Tuesday, April 17, 2012

Open Forum


Here's a riddle. What do Smeagol, Ragnarok, Bruce Dickinson and Samuel Taylor Coleridge all have in common?

The Rhyme of the Ancient Gold-Mariner

Written in 2004 by Smeagol (who now goes by the name Ragnarok, reads this blog, but won't participate in the comments here for the superstitious reason that every site where he comments seems to go the way of the albatross, which he then hangs around his own neck. ;)

Around the World the story had been told,
About a Race that would in time unfold,
Which would intrigue all, lofty or lowly,
With stakes higher than any in history.

The outcome would turn out to affect
Even those who didn't participate or bet.
Irresistibly altering everyone's course
In subtle or brutal ways for better or worse.

Finally the season came for which many long had yearned.
And then dawned the day on which all eyes were turned
To such a spectacle as rare as one would ever see.
Quite possibly the only of its kind to ever be.

Long in preparation with no expenses spared,
While news reporters shouted and klaxons blared,
In the morning at precisely eight-twenty on the clock,
The largest vessel the World had ever seen slid from her dock.

Christened with only the finest of Champagne
In the midst of an extravagant ad campaign,
With a thunderous wave that drenched onlookers ashore,
The Derive was launched, greater than any before.

Financed by those who had no peers,
Built by teams of respected engineers,
Underwritten by triple-A rated papers,
Her decks and bridges rose like skyscrapers.

Stronger she looked than the fortress of a treasury.
Each of her engines could power a very large city.
Her itinerary was impeccable and the menu was endless;
She would make many a tidy sum, this new empress.

One could choose to have every affair managed and let their cares go,
Or experience the thrill of risking it all in the world's largest floating casino.
Thousands boarded and the staff their merchandise stowed.
The Derive was open for business and the profits flowed.

Since she commanded resources so vast,
Against this behemoth surely no other could last.
With every option, every benefit one could describe,
What could ever compete with the great Derive?

Yet in time a glorious ship on the horizon did appear.
Old yet majestic was the Standard, proud and without fear.
Wherever and whenever her tall silver sails unfurled
She was considered the greatest ocean-going craft in the World.

Glad cries went up as the renowned Standard dropped anchor.
Trusty and secure, "Good as gold" everyone ranked her.
A boast in typical good faith her Captain did make:
"Come, Derive, we challenge you to follow in our wake!"

Then the parties commenced and everyone celebrated.
In sleepless expectation the start they anticipated,
Only to be rudely stunned awake by the news at break of day;
The great Standard had sunk, right there in the bay!

Treachery! Skullduggery! Sabotage, Cloaks and Daggers!
Conspiracy! An inquiry! yelled headlines in the papers.
But as the days passed it soon became obvious
It was unlikely that any would soon be brought to justice.

Dejected, the daily crowds of spectators milled about.
Derive remained unchallenged and many began to doubt.
"Now what? We might as well go home;
With Standard gone the Derive surely stands alone."

For the great ship Standard had been damaged beyond repair.
Indeed never would her lofty sails again embrace the air.

Meanwhile, far out on the ocean a brilliant flash of sun
Glanced from golden hulls; from the middle one,
A golden mast with yellow sail canted at a jaunty angle.
From another the legs of some of her crew did dangle.

A sleek seaworthy time-tested trimaran was she,
Skimming the sun-dappled waves like golden dolphins three.
At first few noticed the elegant ship's approach;
After all the harbor a great many and much bigger did boast.

But nimbly she wove, through and between, eventually to arrive
Right under the bow of the humongous Derive.
Her crew and captain were rugged, strong and lean as wires.
In some other tale perhaps, they might pass as miners.

"Many a thousand mile we've come to see this big pile o' ship.
I'm Captain Goldheart. Excuse me, *BAU-URR-I-I-P-P*!
But your claim to be the best we most emphatically doubt.
We're throwing down the gauntlet. Calling you out.

We've seen a few rough times, but no race we've ever lost.
I don't care how huge, how powerful or how much you cost.
Goldwing here's a four-nine ship with a mighty fine crew,
And we're just itching to trounce the likes of you!"

The multitude was bemused by Goldheart's rash bravado.
Something about the depth of passion in his voice was odd, though.
Perplexed, confused, they wondered at some hoax;
"Maybe it's someone's strange idea of a joke?"

Now Goldwing wasn't a small ship compared to some,
But when nearby the tremendous Derive did she come,
Most obvious to all was the great difference in size.
Her mast not halfway to Derive's first railing did rise.

The scene certainly didn't suggest any possibility of a race.
By now some were thinking the whole thing a disgrace.
"Give us a break!" "A trimaran?" "That design's a relic."
"Pretty, yes, but... isn't it kind of barbaric?"

Then, to the utter astonishment of all,
The Captain of Derive answered the call!

"We're going abroad no matter who you are or what you say.
You may tag along if you want, only stay out of our way!
Frankly we stand to gain whether or not a race is run.
But we like good times and speculation as much as anyone.

I bring word the Board of Directors will hand to you Derive,
Should you circle the World before us, and here return alive.
Otherwise, you must give up your antiquated ship of gold,
As our trophy to display in our Ancient Exhibits hold."

Every eye went to and fro the two ships, worlds apart.
"What say you to these terms, Captain Goldheart?"
Goldheart said nothing, carefully weighing the words.
All grew hushed, expectant; only seagulls could be heard.

Then,"You've nothing we can't get, even if we wanted it, you see.
We live life to it's fullest and make our own prosperity.
I wouldn't give anything for that, much less bet," he said.
"But if that's what you think you need then that I'll accept."

A mighty cheer went up and around the World the message ran,
And one day at noon as cannon boomed the great Race began.
All kinds of boats, from skiffs to freighters of many thousand ton,
Took to sea to see them off, even to the setting sun.

Liesurely it seemed, but never forgetting the true intent,
Around the World in fair weather and foul Derive and Goldwing went.
Occasionally lesser ships to and from Derive would ply,
Changing crew and passengers, bringing fuel and supplies.

Only rarely would anyone draw alongside Goldwing,
Save to bring news, encouragment, or perhaps trade them something.
For they were resourceful, independent and industrious.
Long ago they learned what to stow for any journey perilous.

Far too long was the Race to relate here every detail
Of the contrasts and the struggles of brute force versus sail
As each sought to divine the other's strategies,
Weaknesses, strong points, capabilities.

Making the most of breeze or calm, Goldwing expressed competence,
While Derive plowed on relentlessly, heedless of wind or currents.
Neither could gain for long a truly decisive lead;
Who the victor would eventually be was impossible to read.

Thus had they come to the most dangerous part,
The last but not the least leg of many since the start.
Ahead lay the treacherous Horn which they must round,
Then they would be homeward bound.

It had been noticed with not a little concern,
A severe storm unpredicted was brewing astern.
On all ships barometers were falling rapidly;
Dangerous weather would be upon them presently.

The wind came up hard and Goldwing made time,
Leaping easily past Derive, leaving her far behind.
For the first time some aboard Derive felt a bit seasick,
While those on Goldwing exulted in adrenaline's kick.

But like Derive the storm itself was unlike any other before.
Therefore no one really knew what it held in store.
And as the winds rose fiercer in its darkening gloom,
Goldwing's crew must trim sail and therein lay her doom.

Helpful wind had become a threat and the current only mocked -
From behind in driving rain came Derive like a juggernaut!

"Captain, it's a big storm, looks like a bad one too.
It's different than any I've ever seen before, have you?"
With easy confidence Derive's Captain reassured,
"Yes, but it matters not; by highest-rated paper we're insured."

"She's a big storm, Cap'n, an' a real blower, too.
Different, colder than any I've ever felt before, have you?"
"That's 'cause she's a perfect one." Goldheart said. "Let 'er come!"
Secure every kilogram of ballast. Pass 'round this rum."

And so it was in shrieking gale in the worst possible strait
That they went neck and neck round the Horn, there to meet their fate.
For there instead of open water an icy wall towered high;
Massive storm-carved battlements raked the ragged sky.

On Derive the sirens wailed
As her watchmen loudly hailed,

"DEBT BERG, DEAD AHEAD!"

On Derive a passenger uneasily said,
"It sounds a bit worrisome, this Debt".
"Au contraire," said the waiter, "There is no need to be alarmed.
It happens all the time. Would you like your coffee warmed?"

For indeed Derive in ponderous majesty
Always rode the sea in aloof supremacy.
Aside from her impervious hull small bergs were haughtily cast,
While titanic ones with a shuddering boom were spectacularly smashed.

Indeed it had become tradition to save a souvenir
To float in a drink or ice down some beer.
In fair weather the spectacle was a popular hit;
In conditions like this none would be bothered to see it.

On Goldwing an uneasy crewman said,
"It could be the end of us, this Debt.
We're berg-side of Derive and toward it the current's driving us.
We might avoid her but not that colossus!"

Captain Goldheart considered, then wryly shook his head.
"Looks like we'll have to one-up them both instead.
The wind's across the current seventy-nine degrees."
And he charted a course for all of them to see.

Low murmurs of "That's insane!","It's suicide!".
"I'M the Captain and I'LL decide!"
bellowed Goldheart, eyes flashing under his brow.
"Trust me nevermore but trust me now!

We've all been through many a nasty blow together.
This one's a doozy but that don't mean we can't win 'er.
Just do as I say, lash you down, raise spinnaker and bide,
And get yourselves ready for one HELLUVA ride!"

In failing light and lashing rain the orders were obeyed,
While Goldwing's crew (and her captain) silently prayed.
Wet lines snapped taut singing, slipped in white-knuckled hands;
Overstressed canvas nearly ripped from its bands.

Like a golden stone from some legendary giant's sling,
Across the spindrift-blowing breakers Goldwing shot skipping.
Right into the harrowing rapidly narrowing slot she was swept,
Between imperious Derive and importunate Debt!

Through roaring twilight's last fading
Thundered the crunching shrieking grinding
Of many dreams and hopes, of life's fortunes imagined and real,
Shredding on ice that would not yield.

Over the howl of the wind, to the soaked and shaking crew,
Goldheart shouted "We're past them, we're through!"
Sail was hurriedly gathered and all was made fast;
No one spoke and finally Goldheart said at last,

"Though it mighta looked impossible back there,
I'd've never put you through that if it wasn't clear
She's a four-nine ship with a mighty fine crew;
It was a hard test and I'm very proud of you"

But upon the wind was borne many a terrible sound;
Somewhere out there the great Derive was going down.
There was nothing else those on Goldwing could do,
Except batten down for the night as heavy rain blew.

After setting a watch they slept fitfully
In their little golden boat on the vast heaving sea.
Yet the storm did abate some time in the night,
And they began a search by morning's dreary light.

"We can make room for a few, but no more",
Thought Goldheart, looking on the grey swell in horror.
"I wish that we could've saved them all,
Goldwing my love, but that's not our shot to call."

But no flag nor flare nor smoke was to be seen
Amid the endless rafts of flotsam drifting.
In the near distance the giant berg slowly rolled over,
Mindlessly drowning the scars of the deadly encounter.

"I see no lifeboats, and that's the worst.
How could they have been so-" and he cursed.
But he knew truly wherein the tragic blame did lie:
On belief, not knowledge, did the lost rely.

Out of the thousands lost in the wreck of the Derive,
Only two dozen were found, cold, exhausted and barely alive.
With gilded life-rings attached to sturdy lines
They were drawn to safety, one or two at a time.

Over the next several days the weather gradually cleared,
And towards home still far away they steered.
As those who had been rescued regained their strength,
They talked among themselves at length.

And as they discussed the events of recent days
They discovered that each of them, to lasting amaze,
In some pocket or other for luck or so they thought,
Along on the fateful trip a coin of gold had brought.

These they decided to give to Goldheart in gratitude,
For the selfless deeds of he and Goldwing's crew.
But he said, "Don't think we don't appreciate such a gesture fair.
Someday you may need them again; it's an uncertain world out there.

"Because you had that gold your fortune was such
That you were able to escape the worst of ruin's clutch.
Keep it, save it, and remember how it proved true
As things you thought secure slipped from under you."

In the weeks ahead they busied themselves learning sailing;
Life this close to the sea they found very different, yet satisfying.
"On this ship, like it or not, you're part of the crew,"
Goldheart grinned, "but you'll find it kinda grows on you."

Forever it seemed had passed when finally they returned
To the port whence they had started, and a long rest truly earned.
They were welcomed with fireworks, celebration and laughter,
Tempered somewhat by sobering tales of the incredible Derive disaster.

Everyone wanted to know and would hardly let them rest
Until they told them all about how they survived such a grueling test.
And finally after several days when the hubbub had died down,
Captain Goldheart boarded Goldwing and took a look around.

"Well, what's the damage, or dare I ask?",
Goldheart queried a crewman as he uncapped his flask.
"She's done us more than well, Cap'n, considering what we ask of her.
None the worse for a little wear and tear; a worthy credit to her Maker.

Some nicks here and there, a few good buffs and a scratch,
But we've lost the ball from the top of the mast."
"No surprise, that," Goldheart said as he took a swig and laughed.
"'Twas her last ten-thousandth, and it was made of brass!"

__________


483 comments:

1 – 200 of 483   Newer›   Newest»
Michael said...

riddle answer
affectation of dress

Nickelsaver said...

Oh I do love thee, meek Simplicity!
For of thy lays the lulling simpleness
Goes to my heart, and soothes each small distress,
Distress the small, yet haply great to me.
'Tis true on Lady Fortune's gentlest pad
I amble on; and yet I know not why
So sad I am! but should a friend and I
Frown, pout and part, then I am very sad.
And then with sonnets and with sympathy
My dreamy bosom's mystic woes I pall:
Now of my false friend plaining plaintively,
Now raving at mankind in general;
But whether sad or fierce, 'tis simple all,
All very simple, meek Simplicity!

Nickelsaver said...

the answer, the Albatross of the Ancient Mariner

Blondie said...

Smeagol, Ragnarok, Bruce Dickinson and the original author Samuel Taylor Coleridge have all made revisions to “The Rime of the Ancyent Marinere” which Coleridge first published in 1798.

You have published the revisions of the first two above, and imbedded Dickinson’s version in the video (which, IMO, is a masterpiece of its genre).

“Day after day, day after day,
We stuck, nor breath nor motion;
As idle as a painted ship
Upon a painted ocean…“
;)





BTW, for all those placing links to comments in their comments (or in the body of the post) please be aware that for many readers (depending upon their location, ie. those in the US are not affected so will not have noticed) these links (including all previous ones) no longer function thanks to changes made by Blogger.

The link only gets as far as the top of the post, but not to the comment itself nor to the comment page if it is not on the first of the post.

It would therefore be useful to either copy and paste the relevant section into the present, or accompany the link with the comment's timestamp so the interested reader can locate it themselves, or preferably both.

Be nice if Blogger would sort this out, but it has been about three months so far, so I'm not holding my breath. I'm assuming of course that NZ is not the only jurisdiction affected by this.

mr pinnion said...

What a superb poem.Thanks for that.
A very apt snippet Blondie.
A painted price in a painted market.

Regards
Ozzy

Jeff said...

Rickards walks in someones' footsteps:

http://finance.yahoo.com/news/three-ways-old-money-holds-183211924.html?l=1

Nickelsaver said...

Blondie,

Are you having that problem with 1-200 permalinks as well? Just wondering.

As for the riddle; the fictional character Smeagol did not reinterpret the poem; he is however an embodiment of the Mariner, as are the lives of the authors.

We could add FO/FO/A to that list, no? Don't you just love a good metaphor?

BTW - the poem that I pasted above is the work of Coleridge. I thought it was fitting in the context of the end of the last thread.

"We are all in the same boat in a stormy sea, and we owe each other a terrible loyalty." - G. K. Chesterton

Woland said...

At the risk of picking at a wound which should be at this
point in the process of healing - A short post by Aristotle:
1/13/00 1:17:56MDT Msg ID 22810
"How much wisdom in our annals of history; How much
deliberate choice?"
To which FOA replied: "I could have just posted your item
and not said anything. Just read it and had to note it. Good
Stuff."
I suggest it is worth a look, re: the end of the previous post.

e_r said...

Woland,

Thanks for that pointer.

You've assumed a "Method" where, in fact, there was only "Madness."

After you consider how much rationalization is appropriate for painting our history as a deliberate and calculated act, you are free to carry on.

A relevant nugget from the discussions, and I admire Ari's precision in conveying an idea.

Motley Fool said...

I really liked the poem, kudo's to Ragnarok. :)

Robert LeRoy Parker said...

Anybody willing to re-explain to me how price discovery works in freegold? Also how are loans demoninated in gold kept from happening?

Motley Fool said...

RLP

Central bank stock Maintenance in extremis, in general - markets (that will emerge/evolve post FG).

As to the second, by ensuring that no contract in gold can be enforced.

TF

Robert LeRoy Parker said...

So in the beginning central banks will make the market and eventually arbitrage makes the world go round.

How can you ensure lack of enforcement within a sovereign state? Sanctions from the BIS?

How would we know that gold loans are taking place? A sudden boom/bust within an economy? Will the business cycle be altered by freegold?

Ryan said...

Comments.

Motley Fool said...

RLP

Yep.

Sovereign law will likely follow international precedent, as tends to be the case in law.

International law is enough to deter large companies, which limits the possibilities to small business and personal loans.

It's impossible to stop those that want to loan out gold, but having it unenforceable to be repaid in law does temper action.

Yes, small booms may be indicative in countries without the sovereign law enforcement, however reality, our current experience, and international business will not allow that to get out of proportion.

Freegold will shorten the business cycle from the current credit glut type to one more reminiscent of earlier gold standard days. Of course under FreeGold goverments have the paper option to extend those cycles, at the cost of currency price.

TF

Woland said...

Robert leroy Parker: Much wiser heads than mine will give you
the answers you need, but:
If you sign a chit for $1 million and lose it at craps at Sheldon
Adelson's Macau casino, it will be enforced, yes?
If you throw the same dice against the wall in the casino parking
lot, and lose $1 million, the courts will not help you, no?
The difference: all "contracts" are not equal before the law. The
danger you face in the parking lot is your counter party. IMHO.

Robert LeRoy Parker said...

MF,

Thanks for the clarification. It will be very interesting to watch it play out on the international scale.

Woland,

I see your point but I usually opt for the Marcy projects rather than the casino parking lot.

"When I leave, come together like butt cheeks."

Aaron said...

The women in this video seem to be enjoying spending their silver Dirhams for a nice meal on the town. Personally I'll stick with fiat paper, but to each his/her own.

[Link below for those recently affected by Blogger's link mishap]
http://www.youtube.com/watch?v=c-bo-Yufrrw

Aaron said...

And some pro-gold entertainment for those that missed it over at USAGOLD.

http://goo.gl/I3U1D

Aaron said...

Hey Blondie-

Do you need the links below each embedded link as I included above or did I misunderstand which links aren't working for you?

Blondie said...

NS,

No, I never had trouble with the 1-200 permalinks. The issue is that Blogger have altered their code so that anything that had blogspot.com in the url is automatically changed to blogspot.co.nz in my address bar. Nothing I can do about it. So the link only takes me to the post, not the comment. Most posts have hundreds of comments. I can see by checking statcounter that this is also the case in many/most other countries (I can amongst others see blogspot.co.uk for example- do links to comments still function for UK readers?)

The “Smeagol” FOFOA is referring to is the pseudonym of a USAgold forum member who now posts elsewhere as “Ragnarok” and is responsible for “The Rhyme of the Ancient Gold-Mariner” above, not a fictional Tolkien character.


Aaron,

Your links work fine, it is links to comments on Blogger blogs (such as this one) that don’t any longer. I don’t know if others are having this problem or not. No one has said anything; maybe it's just me.

Nickelsaver said...

Blondie,

The riddle was practically rhetorical - since it was literally answered within the post.

It looses some flavor if I have to explain that I was waxing poetic in finding a deeper meaning by treating it as a deeper riddle.

However, I do admire your penchant for precision. Don't ever change.

JR said...

Speaking of albatross:

Gold is to become the floating, free market reference point for fiat currencies of all stripes. And to do this, it will shed the albatross that is its parity relationship with paper promises of gold from private institutions that are backed by more paper promises of gold from other private institutions in a perpetual loop of paper promises. This paper promise loop/"market" is not a stable benchmark, and it will have to go.

Windmills, Paper Tigers, Straw Men and Fallacious Fallacies

JR said...

Hi RLP,

On leasing ledning of gold,
check out FOFOA's comment on Bron's blog: http://goldchat.blogspot.com/2011/12/my-thoughts-on-freegold.html?showComment=1324256042126#c357579907089176322

FOFOA said...
Hello Bron,

On gold leasing:

I don't know where you got the idea that I have strict Freegold rules. I think you are putting more emphasis on this leasing thing than necessary. I guess it's understandable since your business involves borrowing gold. But as I have said, it is not a prerequisite of Freegold, but more like a natural consequence. The only prerequisite to Freegold is the collapse of confidence in paper gold. The leasing idea is about making a natural concept as clear as possible to the banks that might not get it. Keeping gold out of the business of credit money. Eliminating the lending of gold (or credits denominated in gold ounces) for monetary purposes in which fiat loans will do just fine.

FOA: "Keeping gold out of the fiat arena would be more simple than many hard school advocates envision. The key to that is found in the implementation of international law. The leading economic countries (EuroZone in the future) would have but to establish a protocol that forbid the enforcement of collateral attachment anytime physical gold is traded, lent or involved in a trade. In this context, no banker would lend you gold to buy a house if, in a default, he could not claim your house in a court of law. Even private parties would never lend gold if the asset behind the loan could not be claimed for nonpayment. It's that simple. With a stroke of written law, the trading of gold as wealth would become a final payment with no possible credit implications. Our official fiats and wealth without a country would never again function as one."

Note that the first time this was discussed was in 2001, 3 1/2 years into the Freegold discussion on USAGold. That's because it is not a primary concern and not a big deal. This discussion came about from one of the commenters pushing FOA on the legal issues that might be faced by a currency zone (Eurozone) that wanted to support a sustainable future after the collapse of the old system. Here's the sentence immediately preceding the above paragraph:

"In my discussion with Econoclast, I took his legal meanings and applied them to this "wealth without a country" position…"

JR said...

cont.

Bron, I believe you said your business borrows without having to post collateral because of the WA Government's AAA rating, right? Also, you are not borrowing gold for a purpose that would be equally well served with a fiat loan. So I don't see how your business even applies to what FOA wrote above.

So why do we not want banks lending gold the same way they lend fiat? And why did FOA even have this discussion? Here's a little more. First, Econoclast writing to FOA:

Econoclast: "Any system that could possibly be thought of or proposed must include the use of law. Part of the answer (transparency) includes a complete treatise of the "new" laws written in simple, direct English (8th grade level-2 pages instead of 2000). The laws would be directed towards controlling the bankers, not the people for a change. The laws would be written with input from bankers, but not by bankers. Penalties for financial fraud/counterfeiting/etc. would be severe.

This new gold dollar system would function alongside the current FED system. Any large debts (mortgages, business debt, most importantly, govt debt) would be denominated in fiat dollars. That way govt could continue to operate (maybe, ha ha) and the banksters could still have their play money to manipulate and try to capitalize on. A free market would exist to redeem back and forth as necessary. This free market would show the relative worth between the two currencies."

JR said...

cont.


FOA's reply: "Excellent thought sir. Econoclast, using your thrust as my platform:

One of the major problems faced by past hard money planners was that any time real wealth, gold, is denominated as credit money, it always placed the relationship between the rule of law and the rule of gold at odds. If our laws defined gold as official money, and lent it, then by association the law had to define a portion of gold that did not exist in circulation. That portion was the contract asset held as bank savings. Yet, a person's claims against it identified said gold as real. This was and is an inherent contradiction because no law can define the value of real wealth held in contract.

This particular fiat form of hard money owed its existence upon a continuous function of the economy. What the above means is that you cannot take something real and lend it over and over, as banks do when lending fiat, and still demand that the law recognize said contract moneys as hard legal tender.

I would state that no form of lent gold be recognizable or enforceable in the court of law as a legal tender contract. One may borrow gold, relend it, or even borrow against it, but that gold would not be valid in the payment of all debts both public or private. It could not, by law be legal tender. This is not to say the trading of gold would not somewhat supplant currency in function. It could and most likely would to a degree, but it would no longer carry a credit quality that fiat would in the form of a time function. Indeed, in our modern economic structure, a credit time function is very valuable and gives digital contract currencies their demand.

To deal in the future,,,,, to borrow,,,,, to capitalize would require the use of a fiat function. Gold could / would be a final trade; I'll give you ten cars (or gold) for your house,,, deal done. If I want more time to pay, I and we must engage a fiat loan."

J said...

Blondie,
Try putting a /ncr after .com

blogspot.com/ncr/commentlink

no country redirect

JR said...

Re gold lending/gold leasing:

We had a system where government's tried to make gold fixed to their MoE, and now we live in the remnants of this system, yes?

In Freegold gold is not fixed, it floats. So its sorta like G don't try to make gold tied to your money anymore. See:

One may borrow gold, relend it, or even borrow against it, but that gold would not be valid in the payment of all debts both public or private. It could not, by law be legal tender.

But either way, a G that tires to fix their money to gold will get whacked. So its not like we need to tell G's not to try a fixed gold standard - the Superorganism will bust any such attempt.

And banks don't lend gold, you'll get whacked if you do, because you can't enforce your contract and get repayment in gold (its not legal tender), you can only get enforce repayment in legal tender.

And more to the point, who will demand gold loans?

Freegold Foundations

I do believe that if today all the legal obstacles were removed… people would from their own experience be led to rush for the only thing they know and understand, and start using gold. But this very fact would after a while make it very doubtful whether gold was for the purpose of money really a good standard. It would turn out to be a very good investment, for the reason that because of the increased demand for gold the value of gold would go up; but that very fact would make it very unsuitable as money. You do not want to incur debts in terms of a unit which constantly goes up in value as it would in this case, so people would begin to look for another kind of money: if they were free to choose the money, in terms of which they kept their books, made their calculations, incurred debts or lent money, they would prefer a standard which remains stable in purchasing power.

JR said...

So on why an attempt to fix legal tender /currency/money to gold will fail, or why we don't need laws preventing gold from being legal tender/currency/money to have freegold (because those laws will be unenforceable as the moentary system fails):

Remember the analogy of the tale of Ben and Chen from Focal Point Gold. The one Aristotle wrote a great comment about here.

A point of this tale, as illustrated by FOFOA and Aristotle, is that a floating/increasing valuation of gold helps ensure that the system is sustainable, as contrasted to the unsustainablity of a fixed price of gold. As FOFOA wrote:

I hope that this little analogy helps you visualize the separation of monetary roles, because those talking about a new gold standard are not talking about this. I understand that sometimes you have to speak in terms familiar to your audience in order to not be tuned out, but I also hope that my readers come to understand how and why a new gold standard with a fixed price of gold, no matter how high, will simply not work anymore.

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

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

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

Yes, the gold price must… WILL go much higher.

JR said...

Hi Woland,

Well put! This post really gets at the issue, and hope would, as you allude, help the process of understanding.

At the risk of picking at a wound which should be at this
point in the process of healing - A short post by Aristotle:
1/13/00 1:17:56MDT Msg ID 22810
"How much wisdom in our annals of history; How much
deliberate choice?"
To which FOA replied: "I could have just posted your item
and not said anything. Just read it and had to note it. Good
Stuff."
I suggest it is worth a look, re: the end of the previous post.


Indeed, what was left off at the end of last post was discussion of the **deliberate choice** made by the BIS/Euro group to support the dollar after it died less than ten years after it was floated/delinked from gold in 1971.

re: the end of the previous post

One of the big points in the post above is that exorbitant privilege is something that is given, not something that is taken.

[...]

[ANOTHER] was talking about the European's fear, and the BIS. How could USG fear keep the price rise intact? Obviously he was talking about everyone else. You can't take exorbitant privilege, it must be voluntarily given.

"To hold a dollar backed oil system, the governments agreed to create a liquid "free" gold market."

Ah, the governments (plural) agreed. See that?


Yes I do, thanks FOFOA. Deliberate choice by the BIS folks to "give" the US the exorbitant privilege.

JR said...

As E_R linked above regarding Woland's cite to Aristotle (1/13/00; 1:17:56MDT - Msg ID:22810)
"How much wisdom in our anals of history; how much deliberate choice?"

To wit, the dollar wasn't backed with oil because it was carefully calculated to be the most superior form of monetary arrangement. You have had little trouble poking at the flaws of such a scheme. In the eyes of the officials involved at the time, what was done was perhaps the most expedient course of "policy," for the day, and the concept of oil "backing" the dollar by any fair assessment is most probably a de facto result of the path of least political resistance coupled with our perceptive advantage of hindsight. Meaning, at the time, it was not expressly determined that oil would replace Gold in a new form of "commodity standard," but effectively, hindsight reveals that's effectively what we got -- the approximate result of evolving policy and trade agreements that maintained dollars as the currency of oil settlement (even after the Bretton Woods notion of Gold for $35 went beyond a blushing fiction to unabashed fantasy--followed by the reality of nothing when the window closed in 1971.) Even in those following days, many significant players expected this condition to be temporary--with Gold to be refitted to the monetary framework under some new form of workable terms. (Or should I say, they expected the monetary framework to be refitted to accomodate meaningful Gold settlement--we all know that only Gold is "money" in this modern world.)

Blondie said...

Thanks J.

Totara said...

Hi Blondie,

I too get the blogspot.co.nz in my address bar. But I don't have the same problem as you describe. For example, in JR's comment above (April 18, 2012 9:10 PM), his link directs me straight to the relevant comment (Aristotle February 6, 2012 10:46 AM).

I hope this helps you narrow down the cause of your troubles with Blogger.

Michael H said...

Zerohedge recently ran an article from Artemis called Volatility at World's End: Deflation, Hyperinflation and the Alchemy of Risk.

Summary:

Artemis likens the current economy as an interconnected fleet of ships navigating the straights between the waterfall of crushing deflation and the hellfire of hyperinflation. Having been to the deflationary abyss in 2008, most participants watching for ‘tail risk’ focus on protection from the waterfall, while few seem to be prepared for the danger of hyperinflation.

The author presents data that show that downside market protection is severely overpriced relative to historical norms, while ‘upside protection’ is unheard of. ”The argument that hyperinflation in a developed country and debasement of the global reserve currency is impossible strikes me as similar to the same logic that concluded a nationwide housing collapse was not a believable risk.”

The definition of hyperinflation used in the article is a ‘mild’ one: a mere 26% inflation rate per year as per the IASB.

An interesting side effect of the inflation would be that the relation between volatility and equity prices (e.g. $VIX and $SPX) would be inverted from historical norms. In other words, it would be upward spikes in $SPX that would lead to spikes in $VIX, and either moderation of $SPX price rise or moderate $SPX price declines that would bring $VIX back down.

Gold is not mentioned, but I still found it an interesting article to help visualize what a hyperinflationary episode (even a ‘mild’ one) would look like.

Further, I found the article a good reminder that professional traders have much more effective analytical tools at their disposal (and time to use them!) than mere armchair retail ‘investors’.

Michael H said...

Since victor mentioned John Hussman’s ‘Sixteen Cents’ piece, here is an update for the equations given in his article:

- Monetary base as of 4/4/2012: $ 2658.668 B (down from a high of $2752.973 on 2/22/2012)

- 2011q4 GDP: current dollars $ 15319.4 B, 2005 dollars $ 13429 B

- 3 month T-bill rate ($IRX): 0.065% today, down from a peak of 0.120% in February.

Hussman’s equation for current values yields 12.6% inflation in the pipeline, if these values are sustained over 6-12 months. $IRX has now been at these ‘elevated’ (!!!) levels for about three months.

For reference, currently an $IRX of 0.034% is consistent with 3% inflation. $IRX of 0.1% should lead to 20% inflation. Robust GDP growth would temper the inflation expectations somewhat. This all assumes that the liquidity preference correlations that Hussman cites are still valid.

I hope Hussman publishes an update to his article soon, because the clock appears to be ticking.

Michael H said...

One more thing to add RE: Hussman’s liquidity preference equations:

I mentioned that “Robust GDP growth would temper the inflation expectations somewhat.” More specifically:

Current conditions with 5% nominal GDP growth (in whatever combination of inflation and real growth) would reduce the ‘inflation in the pipeline’ number from 12.6% to 7.2%. An $IRX consistent with 3% inflation would then be 0.05%. A ‘high’ $IRX of 0.1% would lead to 14% inflation.

These numbers are still cause for concern, given the ‘danger of a little inflation’, and also given that the talk is of further expansion to the FED balance sheet.

JR said...

Well said Michael H,

"I hope Hussman publishes an update to his article soon, because the clock appears to be ticking."

Aristotle (1/14/00; 8:59:05MDT - Msg ID:22881)
TheStranger's news item on Nobel laureate Robert Mundell--
"On Mundell - Last night, in London, Robert Mundell gave a lecture in which he repeated his prediction of $600 gold by 2010."

True. Unfortunately, most people failed to grasp that his reference was military time.

Gold. The clock is ticking. ---Aristotle


Archives = A Treasure!

Michael H said...

Another thing to add RE: liquidity preference.

In the second half of 2011 $IRX was signaling 'deflation'; it was sitting at 0.005 for months. So perhaps what we are seeing now is not nascent inflation, but rather a catching up of an earlier imbalance to the downside.

That is why I would be curious to read Hussman's (or anyone else's here, for that matter) take on this, since my interpretation could be off base.

e_r said...

Michael,

Thanks for the Artemis link. Here's a Youtube video of SPX volatility curve done by them.

These guys really know what they are talking about in terms of volatility. I remember reading their volatility report last year and I was impressed by their work:

In the end it is hard to come to terms with this sense of normalcy while looking at some very abnormal facts. For example, is it normal for the US to pass China as the largest holder of its own debt? Is it normal for the Federal Reserve to purchase an estimated 70% of the new supply of that debt5? How can inflation be normal when a broad cross-section of food and commodities appreciate 23% in only six months?Or when global inflation contributes to violent protests, revolutions, and war that spread across the Middle East and Northern Africa causing oil price shocks? Can we say it is normal when the European Union bails out its third member nation in under a year? Or when the Swiss Franc appreciates nearly +30% against the USD in only nine months, cancelling out a +27% gain in the Dow Jones Industrial Index from currency devaluation alone? Why is it so easy for markets to return to normal after a massive disaster in Japan threatens the financial viability of the world's third largest economy and purchaser of US debt? Each and every one of these facts is a fire burning on the wings of the economy. The markets may be passive but not without hidden fear.

The denial of truth is the denial of volatility .

“Nobody will deny there is roughness everywhere….” - Benoit Mandelbrot

On the report that you've linked, I find it interesting that they think buying long-dated OTM call options will serve as a hedge against a hyper-inflation tail risk. Small bet with a potentially large pay off if the tail risk manifests.

Edwardo said...

Michael H posted the following from "Artemis"

"Having been to the deflationary abyss in 2008, most participants watching for ‘tail risk’ focus on protection from the waterfall, while few seem to be prepared for the danger of hyperinflation."

Imagine how easily a HI could be triggered as the result of another severe bout of deflation such that tax receipts collapsed. The authorities would become even more reliant on debt offerings to run the government even as it would be (even more painfully) obvious that economic activity had no hope of allowing said debt offerings to be paid back in anything but, at best, severely devalued currency.

e_r said...

Bank of Japan announces outright purchase schedule of Commercial Paper and Corporate bonds .

I have a naive question regarding this outright purchases.

If they announce this well-ahead in time, can't people just buy them now and dump it to BoJ on those dates and take profit?

Does liquidity injections really inject liquidity or is it simply just a spill-over effect and therefore diluted because of risk-free profit making?

Can Japan really afford interest rate rise with debt well over 200% of GDP?

Motley Fool said...

e_r

Yes, that's the point. Remember though that in the meantime it creates temporary demand and providing those nominal profits literally costs the BOJ nothing. It's a nice form of kick the can.

Of course they can't afford a increase in interest rates; nor can the US. That is part of the reason they are buying their own debt...to keep the rates artificially low. Remember this also costs them nothing to do.

TF

/SleepingVillage/ said...

Albatross

Well I'm feelin' left behind, Lord what a waste of time
They're coming to get you, run on
How can I respect your crime
When all you criminals whine
They bought and sold you, run on, run on

You can call me crazy
You can call me wrong
Cause I was born a liar
Albatross fly on, fly on

My home is kind, man it pays to be blind
I promise to forget you run on
No swallowed pride, no conspiracy lined
Broken promise of the virtue, run on, Lord run on

You can call me lazy
But I know where I belong
Cause I was born a liar
Albatross, fly on, fly on
With your trust in love from your God above...

I believe the Albatross is me

You can call me lazy
You can call me wrong
Cause I was born a liar
Albatross, fly on, fly on

I should have seen the signs
Now the memories far behind
It was no big loss,
Fly on, Albatross yeah

Albatross

Pepper Keenan/Reed Mullin/COC

costata said...

/SleepingVillage/

Grat lyrics, thank you.

e_r,

What MF said.

e_r said...

MF,

1. I don't think the profits are nominal if I'm the first to receive it ;).

2. Printing costs nothing, but there is a non-obvious cost which is the currency's credibility. There are no mathematical models for measuring that though.

Talking about interest rate suppression reminded me of this excellent BIS paper.

Markets for government bonds are increasingly populated by nonmarket players, notably central banks of the United States, Europe and many of the largest emerging markets, calling into question what the information content of bond prices are relatively to their underlying risk profile. This decoupling between interest rates and risk is a common feature of financially repressed systems. With public and private external debts at record highs, many advanced economies are increasingly looking inward for public debt placements.

Motley Fool said...

e_r

Of course on both points.

Many levels of nuance. :P

TF

Gary said...

I read a paper today (by email, so can't link it) that showed that gold supply from 'old scrap gold' has risen from 749 tonnes a year in 2001 to 1,689 tonnes estimated in 2011. Mined supplies have stayed quite steady at c.2500-2800 tonnes per annum.

The supply of scrap has been steady for 3 years now, perhaps indicating a plateau has been reached.

Supply/demand/price will inevitably keep squeezing out some old gold, but I'm thinking there's only so much of it out there, love to see that supply drop to a trickle, then we'd see the squeeze really take the price up to levels that might cause some worry in certain circles.

This is where the report originated, I can't find it, but haven't had time to dig in much, so it may be there somewhere.

http://tocqueville.com/

e_r, re printing costs nothing, can you point me in the direction of that free paper and ink please ;)

e_r said...

Gary,

LOL I should have said electronic press.

Ellen Brown (who believes politicians should have the ability to print money), writes about the ESM Accord .

I did not find any FOFOA post discussing about the ESM accord, may be there are posts hidden within comments (!!) where this may have already been discussed.

Here's a Youtube video that references few phrases from the accord, which sound dictatorial.

Doesn't this affect the independence and sovereignty of the nation states?

What is the effect of this on Freegold?

Alien said...

FOFOA doesn't comment on trivialities like ESM.
That's only smoke and screen from politicians but maybe JR will find an answer to your question.

JR said...

Maybe like me was thinking "this post is 50 comments in and no sign of Aquilus?"

He's still all over last thread.

"During HI real estate will not keep pace with inflation..."

e_r said...

Interesting White Paper from GMO:

Emerging Consumers drive up gold prices.

A staggering 79% of total world gold aggregate demand has come from India and China.

Nickelsaver said...

SV,

I had never heard that song before. Absolutely awesome!

JR said...

RS View: For the wealth-preservation minded individual, the important question centers upon this comment made in the article: “How long this process goes on depends on the availability of alternatives to the dollar.”

Frankly, the answer is surprisingly simple, and the preparatory timeline is surprisingly short.

As evidenced in the commentary about the new trade arrangements between Russia and China, it should be obvious and intuitive that bilateral trade between any two given countries could be similarly invoiced in their respective currencies. The timeline is effectively zero given that these currencies already exist and are in local use. At issue, mostly, is the simple matter of breaking with mere tradition — the habit of invoicing/contracting in this third party currency, the dollar. Given the suitable functionality of most national currencies for the invoicing/payment of their bilateral trade, there is no need for the world to spend time and effort conjuring up a new supra-national currency unit to replace the dollar as a universal invoicing agent.

With invoicing/payment alternatives ready and waiting, the only other aspect of usage in the dollar’s international role is that as a reserve currency — that is, as a store of value.

Store of value is a significant element because at the end of any given trade cycle (monthly or annually for example) a nation actively trading with its international peers as described above will inevitably end up with a net position in various foreign currencies. It becomes a matter of national importance to consolidate those paper positions into a more reliable form that is not dependent upon the fiscal policies and monetary management skills of your international trading partners. It is the form of asset chosen for this consolidation of the net position that embodies the “store of value” function from one trade cycle to the next and beyond.

cont.

JR said...

But as this article points out [see the article link to read more than the few excerpts above], “Since 1973, the dollar has been unanchored and has been anything but a stable store of value.” Gold, on the other hand, serves this role uniquely well because it resists the degrees of artificial inflation and depreciation commonly afflicting national currencies driven by naturally self-centric national management.

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

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

But in light of the current crisis and some of the policy efforts underway to restore calm to the commercial markets, it looks to me that the new timeline for significant transitions is mid-2013 consistent with the current policy talks driving the permanent European Stability Mechanism to that timeframe, but with that said, it could be set into motion at any given moment between now and then, and between your breakfast one day and breakfast the next. Hence, it is best that you work to actively establish your desired gold position without undue delay, and then with peace of mind you can turn your full attention to the business of living your life as it was meant to be. Spending significantly further time obsessing over currencies and investments is a fool’s errand.

R.

Kicking the Hornets' Nest

RJPadavona said...

Hello Friends,


Smeagol's poem reminds me of the old fable about the tortoise and the hare. Patience and endurance are virtues that have proven beneficial to those who possess these traits. Holding possession of physical gold is very similar to what an endurance athlete goes through.

I guess you could say those who trade paper gold are like sprinters and those who hold physical gold are like marathon runners. But there are marathon runners and then there are Marathon Runners.

The Tarahumara tribe are a small tribe of indigenous people who live in the Sierra Madre region of northern Mexico. They are known for their long distance running ability. The entire tribe, men and women, young and old, routinely run 100-200 miles at a time. The tribe record for a single run is 435 miles (16 times farther than a marathon), in just over 2 days. And they run these long distances barefoot.

This is a tribe of Superathletes whose ancestors were known for evading the Spanish conquerors of the 16th century and keeping their culture alive and secluded in the mountains. Their indomitable skill of being able to run these long distances has endured the test of time.

As some of you may know, there's been a new found fascination with barefoot running over the last few years. I'm sure you've seen people walking around in those hideous minimalist shoes that help you emulate the barefoot gait. But the Tarahumara tribe have been doing this for a long time with amazing results. I guess The Avuncular One would refer to them as early adopters.

Do the Tarahumara tribe remind you of another tribe we all know and love?

The only difference is to join the Freegold tribe, you don't have to be born into it. You just have to have a thirst for knowledge, and the patience and endurance to walk a Trail that's more satisfying than any marathon.

Touch the sun.

RJP

Blondie said...

RJP,

Once one has grasped how it is that gold truly functions the patience and endurance are simple corollaries. This wisdom from above bears repeating:

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

Adios

/SleepingVillage/ said...

Man, I'd croak if I ran even 100 miles..

RJP, I'd sure like to sit down and have a chat with you some day, I like the way you think. Perhaps we will all truly have to have a get-together on an island somewhere.

You're all a neat bunch of people and I owe all of you a lot for this education you've shared with me.

Nick, Costata - Glad you guys liked it. I would highly recommend the whole Deliverance album, it's a masterpiece for its genre. You will not be disappointed if you dig southern hard rock type stuff. I don't contribute much intellectually here, but at least I can drop some tunes once in a while, haha!

RJPadavona said...

Blondie,

Well said. Once you learn to save your surplus wealth in gold, there's no effort required. It just becomes second nature. Kinda like getting in the routine of meeting your Friends at the bar every evening after work ;)

Pour me another, we got nothin' but time.



SV,

Thanks. Come to Dixieland and visit anytime. I'll even give you a free haircut. But given your taste in music, you may not get haircuts :-)

Phat Expat said...

The other interesting property of physical gold, in your possession, is that you are unlikely to 'trade' it with each squiggle or wiggle in the paper markets. Not so for the paper playas where the gaming/gambling impulse takes over; and common sense is nowhere to be found.

And, with physical, in the unlikely event it goes against you, your future heirs will be more than grateful for your foresight.

And as it was stated:
"...with peace of mind you can turn your full attention to the business of living your life as it was meant to be."

Emphatically agree; I hope all can enjoy that peace.

And from one of my favorites:
http://www.youtube.com/watch?v=h8YKEwt3wO0

/SleepingVillage/ said...

RJP,

Haha, yep, I'm all beard and hair. But thanks for the offer, none the less. I've always wanted to visit the south. I have a few friends in the NOLA area I met through music related internet stuff, so we will be headin' down that way at some point in time for a visit. Quite a few bands I'd really like to see, often have gigs within a day's drive or so from New Orleans, which makes for a really good excuse for a holiday. Not to mention all the other things to do and see.

Phantom Green

Wendy said...

JR ...."Wendy, stop the charade"

(I gotta say you asked for it!)

Touche. Perhaps it's time for a JRblogspot.com Your total dominance of this blog suggests so.

Although I appreciate your expertise as it relates to freegold, I do not appreciate what I define as plain old school yard bullying. It creates an environment of conflict and inhibits the free flow of ideas and information.

You've been very succesful "evolving" your JR nic, I've watched with amusement... I believe "JR" posted here for the first time about a year ago. Have you met your mandate?

The short version is that you have manipulated this blog into your personal soap box. I don't care who you are, what you do, how you do it, or who your momma is. I care that you have morphed FOFOA.blogspot.com to JR.blogspot.com, and we weren't notified!

I'll stop for now ;)

e_r said...

JR/Blondie,

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.

This wisdom is good, but it doesn't address the core point: which is that for gold to be truly free among the masses, perception is very critical. The perception coming from the ESM is not conducive IMHO (usurpation of democracy, independence, sovereignty). If gold is free to move among the elite giants, but not among the masses (because of punitive capital controls and taxes), Is gold truly free?

FOFOA pointed out in Ball of Twine about POTUS executive order to be indicative of HI preparedness, while it resembled very closely the EO signed by Clinton in 1994 and most of the powers have already been vested with the POTUS for a significant time frame.

Why is ESM's power grab not a cause for concern?

JR said...

which is that for gold to be truly free among the masses, perception is very critical.

_____________________________________________
Sidebar

As I noted here last Friday, during the dark of Thursday night, euro gold mysteriously levitated itself up a whopping €32.89 from Thursday's London PM fix of €1,184.16, which would have been a disappointing decline since the October MTM Party which marked gold at €1,206.39. This, of course, begs the question (once again) that was implied in this post as to how important "Snapshot Day" really is to young central bankers. (Evidence from Sept. '10 and April '11 seems to suggest that year-end and mid-year might be more important than the other two quarters.)

But this is neither here nor there which is why I put it in a silly little sidebar. It is simply a curious observation.
______________________________________________

Party Like It's MTM Time

==========

What we learned from ANOTHER thirty years later was:

1. The purpose of the euro was to provide an international transactional alternative to the dollar.
2. The consequence of the launch of the euro would be that gold would undergo "the most visible transformation since it was first used as money."

Quote - Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."

Tuesday, January 1, 2002 - Launch of euro notes and coins
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500
Monday, July 18, 2011 - GOLD ABOVE $1600
Monday, August 8, 2011 - GOLD ABOVE $1700
Thursday, August 18, 2011 - GOLD ABOVE $1800

What I can tell you with full confidence is that this is only the very beginning of gold's functional transformation.

Once Upon a Time

JR said...

Hi Wendy,

Well the world needs ditch diggers too.

Alien said...

Friday, April 20, 2012 - Gold around $1643

Sucker!

Peter said...

"Spending significantly further time obsessing over currencies and investments is a fool’s errand."

Hey! Why the hell am I still here obsessing over a fool’s errand?!?

Woland said...

Sometimes, you just get in the mood to say something. Even
if nobody needs to hear it. I'm in such a mood. It will pass.

FOA: "Because the trading of paper securities (stocks, bonds,
currencies, etc) have become the only avenue for world economic
activity, we are all compelled to play this game of chess. Like it
or not, your very net worth is every day, in play. And, as such,
we watch for the next move on the board. Each, in his own
quiet way, ready to act quickly and purchase the "next paper
asset" that appears to hold value in trade. That is, before our
neighbor beats us to it. Think now, is this the way of the free
market and the democratic order that one was brought up to
expect? Your life savings, not at risk of being lost, just at risk
of being reevaluated to a lower level of importance in commerce?"

Does that ring any bells of recognition? It sure does with me!

Which leads me to a neat little ARISTOTLE story. Ah, what a
great resource we have in the archives. Lots of wisdom is
available to us "ditch diggers".

Aristotle: True Story, 2000AD
While out at lunch today, I overheard a small bit of conversation
between a couple of university students as the passed by. They
both seemed healthy, burdened though they were with heavy book
bags. The girl said to her friend" Why didn't I buy some AOL.
Why DIDN'T I?"
It struck me as odd. Here we have a young lady in school with a
whole future of possibility before her, and yet she is bemoaning
regrets with the same conviction as an old man who spent his
life in and out of prison (but mostly in) who says, "Why didn't I
learn an honest trade? Why DIDN'T I?"

Since when is the stock market (Woland: or all these markets) the
"End all, be all?" That young girl sounded as though she had
somehow managed to throw her life away, leaving her without expectations or prospects. Sheeeeeesh! (It's now 2012 AD,
she would have to have said Apple, as AOL is on the ropes)

Let me give it a try since it seems to be all the rage these days.
"Why wasn't I born with a silver spoon in my mouth? Why WASN"T
I?" Why wasn't I given a certificate of birth entitling me to a life
of ease? Why can't we ALL simply be given an allocation of AOL
stock at birth so that nobody has to worry about such things as
social programs or unemployment because nobody would need
to work. Instead of sending aid packages of rice and medicine
to the Third World, wouldn't it be easier to drop AOL stock from
planes? Well, WOULDN'T IT? Reality is a good thing. Too bad
so many people don't see it as clearly as they should. But perhaps
some leniency is in order-- this was a youngster after all. I'm
comforted that none of our working adult population is caught
up in such a delusion. Right?

It's nice to know that our Gods here at FOFOA are people too. And
with a sense of humor, too! There, now I feel better. Bye.

matrixsentry said...

Peter,

Being a former member of the "obsessing over currencies and investments camp" I would say that my time here is well spent and frees up a lot of emotional energy for other pursuits. My two Harleys are really looking good these days!

Physical gold is neither a currency or an investment. Investment is not the same as saving if you agree that investments entail some degree of risk in order to provide a return on capital. Acquiring physical gold is saving and I do not see any risk as far as return OF capital.

However, I see a very nice one time bonus in that my physical gold will be revalued as a consequence of RPG. The result is an effective return on my savings capital. If I were to never see a return ON capital, I would still be quite satisfied with the fully retained purchasing power of my savings.

The degree to which I have come to understand RPG directly correlates to my overall sense of balance and ease of manner in which I approach my day. My general feelings of anger and cynicism, fueled by frustration resulting from a perceived lack of control, are largely gone. This blog and the participants here have shown me how to remove the counter-party risk and uncertainty that I have obsessed about for many years.

As an aside, my Technical Analysis has greatly improved as a result of the removal of the emotional element. TA is subjective and conclusions are definitely effected by the emotions and preconceived ideas of the technician. When one only wants to see the chart progress up and to the right, the reversals seemingly become harder to spot. I am now happy to see the price of paper gold fall and the waterfall price event makes me smile.

In so many ways this blog is about freedom. I am thankful and find the world to be a better place because it exists. I think this satisfies my definition of value.

Peter said...

"This blog and the participants here have shown me how to remove the counter-party risk and uncertainty that I have obsessed about for many years."

Ah, yes. Thanks for the reminder of why we're all still here, matrix! ;)

"Well, one could argue that obsessing over everything FOFOA writes once you get the basic concept is a fool's errand."

This was what I meant earlier. But there's more to this world than each of us alone.

jojo said...

I have been under the assumption that after the dust settles and gold is revalued to say $50k per ounce (our big once in a lifetime revalue), that general prices would be lower- that 10 ounces or $500,000- would be like 500k was 40 years ago.
That this new dollar price per ounce is in the new dollars. Have I got this right?

Jeff said...

Hi jojo, let's see if I can beat JR to a quote:

FOFOA: For example, if hyperinflation takes the price of everything up 1,000,000%, gold will go up 40,000,000%. But only gold. Everything else, silver, cans of peas, etc... goes up 1,000,000%. So gold's FREEGOLD rise (that extra 40x rise) is in REAL TERMS because it is relative to everything else REAL. While everything else only rises in NOMINAL terms. Can you see the difference?"

Aaron said...

Hi jojo-

Not quite. That $50k/oz estimate is in terms of purchasing power using the dollar of today -- not 40 years ago. IOW, that $300,000 plot of land you've been eyeballing down the road would cost you ~6 oz. gold post revaluation.

LD said...

Check this out...April 24 is Akshaya Tritaya. An auspicious time for Hindus, especially those from South India to buy gold.

http://www.tabla.com.sg/

LD said...

edit : Check this out...April 24 is Akshaya Tritaya. An auspicious time for Hindus, especially those from South India to buy gold.

http://www.tabla.com.sg/

pages 14 to 21.

jojo said...

Thanks Aaron.
Your other words were a fresh enough perspective for me to see it in a different light.

SO, that same piece of land that was once $300,000 that i can now buy for 6 oz gold could be priced *at that point in time* in "new" dollars of anything- say it's listed for $100,000 (new dollars in the post collapse times)(we could also assume it's priced at a million dollars).
in that case, you could say my 6 oz gold is equal to only $16,600 per ounce. ( or 160,000 per ounce if the "new" dollar price is a million.)

Would we see some people complain then that they thought their gold would be worth 50k new dollars but it's "only" worth 16,6 K???

just trying to talk out loud here and hopefully those behind me can find some illumination from it...

wanderer2go said...

@jojo,

I think I understand it this way:

1 ounce of gold (today) == 7920 eggs (approximate)

1 ounce of gold (post fg) == 396,000 eggs (approximate)

Right?

Ryan said...

jojo,

Have you checked out How can we possibly calculate the future value of gold?

Quote from Another in the article:

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

Many will "think long and hard on this", but will find little reason for this position. For it is in your history to know only "things valued in paper terms".

Your past holds little of knowing value outside of currencies, this does block the good view!

Hear me now, what the wealthy and powerful know: "real value does not have to always be stated or converted thruout time. It need only be priced once during the experience of life, that will be much more than enough!

---

Followed by FOFOA:

Stefan, is an American home on an eighth of a desert acre really worth 200 men's suits? Is an Ivy League education in Investment Banking really worth 2,000 barrels of crude oil? Who knows? We have been living in a fantasy of government-sponsored malinvestment and soft money financial engineering for more than six decades. How will we ever know what things are really worth before it all collapses?

---

I'm sure you'll find the FFPPDC relevant also.

With the monetary plane creating the paper illusion of wealth, how can you accurately say what real things are worth in terms of real things with absolute certainty?

jojo said...

wanderer- eggsactly! ;)

Ryan and Jeff, thanks for JR'ing me.

Re: my last post, I just wanted to make sure I had that straight before I try to use that for another shrimp that has come to me with questions.

It seems especially sticky for newbies I encounter to wrap their heads around the whole dollar price thing. I swear, it's like people have been brainwashed for 40 years with dollars ;)

Robert LeRoy Parker said...

We have been living in a fantasy of government-sponsored malinvestment and soft money financial engineering for more than six decades.

Dollar reserve anthem???

Gary said...

JR, wish I could bite my tongue like you can!
Many here, including me, appreciate the Fofoa flashbacks, but I think you knew that.

Something I've beed mulling: plenty of companies recently been reporting weaker than expected results, many citing margin pressure due to raw material cost increases.

It appears that these companies are swallowing the pain, rather than passing it on to their customers. Also evidence that smaller package sizes are being used by some retailers rather than cost increases (although same result perhaps).

I am just pondering how long these companies can swallow the costs? Eventually profits will wither away, and losses will appear. They may eventually pass on the price increases, rather they will have to.

With real wages declining the world over (except maybe China), how do consumers actually pay more? Will discretionary spending just reduce to zero eventually? Will companies just have to reduce in size or will the playing field lose many players? Will they actually be able to price higher and save themselves, or will that be the 'little inflation' that is the final straw?

I am trying to see how higher prices will seep through and then stick at the end of the day if the wages aren't there, does that mean deflationary pressures might outweigh the inflationary?

I wonder if wage increases will start to spiral upwards, but no sign of that yet.

To me it could still result in either a period of pain that can go on for a long time, or the deflationary pressures causing the collapse in confidence in the system, rather than the inflationary.

Frustrating, as I was sure I'd lost my deflationary bias last year, but it is a tug of war in my mind: does a weaker dollar mean higher prices leading to currency collapse, or to downward pressure on spending/more debt collapse, or both, and which will prove stronger. In the Great Depression I believe the deflationary pressures were winning until the post-confiscation devaluation. Inflation then won the war.

Sorry, rambling now.....but whatever, I still love physical gold.

costata said...

I can't believe the hysterical nonsense that is being written at the moment about the latest plaything of the EU political class - the ESM and its stablemate. (Actually I can believe it, the blogosphere is a new frontier, the Wild West for a digital age.)

These entities cannot print base money. They are not a clone of the ECB Eurosystem. If they/it become a "bank' that new bank will still suffer from the same limitations of any other bank. The capital and/or borrowings have to come from somewhere. In this case taxpayers of the member countries. This European QE to infinity meme is only possible if the ECB Eurosystem, the currency issuer, plays along.

Regardless of the wishes of politicians the capacity to pay taxes is a hard ceiling. "In a rigged market those who can be screwed will be screwed". But eventually the "screwees" run out of money. Those who can't be screwed will not volunteer to switch teams just to take the heat off the political class. The old money likes being rich and they intend to stay that way, thank you.

I would feel sorry for politicians if they weren't such complete A-holes. Congratulations boys and girls. You have your very own Maginot Line now. Repeat after me EU pollies:

It is .. now time.. to plan for...an orderly default.. on unpayable debts...or we will...be confronted with...a disorderly default... later.

The old money has already moved out of the danger zones. The only patsies left are the average Joe and Jane. They cannot foot the bill. It's over. Get with the new program.

/rant over

costata said...

h/t JSmineset for the link to the article. (My emphasis)

http://www.globaltimes.cn/NEWS/tabid/99/ID/705561/SHFE-paves-the-way-for-silver-futures.aspx

The Shanghai Futures Exchange (SHFE), China's largest market for commodities, issued a draft Tuesday, outlining the upcoming launch of the exchange's silver contract, China Securities Journal reported Wednesday....

...Unlike the gold futures contract, which is priced beyond the reach of many small investors, investing in silver futures could require a cash outlay of as little as 6,000 yuan ($951.97), Sun calculated based on the draft.


Woopee! Noose meet neck. Now we get to see if the insiders have been stockpiling silver along with copper. Note this:

The country's high trading volume and booming demand for silver - which is a key component in high-end electronics, solar panels and luxury items - make this the perfect time to start silver futures trading in China, Li added.

I guess it comes down to what the PTB in China values more - silver investors or industrial users. I'm betting on the latter.

Aiionwatha's Nation said...

Costata,

I don't think it comes down to either one. I appreciated your piece on moving the herd a few notes back. What the world lacks is fairly priced available collateral because the dollar float has consumed it all some ten times over. Futures, derivatives, interest rate swaps all are release valves against discovering the lack of collateral against which these dollar positions rest.

Think about ETF's and futures contracts, is there any difference in what is at work? Shift of control from primary market demand to secondary management of OPM in a world that has no room for their$ in reality.

Silver may just do the heavy lifting here but certainly not through an additional futures exchange. Which gets me to my next point, why is gold settled on a futures contract in the first place?

costata said...

AN,

Thanks, glad you enjoyed it. Others here are far better qualified to answer questions about gold futures etc than me. I broadly agree with what you are saying about the "big picture".

I will have to dig for the paper I read where it was pointed out that China's production of complex manufactured goods is now around 6 times larger than production based on raw materials. This tells me they are using a heck of a lot of silver in industrial applications. Add into the mix that China is the largest refiner of silver and a large producer of unknowable quantities of silver.

I think the SHFE will matter if it is used by real producers and real consumers to discover price. If the volume of silver traded on this exchange grows large enough then it could take the lead in price discovery from Comex. Silver investors may, or may not, like those prices.

If, on the other hand, this initiative is an attempt to take over the manipulation of paper silver then the intentions of the manipulators still matters to the price of silver. It simply poses different questions i.e. Who are they and what do they want?

Incidentally, the recent proposal by the LME to include the Yuan in the roster of currencies used to settle some contracts and drop the British Pound looks to me like a shift Eastward in their worldview.

http://uk.reuters.com/article/2012/04/17/uk-lme-yuan-idUKBRE83G02I20120417

FOFOA said...

To Gregor Macdonald (if he happens to be here),

Gregor writes, in Get Ready for 'Hot' Inflation: "If so, Western economies face an unpriced risk now, not from spiraling deflation, nor hyperinflation, but rather from the breakout of a (merely) strong inflation."

Thanks to Costata who sent me Gregor's piece. I wrote back to Costata (and then he encouraged me to post it):

"With our government’s budget deficit at twice the rate of the trade deficit, and with the drop-off in foreign CB support for our government debt, how can we possibly have “merely strong inflation”? The USG would have to cut a quarter of its expenditures just for starters. He sounds like Eric Janszen. Inflation and deflation are polar opposites, but currency collapse and deflation are practically twins."

Funny that I mentioned Eric in the email because after Costata said I should put up a comment, I went back to look at the comments under Gregor's post, and there was only this one:

"Excellent post. FYI, Eric Janszen over at iTulip.com has been the most consistent and sane voice on this topic that I've encountered. For several years now, he has asserted that a period of several years of very high inflation is almost a certainty, but that hyperinflation is an infinitesimally small risk. He correctly points out that none of the self-described experts talking up hyperinflation risk (such as John Williams of ShadowStats fame) are ever willing to discuss the fundamental differences in circumstances between the USA and countries like Argentina, Zimbabwe, and Weimar germany that they so frequently cite as "proof" of what will happen here."

Well, I wouldn't call myself an expert in anything, and I don't think I've ever cited those countries as "proof" of hyperinflation here, but I certainly have discussed the fundamental differences in several posts. Like Moneyness:

"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.

[…]

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.

[…]

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.

[…]

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.


See also my last post, Peak Exorbitant Privilege.

Sincerely,
FOFOA

Woland said...

FOFOA:

You conjure up an interesting reality to test the imagination:
What would the US look like, if all the THINGS it has become
used to consuming had to be exchanged with THINGS it sent
abroad in payment. Forget gold or currency, and go back to
an earlier era of "trade goods", those being the things your
trading partner required in order to complete an exchange.
When the British Empire wanted to trade with China, but all
China would accept was silver, and silver became hard to get,
they turned to their colony of India to produce the opium
which was then forced on the Chinese, via gunboat diplomacy.
I wonder what our "opium equivalent" would have to be to
balance trade in the physical plane. It isn't a pretty picture
to conjure up, in any case! (unless you are the REST of the world).

Jeff said...

rickards interview:

http://www.youtube.com/watch?feature=player_embedded&v=Tl9axPXtN5E#!

Edwardo said...

costata, is this what you have in mind regarding hysteria as it relates to the ESM?

http://www.jsmineset.com/2012/04/19/qe-to-infinity-certain-with-european-stabilization-mechanism-treaty/

Nickelsaver said...

FOFOA, Costata, et al,

In a post transition economy, will there be a Comex (Ex-Gold)? I am guessing yes. And if so. How do you see silver in this context?

Also, I've been reading with interest the comments by JMan and others regarding RE. I understand the argument that RE will revert to a cash value. I am interested in exploring this further from the tax side, specifically as it impacts rent-seekers.

I am a property owner. In general, I am not worried so much about the sell value of my properties changing, as much as I am concerned about my ability to operate those properties, i.e., rent income vs tax burden and maintenance.

JMan1959 said...

Gregor seems to me to be using a rather limited definition of deflation. He refers to asset deflation, listing housing as his prime example, but failing to mention any other major asset class that has gone down in price (likely cannot). I bought a Mastercraft boat in 2008,, used it for three years, and sold it for $5k more than I paid for it! New cars and boats are 15% higher every year. Food, rent, oil and gas, up twice that. No inflation, lalalala(lol), nothing to see here, move along....

Woland said...

Nickelsaver; Until 3 months ago, I was a NYC landlord for 25 years.
You may know from "When Money Dies", an excellent account of
conditions under Weimar Germany, that the government froze rents.
While farmers became rich, as food became a currency, landlords
suffered. It should also not surprise you that, following WWII, in
the US, rent regulation was a nationwide phenomenon, and melted
away slowly, until only Boston and NYC were left. Boston only
abandoned rent controls about 12-15 years ago, and NYC is still
a fully regulated market. A HI of the kind expected on this site
could easily be met by a similar response, as landlords are a "not
in favor" group politically, particularly if their property is multi
unit residential. I would guess that single family and commercial
would be less likely to face G intervention. Just a thought.


:

Nickelsaver said...

Woland,

Yes, this is of great concern to me.

I'm trying to figure out how the government would behave. It wouldn't make much sense for them to so regulate the market that the rent-seekers bail would it? I mean, the properties are a form of income for the government only when the owners are solvent. So if landlord's can't operate in the black, they'll just get out of the business. And since there is already too much housing, that means the government would probably end up owning vacant properties -vs- collecting revenues from landlords. Either that or there will be owners taking a loss for whatever period of time.

So for me the question is (since I rely on rental income as part of my total income) how do I manage the transition?

If I sell my property now and deploy into gold, I lower my income. If the transition is down the road, I might have to deploy my gold early due to the lost income, and I don't want to do that. If I wait too long, then I may have to deploy my gold during the transition to keep from losing the property, or get killed on the sale.

Right now, I'm thinking that if the transition is quick (less than a year), I will come out a wash between the RE I own outright, and that which I could pay off with cheaper dollars.

A long transition could be devastating.

Woland said...

Nickelsaver: A few random thoughts, in no particular order, and
without a deep level of confidence. 1. In a HI, the government
will not be relying on tax receipts to fund their consumption: they
print to cover the shortfall, as the landlord with frozen rents has
no means of payment. 2. In a HI, people benefit by delaying tax
payments. 3. In a HI, tenants whose services are paid by G, or
whose wages are better indexed to the HI, will fare better than
those who relied on fixed incomes of any sort (pensions, bonds)
4. If you have substantial equity in a property, you could borrow
against it, use 75% for physical, and keep the remaining cash as
a cushion to ride out a longer than expected transition to FG. In
the best case, the additional gain found in gold would make up
for the expended cash. 5. Last, if you have a leveraged RE asset
which becomes a loss maker, you can turn over the keys, if the
laws do not allow a deficiency judgement against other assets.
I'm sure others will have additions and improvements to this.
Cheers.

Michael said...

Nicklesaver
you should be aware that the term 'rent seeker' has another more common definition than 'tennant'
from Wikipedia: In economics, rent-seeking is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth, for example, spending money on political lobbying in order to be given a share of wealth that has already been created.

Motley Fool said...

Another FOFOA reader?

http://goldnews.bullionvault.com/user/julian_d_w_phillips

:P

mr pinnion said...

NS.
If i were in your position i would sell all the houses i was nt living in and buy gold with 80% of the profits.Keep the rest in cash and wait.
If everyone in your position did the same it would drive down the prices of houses to a level people could afford, thus helping your fellow man.It would also drive the price of gold up thus helping your fellow bloggers.
IMHO its the right thing to do.

Buying gold gives peace of mind to me regarding my finances.Why own more houses than you need in these uncertain times if it keeps you awake at night?

If FREEGOLD dont happen in the next two years ,its never going to happen IMHO.At that time nobody will be able to pay you rent that will cover maintenance.

Regards
Ozzy

Nickelsaver said...

Michael,

Thanks. I was aware of the larger negative connotation of the term; wasn't sure if being a landlord counted as well. Either way, I'm playing with the cards I am holding.

Ozzy,

thanks for your thoughts

Jeff said...

NS,

What will we need COMEX for when everyone dumps leveraged paper gold? COMEX will fail; say goodbye to COMEX.

FOA: "My friend, it would only be the end of the world for paper gold traders. Indeed, if comex stays intact, I bet my physical will match your contracts ounce for ounce (smile). Something that cannot be said for a reverse situation I see coming. You see, our position is leveraged for a worse case, while yours can only keep up with mine in your good case!"

...The key to understanding our gold markets is in placing paper gold trading in a correct perspective. It's not gold trading, it's leveraged currency trading with a little physical delivery thrown in."

Nickelsaver said...

Jeff,

What about all the other commodities that aren't going to serve as the new monetary system reserve asset? Need a price discover mechanism, no?

costata said...

Edwardo,

The piece that is floating around by the unrelentingly ditzy Ellen Brown is the epitomy of the kind of material I was referring to.

I see that people are also grabbing the wrong end of their Target 2 sticks again as well now that Werner Sinn has modified his earlier position on the topic (presumably to save face).

Jeff,

I'm with NS on this Comex issue. Hopefully the commodity exchanges will revert to their original purpose - allowing producers and consumers to hedge their output and inputs. FWIW I think gold is a special case.

NS,

This RE topic is a difficult one is it not? It keeps coming back to issues surrounding government policy.

Recalling that comment I made recently about "strength in numbers", the PTB are somewhat constrained in how they structure their charges. They can only discriminate between landholders to a limited extent. So if their efforts to raise revenue become draconian you will have some allies in a legal challenge or political campaign.

costata said...

Political Calculus

Thinking about these questions around RE prompted a thought about politicians treatment of wealth and welfare. The calculation is fairly simple in a way. Advantage those who have the highest concentration of wealth to maximise the campaign donations and sprinkle welfare payments on the bottom couple of quintiles to provide the votes to swing an election your way.

Then squeeze the middle class for every cent you can get because they are the only group of income earners that is big enough to provide a large revenue base. I guess we should be grateful for the assurance from the politicians who introduced personal income tax that the rate would never need to be "more than 5 per cent except in time of war" otherwise we'd be paying through the nose.

Wendy said...

Costata,

Do you only pay 5% income tax in Australia??? WOW I pay 30%, it's insane.

KindofBlue said...

Motley Fool

Thanks for the link. Phillips is a clear headed writer and worth the read.

Phat Expat said...

Wow, 30%!? That's simply amazing. Hmmm... I opt for... 0%. Or what my representative of the state, I mean tax accountant, let's me get away with. And as an expat, yep, that's 0%. Maybe I will move back when the IRS has been abolished, there is 'true' property ownership, we are no longer in a persistent state of conflict, and... Until then, I will visit under 30 days per year. More than enough for me.

The Engineer said...

Blondie,

I needed to repost your message above. Can`t think in anything better at the moment:

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

Edwardo said...

This is the sort of thing-outcome of the present putative power struggle in China-that could have implications for, among many other things, the timing of the emergence of a physical only gold market.

http://www.zerohedge.com/news/things-make-you-go-hmmm-such-power-struggle-death-within-chinas-power-elite

www.gregor.us said...

Because the subject is so vast, and because I'd like to make a comment that is useful, I'll just respond briefly to FOFOA on his remarks regarding my present concern for a strong inflation, and my lack of concern for a spiraling deflation or hyperinflation...

So, while there are many components required to foster/create/spark either strong inflation or hyperinflation--which have been discussed and articulated historically in the corpus of work done on the subject--there is in my opinion one factor, and one factor alone, that *must* be present in all hyperinflations. And that factor is the social, behavioral component in which the users of the currency *must* cross a tipping point where they are inclined to effectively throw the currency away, in exchange for any other good or currency, at some notable rate of speed. Without this behavioral shift, without this social decision, without the psychological change in perception that leads to this type of crowd behavior, there will be no hyperinflation.

So, you won't find me predicting USD-zone hyperinflation or even the risk of such any time soon, because the requisite social-psychological shift is a large and heavy object that needs a collapse in confidence to move from its current state of inertia.

Instead, I am genuinely concerned with a breakout of strong inflation, owing to a convergence of very large global trends: primarily the reaching of the Lewis Turning Point in non-OECD countries, and the relentless advance of resource scarcity. OECD currency users, meanwhile, from Japan to Europe to the US remain largely trapped within their currencies and their sovereign bonds, and will remain trapped in these until they aren't.

True, nothing goes on forever. Wake me when the managers of trillions of OECD pension assets panic out of their own currencies, and their own sovereign bonds, and I will finally be willing to entertain the risk of hyperinflation in OECD currency zones: EUR, JPY, USD. Perhaps this happens sooner than I anticipate. But I wager that it happens much later than most anticipate.

G

Jeff said...

On COMEX:

How is COMEX doing on price discovery currently? We know about gold, but how about other commodities? Are producers protected from having their accounts stolen by MF Global? Are buyers protected from JPMorgan buying years worth of copper production to raise the price? Do producers and buyers benefit at all, or only the speculators/brokers/banks who manipulate for profit? Will China stand for having its companies raped by exchange participants forever?

If the people who actually need price discovery want real price discovery, they will find another way. Gold will bust the COMEX like a rotten melon, IMO.

e_r said...

Gregor,

And that factor is the social, behavioral component in which the users of the currency *must* cross a tipping point where they are inclined to effectively throw the currency away, in exchange for any other good or currency, at some notable rate of speed. Without this behavioral shift, without this social decision, without the psychological change in perception that leads to this type of crowd behavior, there will be no hyperinflation.

Well said. I think we're talking about a societal consciousness shift. I don't think that the crisis can emerge in the bond market, since it can be "managed". It will emerge from trade deficit, but there is a political component to this as well. The political class has to be completely blind-sided as they continue engaging in a deficit spending spree, which involves monetization.

Based on the current political climate, I would assign a higher probability of that happening, I think of it as a "fat tail".

Wake me when the managers of trillions of OECD pension assets panic out of their own currencies, and their own sovereign bonds, and I will finally be willing to entertain the risk of hyperinflation in OECD currency zones: EUR, JPY, USD.

I would urge you to consider ideas presented in Moneyness. There is a bidder with infinite capability that can insulate the crisis that can emerge from the monetary plane through financial represssion.

JR said...

Hi Gregor,

In addition to e_r's excellent suggestion of reading Moneyness, I'd also urge you to check out The Debtors and the Savers to better get a feel for the "social, behavioral component," aka the political will. FOFOA has commented in Deflation or Hyperinflation?:

The point of sharing this FOA excerpt was that deflationists, like other groups that have established encampments cluttered with old baggage, tend to miss what is actually unfolding. And for that, you might want to start with my post The Debtors and the Savers. Understanding the balance necessary to keep the peace between these two groups is fundamental to understanding the political will behind the inevitability of both Freegold and dollar hyperinflation.

Gary said...

If we had this run in 2008, it isn't so hard to imagine the run to the physical world:

http://useconomy.about.com/od/criticalssues/a/bailout_cause.htm

As to when, I maintain that once the collective realises TPTB have run out of bullets, and see that QE has no benefits, but rather causes plenty of problems, that will be when the run starts away from fiat. Not this time down I don't think, next time: c.2016.

JR said...

One more Gregor,

FOA: "Remember; in political inflations, money is printed to save the assets as they are currently priced… This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed."

...Were you able to follow all of that? This little bit gets right to the heart of the matter; the difference between paper gold and real physical bullion. Remember from Moneyness that the people's money throughout history has been credit denominated in something. The majority of exchanges up until the invention of paper money were largely on the basis of credit and trust, with accounts later cleared and imbalances settled in metal. In this way, a relatively small and stable monetary base serves a much larger economy.

But today we use that credit, that debt or liability asset as our savings, not just for trade. Now I want you to think about the fundamental difference between claims denominated in paper money versus claims denominated in gold metal. The claims denominated in paper money can be liquefied in actual base money terms by the central bank. But the claims denominated in actual gold metal cannot.

FOA: "Remember; in political inflations, money is printed to save the assets as they are currently priced… This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed."

So claims denominated in dollars must be saved, "made whole" for the sake of the system, but claims denominated in physical metal CANNOT be saved without destroying the banks. The entire international monetary and financial system is in dire need of something to save it right now, wouldn't you agree? The whole system appears insolvable as presently priced, a Catch-22 of incomprehensible dimensions.

But the solution is not so incomprehensible, and it was never up for debate. It was baked into the cake long ago, as FOA pointed out. You may personally prefer that they simply let the system fail. But "they" are central bankers, so we can safely predict they will try something. And that something is the only thing that can happen.

The U.S. dollar and gold will both be massively expanded to recapitalize the system, and life will go on. The difference being that the dollar will be expanded in volume while physical gold bullion will be expanded through value. And through this process, all ambiguous claims, both dollar-based and metal-based will become virtually worthless, while unambiguous gold ownership will literally explode in value.


Unambiguous Wealth

costata said...

Wendy,

I was being ironic. The promises about tax rates were broken (of course) over time. We pay similar rates to Canadians. Then again there are lots of ways to reduce your rate if you have the means and the ability to structure your affairs in certain ways.

That said, if your beloved insists on trying to boost EU GDP into double digits singlehanded then all your careful planning will be for nought at the end of the day. And you could end up like poor old costata putting up with the dog snarling at you every time you go near his food bowl.

costata said...

Hi All,

I dropped in to take a look at the summary of the Harvey Organ interview by Chris Martenson because Jim Sinclair posted a link.

Can anyone confirm whether any of these claims by HO are true?

A lot of people don’t know that China used to refine close to 80% of the world’s supplies of silver, because it’s very toxic. Up until probably ’85, the Chinese handled 80% of the world’s refining of silver. Now they're down to 40%, but that’s still a major part of China’s industry.

In particular is China's share of silver refining down to 40 per cent?

costata said...

Aussie Readers: Batten Down The Hatches

This is how mining booms end. Every time. No exceptions. The miners expand until there is over-capacity and then prices collapse. It's not driven by their customers. IMO we have a year (or two at most) left to prepare for our flavour of the GFC.

http://www.macrobusiness.com.au/2012/04/an-african-iron-ore-deluge-by-david-llewellyn-smith-2/

And no I'm not saying the last chapter has been written in the China story or the India story or any of the other emerging countries. The long term future is bright but it will be very bumpy for a few years and potentially devastating on a personal level if you are positioned wrongly.

jeb said...

Hey, sorry I don't any useful contribution towards the rhyme, I'm after some advice on a decent book on liberal philosophy, any recommendations would be appreciated, thanks.

Woland said...

A very interesting little piece over at FT Alphaville: "The
Unwitting move towards a global gold standard". A quote:
Hence, the great corrolary of over indebtedness is the
relative scarcity of good collateral to support the debt load
outstanding. This imbalance of debt to collateral is impacting
the ability of banks to make loans to their customers, for
central banks to make loans to commercial banks, and for
shadow banks to be funded by the overnight repo market.
Hence the growth of gold as a collateral asset to debt heavy
markets is inevitably in the cards and is de facto occurring.
GOLD is STEPPING UP TO THE PLATE as "good" collateral
in a world of bad collateral".

JR said...

HI Gregor,

I had one more idea. You astutely note:

there is in my opinion one factor, and one factor alone, that *must* be present in all hyperinflations. And that factor is the social, behavioral component in which the users of the currency *must* cross a tipping point where they are inclined to effectively throw the currency away, in exchange for any other good or currency, at some notable rate of speed.

[...]

Wake me when the managers of trillions of OECD pension assets panic out of their own currencies, and their own sovereign bonds, and I will finally be willing to entertain the risk of hyperinflation in OECD currency zones: EUR, JPY, USD.


Well said - that is quite accurate. FOFOA would agree! From Big Gap in Understanding Weakens Deflationist Argument:

Fear is the main emotional motivator in any currency collapse, just like it is in financial market meltdowns. And as we saw even just last night, the herd can stop on a dime and reverse course 180 degrees overnight, from greed to fear, based on a single news item.

The initiating spark of hyperinflation (currency collapse) is the loss of confidence in a currency. This drives the fear of loss of purchasing power which drives people to quickly exchange currency for any economic good they can get their hands on. This drives the prices of economic goods up and empties store shelves, which causes more panic and fear in a vicious feedback loop.

The printing of wheelbarrows full of cash is the government's response to price hyperinflation (currency collapse), not its cause. This uncontrollable (knee-jerk) government response happens in some cases, but not all. Let me repeat: The massive printing that first comes to mind when anyone mentions hyperinflation is not the cause, it is an effect, in the common understanding of hyperinflation which is the collapse of a currency.


cont.

JMan1959 said...

Jeb,

There is no such thing as Santa Claus, the Easter Bunny, or a "decent book on liberal philosophy." That phrase is an oxymoron.

JMan1959 said...

Gregor,

If we do get to strong, Carter-like inflation levels again, do you believe that velocity may increase as people realize that their money will buy 20% less the next year?

JR said...

cont.

So the issue seems to be more how "large and heavy" the object is - the object being the faith in the $IMFS system. What causes the panic, the mass exodus from dollars. As you comment:

"because the requisite social-psychological shift is a large and heavy object that needs a collapse in confidence to move from its current state of inertia."

Here's an idea. AS FOFOA pointed out in Today's (quote-unquote) "Gold"

Price is determined at the margin. Think stock to flow ratios with the ratio acting as a governor on the price in both directions.

So its at the margin where prices are determined. One of the reasons I seconded e_r's great recommendation of Moneyness is the section titled Big Danger in "A Little Inflation". FOFOA discusses how the arrival of a "little inflation" ultimately leads the USG to print in a race to maintain its lifestyle and off it goes:

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.


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

It would seem Gregor you agree on some level with the above idea that inflation may be coming, as FOFOA noted above:

"Gregor writes, in Get Ready for 'Hot' Inflation: "If so, Western economies face an unpriced risk now, not from spiraling deflation, nor hyperinflation, but rather from the breakout of a (merely) strong inflation."

But it seems Gregor you disagree or don't understand how the inflation ---> confidence lost/currency collapse, yes?

cont.

Woland said...

FOA: "Confidence is a strange human emotion. It is fragile beyond
compare. Many confuse "confidence in one's holdings" with
confidence in OUR JUDGEMENT OF OTHERS CONFIDENCE"! There
is a big difference. In other words, we depend on the judgement
of others to protect AND MAINTAIN the value of our assets.
It is here that we approach a truth that, paper wealth today does
occupy "the very edge of reality"!

JR said...

So price is determined at the margin, yes?

Price is determined at the margin. Think stock to flow ratios with the ratio acting as a governor on the price in both directions.

You are waiting for a stock of dollars to panic out of currencies/debt:

Wake me when the managers of trillions of OECD pension assets panic out of their own currencies, and their own sovereign bonds, and I will finally be willing to entertain the risk of hyperinflation in OECD currency zones: EUR, JPY, USD.

But price happens at the margin, where the currency flows. This is the MoE function. Price is not determined by the currency that lies still in debt (the "stock" of the currency held as an SoV in debt), but by the flow (the MoE or transactional function, the "flow").

So what happens when a little inflation shows up and the USG starts to compete to maintain its lifestyle? Yes that is right, prices rise as flow changes at the margin.

Here's a thought experiment - lets say prices double in the ~$3T MoE arena - what happens to the ~$100T SoV arena? That's right, the value of the SoV, that $100T, just got cut in half. Interesting, yes?

Do you see this? Price rises at the margin in the MoE arena drive the loss of purchasing power in the SoV arena. No wonder there will be a stampede...

"Gregor writes, in Get Ready for 'Hot' Inflation: "If so, Western economies face an unpriced risk now, not from spiraling deflation, nor hyperinflation, but rather from the breakout of a (merely) strong inflation."

LD said...

Beijing is planning to avoid U.S. financial sanctions on Iran by paying for oil with gold

http://www.forbes.com/sites/gordonchang/2012/04/22/the-best-reason-in-the-world-to-buy-gold/


oil and gold flowing in opposite directions again.

JR said...

Editing in "China" for "India"

FOFOA said...
I hate to be the one to rain on the Persian parade, but this Iran/China oil for gold deal is quite the OPPOSITE of what ANOTHER was talking about. Here's what ANOTHER wrote:

Hear me now, "if gold tries to go lower than US$ $280 the BIS will buy it OUTRIGHT in the OPEN for all to see"! They must! They will! I know. For no currency system could stand if "Oil" were to bid for gold!

What he was saying was that oil was getting its gold through the miners (through "the deals" made in London). If this flow of gold was cut off due to a price below the cost of production, they (the big oil producers) would bid for physical gold openly wherever they could get it… with their excess dollars! They like gold, and gold is how they like to settle their trade surplus. Not as a currency for all of the trade, but as settlement for the surplus portion of it.

Iran is not openly bidding for gold. It can't. It is cut off from the gold market. It is not driving up the price. It is not breaking the (bullion) banks. In fact, if this story is true, China is actually assisting the $IMFS status quo by agreeing to give Iran some of its physical at the same price Dennis Gartman pays for his paper gold made in New York City.

Settlement is the key! Iran/Chinaa is a bilateral trade arrangement. And in their bilateral relationship, neither one has a stable or widely exchangeable currency. Nor do they have balanced trade between the two of them. They need something for settlement. The dollar was fine because it could be used multilaterally (with other trading partners) in a way that trade would be somewhat settled. But Iran is presently cut off from the stable settlement currency, the dollar.

So now, bilaterally, they don’t have a good way to settle their trade imbalance. Gold can settle the trade, but at the present price it will require a lot more gold (by weight) from China. Luckily China has quite a lot (by weight) in its zone, and Iran has what China needs. Iran doesn’t want to hold a declining rupee for long.

So imagine what will happen when the dollar starts behaving like the rial. Everyone will have problems similar to Iran who is cut off from the settlement currency. They won't be cut off like Iran, but it simply won't be stable anymore. But maybe there will be an alternative currency that’ll work in that same multilateral way and also be exchangeable for free floating gold wherever a surfeit of said currency lands, even if it's outside the zone.

So don't be too disappointed when this story turns out to be dollar-positive after all. Funny, isn't it? If only China would have REFUSED to pay for oil with its gold at today's prices, then all that Iranian oil could maybe have bid for some gold.

Sincerely,
FOFOA
January 23, 2012 11:55 PM

http://fofoa.blogspot.com/2012/01/yonder-thur-be-dragons.html?showComment=1327391750324#c2178987106155972981

JR said...

What he was saying was that oil was getting its gold through the miners (through "the deals" made in London). If this flow of gold was cut off due to a price below the cost of production, they (the big oil producers) would bid for physical gold openly wherever they could get it… with their excess dollars! They like gold, and gold is how they like to settle their trade surplus. Not as a currency for all of the trade, but as settlement for the surplus portion of it.

Iran is not openly bidding for gold. It can't. It is cut off from the gold market. It is not driving up the price...

Settlement is the key! Iran/China is a bilateral trade arrangement. And in their bilateral relationship, neither one has a stable or widely exchangeable currency. Nor do they have balanced trade between the two of them. They need something for settlement.


From the article, reinforcing FOFOA's point that the deal is a bilateral trade agreement, aka golds being used as a MoE, not Oil (aka a net-producers) bidding for gold with dollars as a SoV.

China has already been trading its produce for Iran’s petroleum, but there is only so much gai lan and bok choy the Iranians can eat. That’s why Iran is also accepting, among other goods, Chinese washing machines, refrigerators, toys, clothes, cosmetics, and toiletries.

The barter trade works, but Iran needs cash too. As it is being cut off from the global financial system, the next best thing is gold. So we should not be surprised that in late February the Iranian central bank said it would accept that metal as payment for oil. Last year, China imported $21.7 billion in Iranian oil and exported $14.8 billion in goods and services. As the NDAA goes into effect, look for Beijing to ship gold to Iran to make up the difference.

http://www.forbes.com/sites/gordonchang/2012/04/22/the-best-reason-in-the-world-to-buy-gold/

Jeff said...

If you wait for pension managers panic out of paper you will wait too long. They only have to perform in nominal terms, and they will. But the pensioners will lose everything in real terms. It's that front lawn dump thingy.

FOFOA: Investments denominated in currency may be nominally safe—if you expect to have a million dollars after a given holding period, you WILL have a million dollars at that future time, but you may only be able to purchase a single roll of toilet paper with that million—but their risk in real terms (purchasing power terms) is HUGE… especially today!...

Ultimately, inevitably, today's dollar will lose so much real value that it will save the banks nominally while putting all systemic losses onto everyone holding dollars, regardless of the default of debtors.

Biju said...

Jeff,

your comment "If you wait for pension managers panic out of paper you will wait too long. They only have to perform in nominal terms, and they will"

is will not hold for HI. During BIG Inflation(BI), pensioners will accept if Pension funds perform nominally. But never in HI. Pensioners will string them. Pension funds will have to recognize an unfolding HI event over a BI event.

Biju said...

if HI causes 100,000% increase in prices, they have to catch that nearly(via stocks and commodities) and maybe they will. But pension funds in long term Bonds will be crucified.

JR said...

Hi Biju,

I suspect Jeff means more like to not default on legal obligations denominated in dollars, aka to not go bankrupt and get sued by creditors.

You are very right indeed that they will be "crucified" and fail miserably in real terms. Spot on - debt is not a stable place to save!!

Biju said...

Jeff :

- I guess then we have to look for Bond king (aka Bill Gross) to make a move from Bonds to Gold/T-Bills/Commodities ?

- Where will he move his Trillions to save himself from his pensioners(via CALPERS etc..) and Investors ?

I have heard he has started to make some noise against Bonds.. mostly talk. when will he act. I don't think he will become a victim. TBTF.

The "Too Big that can/will fail" are Govts holding US Bonds - China/Japan/Saudi..rest of the World, because they have a compensating Asset - Gold ? But you see the foreign Govt only hold $5 Trillion and rest of poor country saves + drug dealers + black money have $1 Trillion in cash. So total only $5 Trillion that can be afforded to be lost ?

Biju said...

I emant - But you see the foreign Govt only hold $5 Trillion and rest of poor country savers + drug dealers + black money have $1 Trillion in cash. So total only $6 Trillion that can be afforded to be lost ?

Alien said...

Have a look FOFOA where that damned Mundel and that dirty group of thirty (INCL: Trichet and Volcker) want to bring us to:

International Monetary Reform 2011
Presentation at the China G-20 Seminar, Nanjing PRC, March 31 2011
File Format: Microsoft Powerpoint
Number of slides: 83
A very fucking nice pdf showing the strong connection between the fucking dollar and the euro.
Enjoy!!!!

Edwardo said...

Perhaps old Harv is wrong, but according to him GLD experienced a big puke today.

http://harveyorgan.blogspot.com/2012/04/greece-decides-to-thumb-their-nose-at.html

Robert LeRoy Parker said...

4 tonnes from GLD is 4 average transactions at Lbma.

After passively observing Harvey Organ for a couple years now I would be terrified to have my prescription filled at his pharmacy.

costata said...

Alien,

Could you explain the source of your outrage at Mundell?

Nickelsaver said...

http://robertmundell.net/ebooks/free-downloads/

costata said...

NS,

I'm reluctant to wade through that Powerpoint presentation if Mundell is only discussing ideas and proposals that he has been talking about for years. So I would appreciate Alien pointing out which ones he is apparently so upset about.

Cheers

Alien said...

Costata

it's his proposal on the exchange 1.20-1.40 range,
his idea have the two superpowers aligned inline and China too. That is too much politics and not enough free market economy, interventionism in everything seems to be his favourite way.

cyclecooler said...

Costata re. Aussie Readers: Batten Down The Hatches

I concur with your time frame.

If there was ever a bubble looming, it would be the cashed up bogans in their airport hi vis gear, not reading FOFOA, and their spendthrifty habits on V8's and over priced RE.

All booms end...and so this one will end bad for WA.

Gold? Get you some.

Phat Expat said...

You mean you haven't figured out that Alien is a kissing cousin, if not a pseudonym, for AD? And that this 'person' is anti-FG and is envious of those able to purchase and own the shiny yeller on a whim? You guys (gals) are kinda slow.

Ahhh... In the interim, I keep stacking; looks like the time approaches for a ramp, in the paper price.

Edwardo said...

Yes, as has been pointed out by, among others. VTC,
Harvey O's analysis leaves something to be desired. However, what he is now prescribing is exactly the same medicine as offered here, physical gold.

costata said...

Alien,

his idea have the two superpowers aligned inline and China too

Incredibly important. Beyond what you may, or may not, imagine. He seeks a one world currency. With currency as an MoE perhaps?

Alien said...

Costata

he is holding gold in high esteem, true, but can you point to me a passage where he writes more precisely what you suspect?
I haven't found one yet and am still lokking for it.

Alien said...

Costata

you cannot have a common MoE exchange withou a common
fiscal policy and right now there is no acceptance for it and will never be. We are all too different for that, our individuality as nations is not to compare with the USSA melting pot. NEVER. Wrong after a potential WWIII where almost all humans are decimated.

JR said...

"it's his proposal on the exchange 1.20-1.40 range,"

Here's FOFOA on Mundell and pegged currencies from From the Treasure Chest:

Hello R, I don’t know how much you know about the different types of currency management, but this is a good paper. It is a debate in 2001 between Robert Mundell (“father of the euro”) and Milton Friedman. http://www.irpp.org/po/archive/may01/friedman.pdf

Pegging is arguably a better choice than a “dirty float” in which you surreptitiously intervene. Pegging is one step down from a hard fixed exchange rate like California shares with Texas, or Greece with Germany. And sharing a fixed currency is really no different than sharing any fixed scientific metric, like a meter or a gram. California can still have to pay a higher interest rate than Texas as Greece pays more than Germany (from private debt markets). The fixed currency is not the problem any more than the shared weight of a gram should be a problem. So a pegged currency would be analogous to the meter being pegged to 3.28 feet. Two countries use different standards, but they peg their conversion rate.

The problem is with the perpetual US trade deficit. In order to stay pegged to the dollar, there are only two things these countries can do. And most economists are only aware of one of them. The way everyone thinks it is done is by recycling those dollars into US assets, primarily Treasuries. The Chinese (or Saudi) exporter receives dollars and exchanges them for local currency at the bank. That bank then sells them to the central bank for freshly printed currency, and the CB then buys US assets with the dollars.

And since the US is not in the business of selling off the farm, we sell government debt paper. This has the effect of funding the US government through the trade deficit and exporting the currency inflation to those trading partners that must print their own currency to stay pegged. If they were to buy US-made products with those dollars rather than Treasury paper, then there would be no trade deficit. But then the American economy would have less goods, more cash (inflation) and the government would have to find another stream of funding.


cont.

JR said...

cont.

This is neat - "another thing" a country can do to stay pegged to the dollar.

But there is another thing they can do (and are starting to do) with those dollars we are sending them for their goods. They can buy gold on the open market. It really doesn’t matter if the exporter that receives the dollars buys the gold himself, even inside the country, or if the CB buys it from London. If it is purchased in country by citizens, that will raise the internal price of gold and create an arbitrage opportunity that will cause gold to flow into the country until the price differential (inside and out) is equalized.

So this is a way to use your excess dollars on the world market, rather than inside the US, which also helps keep your currency pegged without running into a foreign exchange crisis. I have my own theory that the actual physical flow of gold into China corresponds to money that Ben Bernanke must now print that was previously being funded by the PBOC. This takes a long chain of thoughts to get there which I’m not going to write here, but I think you can get the concept intuitively.

Buy gold (instead of Treasuries) with your excess dollars received from selling to products or oil to the US. As long as you buy on the open market (as opposed to dark pools as the Saudis used to do or from mines inside your own country) this drives up the price of gold and causes a physical inflow into your country. You no longer have to print equal amounts of your own currency so you have stopped your internal monetary inflation and, instead, channeled it into the price of gold (inflation only against gold, not life’s necessities). The Fed, in turn, is forced into “QE” which is essentially printing those dollars you would have given to Treasury since Congress can’t cut the budget. Also, those dollars you used to buy gold in London or Zurich will eventually find their way back into the US through private channels and add inflation on top of the printing the Fed is doing.

So now, you’ve sent all that monetary inflation back into the US, and still kept your currency pegged. And if you follow this train of thought far enough, I think you’ll find that it leads to stresses that will ultimately break both the US dollar and the paper gold market without ever officially “de-linking”.

The physical gold must continue flowing into the physical boundaries of trade surplus zones while the price of gold rises. Weight-based flow and price level offset each other somewhat. But ultimately this will break the paper gold market because we’re talking about physical flows from the debtor zones into the saver zones. And now the US finds itself between a rock and a hard place. The hard place being that dollar interest rates in the US must skyrocket which would destroy the dollar banking system, Wall Street, the US government welfare state and the US economy, or else the Fed must print to oblivion to keep rates down and suffer the ravages of hyperinflation. That’s the rock, because it will win out over the hard place seven days a week.

e_r said...

FOFOA/Costata/JR,

I understand that based on FOFOA's response to Gregor, FOFOA doesn't believe the case presented by Gregor. but what if both FOFOA and Gregor are true?

What if strong inflation happens as Gregor suggests, which then increases the call for even more inflation?

Inflation is a stealthy tax and when there is complete lack of political will to either a) cut spending or b) increase taxes -- then inflation is seen as a panacea for everything.

But the big danger in little inflation is that it makes the political class NOT to get their act together, which then causes this positive feedback loop of deficit spending through monetization to continue further and further, until the confidence implodes.

I don't like to take sides in these camps (inflation/deflation/HI). The economic spectrum is richer, more complex and highly non-linear to sit in any one of these camps with a 100% certainty. The reality is that there are myriads of opposing forces at work and which case dominates at any given point in time(inflation/deflation) really depends on which forces are stronger.

At the moment, I'd think the dynamics for a higher inflation are stronger.

Thoughts?

matrixsentry said...

All the Compendiums are now in Kindle format with functioning hyperlinks and Table of Contents. The Kindle PDFs are simply in larger font to enable easier reading. They are available to the right at the Ron's Air-Friendly Pdfs link.

Happy reading!

JR said...

I don't like to take sides in these camps (inflation/deflation/HI).

but

'd think the dynamics for a higher inflation are stronger.

What are those "dynamics for a higher inflation" again? You just asked us to assume it happened, aka What if strong inflation happens as Gregor suggests?

Here is FOFOA again from his above response to Gregor:

"With our government’s budget deficit at twice the rate of the trade deficit, and with the drop-off in foreign CB support for our government debt, how can we possibly have “merely strong inflation”? The USG would have to cut a quarter of its expenditures just for starters.

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

I don't like to take sides in these camps (inflation/deflation/HI).

Food for thought:

Inflation and deflation are polar opposites, but currency collapse and deflation are practically twins."

e_r said...

JR,

What are those "dynamics for a higher inflation" again?

Gregor's reply has the answer, but I repeat since you pose the question:

primarily the reaching of the Lewis Turning Point in non-OECD countries, and the relentless advance of resource scarcity.

To FOFOA's question: how can we possibly have “merely strong inflation”? The USG would have to cut a quarter of its expenditures just for starters.

So FOFOA states that we would have a hyper-strong-inflation (meaning a confidence collapse), but as already well-articulated by Gregor: the behavioral shift is not there right at this moment.

Seondly, why is cutting expenditures the only option? What about raising tax rates? At least, the interest in raising taxes on the higher income bracket has been stated by the POTUS several times. Even Buffet had stated it. I'm not saying either cutting spending or raising taxes is going to happen with full certainty, but I am also not writing off these options entirely.

Inflation and deflation are polar opposites, but currency collapse and deflation are practically twins.

I am not contesting that statement in any way whatsoever, but just presenting the case for other forces that drive the inflation dynamic (which are not discussed in this blog).

Since you are obviously interested in ruling out the "strong inflation" case, I was hoping for a solid rebuttal. But I haven't got one yet.

JR said...

Gregor explains why we will have inflation.

FOFOA goes of course, that will lead to the HI feedback loop described in Moneyness. "With our government’s budget deficit at twice the rate of the trade deficit, and with the drop-off in foreign CB support for our government debt, how can we possibly have “merely strong inflation”? The USG would have to cut a quarter of its expenditures just for starters."

Reverting back to gregor's argument for why we will have inflation does not respond to FOFOA's point. How does inflation merely progress to strong inflation?

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

It doesn't help you to say but confidence hasn't yet collapsed" because LDO that is obvious. yes, the running HI has not started. So what? It not yet starting does not mean it won't or that it can't, yes?

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

On why confidence may be lost, aka what drives the behavioral shift:

price happens at the margin, where the currency flows. This is the MoE function. Price is not determined by the currency that lies still in debt (the "stock" of the currency held as an SoV in debt), but by the flow (the MoE or transactional function, the "flow").

So what happens when a little inflation shows up and the USG starts to compete to maintain its lifestyle? Yes that is right, prices rise as flow changes at the margin.

Here's a thought experiment - lets say prices double in the ~$3T MoE arena - what happens to the ~$100T SoV arena? That's right, the value of the SoV, that $100T, just got cut in half. Interesting, yes?

Do you see this? Price rises at the margin in the MoE arena drive the loss of purchasing power in the SoV arena.


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

They can't raise taxes because we already consume more than we produce. Its not an issue of taxing what we produce more (aka the feds taxing more form the private sector), its that we already consume too much so that we require a huge monthly inflow of goods and services from abroad.

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

Since you are obviously interested in ruling out the "strong inflation" case, I was hoping for a solid rebuttal. But I haven't got one yet.

I'm sorry you don't find this as obvious as I do but hopefully you see why no one has advanced a case for how we can have strong inflation. Do you see this?

Gary said...

Off topic by a wide margin, but having just read Martin Armstrong's latest:

http://www.inflateordie.com/files/Behind%20the%20Curtain%2004-22-2012.pdf

and then some background:

http://www.nbclosangeles.com/news/tech/Lieberman-Bill-Internet-115068359.html

and

http://www.opencongress.org/bill/111-s3480/show

I get the feeling that the US government in particular are going to pull out all of the stops when it comes to fighting for their own survival. Not only will the gold price go dark for a period, everything could go dark.

Best to be prepared for the worst, as I don't put anything past these people, although I hope that the UK, Europe and the rest of the world will escape such moves towards dictatorship. I also hope the US don't get militarily aggressive heading towards and through their collapse.

Is it just me, or is what lies ahead pretty terrifying?

www.greenworldbvi.com said...

Gary: As a Brit, I can tell you that you are not paranoid at all. The Government recently just passed a law allowing all kinds of comprehensive internet and telco spying. Meanwhile, I read an article in Wired Magazine about how your NSA in building the largest and most powerful spy center ever constructed out in the desert (I think the state of Utah).
real asset investments

somanyroadsinvesting said...

Been catching up on some older posts. Just read Moneyness, great work!

Any comments from the gallery on this google space mining talk. I know it sounds ridiculous but was curious maybe in 10-20 yrs, don't know. Obviously any new big supply of gold would not be good.

Thanks

DASK said...

Asteroid mining is possible, but 10-20 years is definitely on the short side. We have to identify targets first, then the actual transport is relatively easy. We have already landed a probe on a comet with a similar orbital profile. Mass returns of 100:1 (e.g. a 1 ton spacecraft returning a 100 ton asteroid) are feasible with current technology. At current launch costs that would be about 2 billion to launch the craft to pull back that 100 ton asteroid. Check out permanent.com for in depth info. Long term, there is no reason we can't, but there is a lot of hurdles, and we will get plenty of advance warning if it ever does happen. Nothing to stay awake about.

Robert LeRoy Parker said...

Obviously any new big supply of gold would not be good.

I'm not sure about this. The supply is still constrained by an incredible amount of real work, and cannot be infinitely printed at will. Additionally, the increased supply doesn't change gold's current best function as a store of value. I'd be more worried about a technological revolution in which gold was crucial, perhaps resulting in a changing of gold's role in the monetary system.

It would be very cool to see the StarTram or Launch Loop get off the ground. Who knows, maybe space exploration will become integral to human society within some of our lifetimes. Anybody seen GATTACA? I highly recommend it if you're into scifi.

Edwardo said...

The NSA can collect all the data they like, but that is a far cry from being able to parse it in a meaningful and/or effective way. They will be chasing their own tails at warp speed, as there are all sorts of asymetric responses that will make their job the equivalent of trying to pick just one fishhook out of a bowl full of them.

e_r said...

JR,

So what? It not yet starting does not mean it won't or that it can't, yes?

I agree completely.

They can't raise taxes because we already consume more than we produce.

There's corporate tax rates and then there's individual income tax rates.

Corporate tax rates are pretty high in the United States (35%), but that doesn't mean anything on the surface. GE paid literally 0% in taxes. Loopholes is killing the tax system.

And secondly LOL, does Mitt Romney consume more than he produces? Does he even produce anything? Replace Mitt Romney with any other wealthy person (Warren Buffet, for example) and the same question applies.

You should consider this graph.

The US tax system actively encourages non-productive rent seeking . This will literally kill the system.

we already consume too much so that we require a huge monthly inflow of goods and services from abroad.

I agree that this flow is unsustainable through deficit spending accompanied by monetization.

Here's FOFOA: 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.

So I suppose we agree that increased taxation will not change the nature of money supply, because increased revenue funds the increased spending, right?

JR: Its not an issue of taxing what we produce more (aka the feds taxing more form the private sector)

There's earned income and there's unearned income. Are you saying that the unearned income tax rate increase is going to affect marginal production?

Note that none of what I said above actually contradicts with FOFOA's Moneyness thesis. I am simply presenting a case where strong inflation can persist for some time, provided the fiscal policy makers get their act together.

I think most of what we discuss here are a spectrum of outcomes, and these have a high dependence on fiscal policy. If we assume the fiscal policy to be exactly where it has been (which is deficit spending through monetization), then we are on Highway to Hell.

Edwardo said...

e_r we are well past the point of no return. There is no fiscal policy prescription that were it implemented tomorrow would lead the U.S. off the present path.

Legislators, policy makers, what have you, can pick any sector of the tax paying cohort and squeeze it, they can decide to attack any so called third rails of U.S. government and starve them, and none of that is going to do anything but alter the manner in which the nation reaches it's financial and economic destination.

matrixsentry said...

Finally! The finished product! All FOFOA Compendiums, both standard and Kindle versions, are complete with active hyperlinks, and now all post titles are linked in the Table of Contents. Just click on the title of the post in the Table of Contents and the PDF browser will go straight to the post, no need to scroll or enter go to page #. I finally got that function to work!

If you have downloaded these PDFs earlier, delete them and get these new files. They are exactly what I was hoping to achieve and you will find them very easy to work with, online or offline. These files are an excellent workaround to the cumbersome blogger archives.

The files can be downloaded by selecting the Ron's Air-friendly PDFs link on the right hand side menu of the Blog.

Enjoy!

JR said...

Hi e_r,

This is very good. Here's the deal - all you've done is argue "they can tax more." No one is disputing this.

The point you are arguing against is they can't tax enough because we already consume more than we produce.

So here's a quick FOFOA excerpt from Moneyness - can you go though how you think the tax scenarios impact this and where they fit in?

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.

http://fofoa.blogspot.com/2011/11/moneyness.html

e_r said...

Edwardo,

There is no fiscal policy prescription that were it implemented tomorrow would lead the U.S. off the present path.

Obviously I don't think so.

Have you looked at the wealth disparity data? [ wealth measured in easy money of course ;) ]

These imbalances are a result of a reckless disregard towards prudent fiscal policy.

Based on a report, US was running budget surplus under Clinton tax rates. It was projected that if the same tax rates and spending levels were maintained, US could pay off their debt by 2012.

Legislators, policy makers, what have you, can pick any sector of the tax paying cohort and squeeze it

You're talking like as if US tax rate is like 90%. It is not. Bush-era tax cuts for the ultra wealthy is not sustainable. There's no such thing as trickle-down economics. These are facts, not political opinion.

none of that is going to do anything but alter the manner in which the nation reaches it's financial and economic destination.

May be, but I'm finding it hard to digest, given that so much can still be tried. May be all these actions I'm referring to -- will simply delay the inevitable.

I suppose I'm just presenting a view point that a strong inflationary scenario can turn out to be true in the medium term, which does not in anyway invalidate what FOFOA presents in Moneyness. That's all.

Ron,

Thanks! Great stuff.

JR,

The point you are arguing against is they can't tax enough because we already consume more than we produce.

I'm saying there's more unearned income generated here which can be taxed to pay for such consumption. The source for this unearned income is global, it is not confined simply to local US production.

Will it be sustainable in the long run? LOL, probably not. Will it buy US time? May be yes.

can you go though how you think the tax scenarios impact this and where they fit in?

The whole excerpt that you posted starts with if the dollar sinks . Which will happen when the monetary base is diluted. Monetary base has to be diluted when both the following things don't happen:
a) spending cuts
b) tax increases.

Taxation does not dilute the monetary base, therefore the effects of increasing the monetary base do not apply in this scenario.

Puggle said...

http://www.marketwatch.com/story/whats-your-question-for-bernanke-2012-04-24

costata said...

Looks like the Swiss aren't going to co-operate on the US-EU sanctions on the Iranians with regard to oil and banking transactions.

http://www.businessinsider.com/the-swiss-are-helping-iran-get-around-the-embargo-2012-4

h/t Ed Steer's newsletter

e_r,

The problem with attempting to shift the tax base off earned income and onto unearned income is that it is a zero sum game. In order for taxes to have any impact on the US fiscal position they would need to increase. In other words keep all of the existing tax revenue and create new taxes.

The numbers just don't stack up. The Clinton "surpluses" were due to Robert Rubin's accounting gimmicks. Bush II took the last of the funds available from internal transfers within the USG during his Presidency. That only left two sources for funding the USG - issuing external debt and "printing" money.

costata said...

Gold Collateral

Interesting perspective on the emergence of gold as a safe form of collateral in an international financial system where the supply of acceptable (read safe) collateral is shrinking.

http://ftalphaville.ft.com/blog/2012/04/23/970271/the-unwitting-move-towards-a-global-gold-standard/

This ideas in this article sit well with one of the themes of this blog. The Freegold-RPG regime winning by default. Gold being the "last man standing" as everything else falls by the wayside.

In a similar vein, as much as some may hate the Euro (and Uncle costata sure does at the moment) it may attain the role predicted by A/FOA as much by default as from a meticulous, ingeniously implemented master plan.

costata said...

SDR

I think this article is worth reading.

http://ftalphaville.ft.com/blog/2011/10/10/697681/dealing-with-a-global-triffin-dilemma/

And this quote from Fabrizio Saccomanni, Director General of the Bank of Italy sums up why the SDR is destined for the two hard basket IMHO:

My understanding of the experience of the private ECU is that a key factor of its success was the link to the long-term process of European monetary integration, which provided not only a legal, economic and institutional frame of reference but also a strong political constituency.

By analogy, making the SDR a credible reserve asset and unit of account for both official and private agents would probably require a commitment to eventually transform it into something more than a basket, i.e. a currency in its own right. As we know, we are still very far from having a broad consensus on such a prospect.

Phat Expat said...

e_r
I don't know what you're trying to point out. That we don't pay enough taxes in the good ole USA?

http://www.youtube.com/watch?v=xH53pQJX_Oc

That by raising taxes, we can do the proverbial can-kick and stave off the inevitable, just a bit longer, you know, so 'we' can prepare? What am I missing?

I'm all for penalizing those who have been gaming the system, not paying their fair share, but even that would be just a drop in the bucket and the end result would still be the same. No, we have far too much waste in the system (from local all the way up through Fed and many more in between; private sector included).

Edwardo said...

"You're talking like as if US tax rate is like 90%. It is not. Bush-era tax cuts for the ultra wealthy is not sustainable. There's no such thing as trickle-down economics. These are facts, not political opinion."

No kidding. As John Mitchell asked back in the Reagan era (error) "How do you like being trickled down on?" In order to to come anywhere close to balancing the books, Uncle Sugar would have to not just go into a tax collecting frenzy
of the heretofore relatively untaxed, Uncle would have to drastically cut spending to a degree that would create massive unemployment and social unrest. I'll also add that whatever Clinton's meager achievements, the national debt still grew during his years as POTUS. And, of course, it's worth noting that the course was set for the explosion, and ultimate implosion, of the U.S. financial system.

thedeadfauvi said...

Costata
"In a similar vein, as much as some may hate the Euro (and Uncle costata sure does at the moment) it may attain the role predicted by A/FOA as much by default as from a meticulous, ingeniously implemented master plan."

If you have some spare time would you please expose yout thoughts on the above? Please! I would very much enjoy it. For the moment it's getting harder and harder to understand more than the default alternative. What is it what is disturbing your feelings towards the euro, Uncle?

thedeadfauvi said...

BTW, Merkel is said to push for elections in orderr to make sure she gets reelected before TSHTF. What is on your mind when you hear this?

thedeadfauvi said...

BTW, Merkel is said to push for elections in orderr to make sure she gets reelected before TSHTF. What is on your mind when you hear this?

Woland said...

Costata: Do you read comments? I linked to that 50 comments ago.

costata said...

Woland,

You wrote:
Do you read comments? I linked to that 50 comments ago.

Cut your poor old Uncle costata some slack! I have read 30,000 comments here. And besides some things bear repeating.

Cheers

Edwardo said...

thedeadfauvi,

I'm going to jump in on costata's behalf regarding your question. Just so it's clear, I don't claim to be speaking for Uncle c, I'm just going to, more or less, postulate what I think his response to your question would be.

The Euro is a physical gold friendly medium of exchange. It was, in fact, designed to facilitate the positioning of physical gold as THE store of value for savers. When, not if, (in my view) the only collateral left, aka physical gold, goes into hiding, the Euro will be able to coax physical out of hiding, albeit at a vastly higher currency denominated price.

JMan1959 said...

e r,

Why are you talking about tax increases against the backdrop of a 1.5 trillion dollar annual budget deficit, and a 100 trillion future budget deficit from the unfunded liabilities of Medicare, Medicaid, and social security? You can tax every man, woman, child, and corporation in America 100%, and it still won't make any difference. We can NEVER produce our way out of it. You sound like Obama, like as if everyone "pays their fair share", we can right the ship. It's the Titanic man, and we done hit the iceberg already. If interest rates return to historical levels, the lion's share of our tax base will go to paying just the interest on our debt. I like your optimism, but I believe it to be mathematically challenged. It will take Draconian cuts to everything, which no politician that wants to get reelected will ever do, to right the ship. Printing socializes the losses, and they don't have to pass legislation to do it.

Woland said...

Costata:

Indeed, some things do bear repeating. Regarding the article
to which you linked, perhaps (someone?) might do a short post
entitled "PEAK COLLATERAL in the PHYSICAL PLANE". As ever
increasing debt is being backed by "virtual collateral" in the
monetary/securities plane, which has no correspondence to
the physical world "at current prices", what is desperately
needed is NEW collateral In the physical plane. Some have
suggested mining asteroids for new gold. Another smart
guy has suggested re-valuing what we've already got.

Cheers.

ampmfix said...

Uncle dislikes the € right now because "someone" is spending too many of them overthere... hope she is safely back soon!

JR said...

Hi e_r,

No one disputes the impact of taxes on the size of the base money, nor does anyone argue taxes can't be raised form their current level.

The whole excerpt that you posted starts with if the dollar sinks . Which will happen when the monetary base is diluted. Monetary base has to be diluted when both the following things don't happen:
a) spending cuts
b) tax increases.

Taxation does not dilute the monetary base, therefore the effects of increasing the monetary base do not apply in this scenario.


As you so aptly point out, the issue is whether taxes can be raised enough. If they hadn't done QE and instead raised taxes, the money supply wouldn't expand.

But money supply doesn't initially cause HI, it follows HI (HI is the collapse in confidence).

Big Gap - http://fofoa.blogspot.com/2011/04/big-gap-in-understanding-weakens.html

Fear is the main emotional motivator in any currency collapse, just like it is in financial market meltdowns. And as we saw even just last night, the herd can stop on a dime and reverse course 180 degrees overnight, from greed to fear, based on a single news item.

The initiating spark of hyperinflation (currency collapse) is the loss of confidence in a currency. This drives the fear of loss of purchasing power which drives people to quickly exchange currency for any economic good they can get their hands on. This drives the prices of economic goods up and empties store shelves, which causes more panic and fear in a vicious feedback loop.

The printing of wheelbarrows full of cash is the government's response to price hyperinflation (currency collapse), not its cause. This uncontrollable (knee-jerk) government response happens in some cases, but not all. Let me repeat: The massive printing that first comes to mind when anyone mentions hyperinflation is not the cause, it is an effect, in the common understanding of hyperinflation which is the collapse of a currency.


But if they raised taxes and didn't QE, the the value of the $ would collapse because velocity is what matters and a bone crunching asset deflation and deflationary ecooomic contraction = time to not store wealth in dollar debt anymore.

Moneyness - http://fofoa.blogspot.com/2011/11/moneyness.html

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.

JR said...

Velocity, not money supply drives the show - the money supply change is the response, not the cause. The FED rolled out QE because the confidence was already waning in dollar debt. The Fed bought dollar debt because others were not buying it, yes?


Big Gap - http://fofoa.blogspot.com/2011/04/big-gap-in-understanding-weakens.html

But in the same way that the marketplace has no control over the supply side, the printer is powerless on the demand side. ANOTHER alluded to this years ago when he wrote:

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

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

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

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

So a falling demand = a rising velocity.

DP said...

So a falling demand = a rising velocity.

Use the force.

DP said...

Ahem.

Who puts a single quote in a URL anyway?

www.gregor.us said...

Have really enjoyed reading through the comments. As most seem to agree, hyperinflation is a behaviorial event, not a mechanistic event. Sure, it pays to track the structural conditions which make the risk of hyperinflation more likely, and surely the OECD is in the process of putting those conditions into place. But, to ultimately forecast hyperinflation is, imo, impossible. It is exceedingly difficult to sense in advance the tipping point in behavior. Not that I'm a huge fan, but Gladwell's book on tipping points is useful.

A strong inflation, however, of usual kind will be a more reliable and necessary step to any future hyperinflation. It will take time--as measured in psychological terms--to dislodge the managers of OECD currencies and sovereign bonds from their "safe" assets. I would want to see the appearance of both standard inflation, and see OECD central banks have to acknowledge it publicly (much to their consternation) before I would entertain any collapse in confidence in the currencies of the OECD. Moreover, even that phase could take several years, because status quo confidence in OECD central bank ability to "fight" inflation also remains high.

I will say this: gold suddenly looks dirt cheap "all over again."

G

e_r said...

Costata,

The Clinton "surpluses" were due to Robert Rubin's accounting gimmicks .

Is there any proof for this statement?

Phat Expat,

I don't know what you're trying to point out. That we don't pay enough taxes in the good ole USA?

What I am trying to point out is that non-productive rent-seeking is actively encouraged by the US tax system, therefore wealth (in terms of easy money) is siphoned off to the top.

but even that would be just a drop in the bucket and the end result would still be the same. No, we have far too much waste in the system

I agree about the far too much waste and I think you are presenting an argument for cutting spending. Based on my arguments towards taxation, don't get the idea that I am fine with keeping the same spending levels. Obviously, both need to be done. Yes it will be a form of kick-the-can. But at least it would be something, better than the theatrics going on right now!

Jman,

You sound like Obama, like as if everyone "pays their fair share", we can right the ship.

LOL, I did not want to turn this into a pissing contest of "us vs. them", conservative vs. liberal crap. I was just trying to construct a coherent argument for increased taxation on the uber-wealthy in the US(which in all likelihood may not even happen as they control all the knobs of politics anyway).

It will take Draconian cuts to everything, which no politician that wants to get reelected will ever do, to right the ship.

I am not saying increased taxation is the panacea to avoid HI, LOL.

JR,

But if they raised taxes and didn't QE, the the value of the $ would collapse because velocity is what matters

Raising taxes and cutting spending will show that there is at least a dim glimmer of hope that the thought of getting the house in order is there in USG. Why would the value of $ collapse in that scenario? Wouldn't cutting spending necessarily help boost the SoV function of the $?

The FED rolled out QE because the confidence was already waning in dollar debt. The Fed bought dollar debt because others were not buying it, yes?

The data does not suggest buying has completely stopped. China's buying increased temporarily last year as recession scare plagued the economy.

QE has certainly bought time for US political class to continue its recklessness.

Gregor,

A strong inflation, however, of usual kind will be a more reliable and necessary step to any future hyperinflation.

I think the past hyperinflations are not of much help in understanding what can probably unfold for a US HI. Based on what you say above, I think you are still thinking along the lines of a sovereign debt crisis in the US (bond market interest rate spike). I think the trade deficit is the bigger threat as already clearly articulated by FOFOA.

I would want to see the appearance of both standard inflation, and see OECD central banks have to acknowledge it publicly (much to their consternation) before I would entertain any collapse in confidence in the currencies of the OECD.

While Fiscal policy can nudge US along the standard inflation path, I don't think that is sustainable partly because of the debt burdens all around the world.

The two major currencies in the world are on a see-saw, so if there is a bailout lurking in the Euro (because of Spain or Italy), this would mean a stronger dollar and that would be of a much more serious consternation to the Fed .

I think FOA nailed it: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to!

JR said...

You see, hyperinflation does not require a linear progression from deflation, to less deflation, to slight inflation, to inflation, to high inflation, to hyperinflation. Nope. As a monetary phenomenon, our money supply was already hyperinflated in the 90's. Counting dollars in the world is like counting stars in the sky. (The main difference being new stars are born at a much slower rate.) None of this recent housing bubble or derivatives monster bubble was even needed to create a currency crisis. In fact, these recent bubbles created their own additional credit inflation and also provided a place to put it, a place that has now collapsed to almost nothing. It sure feels like deflation right now. But that's just because of the collapse of the bubble. The money supply was already hyperinflated before this bubble. Even Another said so in 1997.

So why no price hyperinflation yet? That's because the rest of the world has been soaking up our hyperinflated currency through the trade deficit. No other currency in the world has had this privilege. That's why so many other currencies, when hyperinflated, were soon followed by price hyperinflation.

http://fofoa.blogspot.com/2008/12/deflation-or-hyperinflation.html

JR said...

Salting the Mine

Most simply stated, credibility inflation is the expanding confidence in the fiat financial system to always deliver a higher payoff tomorrow than today. And through credibility inflation we ultimately destroy the currency structure by believing it can somehow deliver more than reality will allow.

Credibility inflation is the exact antithesis of price inflations like the 1970's. It is why we saw low consumer price inflation for the last 30 years relative to the massive monetary and financial product inflation. It is partly why we saw gold stagnant or falling for 20 years. Yet it is just as much a product of monetary inflation as regular price inflation is (more on this in a moment). And it is much more catastrophic in the end.

Periods of high credibility inflation are generally not followed by smooth cycles of credibility DEflation. Instead, they tend to SNAP BACK into sudden real price inflation when confidence abates. What happens in the most extreme cases is real price HYPERinflation.

This is one of the main concepts deflationists and mainstream economists completely miss; the SNAP-BACK of credibility inflation that can instantly take down their precious fiat currency. And it is their intentional avoidance of this obvious concept that delivers aid and comfort to masterprinters like Gideon Gono and Ben Bernanke.

http://fofoa.blogspot.com/2010/08/credibility-inflation.html

e_r said...

All my arguments about increased taxation/cutting spending amounts to nothing if there is not even a basic rule of law. We're stuck in a credibility trap.

An interview with Janet Tavakoli, where she says it best:

Is President Obama part of the cover-up?

Yes, in that he’s enabled it. He’s left people in place who crashed the global financial system in the first place: [Treasury Secretary] Tim Geithner and [Federal Reserve chair] Ben Bernanke. Obama had told us: “You can’t keep doing things the same way and expect different results.” So he’s been quite a hypocrite.

JR said...

e_r,

"The data does not suggest buying has completely stopped. China's buying increased temporarily last year as recession scare plagued the economy."

Of course - its not any, but enough that matters.

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

Well said e_r:

"Raising taxes and cutting spending will show that there is at least a dim glimmer of hope that the thought of getting the house in order is there in USG."

That's the crux of the issue, the main point form Moneyness ( http://fofoa.blogspot.com/2011/11/moneyness.html ) - the USG can't cut its consumption:

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.

[...]

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!

[...]

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.

[...]

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.

JR said...

e_r,

In followup to my statement that "Of course - its not any, but enough that matters," here is another excerpt from Moneyness. Note this part in particular - Since then, China has slowly backed off from supporting the dollar.


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.

costata said...

e_r,

I'll post a link or two on the Rubin-Clinton shenanigans when I finish a little project I'm working on at the moment.

As to the "bailout lurking in the Euro" I should mention that Mrs costata doesn't "lurk" old chum. She's abroad in Euroland right now in her usual flamboyant manner. A one-woman consumer led recovery.

And our Spanish readers might let that Rajoy fellow he can stop leaving impassioned messages on our answering machine. Spain is not on her itinerary. "Long Italian bonds" is the cry from next Saturday.

And the Euro skeptics out there can forget about any collapse of confidence in the Euro in Paris. Retailers there are grabbing Euro with both hands.

JR said...

One more e_r,

From Peak Exorbitant Privilege - http://fofoa.blogspot.com/2012/04/peak-exorbitant-privilege.html

The U.S. government has grown addicted to its exorbitant privilege over the years. It is a privilege that has been supported by foreign Central Banks buying U.S. debt for the better part of the last 30 years. But as I wrote in Moneyness, and as Ms. Pomboy has noticed above, that ended a few years ago. From Moneyness, the blue that I circled below shows the Fed defending our exports **of empty containers** with nothing more than the printing press and calling it QE:

http://1.bp.blogspot.com/-C0TMX7zwWeQ/TrCnjtnUKeI/AAAAAAAAB6U/fX87rfc1Ccg/s1600/Monetary_Base_Expansion.png

I would like you all to give this some serious thought:

1. The U.S. exorbitant privilege peaked in 2005 (before the financial crisis) and is now on the decline, meaning it is no longer supported abroad.
2. The U.S. government (with the obvious assistance of the Fed) is now in defensive mode, defending that inflow of free stuff with the printing press.
3. The U.S. federal government budget deficit (DC's "needs" minus its normal revenue) **eclipses** the trade deficit by more than a 2 to 1 margin.

So what could possibly go wrong? The recession has already contracted the U.S. economy, all except the part that resides in Washington, DC. And just to maintain its own status quo (when has it ever been happy doing only that?) our federal government needs to insure our national business of exporting empty containers at its present level.

What could go wrong? Prices! If the price of an apple doubles, what do you think happens to the price of a full container? Those of you who think we are due for some more price deflation in the stuff that the USG needs to maintain its status quo should really have your heads examined. Even Obama is winding up to pitch the whole ball of twine at the problem. He just delegated his executive power to print until the cows come home to each of his department heads. I quote from Executive Order -- National Defense Resources Preparedness:

"To ensure the supply… from high cost sources… in light of a temporary increase in transportation cost… the head of each agency… is delegated the authority… to make subsidy payments"

In case you're having difficulty connecting the dots I've laid out (not) so subtly, I'm talking about a near-term dollar super-hyperinflation that will make your hair curl and make Weimar and Zimbabwe seem like child's play in the rearview mirror. If you're new to this blog, you should know that the rate of hyperinflation does not follow the printing. An apple does not end up costing a trillion dollars because they printed enough dollars to price all apples that way. Hyperinflation comes from the margin, from the government defending its own needs, and there's never enough "money" for us mere mortals to pay the prices which are running away from everyone during hyperinflation.

Also, hyperinflation turns physical (as in physical cash) very quickly once it takes hold. So if you're expecting some sort of electronic currency hyperinflation, fuggedaboutit. If you think we're more technologically advanced than bass-ackward Zimbabwe or ancient Weimar, you are not understanding what really happens during currency hyperinflation. It cannot play out electronically all the way to the bitter end because, when prices are rising that fast, physical cash always brings a premium over electronic deposit transfers which require some amount of time (and thereby devaluation) to clear.

thedeadfauvi said...

Costata

you had me, dude. Tell her to go to chocolatier Hévin in Rue Saint-Honoré, near Place Vendome. Delicious little sins ca. 5-8euro/pc.
I hate the euro and love our European culture :)!

thedeadfauvi said...

Costata

enjoy:
http://relais-du-louvre-paris.com/fr/wp-content/uploads/2011/07/Jean-Paul-Hevin-Chocolatier-Paris-Mousse-Chocolat-Hotel-Relais-du-Louvre.jpg

e_r said...

Costata,

LOL -- I'll keep that in mind.

fauvi,

that does look super delicious.

Gary said...

http://longbets.org/626/

Anyone fancy a flutter?

Biju said...

Gary : Good Bet. Anyone confident to take up that ?

holdinmyown said...

Hello JR.

You quoted from FOFOA:
"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."

I agree completely, but this concept may be hard to understand. The way that I interpret this is that it is all about collateral. Since the USD is the world's reserve currency then the USG debt (USTs) is the world's reserve collateral. So if the USD falls then the UST will fall along with it (interest rates rise). If the world's reserve collateral falls then bank credit must fall along with it. The $IMFS cannot operate unless bank credit continuously expands so a sustained fall in the USD is unacceptable to the ROW (though favorable to the USG ... or so they believe). The finacial and political powers are truly caught between a rock and a hard place. They need to reduce the relative value of the dollar domestically but internationally they need to support the value of the UST (international collateral). These are conflicting objectives. Is this not the true meaning of the Triffen paradox?

Phat Expat said...

e_r

Yes it will be a form of kick-the-can. But at least it would be something, better than the theatrics going on right now!

Unfortunately "something" just isn't good enough anymore. I couldn't stand the wastefulness I observed while part of the G. And it is endemic at all levels and applies to contractors as well. The best thing I could do was to not play along. I have taken my technical ability offshore and frankly don't plan on returning but for the need to visit family. Unless the US can re-establish its moral compass, it is on the avoid list. Much as that pains me...

Gary
I don't bet but I tend to follow another group with fairly consistent results; and they predict HI to begin late 2012 or in 2013. I tend to agree with them.

http://www.leap2020.eu/The-future-of-the-USA-2012-2016-Part-2-The-unstoppable-US-economic-spiral-Recession-depression-inflation_a9859.html

Biju said...

phat-expat,

leap2020 is not reliable. They have been calling on Dollar crash NOW, since long time. The only right call I remember was Global crisis in 2008.

Wendy said...

costata,

2 questions:

Why aren't you in Europe?

Why do you have a dog that growls at you?

Sounds like that dog misses it's mommy.

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