oldest colleges of Oxford University - Balliol college, when a group of students walked past.

One of them said "Oh, this is the college that's going bankrupt!"
Other "Really?"
First "Yep, that's what I heard."

So, take it for what it is, an interesting rumour - a very interesting one.

mortymer said...

@Indenture:
It was part of discussion comparing freegold, paper and gold standard ->
http://tinyurl.com/82xwzs8
"...We are floating here, there are waves up and down, fear and greed. Some want anchor, (which has been tried and is considered dangerous and un-effective) more experienced just a good reliable compass. The IMFs drunken captains holding the wheel try to steer in uncharged waters almost tripping the boat while more and more see the benefit of a golden rose..."

Blondie said...

mortymer, Indenture,

That link doesn't work... linking to Page 2 (or 3) comments is tricky. You have to assemble the URL yourself from the page address and the comment hotlink as neither will link you there directly. Another Blogger bug that has yet to be addressed. Permalinks to comments on the first page (the first 200 comments) on any post work fine, this only applies to comments after page1.

A link to that comment that does work looks like this:

http://fofoa.blogspot.com/2011/10/tweet-this.html?commentPage=2#c2301138114309210798

First you take the URL of the page the comment is on (directly from the address bar, in this case:
http://fofoa.blogspot.com/2011/10/tweet-this.html?commentPage=2)

then take the comment's permalink address (the one inside the comment's timestamp, in this case:
http://fofoa.blogspot.com/2011/10/tweet-this.html?showComment=1320233103116#c6629820772994608749)
Note that the comment permalink address does not have the page number in it. This is why it does not work. Blogger bug.

Anyway, copy the code at the end of the comment timestamp address beginning with the # (when used in a URL the data following the # is called the fragment identifier) and paste it onto the end of the page URL, and test it using the preview function before publishing.

I posted a response to mortymer's comment, which is at the end of this comment, much further down the same page.

The link to Indenture's question is on this the third page of Moneyness comments, so the URL to get you to it looks like this:
http://fofoa.blogspot.com/2011/11/moneyness.html?commentPage=3#c7589989133358641608

All three of these links work fine for me when using preview, so I'm pretty sure this is the correct formula.

costata said...

Hi Blondie,

As a short cut you can also right click on the date/time of the comment you want to link and select Send Link and it will be emailed to you.

This way you have the comment ID number already in place and all you have to do is the correction for the page per your instructions:

?commentPage=X#

Cheers

Blondie said...

Cheers costata!

Blondie said...

edit: that option doesn't seem to be available using MacOS/Safari. I presume you are using a different OS/browser to me?

enough said...

talk gold.....buy gold?

Apmex has quite a few capsule only random West Point mint issued "First Spouse" four nines legal tender 1/2 oz. gold coins at +$29.99...some nice 2007 Dolley Madison proofs in there (so I'm told). I know, I know...I'd rather buy half oz. gold blobs at +$28.99 but for anyone that actually like to enjoy and admire their gold horde these are cheap. Very small mintages. Just put in special instructions to avoid the martha's and abigails...their mugs are frightening :-D !!

Aaron said...

Exclusive Interview with Bill Dudley, President & CEO Federal Reserve Bank of New York

--Aaron

Blondie said...

Rickards:

“...I can see it happening, and it might even be a good thing in the sense that if we combined the official US gold of 8000 tonnes and I think 6000 tonnes that we could confiscate from the Europeans, Japanese and the IMF, and there’s another several thousand tonnes out at JFK airport in warehouses controlled by ScotiaBank and HSBC, its amazing how concentrated the gold is, its not in that many places, its really ten, you can count ten places that hold really the vast majority of all the official gold in the world, combine all that gold and the US could easily have 17,000 tonnes or upwards of 20,000 tonnes, which is you know 70% of all the official gold in the world. That’s enough to dictate the outcome of the international monetary system. It would be like, it would be a lot like Bretton Woods... [other nations] they might as well have stayed at home because the US dictated the outcome... We could do it again if we had that much gold, we could say hey, here’s the deal, here’s the new currency, its the new American dollar, backed by gold, all you other people have to peg to it and if you want your gold back, get to work, and, and try earning it and you know we’ll give you an IOU or something.

Again, this is an extreme scenario, but I think it is something that would be likely to happen in extreme distress. I mean, governments are not just going to throw up their hands, if we have some kind of collapse of confidence in the dollar the United States government is not going to curl up in a ball and cry, they’re going to use executive orders and executive power to dictate an outcome.

[comparing the US to Rome as the current world superpower]... if we converted the European gold for our own purposes, think of it as a 100% tax”

So the US govt will not curl up in a ball, but the rest of the world will?

2000 Flushes said...

20,000 tons you say?

http://www.youtube.com/watch?v=0EdAAZ2x5-E&feature=related

Blondie said...

From Aaron's link above:

DUDLEY: "I completely understand the anger of people at "Occupy Wall Street." What I don`t think, I would argue, I don`t think they understand enough is why we intervene in the way that we did. It wasn`t that we wanted to rescue the banks. We wanted to rescue the financial system because without a functional financial system, credit can`t keep flowing to households and businesses which is the life blood of the economy."

Implicit assumption made there that this "economy" should be sustained. I would argue that all those outside the Anglosphere would rather it was not. Oil only goes along with this because they are being overpaid in gold.

"We think the European situation is definitely solvable. Their fiscal position is certainly no worse than the U.S. The problem is a political one."

Political problem being that the European politicians cannot get the ECB to print on demand. This problem is only "solvable" (from the $IMFS/Anglosphere perspective) if the ECB print. Finally we may see the rubber meet the road. We know what A/FOA had to say on this, we know that this is the real test.

This is a matter of enablement. Printing enables the debtors. This is just like raising a child. You cannot set the wrong precedent. Your credibility disappears. This has been publicly acknowledged by the ECB several times in the last week.

Enabling does a disservice to both parties, ultimately.

I think this is crunch time. Events could occur rapidly from whatever flashpoint eventuates in the next few weeks. If the ECB don't flinch, the market will have to reexamine it's assumptions. Their only realistic option is gold. As Bruce Krasting observed today European policy is forcing the repatriation of capital from the likes of Switzerland back into the banking system of the PIIGS... this capital will, IMO, likely move into gold rather than be held domestically in these countries. It was offshore because of the risks involved in keeping it at home, so if it is forced home it will not be held as currency in the bank.

Europe is giving capital no (realistic) option but to run to gold, as a matter of policy. I don't expect to see the ECB print, and this will precipitate the run.

I can see why Dudley would frame this as a "political" problem.

Aaron said...

February 2011

Randy Strauss:

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


-----


November 2011

DUDLEY:

I think the important thing, it allows people, investors to have more certainty about how the Federal Reserve is going to actually behave in the future (INAUDIBLE) behave in the future. If people have more confidence in how the Fed is likely to react to future incoming economic information, that reduces the riskiness of them going out and buying financial assets. It reduces risk (INAUDIBLE) which supports the economy. Right now we have this mid 2013 date. That`s what we`ve said. But what`s that date based on? And so I think it would be helpful if we could provide a little more detail about what was the underlying thinking that caused us to arrive at that particular date?

GHARIB:

So how did the Fed come up with that mid 2013 that would keep interest rates low until that date?

DUDLEY:

Probably because I think it was the sense of the committee that we were unlikely to reach an unemployment rate and inflation rate that would cause us to want to exit sooner than that. So implicit behind the number, the notion that the economy was unlikely to be strong enough to generate an unemployment rate low enough or inflation rate high enough that would cause us to want to leave sooner.

Blondie said...

Aaron,

While their dates may coincide, I don't believe the "significant transitions" Strauss and Dudley are referring to are the same thing.

Aaron said...

I don't think we could ask for more clarity than Dudley's comments. If we wish to continue to participate in global trade -- we must release our gold. The only question is price.

--Aaron

Aaron said...

Hi Blondie-

"While their dates may coincide, I don't believe the "significant transitions" Strauss and Dudley are referring to are the same thing.'

We agree. My hope was not to place undo significance on Dudley's ideas and Randy's mention of the same underlying idea, I merely found the coincidence of dates interesting.

But you have piqued my interest, why do you believe they are not referring to the same thing?

Blondie said...

Because Strauss is talking about a new monetary system, while Dudley is talking about the Fed ending ZIRP.

How do you read "we must release our gold to continue trade" into Dudley's comments? That escaped my notice.

Aaron said...

How do you read "we must release our gold to continue trade" into Dudley's comments? That escaped my notice.

Dudley didn't say anything about gold and as such nothing has escaped your observation. Those words are mine alone from reflecting on the words of A/FOA.

When I listen to Dudley I hear a whole lot of nothing. That nothing simply re-enforces my conviction that we must change course.

--Aaron

Blondie said...

"When I listen to Dudley I hear a whole lot of nothing."

You and me both.

Its all meaningless hot air to you and I, but the fact he is being interviewed in a calm and collected fashion is all the reassurance the majority require. The substance (or lack thereof) is of much less importance than the style.

mortymer said...

Blondie, costata thanks.

Could this be relevant to Ricard´s of control of foreign gold?
http://neuralnetwriter.cylo42.com/node/3993

Blondie said...

mortymer,

I not sure how.

I think Rickards' book sales are more relevant.

As an aside, the NYFed basement is not US territory, it is officially designated as foreign soil.

mortymer said...

I also am not familiar with international law, what is theoretically possible or what is not but I take it this way: The taking over of the foreign gold is a weak bluff card and does not IMO reflect the reality. It tells just one, that the gold is there :o)

Blondie said...

It just tells one, that the gold is there, perhaps to lessen the credibility of the Eurosystem gold reserve.

This is a confidence game, after all.

d2thdr said...

@ Blondie (quote)This is a confidence game, after all.(unquote)

from March 14. Hope FOFOA does not mind.

Hi d2thdr,
Yes, I am in touch with Randy Strauss. His theory is that tptb are planning for some sort of 2013 transition, after the financial waters have hopefully calmed. But in a way that is like trying to hold back the tide for two more years. Freegold is like a tsunami that can overrun manmade barriers at any time it wants. So every day is like living on the northern Japanese coastline near a nuclear reactor until you've got your gold in hand. Then you are safely on higher ground.

Sincerely,
FOFOA

sean said...

Interestingly, I'm starting to see some comments in the media on the idea that Britain will join the Euro. Can't see it happening before a lot more printing though!


Sorry Wandee, the link in my previous comment was not really visible - this is what I was referring to in regard to countries trusting the US because they
promise not to inferfere in their internal affairs .

Max De Niro said...

No UK government would dare join the euro unless the UK was truly on its knees.

JR said...

There's probably a reason the American and English press dump on the Euro so.

mortymer said...

A very good speech about Sterling, UK and joining the Euro; 1998

Mr. George discusses the prospects for the euro and the attitude towards the
single currency in the United Kingdom Speech by the Governor of the Bank of England,
Mr. E.A.J. George, given to the Financial Forum of West Flanders in Bruges on 21/10/98.

http://www.bis.org/review/r981029b.pdf?frames=0

mortymer said...

BIS - AF - The relationships between currencies and gold

"...Like other real assets, gold can appreciate when there is widespread inflation, which remains a threat. Gold’s importance as a monetary anchor came to an end with the emergence of more rigorous monetary policies in the 1980s and especially the 1990s. But in periods of crisis gold can constitute a sort of reserve or guarantee “of last resort” for a country, as Italy demonstrated during the 1970s. This view appears to be shared by the central banks of the leading industrial countries; when they signed the September 1999 agreement, they stated that gold continued to have an important role to play in the management of global reserves.

It is up to economists to analyze whether and to what extent, in an international monetary system that has surely not yet become fully consistent in many of its parts, reference to gold, which performed a monetary function for thousands of years, can still contribute, in the decades ahead, to preserving that fundamental condition for orderly economic activity - price stability..."

[Mrt: pls note the "end of gold anchor" thingy, actually this is a surprise to me that this term is used also officially, :o), and the "reference point" spoken about by nobody else but Zoellick]

http://anotherfreegoldblog.blogspot.com/2011/11/bis-af-relationships-between-currencies.html

Orig.: http://www.bis.org/review/r001201b.pdf?frames=0

Wandee said...

@200 flushes even in Weimar and Zimbabwe people still went to work esp. govt. workers who got the newly printed currency to spend first.
@Sean:
Point well taken. However all those countries were not “protectorates” of the US Empire “” Certainly the US wants to extend it’s influence wherever and however it can and mistakes are made quite often including many that you mentioned: Iran, Iraq, Afghanistan, Vietnam just for starters. The other side of that are the willing members of the “Pax Americana”: Japan, Taiwan, Israel, South Korea, Western Europe and most importantly perhaps the Gulf Arabs. For these willing countries they get the protection of the US AND maintain most of their domestic sovereignty as long as they play along. Any country that opposes the Empire is subject to having the US attempt to change their govt. Contrast that to the members of other empires for example the Soviet Empire or even the British Empire or the short lived Third Reich. They always employed armies of occupation. When the US goes that route they fail too.
The US knows it’s window for world domination is closing and it is becoming more desperate preparing for worldwide social breakdown by grabbing as much oil, territory and authoritarian control as it can. And it’s “Pax Americana” allies support it. Currency issues and all.

Wandee said...

ANOTHER (THOUGHTS!) ID#60253:

Do you really think the US is the only country that will stand a military in the oil fields? What if they told the US, NO, we want someone else to defend us? You think there are no other takers? The truth is, everyone is lined up to offer defense. The price of "oil backing the defenders currency" is worth almost anything! All the deficit spending you want, goes to the defender! Even Russia, if you can believe it! As my friend would say, "you think long and hard on this"!
I’m thinking long and hard on this. The key player is the Saudi’s. So who else could protect them any better than they can protect themselves other than the US? Russia no longer has the ability to project power beyond it’s adjacent borders and who would allow them anyway unless they had no choice? Only China has the potential and then only in the future, but they currently have the same problem-they can’t project military power beyond their adjacent borders. Certainly the Saudis can’t turn to Iran (Russia’s ally as well). Europe has no military to speak of and wouldn’t cross the US anyway. If the Saudi Royal family wants to maintain power they need the US military. The end of the oil backed dollar will not happen quietly.
Another:
“The banks must sell all the gold they have to keep the system together. And once it is all sold and the financial markets implode the nations will use "whatever force is necessary" to pull the gold back in!”
The US has used its reserve currency to build the strongest intelligence and military capabilities the world has ever seen. More powerful perhaps than all the rest of the world’s military combined!!
I can’t see it letting this advantage go quietly. They will employ this power to try and control the world. The more desperate they become the less they will rely on trust and the more they will resort to force. I do not look forward to this unfolding.
Meanwhile I don‘t see any members of Pax Americana defecting. If anything they are becoming more complicit with the US. Take France for example often a big critic of the US have now changed their tune to support US militarism. Australia which could easily fall under Chinese influence has cemented it’s future with the US with the recently announced posting of US Military in Darwin.
I think we really need to be cognizant of how this collapse will play out and not be complacent that our physical gold will fully protect us, while the US Empire goes quietly into the dustbin of history. I wish it were so easy.
But I fear we are all in for very difficult times. Deflation, Inflation, HI, Freegold and a new beginning, or a long bout of war, despotism and destruction in the midst?
I think this debate is as important as the inflation/deflation one.
What sayest you FOFOA?

Jeff said...

Wandee,

I wouldn't count the russians out; besides their military weapons they are now bigger oil producers than the saudis. Do you think the two largest producers could squeeze the west, if they agreed to do so? Have you seen what the Russians do with natural gas supply when their neighbors displease them?

Jeff said...

ANOTHER
(10/10/98; 16:47:10MDT - Msg ID:488)
THOUGHTS!

Oil in the ground walks the quiet path and speaks with the modest voice. The power of thiswealth brings not the need for confrontation, as all know this commodity could become a"currency" in and of itself, if needed.

FOFOA: Where did all of this money come from? It would seem that America found an efficient means to issue claims on the country in exchange for something that goes up in smoke. Would OPEC own America lock, stock, and barrel? What would OPEC do with all of that cash? And would there be any end to it? How are the poorer countries that must EARN their dollars, as General de Gaulle indicated, going to fund their own oil needs? Banks are the answer. Buy banks, fill banks, and recycle the petrodollars. Oh, and let's not forget Gold. Straight from two ministers of finance, "We would rather keep the oil than have the paper money." We thank you for that insight.

Jeff said...

Wandee, FOFOA wrote a post addressing your question, called Credibility Inflation.

FOA: Fiat currencies must, by definition, always expand in quantity. Their continued usage and acceptance is always obtained with the bribe of "more wealth to come!" Without that bribe, humans would never fall for holding a debt to receive the same goods in the future if they could get the real thing today. Human nature has always dictated that we buy what we need now instead of holding someone's IOU to receive it later. That nature is only changed through the "greed to obtain more." Like this: "I'll hold my wealth in dollars as long as my assets are going up. Later those increased assets will buy me a better lifestyle as I purchase more goods and services than I could buy now."

People destroy the currency structure by thinking it can deliver more than reality will allow. Instead of all debt failing slowly with each upward march of price inflation, prolonged "credibility inflation" snaps all at once as investors try to suddenly revert to a "buy now mentality." The inability of government authorities to contain the fiction of "good debt" is usually the feature behind the investor mood change. The "snap back" into a sudden "real price inflation situation" caused during this stage by a currency failure always breaks the whole structure. We approach this end today!

Someone I know once said; "your wealth is not what your money say it is!"

Date: Sat Apr 18 1998 23:17
ANOTHER (THOUGHTS!) ID#60253

The present digital money undervalues all real things in terms of "gold real money". This process hides the "current debt" that by default, encumbers all assets denominated in "digital currency"! It is to say " your wealth isn't as great as your currency says it is"!

For persons who "settle up" and convert to real things and gold, they have:

"taken two steps to the right, before the opponent has turned" In a Dual it is cheating, but in "life and death", it is a "good move", yes?

Jeff said...

So maybe aircraft carriers don't run on oil any more, but they do still run on dollars, and dollars run on credibility, which comes from acceptance by oil, and can't be forced by aircraft carriers.

Gary said...

Very interesting article about the ECB's actions (or inaction) in relation to Italian bond yields very recently, and the subsequent resignation of Berlusconi.

http://www.zerohedge.com/contributed/brandy

Very interesting.

Wandee said...

@Jeff
“I wouldn't count the russians out; besides their military weapons they are now bigger oil producers than the saudis. Do you think the two largest producers could squeeze the west, if they agreed to do so?”
Perhaps but then there wouldn’t be much left to squeeze other than paper? I think maintaining the status quo (the devil you know) is more important to the Saudis and indeed all governments. The US will never let it come to that-there is no doubt that would start a shooting war-none-zero chance the US would let the Saudi’s partner with the Russkies, nor would the Russians make that move, unless of the course the US military has been emasculated-and the US would never peacefully accept that. The Saudis won’t go that route either. And who’s to say the gold isn’t still flowing their way as I’m sure it is and will continue to.
“Have you seen what the Russians do with natural gas supply when their neighbors displease them?”
Exactly they must use force, the US is at least a bit more subtle and diplomatic in making treaties.
I think there is a great significance to Obama, the bring the troops home guy, giving that speech in Australia announcing the first modern era posting of US military in Oz, sticking it in the face of the Chinese with the Australians standing behind to make it clear where they stand. The US was invited I’m sure or do you think we somehow twisted their arms? The US is pressing (while they can) for complete military control of the world! For sure they will have to allow others a seat at the table, including the Chinese and Russians. Perhaps just like the Europeans found they needed a common union of sorts to maintain peace, enough of the world’s leaders ultimately are realizing the same thing.

Wandee said...

@Jeff
I agree with that. Looks like we could hit that wall of credibility any time. Oil must still be getting gold though or we wouldn’t be getting any oil right? It’s the after the end of credibility that worries me, what happens then???

Jeff said...

The russians use force in a dollar reserve system. If the US used force against those that give it credibility, what happens to credibility?

FOFOA said...

Hello Wandee,

"What sayest you FOFOA?"

The US military is a product of the US dollar, not the other way around. It is true, the world has been paying the US to be the world police by using US dollars, intentionally or unintentionally. But in case you haven't noticed, they are backing off from that support. There is a significant domestic economic cost for supporting the dollar, and at the moment it seems everyone is more concerned about their domestic economies than keeping the dollar as the global reserve currency. Saudi oil is simply not enough backing for what the dollar has become. It wasn't solely sufficient in the 70s and it is less so today.

In this chart that shows the US trade deficit as well as the trade deficit ex-petroleum, you can see that we are still in deficit even without counting oil. Here's a great list of the top 10 US imports by country (2008; scroll down for the countries). Notice oil and gold. Gold is not even on the import list. Now look at this list of the top 10 US exports by country. I found it interesting that "non-monetary gold" was listed in our top exports to London and India, and "gold" was our top export to Switzerland. If you add it up, we exported $14.3B in gold to those three countries in 2008. Imagine a 40X revaluation of gold. $14.3 X 40 = $572B, about the size of our trade deficit.

You make the point that the US is still extending its military reach. If the US pulled its troops home from the more than 150 countries around the world, that would go a long way towards balancing both the federal budget and the balance of payments. But "Obama, the bring the troops home guy" notwithstanding, that's unlikely to happen anytime soon.

You also made the point that "even in Weimar and Zimbabwe people still went to work esp. govt. workers who got the newly printed currency to spend first." The USG needs a lot of currency to keep all those troops and government workers at work, right? So what's going to happen when the US dollar starts losing purchasing power? Is the USG gonna print?

To me it seems that all of your points argue strongly for the opposite conclusion from the one that you are using them to make. The modern US military was built because of a strong dollar that was able to be spent without the pain of work. And now that same US military requires a constant flow of goods and services to merely exist. So with a weak dollar, it seems to me that the very existence of the US military is just one more in a long line of things that guarantee full-on wheelbarrow hyperinflation and the inevitability of Freegold. So sayest me. ;)

Sincerely,
FOFOA

Wandee said...

Thank You FOFOA.
It seems we agree right up until the very last sentence. I don’t know how it will play out.
I appreciate everyone’s input. It seemed to me in reading this post and many of the comments there was this complacent optimism how the collapse of the $ and emergence of freegold would play out.
I’m just not so sure that if the Dollar suddenly collapsed the US would not declare it an act of financial terrorism and strike back by securing oil. And the world knows this. Big stakes poker.
I’m hoping Rickards is right per Blondie’s post above and the US/West can muster up 20ktons and figure out some kind of new currency alignment. Albeit with a much weakened dollar and Western standard of living. Can’t wait huh?
I hope you’re right though and thank you all for your hard work here.

Indenture said...

It's mid-November. Shouldn't some Venezuelan Gold be slowly moving across the globe by now?

M said...

@ Wandee

The last time this happened, France pulled out of the London gold pool, destroyed Bretton Woods 1(the gold backed dollar) and sent a ship to New York to pick up its gold.

That says allot about Rickards theory's about the US seizing gold.

Another thing to keep in mind about oil. (I am working on a blog post about this) I bet not very many people knew that you can make plastics, industrial chemicals, solvents and jet fuel with natural gas.

FOFOA said...

1/4

Hi Wandee,

"declare it an act of financial terrorism"

An act of financial terrorism by whom? It is the marketplace, the physical plane, the Superorganism that collapses a currency. So it's an act of financial terrorism by 7 billion economic actors and trillions of economic exchanges. You think that can be reversed from a central command station? That's like shooting at an incoming tsunami.

The first step is to understand that the US military does not strengthen the dollar, it "taxes" it or weakens it. The US military exerts a downward force on the purchasing power of the dollar because it is a giant super-consumer run by the currency issuer himself.

As to how the USG will react militarily to the collapse of the dollar, that is a separate discussion with many possibilities. But what we can predict with confidence is how the USG will react monetarily. It will do two things. It will print dollars because it has to, and it will ship (export) political gold to key players in defense of a failing dollar.

Rickards predicts the USG will take Germany's gold as a response to the collapse of the dollar. Does this make sense in light of the USG's needs at that time? The USG won't need gold or money. It will need continuity in a trade inflow of the real goods and services needed to run a large government and military.

FOA also said the USG would do these two things: hyperinflate the dollar and ship ever higher priced gold in defense of that failing dollar:

FOA (08/24/01; 10:54:30MT - usagold.com msg#101)

…the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates. With the world credit gold markets paralyzed in default and dollar credibility placed in question along with American economic stamina; physical gold will return to official hands in Europe in exchange for Euros. A paradox observed as high gold places more demand upon Euros and sends the dollar ever lower.


A little different than Rickards' prediction, wouldn't you say?

FOA (10/3/01; 10:21:26MT - usagold.com msg#110)

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.


This was one of the main points in my post above.

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

Our dollar was very much hyper inflated as it was used in a final act of world economic leverage; "political use" that drained the last bit of "leverage value" from a failing currency system.


That "leverage value" we drained was the credibility built up during Bretton Woods. Think of it as a kind of "credibility savings account." We saved it up for many years, and then we drained it for 40 years.

Cont…

FOFOA said...

2/4

FOA (11/2/01; 12:35:27MT - usagold.com msg#128)

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.


Yup, this discussion is more about what to bet your wealth on than it is about whether the USG will lash out like a cornered animal. I don't know if it will or not. But even if it does, it will be within the confines, the reality of a collapsing dollar and a Freegold gold revaluation. And so any action the USG takes will require more printing and exporting more gold.

Wandee: "I’m hoping Rickards is right per Blondie’s post above and the US/West can muster up 20ktons and figure out some kind of new currency alignment."

When the USG called in the gold in 1933, it was legal tender currency that could be called in. Here's some more FOA:

FOA (08/28/01; 10:34:03MT - usagold.com msg#104)

They took back what was "legal tender" , then ,,,, and won't try to get at what is now private gold wealth.

Just like the dollar tender in your pocket, US bullion was not yours to begin with. They had the right to call it in. This area is also a hard concept for gold thinkers to come to grips with. After decades of being told that the gold in Fort Knox belongs to the public, the truth that it doesn't and never was! Its impending use as a currency supporting supplement is shaking people up that believed that position. Soooo many investors thought that this gold reserve was there to back their currency at home, at some future high price… Again, this ain't gona happen! Our currency is going to inflate to hell, even as we clean out our official gold reserves to ship overseas. If ever there was a story to buy gold for your own,,,, this is the tale that will create a killer offtake the world over!


Wandee, you suggest that the big bad USG will simply take the oil when it can no longer buy it, and it will take Germany's gold per Rickards. So what if it does? Do you think either of these actions would reverse a dollar collapse or Freegold revaluation? Would stealing oil and gold make for a viable "strong dollar policy?"

FOA (07/31/01; 21:14:43MT - usagold.com msg#86)
Political Gold

All gold held by the state, unless distributed first to its citizens, is subject to worldwide "Legal Tender" political claims first. The precedent for this is clearly revealed as the Swiss must ship their "Political Gold" to others first; while sending currency to satisfy gold claims against it.

As the IMF has recently extended this protocol, swapping gold at different values, to settle political debts; this action further justifies the US being able to use its gold to defend its currency's settlement function. Aside from the US minting eagles for public sale and it being against the law for gold reserves to be sold outright to open bidders.

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

To draw a conclusion from this "current event":
Deep Storage gold

Americans have the right to buy and own the "Wealth Of Ages". As events draw to a close upon dollar use, we can expect outright use of America's "Political Gold" in restraining the speed of its currency's burn.


Cont…

FOFOA said...

3/4

Wandee, these are two very different predictions. Which one makes more logical sense? The USG tries desperately to keep the goods and services it needs flowing in? Or the USG tries to hold the world hostage and force a new gold standard down its throat? To me, all this talk about the USG confiscating gold and then seizing oil fields when the dollar collapses, and then re-linking the dollar to this newly stolen gold… sounds just like "but Brawndo's got what plants crave…"

I would love to see anyone predicting a USG gold confiscation followed by re-linking the dollar to gold address the issues I wrote about two years ago in Confiscation Anatomy, issues that argue strongly that the future simply can't and won't unfold this way.

Excerpt from Confiscation Anatomy:

The international financial system and the global market place run on procedure protocols that are not binding. They are not binding, but without them, international trade would stop altogether. Just because a rule is not binding does not mean it is not important. And just because a non-binding rule is broken, does not mean it disappears.

Why do you think the US gold hoard was never publicly audited after this? And why do you think the book value of that gold was left frozen at $42 per ounce, never marked to market bringing it "back into play"?

…if the US ever put gold back on the table through another confiscation of its citizens' gold, the BIS would call in all of its outstanding claims in gold at the rate of $42 per ounce. And the BIS would not be alone. Other entities would have legal claims for gold at $20.67 per ounce, and others at $35 per ounce. How much gold was either confiscated or defaulted on without due process of law? Claims of perpetual entities never go away. If the US government ever exposed its own gold (or its citizens' gold through confiscation) to the light of day, it would expose itself to all kinds of claims and an international legal mess. Under international law, the US is still an OUTLAW when it comes to gold!

This is why gold is off the table. This is why we can never go back to a gold backed dollar. It is also why they cannot call in gold AGAIN under the same dollar that they did in 1933. To call in gold at a specific exchange rate now, the US would first have to back the dollar with gold at that rate and then call it in. That would expose the US gold to international legal challenges for redemption. If they simply called in the gold without backing the dollar, the US government would be exposed to thousands of internal law suits. These law suits would rightfully demand a retroactive reversal of 1933 before any new confiscation could take place. They would demand that US official gold be distributed to all citizens at $20 per ounce BEFORE it could be turned back in to the government.

The US government will never take this risk! It will never expose itself to this legal nightmare! The US is already a golden outlaw!


Cont…

FOFOA said...

4/4

If the coming dollar collapse takes the first waterfall route and hits the riverbed, how would an insane and illogical confiscation play out? Well, if the US dropped out of the BIS to secure sovereignty over its confiscated gold, the BIS would halt all international dollar traffic and probably try to use those dollars to buy gold on the international free market. The dollar would be instantly dead.

But what if the dollar falls all the way to the pits of Zimbabwe hell? What if the US simply declares the dollar dead, confiscates the gold, and then starts a new gold backed currency? Wouldn't that work? I will tell you now that it would never be accepted on the international market as an exchange contract for gold! Even at $10,000 or $100,000 an ounce. The world is not that stupid. The US has defaulted on its gold obligations to the world TWICE now. The first default was 41% and the second was 100%. What will it be next time? No, the US will never be trusted to issue paper promises for gold again! Freegold is the only option!

The US government and the US dollar is caught up in this massive Catch-22 because of its own past cheating actions. This is why a future gold confiscation is simply not in the cards. This is why the Fed will appear more and more INSANE in its futile attempts to save the current system, all the way to the fiery bottom. And this is why freegold is the only possible end to this system.

Bottom Line: It takes AAA credibility to gain the confidence needed to run a fractional reserve paper gold scheme. The US government spent all of its credibility on a failed scheme long ago. And now the current COMEX scheme will face the same fate, thanks to the inflating of paper contract supply to meet demand, far in excess of physical supply, in the sole support of the US dollar printing authority that needed support since it had already defaulted TWICE!

And when the dollar finally collapses in value, a THIRD and final default will take place. The US government's existing dollar-denominated debt of $11 trillion will become instantly worthless.

And once the printing press source of funding is gone, the US will be forced to settle its trade deficit with real money on a 1 to 1 basis, no more fractional reserve shenanigans. If this is done centrally, as it is now, then the government will face a whole world of claims saying the gold already belongs to them. For its past sins, the government cannot take this chance. The other way to settle an ongoing trade deficit is on the local level, through millions of small transactions.

This is freegold.


Sincerely,
FOFOA

Robert LeRoy Parker said...

" No, the US will never be trusted to issue paper promises for gold again!"

People's memories are short. There are generations of people of which the vast majority are oblivious to the US defaults on gold.

We are following in the footsteps of giants. But other than central banks, who is the old world gold exactly? What about David?

I'm convinced the dollar is dead, but i'm not convinced that freegold is in the near future.. And if it does occur, despite all of its merit, i'm not convinced it will be sustained.

There is too much noise and too much complexity. Another was right to preach being of simple thought.

FOFOA said...

Hello RLP,

"People's memories are short. There are generations of people of which the vast majority are oblivious to the US defaults on gold."

Of course there are! And most people have no gold! And of those that have gold, most have only contracts good for fractional shares in some ambiguous claim against some counterparty that assures them they own gold. Do you think that the great enthusiasm for corporate promises makes them better than the real thing? Should we be frontrunning the Sheeple? Should we follow in the footsteps of the masses? The point is that it doesn't matter what most people think. They won't get it until it's right in front of their face! Did you think them getting it is what we're waiting for?

"We are following in the footsteps of giants. But other than central banks, who is the old world gold exactly? What about David?"

David is the 1922 Genoa conference. David is the last 90 years. David is the dollar. David is spent. Old world gold is old money and super producers. I have stories about multi-billionaires sending me donations, Chinese industrialists buying 20 tonnes at a time, and really old money in Europe that finds time to read my humble little blog. Unfortunately I cannot tell you these stories beyond that.

"I'm convinced the dollar is dead, but i'm not convinced that freegold is in the near future.."

You must be viewing Freegold differently than me. I cannot see a dollar collapse without a simultaneous revaluation of something else. It's a seesaw. The dollar isn't collapsing against gold. It is collapsing against the physical plane of goods and services. That's the fulcrum, not gold. Dollar collapse is the force, goods and services the fulcrum, and gold the load. So gold is revaluing against goods and services. The gold revaluation is against the physical plane so as to fill the reserve void left by the dollar's collapse.

"And if it does occur, despite all of its merit, i'm not convinced it will be sustained."

Again, a different view than me. I can't imagine how Freegold will need to be sustained. It is as self-sustaining as entropy. It would take a lot of energy to unspill that milk.

"There is too much noise and too much complexity."

Where, in your head? ;) In the mainstream media? On CNBC? ZH? I thought things were pretty simple and quiet here at FOFOA.

"Another was right to preach being of simple thought."

I'm not sure what this means. I thought he merely meant that protecting your savings only requires the simple Thought it takes to buy physical gold, as opposed to understanding complex derivatives or needing to hire "experts" to explain to you what you should do with your savings. ;)

Sincerely,
FOFOA

intuitivereason said...

"The US government will never take this risk! It will never expose itself to this legal nightmare!"

True today. In 2013, should Ron Paul be at the helm... integrity can change much.

Greenie said...

Forbes article -

Is FOFOA as good as FOFOA?

mortymer said...

Wandee:
http://anotherfreegoldblog.blogspot.com/2011/11/barry-eichengreen-global-shifts.html

mortymer said...

@II:
It has a nice summary:
"...It is difficult to pin down the EXACT reasons behind gold’s 10-year bull run, but the reality IS that interest in gold is as old as money itself. Be it an inflation hedge, a bet on an alternate monetary asset, or a move into a safe haven, GLD is one of the MOST popular ways to gain exposure to the yellow metal.

[Mrt: at the moment]

Owning GLD is clearly NOT the same as owning physical gold, it just serves DIFFERENT purposes. GLD allows investors to PLAY the physical metal without facing the underlying COSTS and logistical problems, but it doesn’t ENTITLE one to an actual amount of gold. GLD helped make the market more democratic, to a certain extent, but also injected liquidity, thus fueling further price volatility. ..."
[Mrt: Clear & plain.]

Max De Niro said...

I think Rickards' solutions need to be viewed in the light of his flawed initial premise, which is that gold will back currency at a fixed rate. If gold became dollars became convertible, then this might make sense.

US could put up trade barriers, capital restrictions and retreat to its borders. Can you imagine what would happen to US citizens outside of the US if they stole the worlds' gold? Their plight alone would probably induce a wide-ranging war. Would the US voters support a government who brought this fate on their fellow citizens, friends and family members?

However, if you use the premise that gold won't become money, but a facilitator of international trade and global wealth reserve, then it becomes clear that Rickards' solutions are pure nonsense. The US would become a pariah and would be shut out of world trade. That would lead to the insular police state and eventual collapse and revolution that so many gold bugs see happening.

I obviously don't know excatly why Rickards advocates what he does, but there are so many flaws in his arguments that it makes me think that he is sandbagging and is making these outrageous predictions for other reasons - perhaps to sell his book, knowing that the world is full of conspiritards who will lap it up; perhaps to bring awareness to physical gold possession; or perhaps he really is a war-mongering geo-political Dr.Strangelove crazy wannabe who wants to see a totalitarian world. I don't think it's the latter, he seems more sensible than that, but who knows...

Börjesson said...

What is the FOFOA/Freegold view of the utter chaos currently reigning in Europe? Is it that if it gets bad enough, Europe will "fire the nuke" and settle its debts in revalued gold? Or that the ECB will print when pushed hard enough? Or perhaps that the worst-off countries will exit the eurozone and go back to their national currencies? Seems to me that something has got to give, because as it looks now, the euro is in real danger of failing.

Jeff said...

Borjesson,

Did you see Blondie's comment about the europeans forcing currency repatration back into the euro zone? Or are you talking about the politics of Europe?

FOFOA from DILEMMA:

Second, my praise has nothing to do with Europe's Socialist infrastructure or its politics, which are a mess. As ANOTHER said, Europe's politics are "a side show," easily subservient to the monetary structure which evolves on long-line cycles. Politicians like to pretend things can change on short cycles, with their help. But the euro has been in the works since 1962. And to those that believe short-line politics will break countries like Greece away from the euro, all I can offer is "time will reveal its long-line nature… in time."

and from 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."

5/22/98 ANOTHER (THOUGHTS!)

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

Welcome back to the comments section, FOFOA. :)

mortymer said...

http://video.cnbc.com/gallery/?video=3000054561

Full Trichet Interview
Sun 30 Oct 11 | 08:00 PM ET
On his last day in office, CNBC's Silvia Wadhwa speaks to Jean-Claude Trichet as his eight-year term as ECB president draws to a close. This feature-length interview examines Trichet's leadership of the bank and his handling of the single currency; his management of the subprime and sovereign debt crises and the legacy he leaves his successor, Mario Draghi.

Crack said...

distraction

d2thdr said...

The Trichet interview is very good. The central bankers play their cards so close to their chest, its breathtaking.

As someone in the comments said, 'The politicians do not know what the central bankers know'.

Börjesson said...

Thanks for the answer, Jeff!

Politics is not a side show. Politics is the reason why the ECB looks the way it does, with this "severed link". Politics can also reattach the link. All it takes is for Germany to cave in and agree to French (and others') demands, and for Barroso and his goons to have their way on (undemocratic) fiscal union, i.e. a common financial policy dictated from Brussels. The ECB will then very likely be given a second mandate, and will basically turn into the Fed. And the pressure on Germany to agree to this is massive.

Another possible danger, if the Germans don't budge, is that other member countries decide (politically!) that the whole eurozone thingy doesn't work, that an essentially German-dictated fiscal policy attuned entirely to German needs is hurting the other countries much more than it's profiting them; and so they leave. Will a euro that is only the currency of Germany (and possibly Austria and the Netherlands) still have credibility enough to be the new oil currency and lead the way into Freegold?

And of course, the most imminent danger is that the can-kicking finally comes to the end of its road and something breaks, triggering a chain of defaults that brings down the entire financial system. Can the euro really survive that? (Maybe it can, if this cataclysm gets its ass out of the wagon and happens already, before politics has had time to mess up the euro.)

The best laid schemes o' mice and men can gang agley even if they have been in the making since the 60's. I guess I have the wrong perspective somewhere, but I can't see the inevitability of Freegold. Unless, as I said, they (who are "they" anyway - the ECB? BIS?) fire the nuke.

Max De Niro said...

It would be interesting if there was a revolution in Greece. It wasn't long ago that they were living, suffering and dying under a vicious dictatorship. They have a visceral attachment to their freedom.

That could really throw a spanner into the works, politically, if the people overthrew the puppet Troika government.

mortymer said...

Enjoy today´s 5+1 (FLAR) updates:

http://anotherfreegoldblog.blogspot.com

[Mrt: the learning curve accelerates, FLAR is a nice new addition]

Michael H said...

Wanee,

"... maintain most of their domestic sovereignty as long as they play along."

Notice the contradiction in this sentence?

JR said...

Börjesson,

I think you missed Jeff's point:

"As ANOTHER said, Europe's politics are "a side show," easily subservient to the monetary structure which evolves on long-line cycles. Politicians like to pretend things can change on short cycles, with their help. But the euro has been in the works since 1962."

Do you really think the politicians dictate the economics? Then why are we in a crisis to being with? Perhaps you might benefit from learning about the concept of the Superorganism? Check out Life in the Ant Farm and perhaps maybe you will start to see how its not politicians, but private actors aka methodological individuals that drive economics.

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

You say:

"I can't see the inevitability of Freegold"

It appears the biggest issue is your inability to see the world for what it is. As long as you choose to view the Euro from the $IMFs perspective, your views will seem reasonable to you. This $IMFs view is the current economics groupthink, from the press to bloggers to economists to politicians. And this perspective beats into our heads that there are only two untenable options - print or austerity. Accepting the limited set of options, it becomes clear that the Euro can't survive.

But the $IMFs is but one perspective to view things from. And in the grand scheme of things, the $IMFs perspective is but a small idea, one borne out of our existence since the 1922 Genoa Conference and the institution of Bretton Woods in 1944. FOFOA did a wonderful job of illustrating this point in Once Upon a Time

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

Are you familiar with the concept of Punctuated Equilibrium?

"Some say that biological evolution happens in fits and starts, a theory called "punctuated equilibrium". It states that evolutionary change is characterized by short periods of rapid evolution followed by longer periods of stasis in which no change occurs."

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

You also seem to suggest someone or something has to "lead the way" or take us there:

"Will a euro that is only the currency of Germany (and possibly Austria and the Netherlands) still have credibility enough to be the new oil currency and lead the way into Freegold?"

No one is leading us to Freegold. The Euro area is not choosing Freegold, they are embracing for the inevitability. The Euro is a reactionary effort to this inevitability. Jeff quoted Another to make this very point:

5/22/98 ANOTHER (THOUGHTS!)

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

d2thdr said...

David Cameron says no 'silver bullet' to fix economy

http://www.telegraph.co.uk/finance/economics/8904123/David-Cameron-says-no-silver-bullet-to-fix-economy-at-CBI-conference.html

There is no need for a silver bullet. There is a golden bullet.

JR said...

"This Global Financial Crisis is not so much about the dollar as it is about the dollar system, the $IMFS. The dollar system is a system of selling debt as a wealth reserve..."
"The Gold Man" (not Goldman) at the BIS

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

Some fun stuff from last Thanksgiving - Thanksgiving Week Open Forum

"I have sensed some consternation about the Irish bailout and how it relates to the 10 year old USAGold archives written by Another and FOA. The theme goes something like this: A/FOA didn't foresee what is happening today, therefore the Freegold they did foresee is now in jeopardy... Malarkey!

Europe is presently operating under the $IMFS (that's the dollar international monetary and financial system) and has been since WWII. Europe has supported this system, kept it alive, and bought into it for the last 30 years. The foundation of the $IMFS is the use of contracts obligating someone's, anyone's debt as everyone else's savings, their security for later years, their nest eggs, their pensions, 401K's and IRA's. The tradable value of these "investments" is the very lifeblood of the $IMFS. When that value fails, so will the system.

The system will never voluntarily bleed out as long as it can print money to bail out the value of those paper promises. In the case of underwater homeowners, the bailout goes not to the homeowner, but to buy up the trading price of the debt contracts. In the case of sovereign debt, the bailout goes to the debtor government to drive down the interest rate and maintain the value of debt held in savings.

This is the very essence of the system we have today. It is not a system that was forced upon us. It is a system that was demanded BY us, all of us. But it is a flawed system that is collapsing. And that is why they made the euro the way they did. So that the collapse of the $IMFS would not take down global economic trade continuity with it, whenever it came.
"

Max De Niro said...

If anyone fancies a bit of a chuckle, here's some amusing analysis from ft alphaville on the subject of "on misunderstanding QE and UK inflation."

It made me laugh, outright belly laugh!



The lack of context and understanding in the financial press is astounding!

Börjesson said...

Thanks, JR!

That did provide me with a change of perspective. I have been thinking that the euro was a prerequisite for Freegold; but if I understand you correctly, the euro is merely designed to take advantage of Freegold once it happens. Does this mean that you think Freegold will happen even if the euro is scrapped tomorrow and all countries go back to national currencies? Guess I need to reread some of the posts on Freegold itself, how it works and so on. I thought a currency (or several) that constantly revalued itself against gold was a requirement?

I disagree about my only seeing two options, though. I can see many possibilities: ECB printfest and fiscal union; debt defaults followed by stricter eurozone membership rules (as opposed to actual fiscal union); complete breakup of the EZ followed by devaluation of the new national currencies; deliberate deployment of "the nuke" by someone in order to preempt undesired political changes to the euro... What I can't see is that all of these paths lead to Freegold (rather than a more traditional rigid gold standard for lack of any surviving credible currency) once the dollar breaks down. I'll do some more reading of the FOFOA archives, though, free time permitting, and maybe I'll get there eventually.

DP said...

@Max:

"In other words, learn to sit back and enjoy the inflation. There’s no risk of it spiralling out of control in the current environment."

FFS

holdinmyown said...

M wrote:

@ Holdinmyown

"So if European trade (the 27 nations together make up the world's largest trading block)implodes due to a recession caused by ECB refusal to print and the Euroland bond rates climbing to unsustainable levels, could we see all markets (equities, bonds [except UST which are well bid by the Fed], commodities and paper gold) all fall drastically due to a European auterity-induced super-recession?"

That implies a super rally in the Euro currency doesn't it ?


Eventually yes.

As quoted by FOFOA above:

FOA (08/24/01; 10:54:30MT - usagold.com msg#101)

…the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates. With the world credit gold markets paralyzed in default and dollar credibility placed in question along with American economic stamina; physical gold will return to official hands in Europe in exchange for Euros. A paradox observed as high gold places more demand upon Euros and sends the dollar ever lower.


However initially I believe that the short-term effect will be the opposite of this (until credibility inflation significantly reverses). If all paper financial assets fall suddenly (perhaps due to a new recession?) then as these assets are sold off the currency will flow initially to perceived safe havens such as the UST and USBonds that continue to receive a bid from the Fed. This process will only reverse once credibility in the effectiveness of the use of debt as a store of wealth diminishes and is ultimately lost. So short-term I believe that the USD will rise and the Euro will fall.

Wandee said...

Thank you FOFOA
All I can say is amen my friend and see you at freegold.

Wandee

victorthecleaner said...

Börjesson,

on the topic of a euro break-up.

If a weak country, say Greece, wants to leave the euro, how would this work?

They need to print new notes or perhaps mark existing notes. All banks need to change their software as there is now one more currency. They need to make it legally at least somewhat foolproof. Which bonds are converted and which are not?

If there is a leak and some insiders talk, they will immediately get the final bank run. So as a voluntary step, this would work only if they keep the banks closed for, say, 4-6 weeks, and freeze all international payments during that time.

What remains is the scenario in which the run on the Greek banks happens and their economy comes to a halt anyway. In such a situation in which their banks are effectively out of service, they can work on the switch.

Second, how would a strong country such as Germany leave the euro? That's a lot easier because even if some insiders know it, there would be no immediate run on the banks. Perhaps a run of foreigners to open bank accounts in Germany. But they could have a rule and go by residence or by nationality or by location of the company's head office on January 1, 2011, in order to counter that.

My conclusion is that a weak country cannot leave the euro if they are under pressure. Only after a total collapse, they could, just because it wouldn't make any difference in that chaos. But a strong country can. The example of Switzerland shows that they will probably not want to leave. But, for example, if Germany would find the ECB policy so disadvantageous that it were worse that leaving with an ultra-strong new Deutschmark, they could.

So I conclude that the ECB cannot act against Bundesbank interests in the long run.

Victor

JMan1959 said...

The same genius of the Euro design (nation state separation, MTM gold) that makes their currency stable seems to create other problems, i.e. the inability to adjust exchange rates / effectuate change on non producing, proflogate spending members. This may be a stupid question, but could the Euro survive as the reserve currency/medium of exchange as a private enterprise, with no EU at all? Hayek spoke often of his belief that the evolution of private money issuers with gold backing would be the only way to achieve sound money again. Could the Euro perform this function?

JR said...

Victor,

Your analysis is basically:

1) Victor thinks a weak nation would get crushed if it tried to re-issue its own currency, so it can't, but

2) Victor thinks Germany could re-issue its currency more effectively, so it could leave the euro.

This leads you to conclude that the "ECB can't act against the Brundesbank," because the Brundebank can effectively defect and say piss off to the ECB. As other weaker countries don't have this luxury, you view these weaker counties as more beholden to the ECB.

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

I know I sound like a broken record on this but we clearly disagree on whether Germany has the least or the most to lose form Euro break-up, as most recently seen in our discussion in the comments to RPG Update #4

Here are two quick ideas on why I think Germany has the most to lose. Even if you disagree as to Germany's ordinal place in "who has the most to lose," that is not material to the issue at hand, which is dispelling the myth that Germany could leave the Euro in a relatively painless scenario.

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

First, Germany is perhaps the most industrialized nation in Europe. The Euro is a trade currency. As you acknowledge with Switzerland, the key is currency stability, becuase that's what lets you trade with other people. If Germany leaves the Euro, their exports collapse and the have massive unemployment. And the Euro tanks so guess what happens to their savings.

Germany leaving the Euro is essentially the easy money camp solution - collapse the currency to reset the economy, thereby clearing the debt and destroying the net-producers savings. With this "easy fix" we clear the debt so we can more quickly allow malinvestment to resume through another easy money debt expansion.

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

Second, (you probably won't like this) we talk about the ECB not on its own, but as part of a larger faction, no? We often see reference here to the ECB/BIS, no?

"The BIS, the Central Bank's central bank, was formed in 1930 to handle the collection of German war debt following World War I. Its members are the central banks of the industrial world, such as the Bank of England, the German Bundesbank, the Federal Reserve Bank, the Bank of Japan, and so on. It is almost certainly the most powerful financial institution in the world. Never once in its long history has it ever had to ask for help from any government.

[...]

As regular FOFOA readers know, I believe the BIS (the Bank for International Settlements) is prepared to manage the clearing of international trade after the inevitable collapse of the dollar.

[..]


Q: **Who does BIS really represent?

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


Hair of the Dog?

Yes Victor, this goes back to WWII. The Euro project is all about peace. Germany is well aware of the primacy of this goal and the enormous consequences of failing to meet it.

costata said...

Karl Denninger’s Best Ever Post?

Part 1/2

As a frequent critic of KD over the years I would like to acknowledge that I think Karl has nailed it with this post.

In my opinion these are the repercussions from the collapse of MF Global playing out rather than the EU “debt crisis”. MF Global is a signal event in the grinding erosion of confidence of the past three years (with the weight of a “glacier” of 35+ years of accumulated policy providing the mass).

I view this post as a simple, elegant (perhaps premature?) acknowledgement of human nature, society’s need for the rule of (just) law, honest money and markets that are not rigged.

Another and his friend discussed these matters a decade ago and we continue to discuss them to this day. So I present Karl’s post here in its entirety, to take its place among 25,000 comments amassed over the past three years at the FOFOA blog.

The PTB may be able to halt this slide, yet again, but sooner or later one "MF Global" or “Greece” or “Bear Sterns” too many will blow up this system IMHO. The architects of the Euro and the Freegold-RPG system saw this coming and acted to construct an alternative to the $IMFS. Have they succeeded? Time will tell.

In this post, thankfully, Denninger doesn’t deliver the usual conclusions or recommendations about what "paper" games will protect you nor a blanket rejection of gold as part of a strategy to get “ready for it”.

One final comment from me. Denninger notes that “diversification is a strategy” (with risks) but I would add that it is not a viable strategy IF all markets are correlated. In my opinion to get through this you have to have an asset which possesses the quality of “moneyness” that also sits outside the “system” (as far as possible). But no risk abatement strategy is risk-free. Life isn’t like that.

Now let’s hear from Karl:

We're done folks.

Continued/

costata said...

/Continued

Part 2/2

(Denninger’s emphasis)

CNBC is reporting that there are now clients running out of the markets entirely because they do not believe their customer funds are safe. That's the end of it. The belief that there are more MF Globals has now taken hold. The thieves have pushed it too far and now we've got the start of a global liquidity run, and with good reason.

The authorities both in the regulatory side and on the prosecutorial side have refused to put a stop to the thievery and now the risk factors have turned into realized risk.

The market is done folks. You can be right but if you make your bet in the markets, are right, and then get screwed anyway when someone steals the money and nobody goes to jail there comes a time when people begin to understand that it can happen to them and will unless they depart the market.

We're there folks.

The regulators refused and now it appears that what was put up on a regulated exchange was effectively stolen.

Well folks, then none of your investment accounts -- not your IRA, 401k, not even your bank account -- is safe.

Diversification is a strategy but the risk remains. It is up to you to decide how much you're willing to risk losing to a crook. If the answer is "none" or you cannot reduce the at-risk portion of your assets to what you're willing to lose to fraud then you can no longer participate in the market at all, in any form, nor even do business with a bank.

That sucks, but it is what it is and if this meme spreads -- and it will until it's stopped -- we run the risk of a "sudden stop" economic event.

I hope you're ready for it -- I am to the best of my ability, and you ought to be.


I too hope you are ready. Bella fortuna!

costata

Texan said...

Costata, what KD is noticing is a type of "gating" that I referred to many moons ago as a likely response to contagion in whatever form it may take. That's why in addition to having physical gold, physical fiat ain't a bad idea either. For entirely different purposes of course. But it's why I am not concerned about hyper inflation anytime soon. They are just going to issue ration books if it comes to that.

JR, Germany will be fine. They just exchange the savings in euros for DMarks, if it came to that. They have recent experience with that after all. I agree with you that "it looks bad", but I think thats why they are forcing austerity/loss of budget sovereignty, or default. This is, IMO, PR positioning. I think it's up to Club Med now if it wants to try and stay in the euro or not.

JR said...

I couldn't disagree more Texan.

JR said...

Hi Börjesson,

You commented:

”What is the FOFOA/Freegold view of the utter chaos currently reigning in Europe? Is it that if it gets bad enough, Europe will "fire the nuke" and settle its debts in revalued gold? Or that the ECB will print when pushed hard enough? Or perhaps that the worst-off countries will exit the eurozone and go back to their national currencies? Seems to me that something has got to give, because as it looks now, the euro is in real danger of failing.”

Yes, something certainly has to give. And IMO that’s the $IMFs – the system of selling debt as a wealth reserve. But that’s getting ahead of things.

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

Anyway, your comment that “Is it that if it gets bad enough, Europe will "fire the nuke" and settle its debts in revalued gold” really struck a cord with me. I still remember reading FOFOA’s Of Currency Wars and be befuddled by this line: ”This is not about Greece paying off its debt in high priced gold. It is a systemic shift to meritocracy where if you don't earn it, then you must part with some REAL treasure.”

I asked in a comment:

”Hi FOFOA,

Its not about Greece paying off debt in high priced gold, but the Euro's gold is in play.

Do you see Greece remaining in the Euro and Euro selling gold to raise funds to bailout Greece?

Or is it more as defaults happen there will be more demand for gold, and the Euro won't sell, pressuring the US paper market?

Sorry to be such a noob but how does the Euro deploy its nuclear weapons. If the Euro keeps the gold off the market, thereby accelerating a squeeze on paper gold and an appreciation of the Euro gold - how does this resolve/address the Greek situation, especially as it spread to other Euro nations (PIIGS)?

Many thanks”


Cont.

JR said...

2/3

FOFOA responded:

"Hello JR,

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed."

What is the problem with Greece and the other so-called PIIGS? Is it profligate public spending/financing, the credit that enabled it, the system that helped hide it, and the mountain of unserviceable debt that resulted?

The difference between the $IMFS and Freegold is that the former encourages and enables the above while the latter never lets it get this far along so as to become a systemic risk. It's called 'balance as you go', as opposed to enabling the growth of an imbalance so large that it finally collapses back into balance.

I cannot give you the blow by blow that you ask for, but I can still show you what must happen. And it is helpful in this regard to work backward from the future until we come to two choices that will both result in the same end.

First is that we are facing a systemic shift from the $IMFS to Freegold. Don't forget that the actual value of an individual transactional currency unit (even a euro) doesn't really matter in the context of its primary function. So even though one currency is built for the new, emergent system, I would still not want to be holding that currency through the transition.

Second is that Greece's debt cannot be paid back in real terms, and neither can the aggregate planetary debt. It doesn't really matter if it is not paid back through default (bankruptcy) or through devaluation of the currency... it will not be paid back in real terms. But devaluation of the currency is certainly the more politically acceptable route.

Third is that all this planetary debt (including Greece's) is a function of the $IMFS. The eurosystem, even though it was built to thrive under Freegold, is still supporting the $IMFS. The action to look for is the passive action of withdrawal of support.

The way the $IMFS works is that, at the very end, it either bails you out or kills you dead, depending on who your friends are. Freegold spanks you along the way with a little pain here and there until you get your finances back in order.

I expect Greece and the PIIGS to get spanked hard at the beginning of the new system. I do not expect Greece to leave the euro, but it will certainly have to get its public finances in order.

You see, the shift is going to be swift and it will reveal a change in perception that is almost impossible to imagine right now. Physical gold is going to rise so high, so fast that it will become known as the most prized treasure a collective state can hold. And immediately upon this recognition Greece will have to either part with or encumber its most prized "monetary" treasure while it restructures its newly devalued debt and its economy.

No longer will unlimited Ponzi finance be an option for ANYONE'S financial difficulties. But at the same time, the worst of the financial predicaments will have been significantly devalued, as they were bad bets by creditors from the start.

This is why it is so important to understand the implications of Freegold now, because the cascade of events once "the plug is pulled" will be mind-numbing. The ability to understand events as they unfold will be quite rare (and quite valuable) as we are in uncharted waters.

Does this explanation help you find the answers to your questions?

Sincerely,
FOFOA"


Cont.

JR said...

3/3

”This is not about Greece paying off its debt in high priced gold. It is a systemic shift to meritocracy where if you don't earn it, then you must part with some REAL treasure.”

Anyway, FOFOA brought this idea home for me in Once Upon a Time.

"You can't squeeze blood from a turnip. That's an old saying. It means that you cannot get something from someone that they don't have. In order to pay its debt in real terms, Greece needs to ultimately get back to producing more than it consumes. And as counterintuitive as this may sound, they will first need to run a BOP surplus in order to get there. You do that by exporting more value than you import.

I realize how backward this sounds, but that’s only because we haven’t seen gold function properly in more than 90 years—beyond living memory. And this is why the limited stock of physical gold is far more valuable than the paper gold promises of New York and London would have you believe. This is why Greece will never part with its gold at today's prices. It is far more valuable. Greece ultimately needs to get back to importing gold which is what happens when you produce more than you consume. But you can't get back to that place by spewing your real capital at imaginary capital prices.

At the true value of physical gold set by the Superorganism, Greece will automatically start running a Trade Surplus on its BOP and Germany will automatically run a Deficit with Greece. The high price of gold is the only factor that can achieve this goal. At that point Greece will be paying its debt in real terms and gold will be flowing. This will spur the Greek economy until that flow of gold is reversed and it starts flowing back into Greece. At that point Greece will have a vibrant economy. And then, as the gold flows in, it will start to act as an incremental brake, a natural governor that prevents the overheating of the new Greek economy. This will occur naturally. This is the future in real terms, regardless of all the monetary floundering. And this future cannot be managed by a committee of experts no matter what economic school of thought they practice. This is Freegold.

The elegance of this natural regulator is that, as long as it is free from systemic counterfeits, it functions regardless of the shenanigans of monetary "experts". That's because the Superorganism's price mechanism is a function of the purchasing power and flow of real capital, not the purchasing power and flow of imaginary capital (paper promises). To wrest control away from this "forceful but unobtrusive master" one must render its purchasing power and flow infertile in the global economic ecosystem.”

JR said...

Hi Börjesson,,

Here’s another FOFOA comment from Of Currency Wars about the nuclear option:

”Also, Randy lays down some fine commentary over at USAGOLD

Snippet:

"Remarks by John Lipsky, First Deputy Managing Director, International Monetary Fund...

There is little doubt that a simultaneous move to acquire new reserves would complicate the effort to restore strong and sustained global growth…

[RS Note: That's true.. but only if assuming that these accumulated reserves take the form of sovereign debt, whereas the gold reserve alternative neatly sidesteps the problem completely.]

The test of any alternative to reserve accumulation would be the ability to provide resources reliably, rapidly, in an adequate scale and at a favorable cost relative to reserve holdings. To some extent, this function was filled in a very ad hoc and partial manner during the recent crisis by central bank swap lines…

[RS Note: With the gold reserve alternative, additional reserve resources (i.e. BOOK VALUE) can be reliably, rapidly and adequately achieved simply by CB bidding for gold on the open market. Any resulting price pressure upon the meager ounces available at the margin of the open market will subsequently become leveraged to the institution's further advantage through MTM revaluation upon the larger body of its existing gold reserves. And from a stance that abhors systemic risk, this paradigm is superior to the current system that attempts to achieve similar results through similar bidding on an imponderable supply of U.S. debt which is even further derivatized many many times over.]"

JR, "Sorry to be such a noob but how does the Euro deploy its nuclear weapons."

I think Randy just exposed one of the nukes.

FOFOA”

Texan said...

JR, you don't think Germany would be ok if it left the euro? Really? Why not? DM too strong? They can't make it weaker if they want?

The growth is in the BRICs and Eastern Europe, and perhaps someday Middle East and northern Africa.

Club Med is not where the growth is. Germany knows this.

M said...

@ Holdinmyown

-"If all paper financial assets fall suddenly (perhaps due to a new recession?) then as these assets are sold off the currency will flow initially to perceived safe havens such as the UST and USBonds."

-"I believe that the USD will rise and the Euro will fall."

^That is the consensus. Its hard to find anyone who disagrees with that. Eventually the market has to deem these these people wrong.(and Schiff right) It always does.

JR said...

Hi Börjesson,

Here is an excerpt from Greece is the Word that maybe touches on your comment "Does this mean that you think Freegold will happen even if the euro is scrapped tomorrow and all countries go back to national currencies?"

"The situation with Greece and the euro presents us with a fresh opportunity to explore what is really wrong within the system from a macro perspective. And I am not talking about the euro system. I am talking about our global system of savings that are value-fixed directly to a transactional currency unit whose value doesn't even matter in the context of its primary function.

This problem is what we call a Catch-22, or a no-win situation for the system as a whole. This means that because of its fatal flaw and current precarious position, the global financial system faces threats from too many fronts, any one of which can bring it down like a house of cards. And attempts to shore up the system on one side are kneecapping the legs supporting it on the other. Our global monetary/financial/economic system today lies in a "critical state", barely surviving on a "knife-edge of instability".

In order to understand the greater systemic problem that is presenting today as a boiling pustule in Greece, we must first understand the flow of capital and the growth of debt. With debt growth as the deadly tumor in the cycle, it is easiest to visualize the flow of money as a circular feedback loop, where the debt cycle feeds back on itself in a sustained growth pattern.

The denouement or final shakeout of this systemic crisis will include two separate events, no matter what decisions are made along the way. In this statement I have full confidence. For semantic simplicity I call these two events freegold and hyperinflation. But these terms seem to cause consternation and confusion in many readers, so you can think of them simply as the dramatic devaluation of paper gold and the catastrophic devaluation of the dollar. Two inevitable devaluations. Two unavoidable outcomes.

In order to understand how we get there, we must think about the three main forces at work in today's systemic crisis. The three forces are nature (you can call it "math" or "physics"), politics (call it socialism or "the collective will"), and self preservation (of the giants and the savers). These three forces are interacting in ways that appear chaotic here on Earth, but that form a clear, emergent pattern when viewed from outer space...


cont.

JR said...

cont.

"
Probably the biggest and most visible (and visibility is one of the keys to collapse) problem with our system, reliant as it is on infinite debt accumulation, is that with the majority of the world at its mathematical limit, only one entity remains that is both willing and able to dig itself the infinite debt hole required to keep the system churning.

The problem is that this entity also controls the printing press of the numéraire of its own debt, so no one, or certainly not enough people with real credit money on the periphery, are willing to feed this black hole of moral hazard. So the only one left to fund this debt hole to the extent that is required is the Fed itself. And that means that the fuel needed to churn the credit money system is now fresh base money. And as this fuel flows out from the center of our diagram into the formerly credit-driven periphery, the center base swells like a red giant about to consume its own solar system.

This dilution of the base diminishes the real value of each unit with each unit of fuel that flows. And like an advanced alien civilization fleeing its dying sun, the savers will flee as they see this visible threat swell. Either that or their savings will be swallowed whole by that which was meant to protect them from the default of the "deadbeat" borrowers.

Default or devaluation. Only two ways to go. Catch-22. Math. Inevitable. Unavoidable.

Politics will force devaluation over default, inevitably, presently.

Self preservation will choose the only escape route not subject to economic health nor subject to credit-driven bubble deflation.

Freegold, then hyperinflation.

You see, the system, because it is made up of billions of humans, is like a living organism itself. It will seek out and find what it needs, which is an automatic mechanism to deal with imbalances and bring them back into sustainable equilibrium. That mechanism is extremely high-value gold. And the only way that can be achieved is the destruction of the paper gold-promise market."

M said...

@ Texan

German exports went up as the Dm/ Euro went up. US exports went down as the dollar went down.(last 10 years 120 to 74)Japan has trade surpluses with China, yet they have higher wages then the US. Germany has a stronger currency then the US yet they have trade surpluses with China. The US had the highest wages in the world when it was the biggest exporter in the world.

The idea that a weak currency is ever good is keynesain nonsense.

JR said...

Hi Texan,

I explained two reasons above. In replying to that post to tell me I was wrong, you ignored both. :)

Perhaps a second attempt is in your future?

Cheers, J.R.

Texan said...

Hi JR, I did read it. On your first point, why would German savings be destroyed if they redenominate to DM? If anything, it might be ridiculously strong, in which case they could dial it weaker if they wanted (or not).

On your second point, and I apologize for being a bit blunt about this, "the euro" is increasingly irrelevant. Many of the countries that use it will never be able to recover unless they leave. What is the magic of continuing to defend it? Whatever its original goals, it failed. Half the continent is effectively defaulted or about to default. Its over.

Europe can still have the EU, and everyone can go their
merry way with whatever currency they would like. Heck they could all peg to the new DM for as long as it suited them ( see Swiss).

mortymer said...

Video:
http://www.debtdeflation.com/blogs/2011/11/22/debunking-economics-at-the-university-of-buenos-aires/
Comments?

Crack said...

JR, ---> http://www.youtube.com/watch?v=r5HWzwa3KOo :-\

Indenture said...

Texan: And what currency would buy oil? Oh, I forgot to form my question in the form of a FOFOA Universe. (ah hm, clearing throat) Texan: What currency would oil accept for payment?

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